Cement sector: Slowdown in profit growth in1QFY14

The country’s cement sector, which posted an abnormal profit growth of 93% in FY13, is showing some signs of stability. In 1QFY14 the pace of listed cement sector’s profit growth slowed down. Despite price increase of 12%, increase in power tariff piled pressure on the profitability of the sector and impacted cement players depending upon their reliance on expensive electricity.
“Resultantly, the listed cement stocks that were investors’ favourite in last few years saw their share pricing coming down,” said Topline analyst Asad I. Siddiqui. Since last three months the losses incurred in cement stocks is one of the reason why the broader market is also not performing, he said. With benchmark KSE 100 Index down 4% in last 3 months, listed cement sector market cap has eroded by 15%.
“Our sample inc ludes 12 companies that represent 71% of listed cement companies’ market cap,” said Asad.
Amongst the sample companies, FCCL and MLCF were the star-performers depicting a growth of 61% and 45%, respectively in their bottomline.
Whereas other major players like LUCK and APCL depicted bottomline growth of 26% and 18%, respectively. While one of country’s main cement producers, DGKC depicted profit decline of 26%, however, it’s before tax profit was up 2%. Though some pressure was seen on volumetric front in 1QFY14 but cement sector was able to post topline growth of 9% to Rs38.4bn as against Rs35.4bn in the same period last year. The prime growth driver remained 12% rise in price of the commodity as per bag retention price rose to Rs369 verses Rs337 in 1QFY13. The follow through impact of this was witnessed in pre-tax profit of the sector which increased by 21% to Rs8.8bn. However, this positivity was diluted by 8pps higher effective taxation, which chewed 10-12% profitability of the sector. As against the previous quarter (4QFY13), profits are down 21% on pre tax and 27% on post tax basis.
Thanks to 12% increase in the price of the commodity, the sector’s gross margins were able to sustain the negative impact brought in by 50-60% increase in power tariff and were stable at 34%. Interestingly, amongst the sample of 12 firms, only 4 recorded decline in gross margins in percentage. Moreover, declining interest rate also bode well for sector’s profitability. As 450bps reduction in the policy rate by central bank from June 2011 along with reduction in the leverage of the cement sector culminated into 13% reduction in the financial charges of the sector to Rs1.5bn in 1QFY14.
Reduction in financial charges coupled with follow through impact of topline growth has strengthened sector’s interest coverage ratio to 6.9x. Compared to June quarter, gross margin of sample firms was down by 90bps. Though the price of the commodity increased by 7% QoQ, it was not enough to overcome the hike in electricity tariff & inflationary pressures and consequently margins were slightly affected.
Amongst the cement sector players FCCL and MLCF remained the top performers as their profits grew by 61% and 45%, respectively in 1QFY14. “We believe that both the companies are reaping the benefits of higher operating and financial leverage,” the analyst said.