Attock, Cherat, Bestway: Unmoored

To say, the financial performance for cement companies during FY20 was lackadaisical would be an understatement. But to say, it comes as a surprise would be overdramatic. Though cement companies with operations in the south (Attock, Lucky. Read more: “The luckiest of all”, Aug 26, 2020) have managed to turn a profit during FY20 and performed reasonably better, companies in the north recorded the most dismal year in recent past.

Both Cherat Cement (PSX: CHCC) and Bestway Cement (PSX: BWCL) with factories located in the north and supplying mainly to that region are in pre-tax losses. Bestway received a tax credit which covered the entirety of the loss and then some. Attock Cement however—despite a fall in profits—outperformed its peers, almost in league with the likes of Lucky in terms of earnings now.

Domestic market demand has been listless as construction projects across public and private sector domains were not picking up. Companies in the north performed better domestically as public sector spending concentrated in the region throughout the year while they lost on exports due to the retraction of the Indian market and the general slowdown from Afghanistan and other neighbouring markets. Cherat seems to have grown in both segments (up 15%), Attock shone in exports (share in total: 58%) while Bestway recorded an overall decline in volumes (24%).

Attock being a major clinker exporter sold more to exporting markets than domestic ones. Revenues however for all three companies is a different story. Typically, domestic markets grab a higher price per ton sold compared to exports but price competition in the north was tough. Low volume, low price retention translated to Bestway’s substantial drop in revenues. Cherat’s revenues grew however, as volumes were strong.

On the other side, in exports, clinker units earn less dollars than cement which explains Attock’s decline in the top-line given its leaning on overseas sales (Note: the actual volume data was not available and the numbers used here and any calculations thereafter are estimates made by Topline Securities).

Estimated revenue per ton for all three cement manufacturers fell (Attock: 22%, Cherat: 13%, Bestway: 9%) due to the aforementioned price and volume plays. Costs per ton sold however rose for Bestway (26%) and Cherat (4%) likely due to the depreciation of rupee. Attock’s costs fell per ton by 22 percent. Costs should be lower given that coal prices in the international markets have been falling for a good year now—standing at their lowest levels in the past five years—which should have reduced energy costs for the companies. It seems it has worked for Attock given its proximity to the port as well.

Due to these unique dynamics, while Cherat and Bestway are in hot water in terms of margins landing at single digit numbers, Attock managed to keep its margins on the same level as last year. This no doubt helped the company turn an eventual profit despite higher overheads as a share of revenues during FY20 (Attock: 10%, Cherat: 4%, Bestway; 4%). Higher financial costs also ballooned payments for both Cherat and Bestway; especially the former company which has gone into expansions. Finance expense as a share of revenue expanded to 15 percent of the cement player against 7 percent last year (Attock: 3%, Bestway: 6%).

Demand will rebound as the country goes into large construction and development projects after the announcement of the PM’s Naya Pakistan Housing Program as well as the construction package—with tax waivers and subsidies hoping to revive the construction economy. This will attract some investment into prominent projects no doubt adding to domestic demand for cement. Prices are also expected to be revised up as demand becomes stronger. This will reduce reliance on exporting markets and together will help shore up future earnings.