Cement sector profits grow 12 percent in first quarter in Pakistan

05 December 2016

The cement manufacturers posted 12 percent growth in their profits during the first quarter of the current fiscal year of 2016/17 on high sales and low financial cost, a research report by Topline Securities said on Tuesday.

An analysis of 15 out of a total of 19 listed manufacturers, representing 95 percent of cement companies’ market capitalisation, the profitability of the sector grew to Rs13.6 billion during the quarter.

Analysts attribute this boost to a 10 percent year-on-year increase in sales, which climbed to Rs58.3 billion and lower financial charges, which came down by 40 percent year-on-year basis in 1QFY17.

A heavy local cement demand (up by 10 percent year-on-year basis in 1QFY17) kept the sales on the higher side, the report said.

“Cement sales would have been higher than this, had there not been a change in property taxation/valuation in Budget FY17.,” the report said adding analysts believe a pick-up in China Pakistan Economic Corridor (CPEC) related activities should drive local demand in the long run.

It must be mentioned here that in Budget FY17 the government amended property taxation/valuation mechanism, which affected real estate projects/activities, which is one of the drivers of local cement sales.

“Average gross margins of manufacturers clocked in at 41 percent up by 292bps year-on-year basis in 1QFY17, owing to declining energy and power costs, whereas financial charges declined by 40 percent year-on-year basis to Rs690mn in the same period — thanks to multi decade low policy rate of 5.75 percent.”

Although profit before tax grew by 16 percent year-on-year basis in the period under review, an increase in effective tax rate by 247bps to 30 percent restricted net earnings growth to 12 percent Year-on-year basis.

“Analysts believe that lower taxation loss reserves (which led to normalization in taxes) resulted in higher effective tax rate.”

Moreover, the listed cement companies under review posted record high margins of 46 percent, up 473bps year-on-year basis in 4QFY16, primarily on the back of higher margin local sales, the report said.

“This, coupled with support from 223 percent Year-on-year basis increase in other income to Rs2.7 billion as a result of strong performance posted by subsidiaries and other ventures, led to 25 percent year-on-year basis increase in profitability of cement companies to Rs17.6 billion in 4QFY16.

Excluding FCCL, the profitability of the companies under review grew by 31 percent Year-on-year basis in 4QFY16.

“It was because FCCL’s silo incident led to lower sales, which went down by 7 percent year-on-year basis in 4QFY16. This coupled with higher effective tax rate, up 19ppts year-on-year basis to 42 percent led to decline in the company’s net earnings, down 30 percent year-on-year basis in 4QFY16.”

On the other hand pre-tax profits of the companies under review grew by 36 percent year-on-year basis to Rs26.4 billion while net earnings were recorded at Rs17.5 billion, up 25 percent year-on-year basis in 4QFY16. This was due to higher effective tax rate, up 6ppts. One of the reasons for increase in effective tax rate was imposition of one-time super tax.

Source – The News