Cement's margins under heat in 9MFY17

Cherat, Gharibwal, Kohat and Pioneer cement released their nine-month financial accounts yesterday and they all had one thing in common: they all showed a pressure on their gross margins. Maple Leaf that published its results a day before saw a slight increase- moving from 41 percent to 42 percent. With greater domestic demand, especially in the north where these cement manufacturers are located; revenues have grown all around with the exception of Kohat, the biggest of the four. But margins consistently see a squeeze.

Cherat Cement just came through with an expansion of 1.3 million tons to its existing capacity and is now boosting a capacity share of 5 percent, up from 2 percent earlier. The plant has a waste heat recovery unit installed as well. With that already on the road, Cherat is the only company of this list that showed a slight improvement in its gross margins, as costs did not increase as much as for some others.

Costs have been higher for most as coal prices have rebounded globally, with pressure building up in the outgoing quarter. Coal prices went up by 65 percent year-on-year in the period Jan-Mar. This has resulted in cement manufacturers, especially in the north with higher costs. For firms like Kohat that operate at very high margins- 45 percent through this fiscal and 46 percent this period last year- energy efficiency measures and use of alternative means to cater to electricity needs have worked tremendously well, barring the slight downturn in Q3. In fact, the first half of this fiscal year was pretty strong for the company. In 1HFY17, the company enjoyed margins of 47 percent. Revenues for Kohat have also floundered a little in the third quarter owing to lower sales, especially exports.

The company that's writing a compelling growth story is Pioneer cement, which showed a 38 percent increase in the bottom line and net profit margins of 30 percent. The company had reduced finance cost comparatively and paid less taxes. Its overheads are also relatively less than its peers- 4 percent of sales compared to Cherat's 7 percent, Kohat and Gharibwal's 5 percent and Maple Leaf's 10 percent.

All these players have some expansion project in the pipeline to be financed mostly by debt, so they will all start feeling the heat on their finance costs soon enough. Right now, interest rates are lower. Once expansions come through, Kohat will see its capacity share grow to 7 percent tying in with Maple Leaf; while Cherat, Gharibwal and Pioneer will grow to 6 percent- this given the current add-up of all expansions is coming through over the next five years.

Fundamentally, all these firms are on a growth path bolstered by local demand; though continually falling exports will eventually come back to bite.