The second quarter of FY26 shows a cement industry that has not fully benefitted from growing domestic demand. Sixteen listed companies reported a combined post-tax earnings of Rs34 billion, recording a flat performance from last year and 8 percent down from the first quarter.
While cement companies prefer to sell more in domestic markets, the reduced export offtake recorded a surprisingly low-margin quarter.
Cumulative revenues showed a marginal 1 percent but a 6 percent jump from the previous quarter. Any growth to be had is being fueled by the home front with exports dropped to 15 percent share compared to 20 percent last year, cratering by 24 percent in volumetric terms.
For an industry that used overseas shipments as a safety value to optimize capacity utilization during lean years, the return of the local buyer is undoubtedly a welcome change. But even then, the bottom-line is under pressure.
On a per ton basis, revenues show a 2 percent decline in 2QFY26 where costs per ton sold rose 1 percent. Gross margins fell to 31 percent as a result, down from 33 percent last year. While lower international coal prices (averaging around $85/ton) provided a tailwind, they were offset by the unavailability of cheap Afghan coal for Northern players and a general dip in retention prices.
The sector’s reliance on non-core gains is also fading. Other income fell 13 percent year on year, and as a share of before tax earnings dropped to 17 percent (from 19% last year). In the previous quarter, this was 26 percent, largely driven by Lucky Cement which has since seen a dip in dividend flows from its power subsidiary this quarter.
The hero is financial costs that have been slashed by 50 percent which was made possible through a combination of delveraging and a downward trend in interest rates.
Cumulative finance costs fell from 4 percent to 2 percent of revenue. But without this financial engineering, the 5 percent drop in gross profit would have translated into a significant earnings contraction as overheads remained constant at 6 percent of revenue.
From the demand end, the industry is entering a growth phase, trying to lift capacity utilization levels above 60 percent. The focus now will turn to price discipline. The only major risks are cost related.
Global coal prices would follow the oil rally as war-time disruptions come to a head. Cement makers should be able to pass on the rising costs to consumers but it could easily affect demand in the short-run as projects face cost overuns and fail to absorb the additional price tag.
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