Until recently, Cherat (PSX: CHCC), Kohat (PSX: KOHC) and Fauji (PSX: FCCL) stood roughly in the middle of the pack, in terms of capacity as well as financial performance—though Kohat Cement despite being the smaller of the three has always yielded slightly higher margins than its bigger peers. Suddenly last year though, Fauji announced merging with Askari cement taking its mid-size capacity to one of the largest capacities in the country—just like that. Its financial performance by comparison however leaves something to be desired.

Half-year financial performance for the three is not too different—but despite a bigger top-line and bottom-line, both Kohat and Cherat seem stronger. Fauji’s revenues grew 33 percent in 1HFY23 year on year (Kohat and Cherat: up 32%) while the company’s bottom-line grew 34 percent (Kohat: 25%, Cherat: 28%). The industry has faced muted demand—both in the domestic as well as export markets—but it sustained strong pricing power which facilitated the growth in revenues across the board.

For instance, Fauji’s volumes in the first half dropped 14 percent, but higher cement prices helped shore the top-line—revenue per ton sold increased 54 percent. The company’s gross margins stood at 28 percent—same as in 1HFY22—which could have been higher but high inflationary pressures and coal inventory costs put enough pressure on costs that prices alone could not fight them. Both Cherat and Kohat’s margins are higher than Fauji’s.

Overheads and other charges for both Fauji and Cherat are higher than Kohat’s (4% for Fauji and Cherat and 3% of revenue for Kohat). Kohat’s finance costs are also lower than both Fauji and Cherat, at 2 percent versus the latter two’s 3 percent and 5 percent of revenue respectively. Kohat consistently has lower overheads and finance costs. Meanwhile, Cherat’s higher borrowing at prevailing interest rates is the primary reason for its high finance costs, but historically too, Cherat’s finance costs have remained higher than the other two players. Cherat’s improved margins—to 30 percent in 1HFY23 versus 28 percent last year—were offset by the higher finance costs and overheads.

While Kohat’s other income buttered the bottom-line—in 1HFY23, other income was 15 percent of before-tax earnings—Cherat’s other income could not do so much. At only 3 percent of before-tax earnings, Cherat’s ultimate net margins had a mighty fall. The gap between gross margins to net margins is the lowest for Kohat at 10 percent, then Fauji at 13 percent and then Cherat at 14 percent—the larger drop of Cherat associated to its high expenses and lower other income. Though by comparison, Fauji continued to have the lowest net margins(compared to the other two).

High inflation—particularly associated to power and energy tariffs as well as coal prices—will remain a bane in the financial performance of cement manufacturers, big or small. Though, higher reliance on captive power against the grid does make a solid difference on companies’ margins. As expansions come in, all three companies are expected to incur higher finance costs, given surging interest rates too. Though prices are staying robust for cement, downward demand pressure may force companies to revisit their pricing policies. Construction demand is feeble and will stay at the current levels until the economy stabilizes which is not going to happen in a hurry.

Most cement companies are holding on due to pricing power in the domestic market and availability of local as well as Afghan coal which has to a great extent bypassed the need to import coal in dollars. If the industry was completely reliant on imports for its coal needs, the financial statements would be singing a very different tune.

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