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Cherat Cement earns Rs743m in Oct-Dec quarter

KARACHI: Cherat Cement Company has posted a net profit of Rs743 million in the October-December quarter of FY18, up 20% compared with Rs621 million in the same period of previous fiscal year, according to a company notice sent to the Pakistan Stock Exchange (PSX). The result was above market expectations, according to a Sherman Securities’ report.

Earnings per share (EPS) jumped to Rs4.21 in Oct-Dec FY18 compared with Rs3.51 in the corresponding period of previous year.

This took the first six-month (Jul-Dec) 2017 net profit to Rs1.35 billion (EPS Rs7.64), up 32% compared with Rs1.02 billion (EPS Rs5.80) in the same period of previous fiscal year.

Along with the result, the company announced an interim cash dividend of Rs1 per share.

The company booked tax credit of Rs0.1 million during the first half of fiscal year 2017-18 (1HFY18) against tax expense of Rs340 million in the same period of last year. Realisation of tax credit was due to a tax holiday available for the company’s new plant.

The company was a main beneficiary of its new capacity addition as its market share increased by 3.1 percentage points to 7% in 1HFY18. As a result, revenues increased by 86% year-on-year to Rs7.6 billion during 1HFY18 owing to increase in overall cement dispatches by 107%.

Gross margins of the company stood at 25% during 1HFY18 compared with 41% in the same period of last year. The decline can be attributed to 20% higher coal prices year-on-year and 10% lower retention price year-on-year.

Meanwhile, Some cement companies—including Cherat—have also been giving discounts (Rs10-20 per bag) to clear excess volume faster. This is why at an industry capacity utilization of 95 percent in 1HFY18; revenues for the industry will be lower. For Cherat, revenues have clearly not grown proportionately with the growth in dispatches.

The second major issue is input costs. Rising oil and coal prices have put an inordinate amount of pressure on gross margins. At 1HFY18, Cherat’s margins stood at 25 percent where they used to be upwards of 40 percent the same period last year. On average, coal prices were $75 per ton in July-Dec16 but grew to $86 per ton in July-Dec17. In Nov-17 and Dec-17 at $89-90 per ton, they were the highest since 2013. Combine it with freight costs, and it is clear why margins have plummeted.

The third concern is finance costs. Having launched its second production line, for which it is still paying the depreciating and finance fee, the company is now commissioning its third production line. For the latter, long-term loans have already been negotiated which will continue to put pressure on expenses going forward. However, one cost cutting measure is the commissioning of three new Wartsila Diesel engines (30MW) will bring down long term costs of production.

On another positive front, the company doubled down on its indirect expenses which were 9 percent of revenues in 1HFY17, falling down to 5 percent in 1HFY18. With lower indirect expenses, but significantly high costs of production and finance costs, the company saw a decrease in its before-tax bottom line. Saved only by our fifth driving factor: tax benefit.

Because of the capital expenditure on expansion, the company enjoyed a lower effective tax that helped boost its profit-after-tax. As a result, profit margins did not fall as much as they should have in absence of this provision. Had effective tax remained the same as last year, profit margins in 1HFY18 would be approximately 13 percent instead of the current 18 percent. Not too shabby!

Fluctuation prices, falling retention prices and rising finance costs will continue to be the bane of Cherat’s margins going forward.

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