Supported by lower coal prices amid decline in borrowing costs and exchange losses, the countrys second biggest cement maker - DG Khan Cement - earned Rs 630 million in first quarter of current financial year, against a loss of Rs 233 million incurred in same period last year.
Despite the price war in local market, DGKC was able to marginally increase its revenues as price reduction boosted its sales volume by 28 percent in first quarter. Luckily, lower coal prices helped company to maintain gross margin stable at 30 percent. So far so good; but the question is whether cement businesses in Pakistan will be able to sustain such growth in profits or not.
The fate of all manufacturing industries in general and cement manufacturers in particular, operating in Pakistan is largely dependent on future energy prices, as energy cost represents around more than 30 percent of the total cement production cost. While, declining coal prices have given some cushion to cement manufacturers in the past six months; woefully, amid global economic recovery, energy prices including oil, coal and natural gas, are likely to rebound northwards -- thus increasing the pressure on margins.
Lately, analysts at Goldman Sach, Merrill Lynch and UBS AG have raised coal price forecast, citing that the worlds two largest coal producers, Australia and Indonesia, are facing huge demand pressure from India and China who have already contracted much of their 2009 production. In addition, many Asian countries are shifting power plants from oil to coal due to energy shortage and high oil prices. And if these cost pressures weren enough, cement makers are also expected to witness a decline in local and global demand.
Domestic demand is seen damp, as private sector credit off-take remains weak amid falling development spending by the government. According to reports published in this newspaper last week, the Ministry of Water received merely Rs 2.8 billion in the first quarter, under PSDP, against the allocated amount of Rs 17.8 billion. This means that local cement demand will be sluggish due to delay in construction of dams and other major developments projects.
And for firms like DGKC, which are situated in the countrys north, this means little growth due to higher distribution costs incurred in exports through sea port in Karachi. Even if they could, export demand itself is likely to slowdown in the near to medium term.
Oil producing countries including Iran and Saudi Arabia are already in the process of expanding cement production capacity to capture major export market share, as production cost in these countries are lower due to cheap energy bills. So, in short, its surprising to see investors pretty sanguine on the firms performance - sending its stock price to upper circuit limit by the session close on Wednesday.
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DGKC Profit & Loss
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Rs (mn) 1QFY10 1QFY09 % chg
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Sales 4,764 4,410 8%
Cost of sales 3,341 3,070 9%
Gross profit 1,422 1,339 6%
Gross margin 30% 30% -2%
Administrative exp 36 32 13%
Selling & distribution exp 399 430 -7%
Other operating exp 98 620 -84%
Other income 160 176 -9%
Finance cost 496 824 -40%
Net profit 630 -223 NA
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Source: KSE announcements