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Kohat Cement (PSX: KOHC) is slowly gaining ground, turning losses into earnings that rival the company’s (and industry’s) glory days of FY17 and FY18 when demand was soaring and costs remained abated. With the successful completion of its fourth production line that expanded capacity to about 5 million tons (up 87%), Kohat dispatched almost 60 percent more cement during the year compared to FY20 and had retention prices on its side.

The enhanced capacity and demand growth translated to market share growing from 5 percent to 6 percent for Kohat which was almost entirely sold domestically. Only about 4 percent of the company’s sales went cross-border. Since domestic sales dominated the sales mix, the company was able to optimize its revenue—per ton sales in value grew 30 percent which a phenomenal retention.

Even though coal prices have been growing dramatically during the year, it seems Kohat was able to shield the impact through prudent forecasting and inventory management. On average, coal importers in Pakistan importing South African coal paid 10 percent more per ton this year, assuming a one-month lag. Kohat’s per ton cost of sales fell by 2 percent (using estimated dispatch numbers). Last year, the company’s usage of coal and gas amounted to 46 percent of its cost of sales which is a significant number. But thanks to higher sales, the company has benefitted from economies of scale.

All these factors led to margins growing into double-digits 25 percent from break-even. Finance costs as a share of revenue fell as cost of borrowing dropped—landing at 2 percent vs nearly 4 percent last year. The company’s planned expansion in Punjab which is scheduled to be commissioned in FY22 will have a debt component which will eventually raise finance costs over the next few years. The company also maintained its overheads at 3 percent of revenues which is contained due to low distribution expense as most markets the company is supplying to are nearby.

As a result, before-tax earnings grew 9 times during the year, bringing after-tax net profit margin from negative zone to 15 percent. Demand is expected to continue its upward trajectory owing to multiple housing projects, construction of hydro power plants and other CPEC-funded projects in the works. Kohat’s new expansion will come just in time when capacity utilization will start to maximize. And if all goes to plan, Kohat may be able to further improve its market positioning and become a prominent beneficiary of this regime’s massive government spending.

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