There is much cause for celebration for cement companies whose combined earnings, after accounting for tax, has more than doubled, a multiple of 2.2x to be exact in the third quarter of the fiscal year FY25. In 1H, consolidated profits were up 31 percent. The tide has turned quite effortlessly for cement companies, some more than others, as it appears that the rest of the year would be smooth sailing.
The major driver of earnings this time—unlike in many previous quarters—is not prices. It is a slowly improving demand. Volumes in 3Q went up by 4 percent in tons; of the 11 million tons sold, 16 percent were exports that grew 19 percent. Exports tipped the scales ever so slightly even as domestic dispatches have started moving slowly up too.
Though prices have been erraticand mostly looking up, revenue per ton sold for the 16 listed cement companies grew only 2 percent on average. What improved margins was ultimately the reduction in the average costs that fell 2 percent in 3QFY25, vs the same period last year. This helped margins rise to 29 percent, from 26 percent last year. In 1HFY25, gross margins had climbed 31 percent as retention prices performed substantially better for the companies during that period. For instance, revenue per ton sold at that time grew 8 percent year on year, while costs rose only 2 percent. This enabled net margins to land at 16 percent. In 3QFY24, net margins are a phenomenal 23 percent.
Lucky and Mapleleaf cement contributed to this major bump as their other incomes ballooned. For both companies, net margins were much higher than gross margins, as other income not only covered overheads but more than buttressed the bottom-line. To illustrate, during the quarter, Lucky’s other income was 36 percent of revenue and 64 percent of before-tax earnings while Mapleleaf’s was 34 percent and 65 percent respectively. Together the two companies earned roughly 55 percent of the total profits earned by the 16 cement companies. That is a sweetspot for Lucky to become more comfortable in, and a fresh surge for Mapleleaf that has until now been pretty much stayed middle of the pack.
As such, if just EBITDA is considered, the combined growth stands at 16 percent which is decent considering revenues rose only 6 percent during the quarter. The core business for most cement companies is operating above water, with exports taking on the charge wherever domestic markets begin to flounder. The combined overheads are controlled (6% of revenue) while financial costs are down significantly from 7 percent to 4 percent of revenue that also helped shore the earnings for most cement companies.
As demand continues to rebound, cement companies are well-positioned for sustained profitability, even if they end up paying penalties or fines imposed by the Competition Commission of Pakistan (CCP) over allegations of long-running price fixing, a cartel case dating back to 2009 that has recently resurfaced. Notably, the cement association is still contesting these claims.
