LAHORE - Pakistan’s listed cement sector continued to deliver double digit profitability growth in FY15. Profits grew by 13% YoY to Rs46.6 billion in FY15 versus 14% growth seen last year. This improvement in profits was led by volumetric growth and lower energy costs.

Our sample includes 11 out of a total of 19 listed cement companies, representing 95% of the total cement companies’ market capitalization. Other cement companies have either not announced their 4QFY15 results or are adjusted for outliers.

With average cement prices staying almost flat at Rs510-560/bag in FY15, total dispatches of the industry grew by 3.5% to 35.5mn tons. Following industry’s volumetric growth, revenues of sample companies grew by 3.7% to Rs194.4bn.

Export fell by 11.7% YoY to 7.2mn tons due to weak demand from Afghanistan market coupled with anti-dumping duty imposed by South Africa on Pakistan cement manufacturers. Local cement demand remained strong up by 8.2% to 28.3mn tons emanating from 1) higher public and private sector spending and 2) favorable cement industry dynamics.

Growth in profits was also supported by 1) declining financial charges, down by 31.7% YoY thanks to lower policy rate 2) falling selling and distribution expenses, down by 5.2% due to lower inflation and 3) higher other income up by 23.9% YoY due to increase in dividend income & profits from associates.

In 4QFY15, revenues of 11 listed companies grew by 3% to Rs52.8bn while net earnings grew by 20% YoY to Rs13.6bn primarily due to 470bps YoY increase in gross margin. Increase in gross margin was fueled by 1) lower coal prices, 2) cement players’ shift to alternate energy sources like Waste Heat Recovery (WHR), and 3) lower electricity charges, down by 17% YoY.

Total industry dispatches are expected to grow by 8.8% to 38.6mn tons in FY16 primarily due to strong local demand expected from higher infrastructure spending and mega projects including China Pakistan Economic Corridor (CPEC). With stable cement prices and robust local cement demand, we expect sales of Topline Cement Universe to grow by 16%.

Manufacturing costs in FY16 are expected to remain benign for the industry to be led by lower energy costs. Lower electricity charges and shift to more efficient sources like WHR would lead to further decrease in power and fuel costs for concrete players. Moreover, imported coal prices are expected to remain at lower levels owing to slowdown in China’s growth, which will further drive up margins of cement manufacturers, we believe.