Improved price retention, better inventory management, lower coal prices, reduced borrowing costs, and tighter purse strings on overheads, aside from an obvious turnaround in demand — both domestic and foreign — has turned cement’s losses into nifty profits.
That is not to say that gross and net profit margins can once again rival FY17 and FY18 when industry gross margins were 38 percent and 29 percent, respectively, against net profit margins of 23 percent and 21 percent, but they are upward looking and set to improve further. In fact, some believe the industry will soon hit its maximum capacity and may enter another spree of capacity enhancement to cater to the growth spurt of new demand.
The current improvement is self-evident (see table). Gross profits have quadrupled during the first quarter of FY21 against the corresponding quarter last year when local demand was slow, and the north market was rife with competition which led to slipping average prices. The rupee was also weak which made key imports more expenses despite low coal prices — which impacted the whole industry. Many companies in the south could not find demand domestically which pushed them to sell clinker instead of cement abroad which typically grabs lower margins than the final finished product.
The latest trend has not varied too much. Cement companies are invariably still exporting — and more than they were last year, bringing up the share of exports to 20 percent in total dispatches (including clinker). This is not particularly reflective of lower domestic demand but may signify companies optimizing their sales mix based on price retention. Sales go where margins can be best improved and if cement bags are heading abroad, it may indicate better price competitiveness in overseas market against cost of production.
One thing is patently obvious — the government is in the driver’s seat, playing a very positive role in a soon-to-be turnaround in the industry. Through subsidy measures, regulatory incentives, and tax cuts for builders, developers and home-buyers alike, there is a clear policy tilt towards promotion of the construction industry — which will no doubt create a wave of new jobs (unskilled and low-skilled) over the next few years.
Development projects are once again picking up with several dam and infrastructure deals (many of which are CPEC-based) either already kicked off or currently in the conception phase. That together with the construction of already-approved 100,000 houses (a fraction of the total planned 5 million units) will catapult demand, which will create a multiplier effect as private sector investments will also roll in. FY21 will be a good year for cement makers.
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