PAKISTAN: Cement sector turns profitable in FY12

Despite rising energy cost with higher oil prices and gas cess, the cement manufacturers’ remained comfortable with gross margin increasing by 7pps to 30 per cent during FY12. However, 17 per cent increase in financial charges to Rs8.7 billion amid currency devaluation and higher borrowing (particularly in 1H) diluted their bottomline. Thanks to robust increase in cement prices (up 26 per cent), profits of cement companies have increased by 7x in FY12 to Rs16 billion ($168 million). Interestingly, out of 10 companies which have announced their full year results, only one cement company has posted losses in FY12 whereas last time almost 50 per cent of cement companies were in losses. Thus, better cement sector outlook and turnaround in FY12 is expected as the cement sector posted 119 per cent return during 2012 to date as well. A report, released on Tuesday, has analysed 10 cement companies (representing 76 per cent of market capitalisation) as the rest have not yet announced their full year results, while Javedan Corporation, has also been excluded as it was non-operational during FY12. Farhan Mehmood, in its report, said that one of the turnaround stories for cement manufacturers in FY12 was sharp rise in local cement demand which led to improvement in cement prices at local arena. This led to handsome increase in total revenues by 33 per cent to Rs123 billion ($1.3 billion) where local volumetric sales remained higher by 9 per cent to 24 million tons in FY12. According to experts, local cement prices improved by an average 26 per cent during FY12, however, total sales during FY12 (local + exports) stood at 32.6 million tons, up 4 per cent.Profits of Kohat cement grew by massive 26x followed by DG Khan Cement (up 24x) whereas most of the companies which had operational issues due to high cost of production and high leverage, turned their losses into profits in FY12. Experts said that amidst constant hike in power tariff and petroleum products, the prices of cement in upcountry have fallen by Rs10-15 per 50kg bag to Rs 425-420 during one week. Industry sources said that decrease in price is attributable to seasonal decline in dispatches owing to intense rainfalls in northern region hindering construction and transportation activities.Experts said that cement prices in India also saw a correction during August and Sept 2012 and declined by Rs10-30/bag MoM across regions due to the onset of monsoons. They, however, said the decline in price was for short term and it would revert back soon because jump in cost of production.Industry sources informed that cement industry has not yet passed on the impact of recent increases in input prices of electricity, gypsum, devaluation of Pak rupee and transportation of goods from Karachi by any unit in the north zone due to severely depressed demand. Energy, which constitutes more than 60 per cent cost of production, has taken a quantum jump in a couple of years.