Lucky Cement Limited (PSX: LUCK) was set up under the Companies Ordinance, 1984 (now Companies Act, 2017) in 1993. It manufactures, markets and sells cement at its two production facilities; one located at Pezu, in the province of Khyber Pakhunkhwa and the other at Main Superhighway in Karachi, Sindh.
As at June 30, 2020, Lucky Cement Limited is primarily owned by its directors, CEO, their spouses and minor children with over 40 percent of the shares held under this category. Within this, close to 20 percent of the shares are with the directors and their spouses. A little over 22 percent of the shares of the company are owned by its associated companies, undertakings and related parties, followed by 12 percent held by foreign general public; about 11 percent in local general public. The remaining roughly 14 percent of the total shares are with the rest of the shareholder categories.
Historical operational performance
Lucky Cement has, for the large part, seen a growing topline, with the exception of FY10 and more recently in FY20. Profit margins grew up till FY16, reached a peak and have declined sharply with FY20 seeing a single digit net margin.
During FY17, the company saw one of its lowest growth in its sales revenue; in volumetric terms, sales grew by 3.1 percent, with a total of 7.15 million tons. Of this, majority of the growth was dominated by local sales, that saw an almost 14 percent increase, while export sales fell by almost 33 percent. Cost of production increased to make up a little over 53 percent of revenue, up from previous year’s almost 52 percent. So, while gross margin reduced to 46.6 percent, operating and met margin increased, with the latter recorded at nearly 30 percent due to the contribution by other income that grew to more than 4 percent of revenue. This was primarily derived from dividend income.
While the cement industry grew by nearly 14 percent during FY18, the company’s topline registered a 4 percent growth rate- the highest seen in four years. Volumetrically, sales saw a 9.4 percent increase that was primarily driven by local sales; however, exports also grew by 4.6 percent. Cost of production escalated significantly to consume more than 64 percent of revenue. This was attributed to an increase in coal prices, packing material prices and fuel prices. Therefore, gross margin was slashed to almost 36 percent, while bottomline was somewhat supported by other income, but it was not sufficient to sustain previous levels. Thus, net margin fell to nearly 26 percent.
In FY19, the cement industry overall registered a growth rate of 1.9 percent volumetrically, with export sales seeing a 37.4 percent upward jump, while local sales declined by 2.2 percent. For Lucky Cement, on the other hand, total sales volumes declined by 1.8 percent, with local sales reducing by almost 12 percent, and exports higher by almost 61 percent. This translated into a marginal topline growth rate of 1 percent. The local market saw a slow down while export sales of clinker was mainly responsible for the growth in revenue. Cost of production continued to increase, making up almost 71 percent of revenue; this was attributed to currency devaluation, along with increase in input prices. Thus, gross margin fell to 29 percent. Despite the support from other income, net margin also reduced, to nearly 22 percent.
Cement industry’s volumes rose by 2 percent during FY20 with export volumes growing by 20 percent and local sales volumes falling by 0.9 percent. Lucky Cement’s sales volumes fell by 0.6 percent, while the effect on net revenue was more exaggerated at a contraction of almost 13 percent; local sales volume reduced by 7.6 percent and export sales volumes rose by near 19 percent. Cost of production was at its all-time high of 85.5 percent of revenue, due to increase in gas price, packing material prices, and transportation costs on input materials. This resulted in gross margin to drop its lowest of 14.5 percent; this also trickled down to the bottomline, with net margin at single digit of nearly 8 percent for the year.
Quarterly results and future outlook
Cement industry’s volumes during 1QFY21 were backed by resumption of economic activity after Covid-19 related lock downs and revival of CPEC projects. The industry’s volumes grew by 22 percent with growth seen in both, local sales and export sales. For Lucky Cement too, total volumes saw a more than 48 percent growth with both local and export sales seeing double-digit growth. While local sales were driven by additional capacity at Pezu plant as well as demand that was absent in the last quarter. Export sales, on the other hand, were due to higher exports of loose cement and clinker. With cost of production also lower year on year, net margin improved from nearly 10 percent in 1QFY20 to 15.5 percent in 1QFY21.
With the resumption of economic activities after the strict lock down in the event of the pandemic, the company sees a positive outlook on the cement industry. This has also resulted in price stability. It also foresees stable export sales.