The cement sector has delivered a return of 84.3% during CY24TD, outperforming the KSE100 index, which posted a 74.4% return during the same period. In FY24, the sector achieved an impressive profitability growth of 61% YoY, with an expected increase in profitability of 32% YoY in FY25. We believe that the industry is expected to be one of the top performers in CY25 due to: i) a rebound in domestic demand as inflationary pressures ease and interest rates decline, ii) better coal mix and use of alternate fuel, and iii) higher anticipated profitability driven by increased retention prices and a decline in interest rates. Our top picks in the cement sector are FCCL, MLCF, and LUCK.
Domestic demand to pick up: Local cement dispatches have declined over the past three years amid elevated inflation and interest rates. However, the recent decline in inflation and interest rates has created a favourable environment for a recovery in domestic demand. This positive trend was reflected in Nov’24, as domestic dispatches increased by 2% YoY, marking the first YoY growth after 15 consecutive months of decline.
We have updated our domestic dispatches growth assumptions for next three years, revising them from -8% to -6% for FY25, from +5% to +10% for FY26, and +4% to +5% for FY27. As a result, we have increased our earnings estimates and target prices for AHL cement universe. The table on the right compares our previous and revised earnings forecasts and target prices.
Margins to remain robust: Due to the surge in coal prices during 2022 and rising electricity tariffs, cement companies started utilizing local, Afghan coal and alternate energy fuels while investing in renewable energy sources. This initiative aimed to secure cheaper and more reliable energy alternatives. Currently, cement manufacturers employ a mix of imported, local, and Afghan coal, adjusting the blend based on availability and cost-effectiveness. As a result of investments in renewables, the sector’s reliance on the national grid has declined, with the current energy mix comprising 24% from the national grid, 32% from waste heat recovery, 25% from captive power, and 18% from renewable energy sources. We anticipate that the gross margins for the AHL universe will remain around 32% during FY25-27.
Strong profitability growth (+32%) expected in FY25: The cement sector demonstrated resilience despite challenges in local demand, achieving an impressive 61% growth in profitability during FY24. Looking ahead, profitability is projected to grow by another 32% in FY25, driven by: i) revial in demand, ii) higher retention prices and iii) decline in interest rates.
Courtesy – AHL Research
