Cement companies recorded the second highest sales during a quarter (three-month period) in the history of the country at 13.6 million tons while higher profit margins and lower financial costs helped them book lucrative profits.
JS Global Research Analyst Arsalan Ahmed said three main things have made the this quarter profitable for cement companies.
“The industry recorded high volumes (unit sales), which has been the second highest in the country’s history,” Ahmed said. “The quarter also marked low financial costs and a higher retention price for cement companies.”
Industry sales were 22% more than the same quarter last year (July to September 2019). They were also 26% higher than the previous quarter (April, May and June). Cement exports also increased by 36% compared to the same period last year.
The higher cement sales are attributed to increased construction activities due to the PM Housing Amnesty Package, which gives incentives to builders, developers and first-time buyers. Stakeholders will get tax incentives and more importantly they will not have to provide a money trail. The package will end by December 31 this year.
Retention price of a cement bag is simply a price that the company charges and goes into its kitty. It doesn’t include the 17% sales tax, dealer discount or commission, outward transportation cost or Federal Excise Duty (FED).
“According to my assessment, the retention price for cement companies has gone up by up to Rs100 during this quarter,” said another research analyst Saqib Hussain.
He said that the average financial cost was previously around 10% but has now reduced to around 7%. Financial cost for companies is the interest they pay on loans. Lower FED, Rs25 lower per bag, during the quarter has also improved profit margins.
According to a Topline Securities report, the cement companies it focuses on are likely to register profits of Rs4.2 billion. They recorded losses of Rs758 million in the previous quarter.
The Topline Securities report expects the industry to do better because of government incentives under the construction package and increased available funds for the sector. The State Bank has made it mandatory for banks to maintain 5% loans to the sector of their total private sector credit. New additions in CPEC projects and relatively lower commodity prices such as oil and coal will also improve the industry’s profitability.