Bestway, Thatta mirror performances

Thatta Cement (PSX: THCCL), a humble cement plant located in Sindh with a nominal capacity and Bestway Cement (PSX: BWCL) arguably one of the two biggest cement manufacturers in the country present several interesting opportunities for comparison. The cement industry has a few players that operate in a careful, organized, mostly efficient environment. Small or big, they expand together, slip into losses together and turn around fortunes to be profitable again together. While players operating in the north and south zone face considerably different dynamics that reflect in their financial statements, there are similarities that cannot be ignored.

Broadly, FY21 was characterised by better retention prices, pent-up domestic demand materializing and rising cost of imported coal. These translated to losses turning to profits across the industry, whether they were small or big, located in the north or the south.

Specifically, let’s look at coal costs. On average, coal importers in Pakistan importing South African coal paid 10 percent more per ton this year compared to FY20, assuming a one-month lag. Plants that were more efficient, had captive power generation or waste heat recovery facilities and managed inventory better were able to absorb the rising cost of coal more. Improved demand and economies of scale enabled cost per ton sold to actually fall. This was consistent for both Bestway (fell by 6%) and Thatta (fell by 26%). Thatta being closer to the port incurs less transport costs too. [Note: calculations have used estimated volumetric numbers].

On the revenue side, Northern players had more demand flowing from infrastructure and construction projects and resurgence in commercial and private sector development. This allowed north players to raise prices more and faster (look at price comparison graph here: “Cement prices: Unaffordable truths”, Aug 26, 2021). Bestway’s sales growth of 18 percent translated to a 53 percent improvement in the top-line primarily because of substantially improved retention—revenue per ton sold for Bestway grew 29 percent during FY21.

In contrast, while Thatta’s revenue per ton sold also improved—up 8 percent—it clearly did not improve with the same intensity as most North players as prices in the south tend to remain pretty stable. Both these factors led to margins for Bestway as well as Thatta coming back into double-digits.

Lower incidence of exports in both cases led to reduce overheads such as distribution costs. For Bestway, as a share of revenue, overheads fell from 5 percent to 3 percent while for Thatta, this fell from 11 percent to 8 percent. Similarly, more affordable cost of borrowing due to interest rates decline led to finance costs as a share of revenue decline from 6 percent to 2 percent and from 3 percent to 1 percent for Bestway and Thatta, respectively.

While both cement companies are in different leagues—Bestway’s topline alone is 23x of Thatta’s during FY21—they are moving in the same direction, only at different paces which is expected.

The upcoming year poses less threats and more chances for growth as hydro power projects kick off and construction and infrastructure development led by government’s Naya Pakistan Housing Program picks up steam. This government has introduced many incentives (including an amnesty scheme for developers and builders) which are all poised to boost the construction industry. The benefits of these dynamics will be accrued by all.