Cherat: worth two in the bush?

Despite a somber finish to a shaky start, some lucky breaks notwithstanding, Cherat has given Rs1 per share in dividend (10%) to its shareholders. It’s not a lot compared to Lucky’s 65 percent but it’s something. This is at a time when before-tax profits (Rs 1 billion) have fallen by 51 percent, though net profit after tax landed higher—at Rs 1.8 billion after a tax reversal in FY19. Dividend signaling theory purports that dividends are a positive signal from the management of the company regarding its future profitability. Last year, the company gave Rs4 per share as dividend so the decline to Rs1 could be good or bad, depending on how one views the situation. At the time of writing this, the company’s stock rose 1.7 percent against a market decline of 2.11 percent.

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Given the dramatic changes in economic environment in general and cement dynamics in particular, Cherat wants investors to remain confident—and put. As the adage goes, a bird in hand is worth two in the bush. No doubt, the company’s financials have improved since 9M of the year where revenues barely inched from last year. In the full financial year, the company boosts a 10 percent revenue growth which could only have been possible with a demand improvement. In 9M, the company’s total dispatches fell by 14 percent. Better retention prices allowed it to earn a positive growth in sales. By that measure, demand for Cherat may have improved.

Demand across the cement industry has been lethargic. Particularly in the north zone where major demand comes from infrastructure and development projects undertaken by the government. Cuts in PSDP, and lower appetite for commercial real estate and housing projects (there was also a ban on property purchase for non-filers) brought demand to a standstill. Exports in the north zone have also suffered as Afghanistan and India, the primary markets for Pakistani cement via land became less receptive, the latter closing down for Pakistani goods altogether. This meant the 12-15 percent dispatches that could be steered in that direction had to be sold locally. As a result, most cement companies in the north have suffered. Cherat had better luck.

Cherat’s positive revenue growth vouches for its growing market share, though costs remain a thorn on its side. Globally South African coal prices have come down—they averaged $93 per ton in FY18 and came down to an average of $87 per ton. In fact, while they grew 27 percent last year, coal prices fell 33 percent since Jul-18 till Jun-19. Though coal was cheaper, electricity and fuel prices were higher, while rupee depreciation also put pressure on the cost of imports.

As earlier opined here: “It comes down to effective inventory management for cement players to mitigate the risks related to exchange rate and global price movements”. Gross margins, EBIT margins and Net profit margins have also slid. Though the company has kept a check on its various expenses, its finance costs have risen due to rising KIBOR rates. Monetary policy tightening has raised cost of borrowing significantly. The company is paying mark-up on short term borrowing as well as expansion relating debt. As a result, finance costs as a share of revenue grew to 5 percent (FY18: 2%). But at the end of it all, tax credit saved the day for Cherat, though it could not offset some major expense ticket items.

Cherat’s third production line is now online. The company has a lot more capacity now than it did last year. It needs to manage its exchange, interest rate and concentration risk, while managing its inventory optimally. Coal prices are at their very low right now and it would do well for cement companies to stock up.