Karachi, September 27, 2022 (PPI-OT): Cement: 4QFY22 margins gain support on efficient inventory management

We present 4QFY22 earnings review for the Cement sector earnings that came in better than industry estimates on core level, however reported various one-offs leading to bottom-line deviations. Most cement companies posted a decline in earnings on a sequential basis, primarily owing to higher financial charges and one-time Super tax charge of 10%.

Rising coal costs were more than offset by higher retention prices resulting in higher margins. The sector managed to post avg gross margins of 25% during 4QFY22.

Cement demand has been dull during the first two months however some uptick in the coming months can be expected in the case of private housing construction.

4QFY22 core results came in better than estimates

The recent quarter results of JS Cement Universe were broadly better than estimates at the core level. Most of the deviations however were led by non-recurring entries as some companies had one-offs which are likely going to be absent in the coming quarters. Major reasons for the sequential decline in earnings were higher finance costs (owing to higher debt and increase in interest rates), 10% super tax charge and deferred tax adjustments.

FY22 earnings for the selected 7 companies showed a 10% YoY increase despite higher tax and finance charges. We exclude Fauji Cement (FCCL) from our sample base for valid comparisons. The company has recently undergone merger with Askari Cement, where likewise data for previous periods is not available.

Effective inventory management supported margins

Gross margins were generally better than estimates. Sector’s margins showed a 2ppt increment compared to the previous quarter despite rising input costs during the past four quarters owing to effective coal inventory management. While DGKC and ACPL underperformed compared to expectations on the gross level; LUCK, PIOC and CHCC posted better than expected gross margins. The sector was able to maintain its gross margins at ~25% where LUCK showed the highest gross level performance from our universe.