A 3 percent increase in sales may seem inconsequential, signaling weakness, but for the cement industry, a combined offtake growth of just that translated to profits surging by 12 percent. Post-tax earnings, that is. Cumulatively (for all the 17 companies listed on the PSX), the industry earned Rs82 billion in post-tax profits after making sales of roughly Rs 540 billion during 9MFY24, up 11 percent. This was a dullard year for cement companies from a demand perspective, but compared to the rest of the economy, it comes out of the fiscal year, and the economic crisis it carried, fairly unscathed. For now.
Domestic demand has been the bane—the 3 percent growth in offtake was reached through mammoth efforts on the exports front—exports grew 67 percent in 9MFY24 year on year, up from contributing less than 10 percent to the sales mix to chipping in 15 percent. These financial records are till March, for the period 9M. In the two months since, an export share has grown even more—21 percent and 22 percent respectively in Apr-24, and May-24. By the time the year would end, exports would surely be contributing well above 15 percent. Exports pulled demand from a particular low where domestic dispatches have actually declined from last year. Last year when demand was again abysmal.
What worked other than impressive export growth and a sales mix that resulted in a slight expansion in gross margins were contained costs coupled with continued strong pricing power. In fact, prices have never abandoned their support to the top lines and it shows.
To illustrate, estimated revenue per ton sold rose 8 percent demonstrating the marked increase in prices while costs per ton sold given higher fuel, transport, and other raw material costs grew less in comparison, by 4 percent.
Overheads and finance costs remained curtailed considering interest rate levels, up only slightly as shares of revenue (see table). Even so, a similar improvement in other income provided a much-needed buffer.
As a result, the profit before tax for the industry grew 20 percent; and 12 percent after accounting for a 29 percent tax incidence. In 9MFY23, this was lower at 24 percent.
Presumably, the economy is in recovery mode. Interest rates may be lowered which may spur borrowing while the budget is all set to increase PSDP expense. However, the journey to growth will not be a smooth path and there will be many losers. Higher consumption taxes as well as income taxes will keep demand tethered to the bottom for now. Cement companies keep exports as plan B and that’s a business model that has worked for them thus far.
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