Even as exports slide into the background, cement companies are exceeding expectations. For DG Khan Cement (PSX: DGKC), the one dominant driver in 1QFY22 is substantially improved pricing power in key markets. Given the company’s presence in both north and south zones—with the added ability to export clinker overseas—DGKC has the advantage of optimizing its sales mix keeping the movement in retention prices into consideration. It seems DGKC is still trying to manage these dynamics as total dispatches have not grown from last year. The company’s turnaround from a loss to a profit this quarter, however, is a healthy start.
Estimated sales for DGKC show a decline but revenues have grown by 6 percent owing to improved retention. On average, according to Pakistan Bureau of Statistics (PBS) weekly price data, prices during the quarter are up 20 percent from last year—slightly higher in the north markets. In fact, the gap between prices in the north zone and south zone (typically, prices in the south remain substantially higher than those in the north where competition is tougher) has shrunk over the past year. Prices in the north are keeping up with the pressure and delivering, much to the chagrin of construction developers.
Based on estimated dispatch numbers (official numbers are not out yet), DGKC’s revenue per ton sold improved 38 percent during the quarter. Even though coal prices have remained in massive flux over the past few months, becoming oh so expensive, Pakistani cement companies have diverted imports from South Africa to Afghanistan or locally sourced coal which might not be the best quality but at a time when prices have been increased by 200-300 percent in a matter of months, something had to give (Read: “Coal calls”, Oct 1, 2021). Once coal prices in the global market normalize, companies are likely to switch back to better quality coal from abroad. The trade diversion helped to keep the rising costs at bay during the quarter shielding margins to a great extent from a giant dip. Gross margins for DGKC grew on the back of these factors, landing at just shy off 20 percent.
The company’s finance costs as a share of revenue remained 7 percent. The company has relatively higher overheads than peers at 7 percent of revenue—during the quarter, operating expenses rose significantly. A major thrust to the bottom-line was also provided by the “other income” component (includes income on bank deposits, mark-up on loans to related parties, dividend income, rental income etc.) that contributed 42 percent to pre-tax profits which means reliance on non-business income is pretty high.
Given export markets drying up slowly—owing to a variety of factors including ballooning freight costs—DGKC should divert all focus onto capturing a higher share of the domestic market where retention prices are still moving up amid a demand that might not be keeping pace with expectations.
