The floods that hit earlier this fiscal year will haunt not only the countrys economic account till June 2011, but also the balance sheets of some relevant sectors. The case of Lucky Cement in the cement sector is a prominent one.
While a year-on-year comparison of the third quarter shows improving margins for the company, change during 9MFY11 vis-à-vis the same period last year depicts descending margins.
The falling out of the 9-month results is plausibly due to the carryover effects of the floods, which affected the companys revenues significantly in the first quarter this fiscal year. Besides this, the slashing of government spending on PSDP is also a key contributor to the decline in the companys local cement dispatches.
While local sales revenues thrived during both the 3QFY11 and 9MFY11 relative to the same periods last year, increasing by 55 percent and 41 percent respectively, export sales revenues witnessed a drop of 27 percent and 22 percent respectively.
On the local front, the rise in revenues was helped by an increase in cement prices, as well as volumetric growth due to post-flood reconstruction activities.
On the international front, however, volume of exports witnessed a drop of 33 percent, most likely due to an oversupply scenario in the GCC countries, and the reduced international prices of cement, which affects competitiveness of local companies.
In total, volumetric sales decreased by 12 percent to 4.28 million tons, indicating that the increase in turnover was largely led by the rise in local cement prices.
Because of increasing cost pressures, arising from high costs of fuel and power and rising prices of coal in international markets, gross margins declined by 2 percentage points for 9MFY11.
Yet, a fair surge in turnover for 3QFY11 of 10 percent helped buoy up gross margins for the third quarter by 2 percentage points.
Successful implementation of the Waste Heat Recovery Systems at both Karachi and Pezu helped the company through the trying period of high fuel prices, as the projects afford Lucky the benefit of cheap electricity, thus reducing the reliance on fuel.
The company also enjoyed a handsome year-on-year decline in distribution costs during 9MFY11 and 3QFY11, which helped arrest the drop in operating margin to 1.7 percentage points on a 9-monthly basis, and helped it rise by 5.5 percentage points in the 3rd quarter. The decline in distribution costs can be attributed to the fall in export sales which brings about a decrease in related expenses.
By and large, the better performance of the company in 3QFY11 was reflected in the over 55 percent increase in after tax profits from Rs653 million in 3QFY10, though it declined marginally by 3.3 percent in 9MFY11. The net margin in 3QFY11 was the highest quarterly margin this year, and since 1QFY10.
Future prospects for Lucky appear favourable as far as the local market is concerned, owing to post-floods reconstruction activities that are likely to keep up local dispatches.
As far as exports are concerned, however, international prices are likely to stay competitive, putting pressure on the companys export dispatches, though the company might be able to pass on the impact of high costs in international markets in future as even international companies are facing high costs of production due to rising coal prices.
The resumption of cement exports to India comes as positive news, though the proportion of sales to India is not very large relative to total export sales. Yet, rising demand from the neighbour does promise a rising potential market. Expected upbeat demand from Afghanistan is also likely to be the saving grace of the companys cement exports.
However, rising coal prices, expected to stay up in the near future, are likely to pose a great challenge for Lucky in maneuvering its cost of sales, though the use of alternate energy by the company lends them a competitive edge.
Lucky Cement
P&L (Rs mn) 3QFY11 Y/Y chg 9MFY11 Y/Y chg
Net sales 6,504 10% 18,531 3%
Cost of sales 4,438 7% 12,498 6%
Gross profit 2,065 17% 6,033 -4%
Gross margin 32% 33%
Distribution costs 697 -15% 2,512 -1%
Operating profit 1,313 51% 3,307 -6%
Operating margin 20% 18%
Finance costs 118 -2% 412 -2%
PAT 1,014 55% 2,475 -3%
Net margin 16% 13%
EPS (Rs) 3.14 7.66
Source: KSE notice
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