Lucky, DGKC, Kohat: Back to the basics

Losses are turning into profits (or less losses in the case of DGKC) for cement manufacturers as the first quarter of FY21 comes to a close. Both Lucky Cement (PSX: LUCK) and the smaller Kohat (PSX: KOHC) recorded an improvement in their bottom-line as several factors began to work in the favor of cement industry; demand recovery being a major one.

Dispatches during the quarter grew 22 percent year on year (26% QoQ) for the industry—much higher evidently for both Lucky and Kohat that translated to stellar revenue performance. This is post-lockdown where demand improved organically as development expenditure was unlocked, new projects were announced and private sector spending began to mobilize after the government announced a construction amnesty scheme.

DGKC’s decent growth in the top line came despite a decline in volumetric sales. The company had lower operational days due to scheduled shut down for repair and maintenance which led to reduced clinker production. But the growth in revenue is testament to the company’s improved position in terms of price retention. In fact, revenue per ton sold grew phenomenally for DGKC by 21 percent—against Lucky and Kohat’s less than 1 percent.

Where DGKC seems to have lost the script is overheads. Mind you, the company was in gross losses during the quarter in FY20 and the improvement of margins to 10 percent is a massive step up. But the company could not keep a cap on its overheads that remained 7 percent of revenues during the period in question, same as last year. Meanwhile, finance costs came down to 7 percent (from 14%) as a share of revenue on account of reduced Kibor, the combined 14 percent of revenue ultimately weighed down the scale against the 10 percent margins. Other income also plummeted.

While Lucky recorded a decline in overheads as share of revenue (13% against 14% 1QFY20), Kohat’s remained constant at 3 percent. The latter runs a smaller yet tight ship. Both companies are less leveraged incurring small finance expenses and as a result remained shielded from the high kibor pricing even last year.

Due to lower coal prices, both companies also witnessed a reduction in cost per ton sold (Lucky: 14%, Kohat: 15%). This together with strong revenue flows and controlled overheads led to the bottom-line doubling in the case of lucky and Kohat’s growing 5x.

The next few quarters will continue to show similar improvement as the Naya Pakistan Housing projects and the impact of the construction package unfolds. The SBP has called for an increase in construction sector loans to 5 percent of private credit which will spur private sector demand in addition to all other tax and subsidy incentives. CPEC and Dam projects are also picking up steam. The spoils of this will be enjoyed by all and sundry in the cement business. What will set them apart are their control on overheads and inventory planning to optimize sales mix and major cost inputs.