Karachi, August 31, 2023 (PPI-OT): LUCK: Management highlights mitigants to headwinds

Lucky Cement Company Limited (LUCK) conducted its Corporate Briefing yesterday to discuss FY23 results and outlook. As the management expects ongoing macro challenges to persist in FY24, efforts towards increasing cost efficiencies continue to counter demand pressure.

Expanding economical coal sourcing options and incorporating renewable energy sources are among the ongoing initiatives of increasing cost efficiencies. Contribution from Solar in the power mix is expected to increase from 12% to 20% after commencement of Solar plant at Karachi.

Given LUCK's diversification strategy and steady earnings growth, our stance on LUCK remains positive, with prospective capital upside of ~30% from current levels. Our SoTP based Target Price for the share totals to Rs750.

Anticipation of dull volumes during FY24

Lucky Cement (LUCK) held its post result Corporate Briefing session yesterday, in which the key area of concern discussed was prospective demand pressure during FY24 due to the challenging economic situation. Management shared that it expects total volumes to follow a declining trend as seen last year, effectively translating to 5-10% YoY decline in FY24. Management also believes that exports may become viable if international coal prices continue on the downward trajectory. To recall, FY23 total cement volumes reported a decline of 16% YoY.

Focus remains on cost optimization

The company plans to utilize Afghan and Local coal for North plant whereas for South it will likely rely on imported coal. Management believes that lower global coal prices and a rise in the utilization of domestic coal are likely to provide margin support to the cement sector. On the power front, LUCK’s 34MW Solar project at Pezu site has commenced operations while another Solar project announced during 3QFY23 for South plant with a capacity of 25.3MW is expected to commence operations during FY24. Contribution from Solar in the power mix is expected to increase from 12% to 20% after commencement of Solar plant at Karachi. These solar projects are expected to provide support to prospective margins.

Some caveats to meet for LEPCL dividend

Though the coal plant operated by Lucky Electric Power Company (LEPCL - 660MW coal plant) is designed to utilize a combination of domestically sourced and imported coal, it is relying on international coal at present. The reduction in the utilization of Thar coal is expected to persist in the coming months, while enhancements from the same are expected to occur upon the commencement of Phase-III operations by SECMC. LEPCL's long-term strategy remains completely transitioning to locally sourced coal. Management briefed that LEPCL contributed positively to consolidated profits of the company during FY23. To recall, the company faced teething issues in the early phase which were resolved later leading to achievement of 100% plant availability during 4QFY23.

The subsidiary has a stable financial position and is not facing any significant cash flow issues. The tariff true-up is pending, after which it can start dividend announcements. Further clarity on dividend outlook is expected by mid-FY24.

Lucky Motors to face pressure on demand front

For LUCK's Auto and Mobile assembly divisions, import restrictions were a major impediment during FY23. Auto segment sales were down 55% whereas mobile division declined 60% YoY in FY23. In the coming quarters, sales would likely continue to be adversely impacted by inflation-related price increments. The projected economic downturn is anticipated to restrain consumer demand for smartphones, owing to potential reduction in discretionary spending. Management remains focused on cost optimization to ensure sustainable operations.

Second Buy-back completes 44% of target so far

LUCK commenced a second share buy-back of up to 23.8mn of its shares (22% of outstanding free float). Company has started buying these shares back at prevalent prices and the buyback window will remain open till 20th November, 2023. In the ongoing buy-back, as at 30-Aug 2023, LUCK has bought 10.5mn shares costing Rs6bn at an average price of Rs580.14/share. To recall, LUCK completed its first buyback transaction of 10mn shares (3.2% of outstanding shares) 5 months ago.

Long term potential remains intact

LUCK stands apart from the competition due to its diverse portfolio of assets, which includes investments in power, chemical, pharmaceutical, and automobile sectors as well as its capacity to profit from global projects.

We believe LUCK will have a competitive advantage after the latest expansion in terms of market share. We maintain an Overweight stance on LUCK with attractive upside of ~30% from current levels to our SoTP based Target Price of Rs750.