Lucky charm!

Stellar demand is bringing cement companies back into their groove. Market leader Lucky Cement (PSX: LUCK) in 1HFY21 has witnessed earnings more than doubling compared to last year driven by robust sales, better price retention, a tighter control on costs of production as well as overheads.

Sales growth of 36 percent, revenue per ton sold (on an average basis) improvement of 4.3 percent and a subsequent marked reduction in costs per ton sold (about 12%) have also shored up margins—now touching 30 percent, double of last year. With covid-related impact in the rear view, a resurgence of infrastructure and public-sector led spending has truly shaped up this turnaround. While the company exports a good share overseas (26% in 1HFY21 against 29% the previous year) which includes clinker exports, it is domestic sales that are a force to be reckoned with.

This is considering that the recently extended construction package of the government—that is meant to spur construction and housing demand in the private sector—has not quite taken-off yet in terms of getting construction off the ground. Having said that, developers and builders have registered their existing projects under the scheme to utilize policy benefits which have resuscitated construction demand from the private sector boosting cement (and other building materials) offtake.

On the costs front, lower coal prices—specially in the first quarter (cost per ton sold went down 14% in 1QFY21)—and production efficiencies caused costs to decline fairly well.

Lucky is also spreading its wings to capture a greater market share with the expectation of new demand coming on board by expanding its production capacity at its Pezu plant located in the north zone—taking its existing capacity of 3.15 million tons to 10 million tons. This brings up its total capacity to 15 million tons. The new capacity will grab demand not only from new private sector construction projects but public sector demand coming from CPEC and hyrdo power plants.

The company is availing the concessionary TERF facility for a portion of the expansion which will keep finance costs under control. Currently, the company has a 16 percent share in the domestic market which would likely grow post-expansion come 2023.

With coal prices circling back up, astute inventory planning and an optimal sales mix (deciding between domestic vs exports volumes) will keep costs and overheads in check and improve margins. Price competition in the north however is a risk consideration since the north zone already has several players, and expectedly, many of which will move into expansions as well. This might impact company’s retention.