The turnaround for most, if not all, cement companies during FY21 from the previous year—pandemic be damned—is certainly speaking volumes. Despite the differing sizes in their balance sheets, cement companies whether big or small are moving in the same direction (read: “Bestway, Thatta mirror performances”, 21 Sep 2021)—losses to comfortable profits. Third largest player DGKC along with a mid-size plant such as Cherat and a small cement manufacturer Flying cement paint a story that is not unique for the industry. But the devil, as they say, is in the details.
The primary credit for the profitability shift goes to domestic demand outshining the previous year where exports have certainly taken the back seat—in general (“Cement: exports riding in the back seat”, Jul 12, 2021). This is coupled with higher retention prices particularly in the north zone where demand began to boom. Total industry volumes grew 20 percent in FY21, of which 16 percent were exports.
In DGKC’s case however, having plants in both south and north does not seem to be yielding quite the same outcomes as, for example, a giant like Lucky that also has plants in both zones and managed to improve its margins from 15 percent to 30 percent. DGKC’s lagged behind—even against manufacturers significantly smaller in capacity than it. Cherat as a comparison improved margins from 2 percent last year to 27 percent in FY21. DGKC’s stand at 18 percent.
One reason is possibly the company’s sales mix. Since it started exporting clinker—which sells at a lower price per ton than cement—exports share in FY21 actually grew to 27 percent in FY21 (FY20: 26%). Even though, Lucky is selling the highest volumes abroad within the industry, its exports share in total sales for FY21 was about 24 percent. Overall cement sales for DGKC fell during the year. While exploring new markets for exports bodes well for the company staving off concentration risk in the future, at a time when retention prices in the domestic market are favourably moving up and cement companies are enjoying pricing power once again, DGKC was always going to suffer in contrast.
Its revenue per ton sold reflects this well. Using estimated volumes for FY21, revenue per ton sold for DGKC grew 20 percent (entirely because of better pricing in the north markets). The same measure for Cherat shows a 27 percent improvement in revenue per ton sold during FY21.
Certainly, of the three companies mentioned in this analysis, Cherat offers the most bang for the buck it seems with earnings per share trailing Rs17 versus DGKC’s Rs8.5 despite DGKC’s capacity and top-line superiority. Flying cement is not quite flying being a tiny player among several bigger fish swimming at stellar speeds.
On the other hand, coal and power costs have been up. Global coal prices have been out of control lately (read: “Coal rush!”, Jul 9, 2021 and “Coal dunnit”, Aug 6, 2021) currently rivalling peak volumes in history. Between Apr-20 and Jul-21, South African coal prices grew 169 percent. This is where savvy inventory management comes in and those companies that imported at the right time were able to benefit from it. But largely, the higher cost of coal was unavoidable as is the case where a large portion of input costs are sensitive to erratic commodity price movements in the international markets. DGKC’s cost per ton sold grew 2 percent while Cherat’s fell by 5 percent which ultimately led to the latter’s very impressive margins.
With reduced interest rates, finance costs as a share of revenue fell to 6 percent for both DGKC and Cherat from 12 percent and 15 percent respectively in FY20. Flying’s small debt profile got smaller with finance costs falling to 2 percent of revenue from 7 percent last year. What’s even more curious is Flying’s “other income” component which contributed to 42 percent of its before-tax profits during FY21. For DGKC, it is even higher at 53 percent. Basically, both companies are relying heavily on non-business income right now. Cherat’s other income is very nominal at 2 percent and speaks for its controlled overheads and remarkable shift in its price-cost dynamics.
Growth in domestic demand is expected to be grand in the coming year which the industry is poised to exploit. If government does not intervene to control prices in the domestic markets (which it should not), and coal prices start to cool down (which is expected), there will be plenty of spoils for everyone to enjoy.
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