March 28, 2024

Pakistan Market Savvy

Cement: 3QFY24 Earnings to Decline by 25%QoQ

Abdul Hadi
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Cement: 3QFY24 Earnings to Decline by 25%QoQ

With result season around the corner, we present preliminary earnings preview Key Data
of our sample cement companies for 3QFY24. We expect our cement universe Sector Cement
profitability to decline by ~25%QoQ. This projection primarily stems from the Stance Over-Weight
anticipated sharp decline in total dispatches by ~14%QoQ and decline in gross Current Maket Cap. (Rs bn) 596
Current Turnover (mn sh) 8.0
margins. On YoY basis, profitability of cement sector is expected to decline by
Current Traded Value (Rs bn) 0.3
4%YoY mainly led by higher finance cost, lower dispatches and implementation 3m 6m 12m
of axle load regime. We believe capacity utilization may fell to 52% during Avg. Maket Cap. (Rs bn) 606 587 516
3QFY24 as compared to 61% in previous quarter. Avg. Turnover (mn sh) 15.8 27.4 20.7
Avg. Traded Value (Rs bn) 0.7 1.2 1.0
Total cement dispatches to hit 6-quarter low Source: PSX, Sherman Research

During ongoing quarter, we expect cement dispatches to fall sharply by 12%YoY

Quarterly Cement Dispatches
to ~10.4mn tons as compared to 11.8mn tons during the same period last year. (mn tons) 3QFY24E YoY Δ% QoQ Δ%
Besides weak cement demand amid economic slowdown and restricted Local 9.0 -15% -11%
development expenditures to contain fiscal deficit under IMF, several other Export 1.4 5% -28%
factors affected cement demand as well including 1) demand suppression during Total 10.4 -12% -14%
Source: APCMA, Sherman Research
election period and 2) slowdown in construction activities during Ramazan. All
these factors led cement consumption to hit a six-quarter low during 3QFY24. Cement Price Vs Coal Price
We expect topline of our cement universe to arrive at 101bn, down by 5%YoY (Rs/bag) (US$/m.tons)
mainly due to sharp fall in total dispatches (~12%YoY). 1,500 400
1,000 300
Gross margins to increase by 5pptYoY, down 2pptQoQ 200
500 100
Despite consistent cost pressures and lower volume, we expect gross margin of -0 0-

Mar-22

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Mar-24
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Jun-23
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Sep-23
the industry to arrive at 29%, up by 5pptYoY compared to 24% during the same
period last year. The increase in margins is mainly attributed to sharp increase in
cement retail prices, up by 12%YoY led by implementation of axle load regime Retail Price Coal Price
Source: Richard Bay, PBS, Sherman Research
and major correction in Richard Bay coal prices, down by 35%YoY. On QoQ basis,
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gross margins are likely to trim by 2ppt despite higher retention prices and Earning Snapshot - Quarterly
better coal prices, primarily due to decrease in total dispatches of ~12-15%QoQ. (Rs/sh) 3Q23A 3Q24E YoY Δ% 2Q24A QoQ Δ%
This decline in sales volumes directly impacts the top-line, thereby exerting KOHC 8.1 9.9 23% 11.4 -13%
downward pressure on gross margins. FCCL 0.8 0.69 -10% 1.1 -36%
DGKC 2.7 -0.7 -127% 0.9 NM
LUCK & PIOC earnings growth to outpace industry while FCCL to witness sharp CHCC 6.6 7.6 16% 9.6 -21%
decline YoY PIOC 4.2 5.7 36% 7.5 -24%
LUCK is expected to post unconsolidated PAT of Rs5.7bn(EPS Rs19.31), up by MLCF 1.8 1.5 -16% 2.1 -30%
LUCK* 13.7 19.3 41% 23.1 -17%
41%YoY. Despite the sharp decline in total dispatches, the profitability is likely to
* Unconsolidated Earnings at 293mn shares
increase due to higher retention prices, better other income, lower sea borne NM: Not Meaningful
coal price as company is mostly relying on Richard Bay. On QoQ basis, we expect Source: Company Accounts, Sherman Research
decline in earnings by 17% primarily due to lower sales volume. We anticipate
gross margins may decline to 35% as compared to 36% during previous quarter.
PIOC is expected to post net earnings of Rs1.3bn(EPS Rs5.7), up by 36%YoY. The
increase in profitability is mainly led by higher retention prices, lower finance
cost as company is focusing on reducing debt levels. On QoQ basis, we expect
decline in earnings by 24% primarily due to lower sales volume during the
quarter. We expect gross margin to arrive at 33% during the quarter.
FCCL is expected to post PAT of Rs1.7bn (EPS 0.69), down by 10%YoY, despite the
sharp increase in retention prices(up by ~13%YoY) which is offset by lower sales
volume, higher depreciation expense due to the commencement of new plant at
DG Khan with annual capacity of 2.05mn tons. On QoQ basis, earning are
expected to decline by 36%QoQ mainly led by lower dispatches resulting in
lower margins, higher finance cost during the quarter. We anticipate gross
margin to arrive at 30% as compared to 26% during the same period last year.

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Risks to Valuation:
Risks to valuation includes: 1) Change in coal and oil prices. 2) Lower than expected growth in dispatches. 3) Change in cement prices. 4) Higher than expected interest.
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from the subject company in the past 12 months.
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Rating Interpretation
© Copyright 2024, Sherman Securities (Pvt.) Ltd. Buy ≥ 24.0%
All rights reserved. Sell ≤ -10.0%
Hold Between -10.0% to 24.0%