Karachi, January 31, 2023 (PPI-OT): LUCK: Some tough months; strong in the long run
Lucky Cement Company Limited’s (LUCK) is one of the first companies to go for an expansion in the ongoing cycle and has recently commenced its 3.1mn tons expansion taking total capacity to ~15.3mn tons, providing opportunity to avail higher market share compared to most peers.
The company’s core business has however been facing dull demand in recent months. Management, in its briefing held yesterday, acknowledged that due to the difficult economic climate, demand pressure would persist during the remainder of FY23. To recall, 1HFY23 volumes reported a 21% YoY decline.
Briefed by the management in its Corporate Briefing session held yesterday, the company is continuously working to lower production costs, such as by diversifying coal sourcing avenues, adding renewable-based power sources, and ensuring uninterrupted production in the case of unavailability of gas supply through cheaper furnace oil stock.
Given earnings growth stored in with stable margins, we maintain an Overweight stance on LUCK with attractive upside of 68% from current levels to our SoTP based Target Price of Rs665.
Construction sector demand to remain dull during 2HFY23
Lucky Cement (LUCK) held its post result Corporate Briefing session yesterday, in which the key area of concern discussed was prospective demand pressure during the remainder of FY23 due to the challenging economic situation. Management shared that it expects total volumes to decline by ~18% YoY for FY23, which effectively translates to 15% YoY decline in 2HFY23.
Some respite can come from the reconstruction demand from flood affected areas in light of the recent international pledges. Management believes that exports may become viable if international coal prices continue on the downward trajectory and prices go below US$130/ton. To recall, 1HFY23 total cement volumes reported a decline of 21% YoY.
Company explores alternative fuel sources
The company’s core business reported a QoQ decline during 2QFY23 at the gross level mainly due to normalization of inventory cost of coal. To recall, the company had used low cost South African coal during previous quarters resulting in higher gross level performance.
Current weighted average cost of coal as per management is around Rs50k/ton, whereas inventory is available for 30 days at both plants. The coal mix of the company comprises of 30-40% international coal, while the remaining 60% comes from Afghan and local coal. LUCK also mixed 1-2% of Thar coal in the mix for testing purposes.
Management shared that currently it doesn’t require to import further coal and would primarily rely on Afghan and local coal. LUCK has not been able to import Shredded tyres for Tire derived fuel (TDF), however alternative fuel like TDF and poultry waste etc. is likely to be introduced to the fuel mix by 4QFY23.
Arrangements to curtail power costs also at play
LUCK’s 34MW Solar project at Pezu site commenced operations during the outgoing quarter while another Solar project announced during last quarter for South plant with a capacity of 25.3MW is expected to commence from 2QFY24. These projects are expected to provide support to margins. Subject to gas unavailability, the company uses furnace oil as an alternate source for power generation, which is expensive compared to gas. Management shared that the company has furnace oil inventory costing less than Rs100,000/ton which is likely to keep operations uninterrupted.
LEPCL starts contributing to the consolidated profits
Management briefed that Lucky Electric Power Company (LEPCL) contributed positively to the consolidated profits of the company during 2QFY23 as the plant is now up and running. The company had some teething issues earlier which, as per the management, have now been resolved. To recall, the 660MW plant had faced delays due to impediments in getting connected to the grid last year. The plant at present has a 92% availability which the company aims to take to 100% going forward. Currently a mix of local and imported coal is being used where 60-65% coal comes from Thar while the remaining 30-35% comprises of international coal.
Going forward, LEPCL plans to shift completely to local coal. The subsidiary has a pending tariff true-up after which it can start dividend payments from Sep-2023 onwards. We believe that the power plant, if it remains fully operational, can add ~Rs32/share per annum to LUCK’s consolidated earnings. Company has a strong financial position and is not facing any cash flow issues as government is paying timely to the efficient IPPs. Management claimed that LEPCL has the lowest electricity fuel cost in the country at Rs15.16/Kwh.
Overseas operations witness higher profitability
The management apprised that the group’s foreign JVs showed an increase at the EBITDA level during the outgoing period. The facility at Congo showed the most upside in EBITDA of 15% YoY. On the other hand, facility at Iraq depicted a marginal decline in profitability. Going forward, the management is hopeful that the foreign ventures will show improved profitability on back of rupee devaluation and enhanced operational efficiencies.
Auto and mobile segments to remain under pressure
Import limitations will continue to be a challenge for the auto and mobile assembly segments of LUCK. Inflation-related automobile price increases would continue to have an influence on sales volumes in the coming months. After the recent SBP circular directing banks to open LCs for only essential businesses, the mobile assembly and automotive businesses face challenges. As per the management, sales volume for Mobile segment is down by 30% YoY whereas Auto sales volume has dropped by 40% YoY. The segments also did not announce any dividend in the outgoing quarter. Management shared that it is constantly engaging with the government to work out a way easing policy restrictions.
Overweight stance on the conglomerate remains intact
LUCK stands apart from the competition due to its diverse portfolio of assets, which includes investments in the power, chemical, pharmaceutical, and automobile sectors as well as its capacity to profit from global projects. We believe LUCK will have a competitive advantage over competitors after the latest expansion in terms of market share. We maintain an Overweight stance on LUCK with attractive upside of 68% from current levels to our SoTP based Target Price of Rs665.