At a time of lethargic domestic demand, rising price competition and shaky cement exports to certain markets, Bestway Cement (PSX: BWCL) inspires confidence. Since its result announcement on Friday, the stock climbed 4.38 percent in day trading (cement stocks up 0.73%)—the stock has climbed by 9 percent in the last month alone. In 1HFY19, the net revenue growth of 5 percent translated to an 11 percent rise in the bottom-line primarily due to an overall tighter control on indirect costs during the half year and stellar second quarter performance led by higher demand and a tax reversal.
In fact, effective tax rate for the half year was 9 percent (Q1: 24%) against 25 percent this period last year. Earnings would have dropped by 9 percent at last year’s rate so this (owing to expansion that came online in Aug-18) couldn’t have come at a better time. In the first quarter, domestic and export volumetric sales fell by 2 percent and 4 percent respectively leading to an 8 percent drop in revenues. In the second quarter, a turnaround in volumetric sales and better retention prices led to a 17 percent growth in the top line.
Companies have raised prices for cement bags on average by 7 percent between July and Dec-18. These prices rose by 8-12 percent for cities like Islamabad, Molten and Peshawar that are in the north where cement players have experienced higher cost fluctuations. The second quarter fetched better prices but despite that, margins for cement players have suffered. Bestway’s fell to 33 percent in 1HFY19 (1HFY18: 37%)—as a point of comparison, these margins were a whopping 46 percent in 1HFY17. Talk about falling from grace. Reason: the dual effect of lower half yearly volumetric sales, and higher costs of production.
The government not only slashed the PSDP spending, private sector commercial and housing construction spending also cooled down leading to lower cement sales, particularly in the north zone. There is also an effective ban on non-filers to purchase properties. For north players that export to Afghanistan and India, exports have fallen as both markets have become less receptive. Afghanistan for instance, has opened wider doors for Iranian and other cement coming into that market and is working on creating domestic capabilities. Political tensions between the two countries have not helped.
Meanwhile, input costs have been up. South African imported coal prices rose by 10 percent on average between July and Dec-18; imports have become more expensive due to rupee depreciation of 14 percent while prices of other fuels as well as grid electricity has also been higher.
The company has cut down significantly on its administrative expenses—total indirect costs came down to 6 percent of net revenues against 9 percent this period last year. Finance costs, due to higher expansion related borrowing and hike in policy rate, rose to 3 percent against 1 percent of net revenues. Earnings could have easily fallen if it had not been for the tax reversal in 2QFY19.
Events of the past week or so may have further exacerbated outlook for cement makers, particularly those in the north and Bestway is one of them. After India withdrew the MFN status from Pakistan, reportedly, Pakistani trucks are stranded at the border to India unable to pass. Companies like Bestway exporting cement to India will suffer.
On the costs side, analysts have forecasted a downward trend for coal prices due to supply glut and depleting coal demand in China.
his is positive news for cement manufactures here at home. Exports have fetched better prices due to rupee depreciation for now but for north players, Indian market shutting down access may hurt the top-lines, especially if domestic market does not recover. Any major development expenditure aside from PSDP allocations is out of question. For those waiting for PM housing plan to kick off now may have to just keep waiting for a good while.
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