Kohat: Soldiering on

Kohat cement (PSX: KOHC) is one of the smaller cement manufacturers that also happens to be one of the strongest of the lot in terms of its financial standing. Against a declining demand throughout FY22, the company recorded before-tax earnings growth of nearly double of last year (1.8x to be exact) amid controlled overheads and financial costs, strong gross margins, bolstered by other income during the year.

In fact, the only factor that did not work for the company was the super-tax imposition that took the effective tax for the year to 44 percent (FY21: 28%) with the major thrust coming through in Q4 where effective tax stood at nearly 84 percent of earnings. Resultantly, post-tax earnings recorded a growth of 44 percent. Kohat shone in other players.

Overheads including other expenses remained at 3 percent of revenue while finance costs also stood the same as last year at 2 percent. Due to higher interest rates, finance costs grew 27 percent year on year in Q4 but did not go off-track from revenue growth. Other income was 8 percent of before-tax earnings during FY22 compared to 3 percent last year owning to adequate short-term investments which were strengthened by the rising interest rates.

Even though, both domestic and exporting markets remained dry, Kohat’s revenue growth was 37 percent due to surging retention prices. Meanwhile, despite higher coal prices, depreciating rupee causing imports to be more expensive and ballooning fuel and power costs, the company margins improved substantially (mainly during the first three quarters) from last year, standing tall at 30 percent during FY22 (FY21: 25%). Like other cement players, Kohat has also been using a mix of Afghan and local coal to bypass the cost inflation associated to international coal which has been intense over the past year along with other fuels.

There are few opportunities and many risks that need to be mitigated over the coming year. Rising construction costs, together with overall inflation is not conducive to new private sector construction spending. Meanwhile, the future of Naya Pakistan Housing Program (NPHP) hangs in the balance with the ouster of the previous government whose brainchild NPHP was. There is hope that the Mera Pakistan Mera Ghar scheme may get a reboot but thus far, it stands suspended. Public sector spending is also down. Flood related rehabilitation may boost local demand which may become a saving grace over the coming quarters. Exports meanwhile are not expected to recover as political troubles in Afghanistan persist while Sri Lanka and Bangladesh struggle to lick their ongoing economic wounds. Whilst demand tells a sobering tale, Kohat has a strong balance sheet and may swim through such treacherous waters fairly better than some others.