Cement: Small companies, big surprises

If DG Khan Cement (PSX: DGKC) is experiencing a rather turbulent few years since the management began to take risky but encouraging steps toward differentiating itself from the group (read: “DGKC’s long game”), there are two other cement companies that are standing out. But unlike DGKC, whatever these companies are doing, it’s working. Two mid to small cement makers that are soaring high –almost at par with the industry leader, Lucky Cement—despite their relatively small stature and size!

The scatterplot illustration can identify them almost instantly. Check out Kohat Cement and Thatta Cement at the top right corner of the graphic. In FY24, Lucky Cement remains at the top of the chart, with the biggest revenue stream, the highest gross margins at 34 percent and the highest net margins at 24 percent. Last year, these were 27 percent and 14 percent, respectively. Enter Kohat Cement that grew its net margins from 15 percent to 23 percent in FY24, higher than any company during the year other than Lucky, which is 3 times bigger than Kohat in terms of revenues. If one has been following Kohat Cement, though it is easily an ignorable cement player, its gross margins have always been higher than other larger companies. In that perhaps, Kohat’s stellar performance does not come off as a major surprise.

But then there is Thatta Cement which until last year was an inconsequential nobody in the industry. In FY24, Thatta’s gross margins grew from 8 percent in FY23 to a whopping 29 percent. Its revenues expanded nearly 40 percent and its after-tax earnings ballooned by 6 times! How did the company spin this? Thatta happens to be one of the few companies this year that grew its dispatches. Local dispatches grew 22 percent in FY24 year on year—the industry meanwhile saw domestic dispatches fall by 5 percent during the year. Strong and growing pricing in the domestic markets further enabled the revenue growth that Thatta achieved. At the same time, according to its annual reports, the company has been actively working on cost optimization which includes utilizing domestic coal (a strategy that runs true across the industry as they shifted to coal located nearby owing to its affordability) as well as investing in solar energy to reduce power costs that weigh heavy on a cement company’s income statement.

Both these moves have worked wonders for Thatta. Other areas where Thatta is excelling is running a lean business with nearly no finance costs as the company doesn’t have any long-term debt and keeping overheads below the threshold of 5 percent (of revenues). In FY24, overheads amounted to 2.6 percent and finance costs were miniscule at less than 1 percent. In contrast, the company saw its other income (borne by timely investment) grow to 10 percent this year from 5 percent of revenue in FY23. This means, all of its expenses are more than covered by the company’s other income, an aspect that is common in only 4 out of the 10 companies in our sample (see second illustration), and who would know it, the other two are Lucky and Kohat Cement.

It is often argued that the cement industry works in cohesion and coordination with each other, which also often translates to companies performing the same one year after another, maintaining their market space, expanding together, falling back together, season after season, year after year. It is then rather exciting when a company sets to extricate itself from the group, or takes strategic steps to get ahead than was expected from it, and such moves bearing fruits of labor so quickly.