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Cement sector pre-tax profits down by 36pc

Cement sector pre-tax profits down by 36pc

LAHORE: While net earnings of the cement industry are up by 45 percent annually in 4QFY18, pre-tax profits have fallen by 36 percent to a four-year low of Rs11 billion.

According to the data, companies that booked huge tax benefits were ACPL, BWCL and DGKC. Pre-tax profits were down mainly due to lower GP margins, which are at six-year low.

Statistics revealed that cement sector’s gross margins fell 8.8ppts YoY to 26.6 percent in 4QFY18. Margins continued to fall amid increase in production costs on the back of higher coal prices (+30 percent YoY), increase in RLNG cost due to higher international oil prices (+47 percent YoY), currency devaluation and weak pricing discipline owing to oversupply concerns on the back of upcoming capacities which also restricted manufacturers ability to pass on higher Federal Excise Duty (FED) imposed in last year’s Budget. Experts said that gross margins are moving down towards regional average of 20-25 percent.

Industry experts from Topline observed in a report that industry’s dispatches during 4QFY18 were up 10 percent led by 7 percent increase in local dispatches and 39 percent increase in exports. Exports grew thanks to currency devaluation, additional production from new capacities in South and higher clinker sales to regional countries on the back of closure of some clinker production lines in China owing to strict environmental regulation.

Financial charges were up 47 percent YoY in 4QFY18, as producers took on more debt to fund their upcoming expansions coupled with higher interest rates (average 6.33 percent in 4QFY18 vs 5.75 percent in 4QFY17). Interest rates have now reached to 8.5 percent with 2018YTD increase of 275bps.

The industry reported tax benefit of around Rs9.5bn on the back of tax credit under 65B of the Income Tax Ordinance, 2001 on account of investment in new cement lines and adjustment of deferred taxes as a result of downward revision in future corporate tax (previous Govt announced corporate tax rate to be gradually reduced by 1 percent to 25 percent from 30 percent in the next 5 years).