LAHORE -  The profitability of cement companies grew by 12 percent annually to Rs13.6 billion due to 10 percent increase in sales to Rs58.3 billion and lower financial charges, down by 40 percent in 1QFY17.

Excluding Fauji Cement (FCCL) due to its silo incident, majority of companies posted profitability growth of 18 percent YoY in 1QFY17. According to industry experts, sales of companies were up on the back of robust local cement demand (up 10 percent YoY in 1QFY17). The sales would have been higher than this, had there not been change in property taxation/valuation in Budget FY17. To recall, the government in budget FY17 amended property taxation/valuation mechanism which affected real estate projects/activities (one of the drivers of local cement sales). However, experts believe that pick-up in China Pakistan Economic Corridor (CPEC) related activities should drive local demand in the long run.

Average gross margins of manufacturers clocked in at 41 percent, up 292bps YoY in 1QFY17, owing to declining energy and power costs. Financial charges declined by 40 percent YoY to Rs690 million in 1QFY17, thanks to multi decade low policy rate of 5.75 percent. Although profit before tax grew by 16 percent YoY in 1QFY17, increase in effective tax rate by 247bps to 30 percent restricted net earnings growth to 12 percent YoY. They believe that lower taxation loss reserves (which led to normalisation in taxes) resulted in higher effective tax rate.

Some listed cement companies posted record high margins of 46 percent, up 473bps YoY in 4QFY16, primarily on the back of higher margin local sales.

This, coupled with support from 223 percent YoY increase in other income to Rs2.7 billion as a result of strong performance posted by subsidiaries and other ventures, led to 25 percent YoY increase in profitability of cement companies to Rs17.6 billion in 4QFY16. If FCCL excluded, profitability of cement companies grew by 31 percent YoY in 4QFY16. To recall, FCCL’s clinker silo collapsed in May 2016 which rendered its line-2 production non-operational. This affected the company’s cement supply cycle.

Experts said that due to the government’s focus on infrastructure projects and stability on political front, they see local cement demand to continue its upward trajectory as a result of kick-start of CPEC related activities.