After the lull period of FY10 where the price war broke amongst the industry players, the country’s cement sector has experienced a reversal in fortunes.
According to analysts at Topline Research, improved margin scenario backed by higher retention prices and manageable coal cost coupled with reduced interest rate environment reflected positively on sector’s profitability.
During the FY13, the sector posted profit growth of 93 percent to Rs 30.9 billion as against Rs16.0 billion in FY12.
“Our sample includes 11 companies that represent 75 percent of listed cement companies’ market capital,” viewed Asad I Siddiqui of Topline Research. Amongst the sample companies, MLCF, FCCL and LPCL were the star-performers depicting a growth of 6.5, 4.8 and 4.6 times, respectively, in their profitability, he said.
Whereas other major players like LUCK and DGKC depicted bottom line growth of 43 percent and 34 percent, respectively, he said. In FY13, the sector posted topline of Rs 151.2 billion as against Rs131.2 billion in the same period last year depicting growth of 15 percent.
“The prime growth driver remained 10 percent in price of the commodity as estimated net retention prices rose to Rs 343 per bag verses Rs310 per bag in FY12,” said the analyst. In addition, 4 percent volumetric variance also played its due role with high margin domestic dispatches rising by 5 percent. Exports on the other hand declined by 2 percent.
The profitability was supported by 20 percent decline in coal prices that account 40 percent for sector’s production cost.
Subsequently, with 10 percent increase in net retention and with cost inching up at slower rate gross margins improved by significant 7pps to 37 percent in the FY13 as against 30 percent in same period last year. Lastly, declining interest rate also bode well for the 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 34 percent reduction in the financial charges of the sector to Rs3.8 billion.
Reduction in financial charges coupled with follow through impact of topline growth has strengthened sector’s interest coverage ratio to 7.2x. Amongst the cement sector players, MLCF and FCCL remained the top performers as their profits grew by 7.0 and 3.0 times in FY13, he said. “We believe that both the companies are reaping the benefits of higher operating and financial leverage,” said the analyst.
The MLCF and FCCL have the highest degree of total leverage with magnifies the impact of increase in prices on their profits.
