Cherat: Steady does it

Amid an economic downturn, somehow the cement industry is on a financial mend—not that cement companies did not perform exceptionally well when demand was down that had translated to offtake dropping 16 percent in FY23 year on year. In fact, combined earnings before tax rose 9 percent during the fiscal year on the back of a combined 20 percent rise in revenues. In 1QFY24, with demand very evidently up compared to last year, the financials are reflecting it; starting with Cherat.

During the quarter, industry sales rose 23 percent—where domestic offtake was up 18 percent. Cherat experienced an 11 percent growth in its top-line that trickled down to a 7 percent growth in its before-tax earnings, and a 3 percent growth in post-tax earnings. The company was able to achieve this through its strong retention prices—cement prices have steadily been climbing over the past two years, companies not shying away from an apparent plunge in its demand. While capacity utilization catapulted south, cement prices rose ever so calmly. This enabled last year’s earnings, and substantiated the first quarter earnings for the fiscal year. Once the company publishes its quarterly report, we will be able to better gauge the individual impact of offtake and pricing on the revenue growth. It is clear though, that both played a role.

Margins paint a more nuanced story. Gross margins year on year in the first quarter are down from last year’s 32 percent to this year’s 31 percent. Last year, cement companies were heavily utilizing domestic and Afghan coal which was much cheaper and readily available than international coal sources at the time. But coal prices in nearly all markets have fluctuated where Afghan coal prices also began to move up. While gross profits rose 6 percent in 1QFY24, with respect to revenue growth, it looks like costs of production were slightly higher this year (relative to revenue). This could be a function of higher average coal and input prices than the first quarter last year.

The company made the prudent decision to make advance payments on its loans which facilitated the drop in finance costs as a share of revenue from 5 percent to 4 percent. Meanwhile, despite inflationary pressures, overheads such as administrative and marketing expenses remained steady at 3 percent of the revenue; together the net impact of the two was lower on the eventual earnings for Cherat.

If offtake keeps growing at this pace, Cherat—like other cement companies—will be much better positioned than last year, as long as prices keep looking up.