EUR 4.27 For Business Accounts Only

Pakistan Cement: Pretax Profits -25% YoY in 3QFY19

 

• Pakistan cement industry in 3QFY19 posted its lowest gross margins of 23.6% since 2011 amid higher input costs lower high margin local demand and weak pricing power. Consequently, industry’s pretax earnings have fallen by 25% YoY (-19% QoQ) during the outgoing quarter.
• Our working is based on result analysis of 15 listed producers (out of a total of 17) which represents 99% of total cement companies’ market capitalization. Other companies are in losses/not actively traded.
• Decline in the sector’s net earnings was restricted to 10% YoY in 3QFY19 thanks to lower effective tax rate, down 15ppts to 7.7%. Substantial tax benefit to select cement producers on account of plant expansion led to lower taxes or tax benefit.
• Gross margins fell ~4ppts YoY to 23.6% during the outgoing quarter. Margins contracted amid lower local demand, weak local prices and higher input costs. To note, sector’s GP margins have been under pressure since Jan 2017 (when CHCC’s expansion came online) and have fallen by 17ppts.
• Industry volumes down 9% YoY in 3QFY19 amid 15% decline in local sales. However, exports grew exponentially by 51% YoY thanks to 1) currency devaluation, 2) additional production from new capacities in South and 3) higher clinker sales to regional countries.
• We remain cautious of the industry’s performance in the short to medium term as budgetary measures in the upcoming Budget (May 24) and expected increase in power and gas tariffs amid IMF conditions signals further contraction in GP margins.