Kohat: Gaining ground

After expanding its cement manufacturing plant from 2.55 million tons to 4.78 million tons—up 87 percent—just last year (Jan-20), Kohat Cement (PSX: KOHC) is preparing to further grow in size, taking capacity to somewhere between 7 and 7.8 million tons annually, evidently expecting a big boost in cement demand over the next few years. After doubling back from last year, its earnings are pulling their weight growing 15x in 1HFY21 with gross margins back in the safe double-digit zone.

The company has maintained a healthy utilization level of 90-92 percent over the past few years and is ready to ramp up production levels by as much as 63 percent to preserve and capture a higher market. In 1HFY21, its utilization was about 78 percent due to the expansion—but thanks to a strong volume growth of ~ 64 percent year on year, market share grew to about 7 percent (from 5% during previous periods). Demand is definitely not taking a backseat with supplies to the domestic market growing unabashedly, even as exports to Afghanistan have also upheld momentum.

Better domestic retention prices brought on by recuperating demand from both private and public sector projects—the former perhaps a function of delayed construction projects taking off—took revenues forward by nearly doubling. Cost of production did not grow by that much as coal prices have been falling, trailing their five-year lows. In 1HFY21, average (South African) coal price stood at about $64.5 per ton, 4 percent lower compared to $67.45 per ton in the corresponding period last year. In fact, estimated revenue per ton sold is up 13 percent compared to a decline of 11 percent of costs per unit sold in 1HFY21.

The company paid 3 percent of revenues toward finance costs due to higher borrowing which is after the rate-cut. Further expansion which will be financed through debt and equity will add to this expense item. On the other hand, unlike other cement manufacturers, Kohat’s overheads are fairly low at 3 percent of revenue standing steady in 1HFY21 year on year.

Risk factors include demand not materializing as much as expected—the company is about to spend millions of dollars toward a waste-heat recovery plant, a coal fired power plant and a brownfield expansion which will weigh it down if demand does not exhibit an exuberance worthy of such an investment. Delays in confirmed Dam construction and CPEC projects due to a variety of reasons, the recurrence of deadly covid—and the vaccine not being available to the population simultaneously—and the much-touted Naya Pakistan Housing Program not injecting enough liquidity in the housing segment to be a catalyzer for construction may all lead to stunted demand prospects.

But if all goes according to plan, and demand exceeds expectations, cement manufacturers will fetch better retention prices in the domestic market and continue to gain market share in a largely growing pie. Kohat is in a great shape to be a top contender for that.