LAHORE - The cement producers profitability declined by 24 percent in three quarters of ongoing financial year (3QFY18) versus marginal decline of 1 percent in 3QFY17. Decline in profits was mainly on the back of lower margins which fell to nearly 6-year low of 28pc.

Margins have been on a declining trajectory since 3QFY17. Volumetric growth remained robust during the outgoing quarter, up 19pc YoY thanks to higher local dispatches, fueled by private sector construction activities and demand from CPEC related projects.

Despite robust dispatches, sector revenues grew by mere 4% YoY in 3QFY18, primarily owing to decline in high margin local net retention prices. Experts estimate that the industry’s average net retention prices declined by around 12% YoY to Rs323/bag in 3QFY18. While on sequential basis, average net retention prices were down by Rs12/bag (4%).

Sector’s gross margins fell to near 6-year low of 28pc in 3QFY18, down 8.7ppts YoY. Experts attribute this to 1) higher Federal Excise Duty (FED); the govt in last budget increased FED by 25pc to Rs1.25/kg which north producers were unable to pass on due to weak pricing power, 2) lower local net retention prices and 3) higher input costs. FOB coal prices increased to $93.3/ton, up 13pc YoY in 3QFY18. Combining the devaluation effect, coal prices in rupee terms actually increased by 19%.

On sequential basis, gross margins were down 4.2ppts.

Sector’s financial charges grew by 41% YoY during the outgoing quarter on the back of increase in producers’ debt level to fund upcoming expansions.

While pretax profits were down 28pc YoY in 3QFY18, lower effective tax rate restricted profitability decline to 24pc. During 9MFY18, revenues grew by 4pc while profits were down 18pc as margins contracted by 8.6ppts to 31pc.