Attock Cement: cautiously realistic

Attock cement posted a largely unimpressive financial statement for 1HFY19 albeit one aligned with most expectations and previews posted by brokerage houses. Despite a strong growth in revenues, margins and bottom-line went tumbling down. The underlying cost and pricing dynamics are dire, and local demand is not helping. Even with a new cement grinding unit (costing $25 million) commissioned in Iraq and set to start trial operation, the outlook remains only mildly hopeful.

But blame the game, not the players. There are a few dominating factors that are setting the tone for Attock and its peers. First is demand. While Attock’s revenues saw a growth of 44 percent in 1HFY19 which is encouraging, local demand has not played a huge role. The growth can be associated to sea-born exports that have taken a massive flight due to greater opportunities for Pakistani cement in West Africa, Bangladesh and Kenya, with potential demand coming from East Asia. Being in the south has tipped the scales in Attock’s favour. Industry exports grew by 48 percent in 1HFY19, with seaborne exports growth of 229 percent. It is estimated that Attock’s exports have doubled during the period.

While higher revenues have been brought forth by much greater export off take, margins took a hit, coming down to 21 percent (1HFY18: 33%). Though retention prices in the south have remained pretty stable, exports fetch lower prices which means revenues could have been much higher had local demand delivered. Moreover, the interplay of fuel prices and currency depreciation made matters worse. Coal prices grew on average by 10 percent—in the first half of FY19, they averaged $99 per ton (1HFY18: $90 per ton). Couple that higher grid and other fuel costs and a 14 percent depreciation of rupee against dollar between Jul-18 and Dec-18.

Indirect expenses for the company grew to 10 percent of revenues in 1HFY19 against 8 percent the period last year, owing to much higher exports that saw distribution and selling costs nearly triple. Talk about a double-edged sword. Expansion related borrowing and higher interest rates lifted finance costs.
Higher production and other costs are expected to prevail through the fiscal year if low-margin exports continue to take a much bigger chunk in sales mix. Global upward movement in coal prices, much higher local fuel prices, and increased pressure on rupee could push margins into freefall. It does not help that the industry is adding so much more capacity into a domestic market that is cooling down. One could be encouraged by Naya Pakistan Housing and Dam construction plans but both remain in their very infancy, the latter more than the former, but should they materialize, there will be some bite for cement manufacturers in the domestic market. At the current pace though, it is needless to say, these plans won’t manifest in the next six months.