Cement sector?s quarterly profit drops 38pc

KARACHI: Cement makers recorded a 38 percent year-on-year drop in
their quarterly profits as high cost of production brought their
margins down to the six-year low, a brokerage reported on
Thursday.Cement manufacturers earned Rs8.536 billion during the
first quarter of 2018/19 compared to Rs13.746 billion in the
corresponding period a year earlier.“Pakistan’s cement industry
posted its fifth consecutive fall in quarterly profits as the
sector’s gross margins have now contracted to 24 percent (6-year
low), as compared to a high of 46 percent in 4QFY16,” analyst
Nabeel Khursheed at Topline Securities said.The financials’
analysis was based on 15 listed producers, out of a total of 17,
which represent 99 percent of the total market capitalisation of
cement companies.“We believe that further downside in margins
should be limited going forward as cement industry’s margins are
now in the range of regional average of 20-25 percent,” Khursheed
said.The industry volumes grew four percent year-on-year in 1QFY19
owing to exponential 39 percent growth in exports while local
dispatches remained almost flat.“We attribute higher exports to
currency devaluation, additional production from new capacities in
south and higher clinker sales to regional countries on the back of
closure of some clinker production lines in China owing to strict
environmental regulation,” Khursheed added.Gross margins fell 8.4
percentage point year-on-year to 24 percent in 1QFY19.The analyst
said margins continued to fall amid increase in production costs on
a 18 percent increase in coal prices during the first quarter, an
increase in re-gasified liquefied natural gas cost due to higher
international oil prices, currency devaluation and weak pricing
discipline owing to oversupply concerns.Financial charges were up
by a considerable 2.5 times as producers’ books are now heavily
leveraged owing to capital expenditure requirements to fund
upcoming expansions coupled with higher interest rates. The
benchmark interest rate has now reached to 8.5 percent with
increase of 275 basis points since January.Effective tax rate of
the industry remained well below 20 percent due to tax benefits on
account of investment in new cement lines and adjustment of
deferred taxes.In October, cement consumption is expected to settle
at 3.9 million tons, with month-on-month growth of around three
percent.“We expect considerable growth in exports where we
anticipate dispatches to remain over 700,000 tons, a growth of more
than 70 percent year-on-year,” Khursheed added.“This growth in
exports is on the back of higher clinker sales to regional
countries amid clinker production constraints in China due to
strict environmental regulation.”In 4MFY19, local dispatches are
expected to fall by four percent. Exports are to show significant
improvement of up to 49 percent.
Source: FS – All-News2-Economy
Cement sector?s quarterly profit drops 38pc