Cherat: Rain in a drought

What would lead to the highest-ever quarterly earnings for a cement manufacturer like Cherat Cement (PSX: CHCC)? Hint, it isn’t massive demand. Amid an economy that is very evidently out of kilter, cement companies are performing exceptionally well, owing mainly to the pricing power they have enjoyed in the markets they operate in, together with reasonable and cost-efficient adjustments to their coal sources. In 2Q, Cherat’s profits are impressive and its margins are improving.

The revenue profile of Cherat suggests demand has not been great during 2QFY24 as with other cement companies. At the same time, exports have been likely growing their share in the sales mix making space for themselves where domestic market has remained dull. In the first quarter, volumetric sales in tonnage for Cherat was overall down 1 percent, but revenue grew 11 percent year on year, due to strong retention. One could argue that the higher cost of construction was bound to affect demand at some point, which is now clearly materializing. In 2QFY24, revenues fell 2 percent compared to the same period last year; and only slightly above the first quarter. If retention remained the same as the first quarter, offtake was likely down.

Down, but not out and unperturbed by the revenue reduction, the company’s earnings grew 20 percent during the quarter compared to 2QFY23. Despite a higher tax incidence (34% of earnings), at roughly Rs1.9 billion, this is the highest quarterly earnings for Cherat. To celebrate, the company offered interim dividends to its shareholders during the quarter, as opposed to no dividend paid this period last year, or even just last quarter.

Cherat has kept its finance costs and overheads under control; finance costs declined to 4 percent of revenue as compared to 5 percent in 2QFY23 due to reduced debt as the company has been making advance payments against its loans. Lean administrative and sales expenses (3% of revenue) also proved promising for the bottom-line.

Cement demand is not projected to improve substantially in the upcoming weeks—for one, buying power of private sector will remain subdued due to prevailing and continually rising inflation precipitated by energy and power tariffs. Thus far, companies have shielded their profitability from tanking through prudent cost optimization and strong pricing power in the domestic market, exporting however much they can to not have capacities laying idle. Perhaps, if all things remain same, profitability will too.