Pakistan cement co earnings may rise by 89 per cent in 2Q08

Pakistan cement co earnings may rise by 89 per cent in 2Q08
Published: 25 January 2008

Earnings of the Pakistan cement sector would grow by 89 per cent on YoY basis in the second half of the current fiscal, said Muhammad Rehan Khan,  analyst at First Capital Research has said.

This will translate into a full year growth of 19 per cent during fiscal year 2007-08 as against 2006-07, he said in his report on cement sector’s profitability on Thursday.

The profitability of the sector is likely to grow by 22 per cent annually in next five years. The volumetric sales are likely to maintain an average growth rate of 15 per cent for the next five years, the analyst said.

The cement sector of Pakistan has witnessed notable gashes in profitability during last few quarters because of lower retention prices.

Khan said the phenomenon started in FY07 when a huge influx of new production capacities forced the manufactures to reduce cement prices in order to achieve certain capacity utilisation levels. Consequently, almost all companies of the sector went through huge bottom-line losses, he said.

However, during the second quarter of FY08, the prices started recovering and grew 20 percent to Rs 220/bag as against Rs 185/bag in the first quarter. This price recovery is attributed to the outcome of quota arrangements between the cement manufacturers, which was also necessary to compensate the rising fuel cost, he said.

Khan said he expected the industry wide bottom-line declines to minimize in the second quarter of FY08. The absolute impact would be visible from the third quarter onwards, he added.

The analyst projected FY08 profitability of the cement sector to be lower by seven per cent to Rs 796m versus the same quarter last year.

The magnitude of these declines is notably lower than that seen in the previous quarters, he said and added that during 1QFY08, the sector’s profitability was 72 per cent and 70 percent lower on YoY and QoQ basis.

“This bottomline recovery in 2QFY08 is attributable to the higher volumetric sales (up 37%) as well as better retention levels (29% higher) on YoY basis,” said Khan.

On the cost levels, higher coal prices are expected to translate approximately into Rs 350-400/tonne increase in the cost of production. It is though lower than the increase in retention prices.