Fauji catches up

After merging with another military-owned cement company, Fauji’s importance—and its financial performance—should have shot up instantly. But FY24 did little favors for the duo, now uno; earnings shackled by subdued offtake, and significantly high finance costs which other income could not compensate for. As a result, the company’s earnings were below the industry average despite snagging the title of “third largest”. In 1QFY25, Fauji is catching up, not only to its peers but also to its own potential.

Now Fy25 is here, and Fauji is in recovery. Margins are up to 34 percent in 1Q compared to 31 percent in the same quarter last year, while revenues are their very highest. Commissioning of solar power plants may have had something to do with cost efficiency as such an investment typically would reduce power costs. Usage of local coal and other alternative fuels also helped. Stability in prices and improved offtake undoubtedly contributed to the revenue growth (up 13% year on year).

Fauji’s rather high finance costs have skewed earnings for the past two years. Greater working capital requirements and expansion-related financing together with high interest rates have kept finance costs up. In 1QFY25, they are down to 6 percent, down from FY24’s quarterly average of 7 percent. Still high, but it may soon be manageable as interest rates come down. The same is the case for overheads that have been reduced to 5 percent from FY24’s quarterly average of 6 percent. The net effect on eventual earnings is down by 2 percent. With gross margins already improved, and a tighter hand on expenses, profit margins improved to 14 percent, compared to the FY24’s quarterly average of 10 percent. Quarterly earnings reached Rs3.2 billion; up 24 percent from last year despite a higher effective tax. As mentioned elsewhere in this column, Fauji’s expansions, spending on energy efficiency projects, and acquisition of Askari will help the company in the long term granted that finance costs come down and demand moves towards improvement. Fauji is certainly will be well-placed to capture said demand.