Pioneer: Winning on margins

Things are looking up for Pioneer Cement (PSX: PIOC) in the first half of the fiscal year FY23 bringing home revenue growth of 26 percent year-on-year and transforming that into a bottom-line growth of 54 percent, earnings totally unsupported by “other income”. Strong pricing power and controlled costs led to this growth, where margins also improved from 22 percent in 1HFY22 to 25 percent during the period this year.

These are the highest margins in at least the past nine periods under study—the second half of FY18 was the last time margins were at this level. Cement prices in the north have increased between 45 percent to upwards of 50 percent in different markets in the July-December period compared to the same period last year (average taken of weekly prices recorded by the Pakistan Bureau of Statistics). Pioneer’s revenue growth is a combination of robust retention and higher offtake in the second quarter.

At the same time, cost played a positive role as the company optimized on its coal procurement by utilizing a combination of local and Afghan coal which are accessible and less costly. The company has also kept its purse string tight in terms of overheads and other charges that have stayed manageable since FY20 ended. In growth terms, they have increased due to inflationary pressures, but as a share of revenue, they have stood their ground at 2 percent.

In fact, Pioneer’s major problem has been its ballooning finance costs. In the second quarter, the company has attempted to keep a lid on its finance costs by arranging better financing. However, high interest rates have it beat. In Q2, finance cost fell 7 percent compared to Q1. However, in 1HFY23, total financial charges increased 51 percent year on year. Meanwhile, as a share of revenue, finance costs are 9 percent which is a significantly high number, lower only than 2HFY20 when finance costs as a share of the top line was 10 percent.

As a result, net margins of 9 percent were only a slight improvement from last year’s 8 percent. But despite that, the financial position of the company has surpassed previous records because of surging prices. With the new FED, higher sales tax, prices for end users will be even higher, which may further impact the already sobering trends in offtake. The other problem would be high tax on local coal which will add to the cost of production, aside from running inflation for nearly all inputs and commodities.