Margins affected by 10% super tax

Pakistan cement companies listed on the Pakistan Stock Exchange (PSX) are scheduled to announce their financial results for FY21-22 in August-September. The cement industry has fingers crossed to see their top line, which is likely to be impacted by the government's imposition of a one-time surcharge on the previous year's income. The Inter Market Securities Ltd estimated that higher tax and interest would chop earnings of the top seven companies. 

IMS Cement Universe's (comprising Lucky Cement, Chert Cement, Maple Leaf Cement, DG Khan Cement, Pioneer Cement, Fuji Cement and Kohat Cement) cumulative profitability is expected to decline sharply by 29 per cent QoQ to PKR10.3bn (US$49m) in the 4QFY21-22. However, it is likely to increase by four per cent YoY.

The analyst adds that despite elevated coal prices (imported and Afghani) and reduced total dispatches, sector gross margin is likely to increase by 1.1 percentage points to 25 per cent in the 4QFY21-22. However, a 10 per cent one-off super tax will reduce earnings on a QoQ basis. 

Demand contracted significantly
During 4QFY21-22 total cement sales declined by three and 13 per cent QoQ and YoY, respectively to 12.1Mt, while local dispatches increased by two per cent sequentially. The sharp decline in exports, 51  and 70 per cent QoQ and YoY, respectively in 4QFY21-22 to 0.6Mt continues to weigh heavily on utilisation levels. Overall, industry utilisation stood at 70 per cent compared with 81 per cent in the same period last year. The overall increase in manufacturing cost has discouraged southern players from exporting cement/clinker at current prices, which have not moved much in tandem with cost.

Looking ahead
The analyst believes the monsoon spell, elevated construction costs and lower spending from the government amid fiscal tightening will keep a check on domestic cement demand in the 1QFY22-23. Despite the contraction in cement demand, we expect local cement prices to rise due to higher coal prices and inflationary pressures. Hence, this is likely to sustain gross margins in 1HFY22-23. The next key development will be demand dynamics when the new capacities start commissioning.