Karachi, May 09, 2022 (PPI-OT): Cement: 3QFY22 results; no major surprises this time
Cement sector earnings were close to industry expectations in 3QFY22, where deviations were mostly led by one-offs. Most cement companies posted a decline in earnings on a sequential basis, primarily owing to higher fuel cost.
As per our expectations, rising coal costs put pressure on margins. The sector managed to post avg gross margins of 23% during 3QFY22 as higher sale prices somewhat offset the impact of elevated coal costs.
Coal prices have been on an upward trend again and we believe that price pass-on would remain a challenge for the industry amid dull demand going forward.
3QFY22 results broadly in-line with street estimates
The recent quarter results of JS Cement Universe were close to estimates and core results were not a surprise to many. Most of the deviations were led by non-recurring entries as some companies had one-offs which are likely going to be absent in the coming quarters.
LUCK posted higher other income which lifted its bottom-line for the quarter primarily because of the dividend income from subsidiaries and fee income charged to the Congo JV. Moreover, effective tax rate for the quarter also clocked in lower at 16% for the company.
MLCF had lower earnings compared to SPLY because of absence of dividend from Maple leaf Power Ltd. (Rs 3.5bn dividend income in 3QFY21). We believe MLCF may have booked an unrealised loss on investment which resulted in negative other income for the quarter.
Effective inventory management supported margins
Gross margins were generally in-line with estimates. Sector’s margins showed a 2ppt decline compared to the previous quarter despite rising input costs during the past four quarters owing to effective coal inventory management. While MLCF and PIOC underperformed compared to expectations on the gross level; KOHC and DGKC posted better than expected gross margins. The sector was able to maintain its gross margins at ~23% where KOHC showed the highest gross level performance from our universe.
Coal Price pass-on necessary here
The recent spike in coal prices – triggered by the Russia-Ukraine situation – has led to the procurement of coal at higher rates by cement manufacturers, requiring them to raise cement prices. From the current Richard Bay coal price quote of ~US$310/ton (+2.2x CYTD), we can infer that effective coal prices for companies will likely remain high during the coming quarters. Further price increment would be needed to neutralize the cost impact but that would then dent the demand. In the last 12 months, cement prices have hiked by a cumulative Rs250/bag (up 40%). Consequently, cement demand has been relatively dull where local cement sales during 9MFY22 have remained flattish at 0%. We see local dispatches to remain dull during 4QFY22 as well due to slowdown in construction activities owing to Ramzan and Eid. We believe, the year may likely close with negative growth if slowdown persists in the coming months.
We highlight that companies like CHCC, KOHC, FCCL, FLYING, BWCL and MLCF that use the cheaper Afghan coal in their coal mix increased the consumption of Afghan/local coal from the outgoing quarter. While companies that didn’t use Afghan coal earlier like LUCK also switched to the relatively cheaper option to save up on costs. This shift by the industry has now driven the prices of Afghan coal higher as well, Afghan coal prices have risen ~65% CYTD.