Cement: Margins, scale and the middle ground

In a game of profitability vs. efficiency, scale always wins. In FY25, the cement industry is entering an earnings season that by all expectations will last beyond this year.

Despite recent floods, domestic demand is expected to recover from FY25’s sombre decline of 3% while exports are expected to catapult further, having risen 30 percent in FY25.

Not unlike FY25, margins and profitability will both gain ground too where efficient companies like Kohat and Cherat rising to the top of the queue, losing only to the likes of Lucky (and Bestway) that possess size-based advantage.

For the 7 companies that have reported their financial results for FY25 till now, cumulative revenue in FY25 was up 7 percentwhile post-tax earnings rose 64 percent. This is impressive performance as industry wide volumes grew only 2 percent, propelled forward by a substantive growth in exports as global markets opened up and trade routes with bordered countries normalized.

As a result, the contribution of exports rose from 16 percent to 20 percent, offsetting some of decline visible in domestic offtake.

Exports also helped improve the industry’s capacity utilization rates that were trailing their historic lows, pushing companies to amplify their efforts to gain market access abroad wherever it made economic sense.

Margins, both gross and operating, overall improved owing not just to lower coal prices and an industry wide effort to invest in and utilize renewable energy to cut down on massive energy costs, but also due to consistent price increases, on average up 15 percent.

Meanwhile, overheads remained constant (at 7% of revenue) and financial costs (4% down from 6% of revenue) declined as SBP cut down on policy rates.

Individually, Mapleleaf, Lucky and Attock benefitted from other income coming from investments made into subsidiaries that buttressed their bottom-line between 30 and 50 percent which worked wonders for at least the former two and perhaps saved Attock from a loss. The smaller player has prohibitively high overheads and financial costs that have risen this year.

Among mid-sized companies, Cherat stands out with the highest earnings per share and the strongest gross margins boosted by volumetric growth and the addition of solar energy which has brought per unit energy costs down. On the other end though are Fauji and DGKC who despite boosting size and financial improvements from last year struggle to compete.

Fauji’s weak earnings per share despite exports boost and DGKC’s cost and operational inefficiencies bowl them out of the game a little. The latter is on a recovery path with greater cost controls but not quickly enough, it seems. For comparison, DGKC had double the volumes in FY25 compared to Cherat, but earned the same profits as the smaller counterpart.

Now more than ever, what has become abundantly clear is that companies that diversify both their markets and investments are better positioned to survive the long periods when demand is not delivering.