KOHC: Setting an example

At a time of rising fuel prices, efficiency is everything. Cement industry is one of the most intensive energy users and has to constantly grapple with questions of energy conservation, using the optimal energy mix and bringing efficiency into their plants through a variety of different techniques. That ultimately sets the pecking order for the mid-sized cement plants—where they stand among peers in terms of financial standing and future prospects. Kohat Cement (PSX: KOHC) is the one to watch out. In the first quarter of the financial year, Kohat earnings have nearly tripled since this time last year.

This is despite the dramatic rally witnessed in coal prices in the global market over the past six months or so (Read: “Coal calls”, Oct 1, 2021). In addition, due to uncertain situation in Afghanistan, exports for the company have plummeted to negligible. Naturally, Kohat’s focus has shifted entirely on the domestic market where it was able to sell at least as many tons of cement as last year—the year of fairly high growth. This was expected since domestic markets were going to be the primary focus for cement manufacturers (Read: “Cement: exports riding in the back seat”, July 12, 2021). Compared to industry sales, Kohat’s estimated sales suggest it has a 7 percent share in industry cement offtake (including exports).

Kohat’s income statement however shines because of the excellent retention the company was able to fetch in the domestic space. Estimated revenue per ton sold in fact grew 42 percent in 1QFY22 which is exceptionally good. Cement prices have certainly increased and have been a matter of much debate which will certainly benefit nearly all players. On average, cement prices during the quarter are up 20 percent from last year—slightly higher in the north markets where demand has been stellar.

Another major win here is a controlled grasp of costs. Coal prices in the international markets have skyrocketed over the past year driven by the frenzy of China’s returning demand which has overwhelmed global supply of coal and is currently also causing shortages. That has causes prices to hurtle forward. If all the coal was being imported from South Africa, which is the usual practice, assuming a lag of two-month (i.e., coal is imported in advance), average coal prices during 1QFY22 should record a 96 percent increase from this period last year. If we consider a one-month lag, this would be higher at 118 percent price hike.

The landed cost would be higher further due to costlier freight and rupee depreciation. But Kohat’s cost of production have no where near increased by that much. In fact, estimated cost per ton sold has increased 16 percent. Together with improved retention, this allowed gross margins to grow to 33 percent.

This is where prudent coal inventory management, making use of a variety of coal sources such as domestic and Afghani coal, and more efficient use of energy mix altogether comes in. Other components on the expense side have also remained stable with overheads at 3 percent of revenue and finance costs at 1.75 percent of revenue (1QFY21: 2.67%) made possible by reduced debt and favourable interest rates. This expense will likely increase very soon given the rate hike plus the company’s upcoming expansion that has a debt portion in it. In other areas, Kohat is solid.