High interest rates impacting cement companies in Pakistan

Pakistani cement industry profitability in FY19 and moving forward is likely to be dented by high interest rates/financing cost as being reported by number of cement companies in country.

According to a research report of BMA Research, multiple increases in interest rates in the last 20 months have increased finance costs significantly and cement companies may want to reduce this debt burden. As a result, analysts are of the view that this increased burden coupled with the economic slowdown may induce shareholders to replace/lower the existing debt with equity injection.

For instance, Maple Leaf Cement (MLCF) has announced to issue 85 per cent rights at PKR12 (US$0.08)/share amounting to PKR6.1bn. The prime reason for this right issuance is to reduce its long-term debt (last reported total debt: PKR24bn) by the amount of the rights issue. The decision is expected to lower finance cost by ~PKR600m for the company while experts are of the view that unfavourable industry dynamics will still keep the profitability depressed.
 
Experts foresee that a high interest rate environment may result in similar corporate actions from cement and other companies like that seen by MLCF.