Cement companies are well-fed. Evidently, they weren’t just handed a fish for the day. They learned how to fish, which is what has made them significantly successful. One would assume that bigger companies (that have made substantial investments over the years to grab a greater piece of the pie) are for all intents and purposes eating up the smaller fish in a pond that is only slowly expanding. But in this proverbial pond, smaller fish have swum up the stream tremendously well, all things considered.
In 1HFY25 for instance, Kohat and Cherat cement are shining. Both companies are at much higher margins than bigger companies like Lucky, Bestway, and Fauji with revenue streams at much different scales than the two market leaders. Meanwhile, Mapleleaf, a much bigger company with comparable-level margins is standing at a lower earnings point. The other mid-sized company, Pioneer, in the same league as Kohat and Cherat, is lagging behind its peers.
Amid a stream of smaller companies that are still profitable, Attock (in the south), Gharibwal, Fecto, and Flying, Thatta, the latter has experienced explosive growth considering its size. This column has written extensively about it earlier. In 1HFY25 once again, Thatta’s earnings are up 3x, at fairly high margins especially compared to its peers, some of whom are bigger in size than Thatta.
Cost controls by optimizing coal contracts and sources of coal have changed the game for a lot of players in the north. Despite visible demand slowdown, companies on average have improved gross profit and operating profit margins with pricing on their side and costs kept on a leash. Tacit agreement over pricing has enabled companies to keep their revenues growing and market share intact without the fear of price-related retaliation. Thus far, the industry has not seen a price war ensue despite capacity utilization slipping to slightly above 50 percent.
On the other hand, companies have kept their overheads in check while lower interest rates have brought finance costs down too. Companies like Kohat Cement have kept overheads at 2 percent, with little to no finance costs to pay off (1% of revenue), much like Lucky Cement, has been fortunate. Or lucky? This has allowed both big and small players to outperform peers and competitors alike. Thatta has also entered this league, by reducing its overheads (down to 3%) and having only 1 revenue going toward its financial costs. Thatta has to expand its capacity and grow its revenues to financially outpace mid-size and bigger players.
Cement companies are expected to end the fiscal year with an impressive growth trajectory, even if domestic demand which has been slow to burn (in 1H, domestic demand fell 12 percent) continues in the same direction. As companies optimize their sales mix between domestic and export markets, the trajectory of prices will continue to play a dominant role in their profitability. But at the same time, their size (by capacity and revenue) will never determine where they will fall in the winner/loser matrix.
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