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Pakistan cement sector posts losses for 3qfy20

Cement manufacturers in Pakistan have posted losses for 3QFY20 as compared to profit for 3QFY19 and 2QFY20. This raises concerns because the outcome of 4QFY20 could be even worse, because of prolonged lockdown and Ramadan impact. However, the silver lining is the package announced by the government for the construction industry.

This analysis is based on a report by one of Pakistan’s leading brokerage house, Topline Securities, based on 11 listed cement manufacturers out of 15, representing 95% of the total sector market capitalization. The brokerage house has taken into account only those companies which have already announced quarterly results for January-March 2020.

The deterioration in profitability during the quarter was mainly due to declining cement prices amidst competition over market share as industry production capacity has increased by over 50% to 70 million tons over the past three years.

Gross margins during the quarter fell further. This fall could be attributed to decline in retention prices up to 35% for the manufacturers located in the northern region, during the outgoing quarter to an average of Rs250 per bag. During 9MFY20, gross margins declined to 6.6% as retention prices declined by 25%YoY.

Lower retention prices could be attributed to fierce competition, after recent expansion cycle which has limited their ability to pass on rising costs emanating from currency devaluation, grid rates and increase in duties (FED).

As a result of lower prices, net sales for the sector declined by 16%YoY during 3QFY20 despite of an increase in volumetric sales by 8.2%YoY (Northern region increase by 12% YoY and Southern region decrease by 1.3% YoY).

During 9MFY20, volumetric sales increased by 7.1%YoY led by 11% growth in Northern region, while Southern region witnessed 3.1% decline.

Financial cost increased by 57%YoY during outgoing quarter due to increase in bank borrowings coupled with change in accounting treatment of this head from capitalization to expensing out after commercial operations of new plants.

The companies recorded tax reversal of Rs1.1 billion cumulatively as effective tax rate of 7.4%, amounting to Rs829 million for 3QFY19.

DG Khan Cement (DGKC) has reported a loss of Rs2.3/share for 3QFY20 as compared to earnings of Rs2.0/share for 3QFY19. The Company has posted loss ,of Rs4.2/share for 9MFY20, as against earnings of Rs6.0/share in 9MFY19, which can be attributed to erosion in gross margins.

A point worth noting is that net sales declined by 9%YoY during 3QFY20 despite increase in volumetric sales by 6%YoY as cement prices in the Northern region declined by over 15%YoY during the quarter.


As a result, gross profits declined by 97%YoY to Rs56 million for 3QFY20 due to a sharp decline in retention prices and higher coal costs.

Financial cost increased by 32%YoY due to the increase in borrowing by of the company. During 9MFY20, the same has surged by 62% YoY.

Selling and distribution expenses increased by 22%YoY due to higher exports related transportation costs, exports were up 23%YoY.

Analysts flag two major risks facing the company: 1) higher-than-expected impact of COVID-19 and 2) weak pricing environment.

Lucky Cement (LUCK) has reported consolidated earnings of Rs1.4 billion (EPS: Rs4.45), down by 58%YoY. The earnings were above analysts’ expectations primarily due to lower-than-estimated COGS.

Overall earnings for 3QFY20 went down due to decline in gross margins.

Gross margin eroded on a YoY basis on the back of lower retention prices in both Northern and Southern regions, along with increase in input costs. For 9MFY20, gross margins were reported at 13.1%.

Net sales of cement business has declined by 11%YoY to Rs11.2 billion, despite increase in volumetric sales by 8%YoY to 2.1 million tons (cement and clinker both) as cement prices both locally sales and exports declined.

ICI Pakistan (LUCK’s subsidiary) also recorded a decline in earnings by 44%YoY for 3QFY20 due to decline in sales by 5%YoY amidst COVID-19 outbreak. The major drag in earnings came from exchange loss of Rs373 million during the quarter under revised as against Rs19 million in the same period last year.

Key risks facing the company include: 1) intense pricing competition between the manufacturers, 2) lower-than-anticipated domestic demand and 3) higher-than-expected coal prices.

Fauji Cement (FCCL) reported a loss of Rs0.15/share for 3QFY20 – first time in eight years as against earnings of Rs0.45/share for 3QFY19, as a result overall earnings for 9MFY20 declined by 89%YoY to Rs0.20/share.

The company has posted loss primarily due to a gross loss of Rs106 million for 3QFY20 as compared to a gross profit of Rs1.1 billion for 3QFY19. Gross loss emanated due to decline in local retention prices by 24%YoY and 5%QoQ.

Net sales witnessed a decline of 25%YoY to Rs3.9 billion as local sales volume too declined by 4%YoY.

Average price of coal during the outgoing quarter remained around US$80/ton as against an average of US$62/ton for 2QFY20.

The company faces following risks: 1) continuation of slow demand due to COVID-19 price competition, 2) price was among the manufacturers and 3) higher-than-expected coal prices.

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