Karachi, The cement sector in Pakistan, as per a comprehensive analysis covering eight major companies that account for approximately 75% of the sector's market capitalization, demonstrated relative resilience in the second quarter of fiscal year 2024 (2QFY24) despite facing significant cost pressures. This performance comes against a backdrop of challenging macroeconomic and political environments that continue to influence demand trajectories for the sector. However, there's an anticipation of an upturn following Ramadan, coupled with potential interest rate cuts, suggesting a window of opportunity for investors in the cement sector.
According to JS Global, sales volumes across the sector depicted a year-on-year decline during 2QFY24, with capacity utilization dropping for most North-based companies. The decline was partially offset by export sales, highlighting a varied performance landscape within the sector. Notably, international coal prices and their dynamic trade-off with local cement prices continue to impact the sector, with a noted advantage for Southern players due to their proximity to seaports.
In terms of profitability, the sector experienced a mixed bag of results, with gross level profitability reflecting adjustments for varying costs, including selling and distribution expenses attributed to axle load-related impacts. Operating level profitability saw a quarter-on-quarter expansion for most companies, although DGKC and ACPL faced heightened pressures due to their inability to fully pass on inflationary cost pressures.
The analysis also underscored the sector's effort in reducing outstanding debt, showing a trend of earlier debt repayment and lower levels of leverage on balance sheets, particularly for KOHC and LUCK. Interest coverage remains comfortable for most players, limiting the sensitivity to interest rate movements. However, the impact of a 500 basis points policy rate change could potentially increase sector earnings by 1% to 15%, with the variation reflecting the diverse financial structures of the companies analyzed.
Despite recent underperformance in total returns compared to the KSE100 index, the sector holds promise for recovery post-Ramadan, driven by anticipated interest rate cuts and a potential boost in demand. This optimistic outlook is contingent on the sector's ability to navigate the prevailing economic challenges and capitalize on the emerging opportunities for growth and investment.
The JS Global report concludes with a detailed breakdown of sales, profitability, and leverage metrics for the companies within the sample, providing a granular view of the sector's performance and prospects. This analysis serves as a crucial resource for investors looking to understand the cement sector's dynamics amid Pakistan's complex economic landscape.