Lucky’s charm

The cement industry spent most, if not all, of the outgoing year firefighting; watching export markets dry up and domestic demand scurry to a halt as costs ballooned propelling participants to raise prices ever so frequently. Market leader Lucky Cement (PSX: LUCK) however, managed to emerge out of all the chaos fairly unscathed and mostly undefeated. In FY22, when the company’s own sales dropped 9 percent, and industry’s sales dropped 8 percent (where exports fell 44%), Lucky delivered a 29 percent growth in its revenues and 26 percent increase in pre-tax earnings.

After the super-tax imposition, the company recorded a 9 percent growth in after-tax earnings in FY22. This growth was made possible despite the slowdown in demand and a significant increase in the cost of coal and furnace oil which are used in abundance by cement manufacturers. Mixing up the coal source by moving onto higher procurement of Afghancoal which has been selling at a discount to coal from traditional markets much like other players could shield some of the cost impact while the company’s own efforts to use alternative energy sources also contributed to this shielding. Timely buying and inventory management of coal also saved on costs in the start of the year, if not later on when even Afghan coal became more expensive because of rising demand. Overall, costs per ton sold for Lucky Cement in FY22 rose by 46 percent. Cost inflation necessitated the almost persistent increase in retention prices.

Comparing the company’s net revenues to its volumetric sales, it’s revenue per ton sold actually grew 41 percent during the period. Costs rose much more than revenues could which suppressed margins, but in a controlled manner which given the circumstances is fairly reasonable.

The big win for Lucky is the contributions coming in through its investments that are bearing sweet fruit. The company’s other income is 34 percent of its before-tax profits which makes these income sources very significant to the business. Lucky made this possible through its subsidiaries selling electricity and cars whilst making money from interest-earning bank deposits, all the while incurring insignificant financial costs of its own (less than 0.5% of revenues). The company also has declining overheads (10% of revenue) likely because of reduced distribution costs owing to export decline.

If FY22 was tough for the cement industry, FY23 would really put it through the wringer. Construction demand amid massive inflation (specially for construction materials) has already slowed down. The economy is expected to slow down pushed by government efforts—PSDP spending has been slashed. Domestic demand will not resurface at the least the first few months of the coming year as is already evident from July numbers. Meanwhile, coal prices are staying at their current high. Lucky is currently using coal from Thar, Afghanistan, South Africa (as well as other sources) and has room to develop an optimal procurement strategy until it can move entirely to indigenous thar coal which will shield the company greatly from erratic international fuel pricing and rupee devaluation.

With demand forecasted to weaken over the year, and costs remaining at their prevailing conditions, not even Lucky’s bed is lined with roses. Meanwhile, auto and other businesses are also experiencing a slowdown which will affect incomes from investments.