LAHORE: The cement industry’s profitability has declined despite high sales, as its pre-tax profits went down by 15 percent while after-tax earnings reduced by 3 percent annually during first quarter of FY18 against double digit growth of 17 percent and 32 percent seen in 1QFY17 and 1QFY16, respectively.
According to experts, the high-profitability growth period of cement producers no longer holds as the price pressure kicks in owing to upcoming capacities and an inability of manufacturers to pass on rising input costs.
During July-September, net retention prices of producers were down by an average of 4 percent or Rs13 to Rs312 per bag. Volatility in prices was mainly due to the price pressure in the north region after the commissioning of cement industry’s 1.3 million tons plan expansion in January.
During 1QFY18, sector sales grew by 11 percent YoY, mainly supported by 21 percent growth in local dispatches (total volume up 15 percent). Performance of local dispatches remained robust thanks to increase in demand from construction and infrastructure projects ahead of general elections next year. Gross margins were recorded at 32 percent (down 9ppts YoY) in 1QFY18, the lowest in 21 quarters. Last lowest margin of 33 percent was seen in 1QFY13. Experts attribute this to higher input costs (coal prices averaged $87/ton, up 34 percent YoY while gas prices increased by around 25 percent YoY in 1QFY18) and lower local net retention prices.
This stresses that the high profitability growth period of cement producers no longer holds as price pressure kicks-in owing to upcoming capacities and inability of manufacturers to pass on rising input costs. During 1QFY18, net retention prices of producers were down by avg 4 percent. While pretax profits were down 15 percent YoY in 1QFY18, net earnings of cement producers declined by only 3 percent. This was mainly due to 10ppts YoY lower effective tax rate which contained the decline in profitability. Huge tax benefits given to DGKC on account of plant expansion (tax benefit is also expected in the remaining quarters of FY18) led to lower effective tax rate.
