Despite increase in power tariffs, Pakistan's cement sector posted 19percent growth in 1HFY14 as profits grew to Rs 18.7bn. While higher cement retention prices fuelled 13percent growth in the sector's net sales, declining finance costs, due to smooth leveraging, added more pace to the growth in net earnings.
Resultantly, listed cement sector market cap has increased by 4pcYTD while benchmark KSE-100 Index is up by less than 1pc over the same period, according to report released by Topline Securities. Our sample includes 11 companies that represent 91pc of listed cement companies' market cap. Amongst the sample companies GWLC and BWCL were the star-performers depicting bottom-line growth of 92pc and 46pc, respectively. Other major players like FCCL and LUCK depicted bottom-line growth of 36pc and 20pc, respectively, it stated.
1HFY14 profits up 19pc YoY,31pc from 1QFY14 Though local sales volume grew by meager 2pc in 1HFY14, cement sector was able to post top line growth of 13pc to Rs 87bn as against Rs 77bn in the same period last year. The prime growth driver remained 11pc rise in cement retention price (per bag) as it rose to Rs 375 versus Rs 338 in 1HFY13. As a result, sector's operating margins increased by 80bps as distribution costs dropped 15pcYoY due to lower export volumes.
The follow-through impact of this was witnessed in pre-tax profits of the sector which increased by 24pc to Rs 24.3bn. However, this positivity was diluted by 3pps higher effective taxation, which eroded 5pc profitability of the sector. As against the previous quarter (1QFY14), profits are up 26pc on pre-tax and 31pc on post-tax basis. Gross margins at 36pc, finance costs down 25pc; with increase in retention prices sector's gross margins were able to sustain power tariff hike and remained flat at 36pc. Moreover, reduction in the leverage of the cement sector translated into 25pc reduction in financial charges to Rs 2.8bn.
Resultantly, sector's interest coverage ratio improved to 9.6 xs compared to 6.2 xs in 1HFY13. Compared to 1QFY14, gross margins of our sample companies were up 109bps while finance costs dropped 14pc in 2QFY14. GWLC and BWCL: Best performers. Amongst the cement sector players GWLC and BWCL remained the top performers as their profits grew by 92pc and 46pc respectively in 1HFY14. Out of our sample, 5 companies posted earnings growth of more than 20pc. Profits of major cement players like LUCK, FCCL and MLCF grew 20pc, 36pc and 10pc respectively, while DGKC recorded 8pc decline (primarily due to 9pcYoY drop in gross profits), the report concluded.