Lucky Cement Limited

Lucky Cement Limited (PSX: LUCK) was set up in 1993 under the Companies Ordinance, 1984 (now Companies Act, 2017). The company manufactures and sells cement. It has two production plants; one is in the province of Khyber Pakhtunkhwa (KP) at Pezu, and the other is located at Mian Super Highway in Karachi, Sindh.

Shareholding pattern

As at June 30, 2021, over 40 percent shares are with the directors, CEO, their spouses and minor children. Within this, over 19 percent and 18 percent are held by directors & spouse, and sponsors, respectively. Nearly 23 percent shares are held by the associated companies, undertakings and related parties, while the local general public owns over 13 percent shares, followed by 12 percent held by the foreign public. The remaining about 11 percent shares is with the rest of the shareholder categories.

Historical operational performance

Lucky Cement has mostly seen a rising topline over the years, but since FY16, profit margins have been on a decline until FY20, before they improved again in FY21.

In FY17, revenue rose by a little over 1 percent whereas in terms of volumes, sales were higher by over 3 percent, taking the total to 7.15 million tons. Majority of this growth came from local sales that registered a growth of 14 percent, while on the other hand, export sales declined by 33 percent. Production cost, however, grew marginally to over 53 percent, from 51.8 percent of revenue in FY16. Thus, gross margin also fell from 48 percent to 46.6 percent. But operating margin and thus net margin also, saw an upward revision to 41 percent and nearly 30 percent, due to significant contribution from other income that came essentially from dividend income, coupled with a decline in distribution expense, as a share in revenue.

Revenue in FY18 grew by 4 percent that was the highest recorded since FY14, whereas the industry, as a whole, saw a 14 percent rise. For the company, in terms of volumes, sales increased by 9.4 percent, that was largely attributed to the rise in local sales. Some contribution was also made by export sales. But cost of production jumped to over 64 percent of revenue that shrunk gross margin to 35.7 percent. This was a result of an increase in coal prices, packing material prices and fuel prices. But the fall in operating and net margin was somewhat contained due to a rise in other income that grew to Rs 2.6 billion from Rs 1.99 billion and tax expense was also relatively lower for the year. Thus, net margin fell to 25.7 percent.

The company saw a marginal growth in revenue at 1 percent during FY19, while the industry saw a 1.9 percent growth volumetrically; export sales were higher by 37.4 percent, while local sales fell by 2.2 percent. For the company volumes were lower by 1.8 percent; local sales fell by 12 percent due to a slowdown, while sales of clinker mainly contributed to the growth in revenue. On the other hand, export sales witnessed a growth of 61 percent. Production cost continued to make a larger share in revenue at nearly 71 percent of revenue, shrinking gross margins to 29 percent. This was largely due to the effect of currency devaluation combined with increases in prices of inputs. But the continuous rise in other income contained the drop in net margin; the latter was recorded at a lower 21.8 percent for the year.

In FY20 the company saw a major contraction in revenue of 12.8 percent, after rising consecutively for 9 years. In terms of volumes, local sales fell by 7.6 percent, while export sales increased by 19 percent. For the industry too, local sales were lower by 2 percent, while export sales picked up by 20 percent. Production cost for Lucky Cement escalated to an all-time high of 85.5 percent, a result of increase in gas price, transportation costs and packing material prices. Thus, gross margin reduced to an all-time low of 14.5 percent while net margin was recorded at single digits for the first time, at nearly 8 percent.

In FY21, revenue growth, recorded at over 50 percent, recovered remarkably, nearly Rs 63 billion in value terms. Volumetrically, sales were higher by 30.7 percent; local sales were higher by 38.3 percent, while export sales were higher by 11.3 percent. This is attributed to the recovery in demand after lockdowns eased for Covid-19 and the support from the government to encourage construction. Moreover, identification of new markets, boosted exports. Thus, production cost also made a lower share in revenue at nearly 70 percent, allowing gross margin to increase to 30 percent for the year. This growth also offset the increase in other expense and taxation, thus net margin was also recorded at a higher 22.3 percent.

Quarterly results and future outlook

Revenue in the first quarter of FY22 was higher by 18 percent year on year. in terms of volumes, local sales were higher by 3.7 percent, while export sales were lower by 30.4 percent. The latter, in general, for the industry was due to increase in coal prices and freight costs internationally, whereas local sales was due to sustained demand. While gross margin was marginally lower year on year, net margin was significantly supported by other income. Thus, it was recorded at a higher 19.4 percent.

The support from the government and the construction projects of dams, hydropower stations, and CPEC will continue to generate demand. The challenge, however, is the rising prices of coal, furnace oil and freight charges that make up a significant portion of costs for cement industry.