KARACHI: The elevated price of cement during the first quarter of the financial year 2011 is likely to surge profits for the industry by 33 percent annually.
The hike in local cement prices and the improved demand outlook on the back of expected reconstruction activities has made an increase in the sector’s profitability more plausible.
The cement sector’s profitability underwent sustained pressure during the first quarter of the financial year 2011, led by a dwindling off-take (down by an annual 18 percent) subject to recent floods.
Cement prices were also up by only four percent annually compared to a 16 percent annual increase in the cost of goods sold (COGS) per tonne (average coal prices up by 34 percent annually). Moreover, the 10 percent annual higher financial cost due to the rising interest rates added to the manufacturers’ woes.
However, the industry’s gross margins are expected to have reached a low during the quarter, as cement prices have increased by 16 percent since September 2010, compared to a nine percent rise in coal prices.
Seventeen out 21 listed companies represent 98 percent of the sector’s capitalisation, and cumulatively, these companies posted losses of Rs 957 million ($11 million) in the first quarter of the financial year 2011 as against the earnings of Rs 1.19 billion ($14 million) in the corresponding period last year.
The industry’s capacity utilisation was a dismal 66 percent on account of dented local demand (down 21 percent annually) owing to the floods. However, retention prices for the sector improved by four percent annually, an increase of 16 percent annually in the COGS per ton owing to the rising coal prices, dragging down gross margins by 8ppt to 17 percent.
“Financial charges continue to eat away operating profits of the manufacturers and that is evident from the 11ppt difference between their operating margins and net margins,” said Atif Zafar of the JS research, adding that the rising interest rate (average 6M KIBOR up 41bps) was the chief reason behind the increasing financial servicing burden (up 10 percent annually).
