One cannot deny that the dichotomous trends facing the cement industry are nothing less than interesting. On the one hand is the burgeoning local demand working in its favour; on the other are the equally ballooning costs of production.
Market leader Lucky Cement (PSX: LUCK) is at the helm of this growth with 17 percent market share (FY17:18%) bringing brown-field expansions of nearly 4 million tons, diversifying into new projects and boasting a clean debt-free balance sheet. But the outgoing fiscal year hit the dominant player where it hurts the most – the bottom-line. And three factors played a critical role.
Total volumetric sales of 9 percent including exports (north: 18%, south: 11%, Industry: 14%) translated into 4 percent growth in revenues that were marred by lower retention prices, particularly in the north. Revenue per unit fell by 5 percent. Retention prices have been raised in July by Rs60 per 50-kg bag across cities which may counter the rising cost of production.
Which leads to the second factor: commodity prices – per ton cost of sales grew by 15 percent in FY18 due to the increase in coal and fuel prices which constitute more than 50 percent of costs. Coal prices surged by 21 percent in FY18 year on year. Volatility in coal prices is expected to continue well into FY19 with many analysts estimating prices to go further up if China restricts supply and demand perseveres.
The third factor that contributed to the margins falling to 36 percent (FY17: 47%) in FY18 is the deprecation of rupee against dollar by 5 percent year on year. Higher distribution costs were owing to an incremental increase in exports that led to greater freight costs. Overall, however, indirect expenses were kept in check – they fell from 10 percent of revenues to 9 percent in FY18.
Despite sobering financial trends in general for the cement industry, Lucky holds many different cards in the future that will work in its favour. The company intends to fund the entirely of its expansions of over Rs60 billion with internal cash so it will not have to worry about rising interest rates and finance costs. The company has achieved financial closure of its 100 percent indirectly-owned subsidiary Lucky Electric Power Company (LEPCL), which will provide dollar-hedged earnings.
In addition, its partnership with Kia is panning out as planned with commercial production expected in 2QFY19 while the Iraq production facility will come online by end of CY19, beefing up the company’s balance sheet. These projects will reduce Lucky’s concentration-risk from the frequently-changing dynamics of the local cement industry.