Fauji: More power?

There are certainly bigger and better cement players in the market than Fauji but suddenly the company (listed on PSX: FCCL) has begun the new year galloping in the front row, not far behind the big leagues. Despite muted demand and rising costs, might one add. Fauji is slated to become the third largest player in the country soon.

In 1QFY23, revenues for the company rose 27 percent compared to the same period last year and soared 2.6 times compared to the same period two years ago in 1QFY21. Last year, the company finalized its amalgamation with Askari Cement that took its annual top line up 123 percent during FY22, the company doubling its earnings compared to the previous year. The merger has done wonders for the company’s capacity and revenues.

Rising retention prices have only helped. Even though demand has remained lacklustre—expected by the company to drop 10-15 percent during the current year—the company’s revenue per ton sold (calculated using estimated dispatches) grew 69 percent as cement prices have maintained strength in the market. Costs per ton however rose higher—72 percent—owing largely to higher coal prices, which led to the decline in margins from 30 percent to 29 percent.

Even though the overheads sustained at 5 percent of revenue, the company inherited debt (now costlier due to higher policy rate) from Askari that led to the higher finance costs—rising from just 0.8 percent of revenue this period last year to 2 percent of revenue in 1QFY23. This translated to an earnings growth of 10 percent.

Fauji has a lot to look forward to this year given the two new expansions which will take its market share even higher in the country, moving it even a step further. However, there isn’t much to look forward to in terms of demand at the moment as the country recovers from floods and a debilitating economic crisis that will bring a consumption slump. Buying power at such inflationary times may slowly recede which reflects in current cement off take.

On the costs front, even though more local and Afghan coal is consumed, global coal prices will remain under pressure and a matter of concern given the company still imports 30 percent from South Africa. Meanwhile fuel and power prices are also rising. Though the company uses nearly half of its energy using captive power, high tariffs and prevailing coal prices will put pressure on the margins which can only be saved by higher cement prices in the markets. Prices however will ultimately be decided by how much more the consumers are able to absorb till they take a significant step back.