Of the three cement manufacturers in question, MapleLeaf Cement (PSX: MLCF) is really pulling down the team average, as Cherat (PSX: CHCC) gets saved by a tax reversal and Bestway (PSX: BWCL) gets saved by being Bestway—the top cement manufacturer in the country—though not without its own set of setbacks. But all is not well across the sector, and by FY19, most of them, if not all, will be worse-off than they were last year. Let’s look at three factors driving these players in reverse.
First is demand. It is now well-acknowledged that domestic demand in construction is less than robust due to a multitude of reasons including public development expenditure cuts, slowdown in infrastructure projects, economic fatigue transferring to commercial and housing real estate sectors. Not to mention, a restriction on non-filers for the purchase of property above Rs4 million, which itself has long term implications on construction in the private sector. Traditional export markets for north players like India and Pakistan have also slowly closed their doors—with the Indian market all but shutting down exports due to political tiffs and Afghan market opening its borders to other cement exporters.
Second is a price. Retention prices have fluctuated in the domestic north market due to increased price competition as more players are vying for a limited market. Between Feb and March, prices dropped by Rs20 per cement bag, and in some markets where competition is intense, more than Rs30 (read more: “cement cartel: do not resuscitate”, April 11, 2019). On average, however, prices followed a similar pattern as last year. Most players associate the restrained revenues to the lack in demand, rather than prices, even as shocks have come in.
For MapleLeaf, it seems the cards were stacked against it as it reported negative revenue growth. The loss of the Indian market has made a dent on its revenue streams as MapleLeaf was a major exporter to that market. Meanwhile, both Cherat and Bestway just about made it above the sales last year. Unlike the players in the south, north players cannot readily export to far-off markets to have optimal utilization. Having said that, south players aren’t doing so well either as they are selling clinker, rather than cement to markets overseas which fetches substantially lower prices for them.
These two factors together with our third factor: cost of imports, have brought margins for Bestway down to 32 percent in 9MFY19 (9MFY18: 36%); whereas 21 percent for MapleLeaf (9MFY18: 30%); and 19 percent for Cherat (9MFY18: 23%). Fuel and power has historically made up for 50-60 percent of the total cost of sales for cement manufacturers (in the case of Bestway, these costs going up to 69 percent during high cost situations) and coal being a major power source has substantial impact on these coals. With the latest round of rupee depreciations, imports have become more expensive. The rupee depreciated by 13 percent between July-18 and Mar-19 and by 27 percent since Jan-18.
Coal prices in the international markets however have recently come down. While they averaged $94 per ton in the 9MFY19, against $91 per ton during 9MFY18, between Jul-18 and Mar-19, prices slid by 35 percent landing at $78.8 per ton in Mar-19 against $106 in July, fluctuation in between the months. It comes down to effective inventory management for cement players to mitigate the risks related to exchange rate and global price movements. Analysts have been forecasting a downward trend in coal prices but future devaluation may balance any recovery right out.
On the improvement front though, Bestway remains the only player of the three who cut down significantly on its administrative expenses with total indirect costs coming down to 6 percent of net revenues against 9 percent in 9MFY19. MapleLeaf’s also dropped slightly due to a cut down in other expenditure while Cherat’s 5 percent remained constant. However, all three players saw a boost in finance costs, due to expansion related borrowing that has and further will become more expensive with policy rate hike (see table).
As mentioned earlier, Cherat got a tax reversal that saved its bottom line from bottoming out as without the tax reversal, profits were plummeting. MapleLeaf did see a massive drop in earnings while Bestway also sailed through at a lower effective tax rate of 10 percent in 9M, instead of 26 percent this period last year registering a positive growth—but barely. It is now clear that the industry will maintain on these levels of margins and profits as FY19 nears its end as major fundamental factors are expected to remain the same.
Comments
Comments are closed.