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Pakistan Cement: Turn in profits after 4 quarter of losses; Sales up 57% QoQ, Gross Margins at 19.4%

• Pakistan listed Cement sector has turned in a profit of Rs5.3bn, after posting losses for four consecutive quarters. The turnaround in profits is due to (1) 57% QoQ higher Net Sales on the back of 26% QoQ higher volumes and 19% QoQ better retention prices and (2) 19% QoQ decline in Finance Costs.
• During the quarter, total cement dispatches came in at 13.56mn tons (utilization: 82%) – second highest quarterly volumes. Local dispatches increased to 10.8mn tons, up 16% QoQ, wherein the North region’s volumes improved by 14% QoQ and South sales grew by 30% QoQ. Exports too went up by 95% QoQ to 2.7mn tons.
• Local retention prices increased by an average of 19% QoQ or Rs48/bag due to (1) increase in cement prices by Rs15-20/bag, (2) decline in Federal Excise Duty (FED) by Rs25/bag and (3) narrowing of discounts by ~Rs10/bag.
• Our sample includes 15 out of the 16 listed cement companies, i.e. ~100% of the sector’s market capitalization.
• Gross Margins of the sector touched six quarter high of 19.4% due to higher retention prices and decline in Fuel and Power costs in the range of 2-12% QoQ.
• Coal prices (FOB) during 1QFY21 averaged at US$55/ton (incorporating a two month lag) compared to US$69/ ton in 4QFY20 and US$66/ton in 1QFY20. The PKR/US$ averaged at Rs167 during 1QFY21 compared to Rs164 and Rs158 in 4QFY20 and 1QFY20, respectively.
• Finance Costs of the sector also declined by 19% QoQ to Rs3.6bn as repricing of loans have started to kick in after the decline in Policy Rate by 625bps to 7.0%.
• Sector income tax expense was Rs1.5bn in 1QFY21 compared to an average tax benefit of Rs1.1bn in the last four quarters.
• Selling and Distribution expenses increased by 95% QoQ, in line with the growth in exports.
• Other expenses increased by 187% QoQ. This mainly includes WWF/WPPF, which is indexed to profitability of the companies.

We remain Over-Weight on Pakistan Cement sector, wherein our top picks are Lucky Cement (LUCK) and Kohat Cement (KOHC).