Shielded by more than 50 percent decline in finance costs, Lucky Cement's net profits surged 14 percent during quarter ending September, despite weaker margins arising from 12 percent currency depreciation and lower retail prices.
Although, higher exports increased Lucky's sale volume by 24 percent over the same period last year, revenue grew by just 6 percent owing to sharp plunge in both domestic and international prices. The price of cement in local market fell by 18 percent, whereas globally it was down by 14 percent, which kept retail prices under pressure.
Offsetting the 74 percent hike in distribution cost owing to increase in export coupled with higher inland and ocean freights, Lucky's bottom-line found support by lower loan repayments, with finance cost falling to Rs 155 million against Rs 321 million last year.
With dwindling international demand amid further expansions in the region, a supply overhang is in the offing. However, all is not that bad for local manufacturers who can offset the potential fall in overseas sales through better pricing by capitalising on rupee depreciation that makes their exports more competitive.
Pak rupee depreciated most during the period, relative to 2-percent drop in Egyptian pound and almost no change in Saudi riyal and Chinese Yuan, yielding Pakistani cement makers, especially Lucky, better returns.
In addition to better pricing, Lucky is also likely to benefit from lower cost of production, despite the forecast of rising coal prices in tandem with global oil recovery. The company is planning to shift its focus from revenue-centric to cost-centric by adding capacity and by adopting other cost saving techniques like heat recovery.
Commencing by December 2009, the firm's Karachi plant will be able to produce cheap electricity through heat recovery project, whereas that in Pezu will start using its heat by the end of fiscal year 2010.
The purpose of the project is to provide cheap electricity using the heat energy from kilns -- which previously was left unutilised -- thereby substantially reducing the firm's major cost of gas used for power generation. Secondly, the company also has potential to mitigate the impact of coal price upsurge with rapid shift to Refuse-Derived-Fuel (RDF).
Placed both in north and south of the country, the company has much brighter prospects than its peers. Not only its export potential is attractive but it also benefits from about 15 to 18 percent lower cost of logistics.
In short, contrary to popular perception, Lucky isn't of the ordinary lot. Even if demand falls at home or abroad, the firm would still be able to mitigate cost pressures by shifting towards more efficient energy alternatives leaving its peers far behind.
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LUCK P&L
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Rs (mn) 1QFY10 1QFY09 (+/-)%
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Sales 6,042 5,715 6%
COGS 3,808 3,371 13%
Gross profit 2,234 2,344 -5%
Gross Margin 37% 41% -10%
Dist & Admin Exp 724 416 74%
Other Income 1 0 -
Finance cost 155 321 -52%
PAT 1,103 963 14%
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EPS(Rs) 3.41 2.98
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Source: Company Results
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