Karachi, January 27, 2022 (PPI-OT): Cements: 2QFY22E margins to broadly hold ground

We present earnings estimates for Cement sector ahead of the 2QFY22 result announcements. We expect margins to remain flat on a YoY basis for the companies as higher sale prices are expected to broadly offset the impact of elevated coal costs.

Sector’s profits for the quarter are expected to jump by 21% YoY on account of 32% YoY higher sales and improved operational efficiencies during the period.

Going forward, we believe a price hike would be needed to maintain margins if international coal prices continue to remain at current levels for the next two months.

Higher sales and stable margins despite high fuel prices

We preview Cement sector’s profitability for 2QFY22 with a sample size of 8 companies. Sector’s absolute profits for the quarter are estimated to expand by 21% on a YoY basis mainly led by higher sales and improved operational efficiencies during the period. During the quarter, top-line is expected to expand by a double-digit growth of 32% YoY over higher prices and dispatches for almost all cement companies. On the costing side, most cement companies managed coal costs effectively and average coal inventory likely costs lower than US$125/ton FoB. We hence expect cement companies to report similar margins as compared to same period last year, owing to the recent price hikes. Cement companies, KOHC and LUCK, along with CHCC and FCCL, are expected to witness relatively higher gross margins compared to peers during 2QFY22.

Attractive valuations

We believe that the sector’s valuations have attractive upside from current levels, not to forget that the cement sector has received enough beating in the outgoing year and underperformed KSE100 Index by 9%. Primary reasons for the lacklustre performance were (1) increasing input costs (mainly coal prices) amid currency de-valuation, (2) lower demand due to rainfall and winter season and (3) fiscal side constraints.

Average forward P/E of our sample base is currently at ~5.0x and current EV/ton of ~US$44/ton compared to pre-COVID 10-year average of US$87/ton also reflects a deep discount of 50% at current levels. Margins for cement players are expected to sequentially improve from 4QFY22 onward with coal prices potentially normalizing and ability of companies to increase prices amid demand pickup as we enter the year before election. Quicker than expected reversion in coal prices is an upside risk for the sector.