Saturday , 18 November 2017

Profits sink in cement sector

Cement profits fall amidst rising sales

The profitability of the cement industry has declined despite rising local sales, latest data shows.

Manufacturers posted an earnings decline of three per cent year-on-year – with pre-tax profits down 15pc – in July-September versus double-digit growth of 17pc and 32pc seen in the comparable quarters of 2016-17 and 2015-16, respectively.

Sector sales grew 11pc year-on-year in July-September, mainly supported by 21pc growth in local despatches (total volume up 15pc), thanks to robust demand from construction and infrastructure projects ahead of the general election next year.

The construction sector’s credit off-take was up 48pc year-on-year by September, said Nabeel Khursheed, an analyst at Topline Securities.

Gross margins were recorded at 32pc, down nine percentage points year-on-year, in July-September, the lowest in 21 quarters, due to higher input costs. Coal prices averaged $87 per tonne, up 34pc year-on-year, while gas prices increased around 25pc in July-September.

He said 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 4pc or Rs13 to Rs312 per bag. Volatility in prices was mainly due to the price pressure in the north region after the commissioning of Cherat Cement’s 1.3m tonnes of brownfield expansion in January.

While pre-tax profits were down 15pc year-on-year in July-September, net earnings of cement producers fell only 3pc due to 10 percentage-point lower effective tax rate year-on-year, which contained the decline in profitability. Huge tax benefits given to D.G. Khan Cement on account of the plant expansion led to a lower effective tax rate.

Upcoming capacities of Attock Cement, D.G. Khan Cement and Lucky Cement will translate into a cumulative addition of 5.3m tonnes per annum in the south zone in July-December. The price pressure might appear soon in the south zone, which has remained unaffected so far, he said.

Topline Securities conducted this analysis based on a sample of 15 listed cement producers (out of a total of 18), representing 99.7pc of cement companies’ total market capitalisation.

www.dawn.com

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