Pakistan Cements: Earnings Revised Upward; Buy Stance Maintained

Staff Report:

Topline Research has revised up its earlier estimates of cement earnings by a simple average of 23-28% for FY25 and FY26 due to multiple factors, including better-than-expected domestic demand recovery in FY25 and lower coal costs.

Better-than-expected domestic dispatches: In 1QFY25, local cement dispatches decreased by approximately 20% YoY and by 7% QoQ to 8.1 million tons. This decrease was mainly due to a sudden jump in bag prices, primarily caused by an increase in FED per bag to Rs4 from Rs2. Another major reason was strikes by cement dealers due to taxation measures introduced in the FY25 budget.

In 2QFY25, cement dispatches displayed tremendous recovery, increasing by 23% on a QoQ basis to 9.9 million tons. Local dispatches in the first two months of 3QFY25 have also shown improved performance. As a result of rising YoY growth in subsequent months, the 8MFY25 local dispatches decline stands at 6% YoY compared to 8MFY24.Pakistan Minerals Investment Forum 2025 to be Held on April 8-9 in Islamabad

We expect local cement dispatches to close FY25 at a YoY decline of 4% to 36.8 million tons versus our earlier expectations of an 8% decline. In FY26, we anticipate an increase in dispatches by 9% to 40.1 million tons due to a lower policy rate, improved construction activity, higher government spending, and a low base of FY24.

Declining coal costs leading to better margins: Coal prices have decreased to approximately US$90/ton in Mar-25, compared to US$97/ton in Feb-25 and US$106/ton in 2024. Prices for local and Afghan coal have also reduced, with the former coming down due to a reduction in duties to Rs36-37k/ton, while the latter has declined in the same proportion. In 2QFY25, Topline universe cement sector gross margins have already improved to 34.8%, and we expect FY25 and FY26 gross margins of our universe to clock in at 32.9% and 33.6%, respectively, compared to FY24 gross margins of 29.7%. We have assumed coal prices at US$100/ton and US$95/ton in FY25 and FY26, respectively.

Recovery in North bag prices: Due to issues among North players, average prices per bag reduced to Rs1,329 in Feb-25 from a peak of Rs1,530 in Aug-24. After partial resolution of issues among manufacturers, prices increased to Rs1,370 in Mar-25, with another increase expected after Eid holidays as per channel checks.

Move to a more efficient power mix: To counter the negative impact of grid power costs, cement players have increased their renewable capabilities. LUCK, FCCL, KOHC, MLCF, and DGKC have expanded their solar capacities, while LUCK has also added a wind power plant. In FY27, KOHC’s 30MW coal plant is expected to come online, further reducing reliance on the grid.

D.G. Khan Cement (DGKC): Company earnings (unconsolidated) have been revised up by 77%, 58%, and 58% to Rs15.7/20.7/24.9 per share in FY25/26/27, mainly due to margin revisions, higher domestic dispatches, and a more cost-efficient power mix. DGKC margins have been revised in the range of 23-24% from earlier estimates of 20-21%. Lower Afghan, local, and international coal prices will lead to reduced fuel costs for the company, as well as lower power costs, since DGKC’s D.G. Khan and Hub plants have captive coal plants. Due to a decline in international oil prices, the company is using furnace oil (FO) for power generation, which has reduced reliance on the grid. Total dispatches are also expected to be higher due to increased domestic and export shares in the South.

Maple Leaf Cement (MLCF): Company earnings have been revised up by 41%, 36%, and 35% to Rs9.3/11.0/12.9, mainly due to higher-than-expected gross margins. We expect gross margins in the range of 36-37% for FY25/26/27, compared to earlier estimates of 33-34%, due to lower international coal prices. The company is using 70% pet coke in its fuel mix, and lower coal prices benefit the power mix, as 55-60% of power is generated through the captive coal plant. MLCF has also boosted its margins by maintaining relatively better retention prices due to its brand value and dominance in white cement.

Fauji Cement (FCCL): Company earnings have been revised up by 13%, 15%, and 16% to Rs5.9/7.4/8.6, mainly due to expected improvements in net sales and gross margins. FCCL is expected to post higher net sales due to increased domestic dispatches, which are projected to grow by 10% YoY in FY25, compared to an expected industry decline of 4-5%. The company is anticipated to achieve gross margins in the range of 35-36%, up from earlier estimates of 33-34%, due to lower Afghan/local coal costs. Additionally, 15MW of additional solar capacity is expected to come online in the last quarter of FY25. This follows the addition of 12.5MW of solar capacity at the start of FY25.

Lucky Cement (LUCK): Company earnings (consolidated) have been revised up by 8% for FY25/26/27 to Rs271/306/346, mainly due to a higher-than-expected contribution from the local cement business and Lucky Core Industries (LCI). Local cement profitability is expected to be higher due to lower coal costs, while LCI is projected to post increased profits from improved revenue and operating performance in the Polyester and Pharma segments.

Kohat Cement (KOHC): Company FY27 earnings have been revised up by 7%, primarily due to the upcoming 30MW captive coal plant, which is expected to come online by the start of FY27. The Letter of Credit (LC) for importing plant and equipment has been established, and the selection process for construction and installation contractors is currently underway.