Fauji Cement Company Ltd (FCCL) posted 1QFY21 NPAT of PKR696mn (EPS: PKR0.50), as compared to our estimate of PKR234mn (LPS: PKR0.17). Higher gross margins because of a steep rise in retention prices was the major deviation. The company has posted decent earnings mainly because of (i) higher retention prices, (ii) decline in international energy prices, and (iii) decline in transportation cost amid relaxation of axle load and lower oil prices.

1QFY21 Key result highlights:

§ Net sales increased by a massive 30% yoy to PKR5.5bn, on account of higher domestic volumes, which increased by 26% yoy; however, exports have declined by 8% yoy. As a result of such strong growth, FCCL’s utilization rate was 97% as compared to 79% in 1QFY20.

§ Gross margins increased to 22%, up by a staggering 28ppt qoq (8ppt yoy), against our expectation of 11%. After LUCK (29%), FCCL’s GM in 1Q is the highest among our Cement Universe. This is attributable to (i) higher retention prices amid decline in FED by PKR25/bag and discontinuation of discounts, and (ii) lower variable costs due to lower energy prices. Retention prices in 1QFY21 clocked in at PKR330/bag, up 6% yoy and 22% qoq, estimated to be the highest among peers.

§ Distribution expenses has declined to PKR48bn down 11% yoy, mainly because of lower exports and transportation expenses.

§ Among other line items: (i) the company booked effective tax rate of 27% (same as in 1QFY20) (ii) despite decline in interest rates, finance cost has increased to PK20mn, up 42% yoy, owing to higher short-term debt.

FCCL so far posted the highest gross margins among the North based producers besides BWCL. Also, the company has touched a utilization level of 97% and taken 7.2% of local share compared to their capacity share of 5% in 1QFY21. We believe that FCCL will continue to sell more than its capacity share. We reiterate our Buy stance on the stock with a June 2021 TP of PKR23/sh.

Intermarket Securities Limited.