Karachi, September 16, 2021 (PPI-OT): Cement: Briefing session key takeaways

A briefing session with four cement companies was held yesterday to discuss FY21 results and the sector’s outlook. We present key takeaways from the session.

The cement sector has been facing rising input costs and freight charges for some time while local demand growth has also remained subdued in recent months due to heavy monsoon in Punjab. If this demand picks up, players in the North would be in a somewhat better position to increase retail prices to relay input costs, particularly coal price hikes. If any, we expect delayed nominal price hikes. Here, we would like to highlight the government’s pressure on the sector to keep prices in check which could prove to be a major constraint for manufacturers (refer to our report from last month titled ‘Cements: Tough months ahead’).

Lucky Cement

Lucky Cement Limited (LUCK) announced its FY21 result on August 9th, 2021, wherein the company posted consolidated earnings of Rs28.3bn translating into an EPS of Rs70.69. The company also held a corporate briefing session after its result announcement (refer to our notes here) to discuss FY21 results and the outlook of the company and the cement sector in general.

The company expects that an uptick in economic activity will trigger good demand for the cement sector where construction packages announced by the GoP, focus on housing projects and dams and other CPEC related activities will likely help generate decent demand.

Higher commodity prices will keep cement business’ margins under pressure for some time. LUCK’s current coal inventory has a weighted average cost of ~US$100/ton but it will be around current levels of international coal prices by October. The company also highlighted that limestone costs have increased in the Southern region and now are similar to prices in North (~Rs120/ton). The current retention prices in the Northern region are around Rs7,800-8,000/ton.

The company shared that it is focusing on value creating projects at the moment after which it may resume its dividend policy. Talking about Lucky Electric Power Company, the management shared that the plant is expected to come online by 2QFY21.

Lucky Motor Corporation has plans to launch the Peugeot brand and expand on the KIA lineup in the coming months. The subsidiary has also entered into an agreement with Samsung recently for mobile assembly; the plant is expected to come online by Dec-2021.

Attock Cement

The management of Attock Cement (ACPL) believes that coal prices will remain high until Feb-2022. The company’s current average coal inventory costs US$105/ton but it is expected to rise to current rates shortly. Local retention prices are in the range of Rs7,500-8,000/ton. On the other hand, contribution margin from exports is negative and the company is exporting just enough to maintain a footprint in the regions it exports to.

The company targets 1QFY24 for the CoD of its Line-4. A loan of Rs9.7bn has been arranged out of which ~5bn is under LTFF and 4.7bn under TERF facility of SBP. The loan has tenure of 10 years with a 2 year grace period.

Gharibwal Cement

Gharibwal Cement (GWLC) also shares a similar view on coal prices and shared that it holds an inventory of ~2 months which currently has an average cost of ~US$110/ton.

If the board of GWLC decides to opt for an expansion it’ll take around 2 years to complete. The company might opt for a hybrid plant in that case, where major components will be European while some basic motors and steel structures will be Chinese.

DG Khan Cement

The management of DG Khan Cement (DGKC) believes that the new cement expansion of 10-14ktons/day will come online by 2025. The estimated CAPEX is US$250mn. Company will be taking on debt for the expansion and hence total debt of the company will remain in the range of Rs50-55bn in the coming years.

The company has recently completed the installation and commissioning of its 30MW Coal fired plant at Hub. With this plant coming online the total captive generation capability at Hub site has reached ~40MW.

Management is of the view that if coal prices remain at this level and the sector is not able to pass it on in prices, cement companies could incur losses in the coming quarters.