Lucky Cement Limited (LUCK) Earnings Call Transcript & Summary

[Foreign Language] Welcome to Lucky Cement Analyst Briefing for FY '25. My name is [indiscernible], and I will be moderating the Zoom session. I have with me Mr. Atif Kaludi. He's the CFO. He will brief you about the Lucky's current financial performance and future outlook. Now I would like to request Mr. Atif Kaludi to start.

[Foreign Language] Thank you all, and welcome to our analyst briefing for FY 2025. So this is the portfolio of our companies and segments that we are in, just for recollection of the businesses that our conglomerate has. So starting from the increase in volumetric dispatches. The overall increase in volumetric dispatches is 8%, which includes both local and export. We are going to drill down deep in the coming slides, so I will mention that later. So during the year, we announced a stock split of 5:1. We were one of the very first few companies to do that. And the key reason to do that was to make our share more accessible to the retail investors and increase the number of shareholders. So [Foreign Language] as of today, more than 60% or 60% to 65% of our shareholders are now holding less than or equal to 500 shares. So that was the plan and [Foreign Language] which has been achieved. And talking about energy initiatives, so we installed renewable capacity in the last 2 to 3 years at both of our facilities. And once the installation was completed, then we went on to optimize the usage of this -- the renewable energy capacity. And the way to optimize that was to install battery energy storage systems because when there is an energy surge or energy shortage in the -- on the renewable side, then the battery sort of partially takes over. Plus also you then reduce the redundancy of your conventional energy. So that also optimizes the energy mix. So the energy storage is not there to take over the entire renewable capacity if the renewable energy is present. It is only to optimize the mix of renewable and the conventional energy. So at our North plant, this capacity was completed. The [ BESS ] project was completed last year. And for this Karachi project, this has been completed post 30th June. Then talking about our foreign cement operations, [Foreign Language], the foreign cement operations continue to give us very good results. We have 3 locations in our foreign cement operations, 2 in Iraq and 1 in Congo. So the ones in Iraq continue to operate at around 95% capacity, which is why we're expanding the cement capacity over there. That expansion would be coming online in the coming year. And apart from that, our Congo operations, which is [Foreign Language] also profitable, that continues to operate around 84% to 85%. Then during the year, we made an announcement of investment and some progress made in our mining venture, which is NRL, which is basically undertaking copper and gold exploration in the Chaghi District of Balochistan. So the results of the scout drilling that have been conducted so far are very encouraging. And in mining terminology, when you say encouraging, it means that there's sufficient grounds to continue the exploration activity. It is not that you've actually discovered economically mineable copper and gold, but it means that there are -- there is evidence which justifies incurring further exploration in that area. So broadly speaking, there is a period of scout drilling, then you are into a phase of advanced drilling. And then you are able to make a material resource estimate -- sorry, mineral resource estimate, which is called the MRE. And once you're able to assess that, then you conduct feasibility studies and then you go on to the financial close. So we are clearly -- if everything goes as per plan, -- so we're -- clearly 2.5 to 3 years away from making that estimate right now. And once that financial close is made, then the mining construction activities start. So that's another 2 to 2.5 years of that. So it was just to give you the right context of this venture and initiative and the timing around which we should expect to see some results from there. Next. Okay. So for the last, I think, 4 years continuously or it was around the third year that we've seen a continuous decline in the domestic sales of cement. And this year also, the domestic sales decreased. And as a result, the Lucky Cement sale also decreased by 5.5%. So the industry sales decreased from 38.2 million tonnes to 37.1 million tonnes, and our sales came down to 5.9 million tonnes. But our market share was more or less intact at 16% versus 16.4% last time. So on the export front, I think the results were much more encouraging as compared to the domestic market because not only the export volumes from Pakistan increased because of stoppage of supplies from some other export destinations globally. So we were able to capture the market share in those areas. But Lucky, I think, remained the largest exporter in the country. So our share was 3.4 million tonnes out of the total 9.2 million tonnes domestic exported from Pakistan. So clearly, as you can see, the result of the enhancement of volumes, what has happened is that the African regions, which is -- which includes mainly [ Ghana, ] Madagascar and Cameroon, they became our high volume, I would say, destinations, which is why the share of Africa has increased. And in terms of absolute volumes, the other destinations have more or less remained the same. But because the African region took the larger share, so that's why that share of the pie has increased, whereas others seem to have reduced. So [Foreign Language], all these indicators for the past, I think, post-COVID have been increasing year-on-year. [ Mainly, ] I will talk about the gross profit. The primary reason for increase in our gross profit from PKR 38.8 billion to PKR 42.7 billion is the stable coal prices. The installation of renewable energy was completed at our Karachi plant, which is basically a 28.8 megawatt wind project, which was completed in October 2024. So this year only saw 9 months of that additional renewable energy. So next year, the results should be even better as far as the contribution from this initiative is concerned. Then apart from that, the coal prices remained stable. The exchange rate remained stable. And all of that basically resulted in a jump in the gross profitability to above PKR 42 billion. Then talking about the other big increase in other income, the result is -- this is a result of surplus cash with Lucky Cement, which we have kept for future strategic investments, future expansions and the fact that now [Foreign Language] we are such a large group, there's a certain level of contingency that needs to be kept as a cash reserve. So because of that cash pile, we are able to generate significant other income, which has resulted in this increase. So consolidated figures paint a similar picture. The profitability after tax is up by 17%. It stands at PKR 84.5 billion. The main red indicator is basically the decrease in gross profit by a marginal 1%. And that also the reason is academic because the operations and financials of Lucky Electric are consolidated in these financials. So the way the IPP tariff is structured is that as you keep on repaying the debt, the revenue component of the debt repayment and interest decreases and so does the financial charges, but they appear below the gross profit line. So on a totality basis, this sort of neutralizes. But the way the accounting statements are prepared, it looks as if the gross profit has dropped. But on a totality basis, this does not have any impact. So which is why the enhancement in profitability of cement operations, the other business, the contribution from foreign cement operations has resulted in an increase in consolidated profit to PKR 84.5 million. So this is slightly the longer-term trend from the COVID period to [Foreign Language] this financial year of 2025, we are now at a net revenue of PKR 450 billion, total assets of PKR 730 billion and an EPS of PKR 52.5. And this EPS is based on the post-split number of shares because the pre-split, our EPS used to be above PKR 200. So I think outlook portion is relatively -- we will take that into the Q&A discussion.

[Foreign Language] Thank you so much for giving me this opportunity. And once again, congratulations to the management of Lucky as well on achieving PKR 700 billion market cap mark on the stock exchange.

Thank you.

Sir, my question is with regards to your capital allocation plan for both local operations and for the international operations. So I believe around more than PKR 60 billion to PKR 70 billion of cash is on the Lucky's balance sheet and some of it will go towards the [ PIGA ] investment most likely if the consortium is shortlisted. Then what about the remaining amount? If you can share some light on the priority areas where the management is focusing on, on the local side? And also, if you can guide on the capital allocation plan for the amount parked in the LCL. I think that amount is also significantly higher.

Sure. So [ Shankar, ] given our group's historic performance in diversification and expansion, we've seen the group go into new territories every 3 to 4 years with -- starting from Lucky Electric to autos to mobile, then to mining. So I expect that [Foreign Language], you should continue to see that trend. Now PIA is one, I would say, opportunity that is in your knowledge and in public's knowledge because that requires us to make certain disclosures, which were made to the PSX. But at any given point in time, there are multiple opportunities that are being looked at by the Lucky Cement management. So NRL has already been announced. So while the capital spend on NRL would not be so significant for the next 3 to 4 years, but obviously, that if the things move into the right direction, this is a huge investment that would require a lot of cash. So the cash accumulation that you're seeing is to take care of the projects that are already announced. For example, it is -- one is NRL. The second is the PIA, which really depends on how the transaction goes through, we are in the due diligence phase right now. And last time, we also carried out -- the group carried out the due diligence, but several asks of the, I would say, the bidders were not met, which is why the project was -- the investment was not considered to be feasible. So we hope that the government is going to improve the transaction structure this time in such a manner that it becomes more palatable for the new investors. And if this happens, so obviously, this will also result in some cash deployment on that side. But I think overall, what we need to understand is that because of the size of the group's operations and our plans, this is the amount of cash that I think, which we need to have to maintain healthy current ratios, healthy gearing ratios. I'm not saying this is the amount of cash that would always be there, but significant amount of cash would be on the balance sheet to account for the expansion and then above all, some contingencies also.

And any guidance from the international businesses where LCL [ IL ] is holding a huge amount of cash. Can that be remitted back to the Pakistan or that will be deployed in further investments? Any guidance on that?

So my answer is, I mean, same for both. When I answered this question, that applies to both the locations.

Okay. One last question from my side. I know the KIA numbers were not disclosed earlier because of many reasons, but I think it's now 6 to 7 years that company is operating now. And you have mentioned in the annual report that company achieved around 40% volumetric growth in fiscal year '25. So this is just a suggestion now onwards, if you guys can share the actual number of KIA product-wise. And if you can also provide some guidance on the future sales for the KIA Lucky Motors and the overall Lucky Motors...

Yes. Once a year, Shankar, we disclosed this in our annual report and the number of models that KIA has and KIA and Peugeot have, I mean, it's not very difficult to make that out. But I think whatever we are doing is a part of our overall strategy, considering the competitive dynamics in the industry and -- what values our group believes in. So that's the reason for disclosing the numbers once a year in the annual report. And apart from that, I think because of the decrease in inflation, which is now partially it is going to see some impact because of floods. But apart from that, the overall decrease in interest rates, the political stability, we are already seeing signs of consumer spending in terms of autos. Cement has yet to see that there are -- I think the cement demand has not yet been impacted by that factor. But auto, I mean, even for the July and August, the numbers that you're seeing, I don't see why -- any reason why KIA and Peugeot and the other -- all the mobile brands that we have, they don't continue to enjoy from the higher consumer spending.

I have received a few questions via chat. Let me first read it out loudly for you. What is the retention price in North and South?

So for the outgoing year, the average retention for the company was PKR 15,500. North was slightly higher because of the different dynamics in North where some of the players were facing higher royalties because of which the prices were increased. So North was generally -- North remained an average around PKR 16,000 and South was at around PKR 15,000.

What was price per tonne currently in North and South?

So the price per tonne currently in North and South, I would say it is more or less at the similar levels that was averaging in 2025, but that has already been distorted because of the, I think, the recent events arising out of floods and the rains.

Expecting sales to increase?

Sorry, [ Ylan, ] you're asking about the sales growth, right?

Sales growth, yes.

Okay. So if you see the trajectory of the last 4 years, the cement demand is standing in FY '25, the total was, what, 37 million tonnes. So the cement demand has been hovering around the same number for last 6 or 7 years. So if you compare it with like 6 years ago, there's been 0 growth in this period. So considering that there has been such a long period of stagnation at the start of the year, we had forecasted a growth of both combined growth in North and South of 5%. It is very early in the year to say because the growth number of 14% of year-on-year, which you are seeing in FY 2026, July, August 2026 versus '25, that is slightly misleading because the 2025 numbers were depressed. And that was because of the higher FED in June 2025 -- sorry, in July 2025, which is why the higher sale was made towards the end of the year. So actually, if you compare it with the number of FY 2024, these 2 months, we are actually selling lower than what was being sold in 2024. So that explains that this 14% growth that you're seeing this year is not a correct depiction of the actual situation. Now our forecast of 5%, I think that remains intact because if there is any upside that was expected because of the political stability and the drop in inflation and interest rates, I think the current floods will eat up that growth. And I don't agree with the general view that the floods will result in any significant demand coming from housing and construction of dams because the dams construction would -- is not going to start anytime soon even if it were decided today. And plus, we've seen patterns in the previous years, what has happened in the previous floods. So if you analyze that data, what happens is for the 2, 3 months of the rains and floods period, the demand goes down and then it gradually comes back to normal. But had the floods been a cause of major cement consumption, we've had 2 to 3 floods in the last years, and that has not resulted in any increase in cement demand in these last 5 to 6 years. So my forecast number at the moment is 5%. Now as the year progresses, we will be able to make more accurate forecasts.

[Foreign Language] Thank you for [indiscernible] everything. My question is particularly regarding the Karachi plant's power mix. So can you please shed some light if you guys are looking for maybe a grid connection in the Karachi plant? And secondly, what is the status of gas levy, especially when it comes to the South of the Karachi plant? Are you provisioning the cost -- the extra levy of PKR 791 per MMBtu, are you provisioning the cost or not?

So [ Rasheed, ] so we've made your life very easy by having 55% renewable energy in our energy mix, right? So that energy, I mean, in terms of variable cost, the wind, the solar and the waste heat recovery, in terms of variable cost, it is -- the cost is negligible. So that is very close to 0. There's obviously a fixed cost component in terms of depreciation. But the remaining 45% now if you analyze the cost from different sources, whether it is furnace oil. I mean furnace oil after that PK 80,000 levy is clearly out. We don't even calculate -- use that in calculation. But what furnace oil was costing before this abnormal levy of PKR 80,000 and the other thermal sources versus the grid, more or less, it is -- I mean, yes, furnace oil today is probably the most cheapest if you exclude the levy, but that's not an option anymore. So the other grid and other thermal sources that are available, plus/minus PKR 100 per tonne is the delta between the cheapest source and the most expensive source, if you assume, a, renewable energy mix of 55%. So then it does not matter from what source of energy you're using. So that's one about levy, I mean, the matter is subjudice. It is in litigation right now. So I would not like to comment on that.

So a few questions from my side regarding the power mix, you mentioned that in case of a 55% renewable, 45% nonrenewable case, your cost is pretty much similar for the grid and other sources. Regarding the fuel cost, your coal cost, could you please elaborate what they are for different plants?

So what we are doing is because our South plant is -- I mean, it makes sense to use the imported coal whether it's from South Africa, Tanzania, whatever is economically good quality coal is available. So we're using that imported coal at our South plant. And our North plant uses 80% or 75% local coal and 25% Afghan coal, again, depending on the pricing and the quality we are getting. So for the outgoing year, our South plant, it was using international coal, which was priced at $100 per tonne, and you can put on 12% incidentals and apply exchange rate of PKR 282. So that will give you an average of PKR 33,000 per tonne for Karachi, whereas for the Northern plant because you have to incur transportation when you transport the coal. So that cost was around PKR 38,000 for the outgoing year for the North plant.

Okay. And currently, where does it stand?

It is more or less close to the same number.

Okay. So regarding the growth that you mentioned, you don't seem to be very optimistic compared to the views we found in the industry, at least in the first 2 months, it was around 8% to 10%. So is it because of the floods? And don't you see the fiscal space improving, the government putting more money towards development projects post floods?

I think, [ Sarmad, ] I think the ethos of our group, I mean, in terms of forecasting growth because you see what difference does it make? Somebody who's forecasting 10% and somebody who's forecasting 5%, right? Had this forecast made any difference on our preparedness for the future, I would have forecasted a much more aggressive number. But because our surplus capacity is there, we can produce double the amount that we are producing today if there is demand, right? So I think the mindset that we have is we'd rather be conservative in sharing forecasts with you rather than sharing aggressive. But even what I'm saying 5% versus what I -- the reasonable forecast I've heard from others is a max of 8%, right? So it's really not very different.

So one last question, and I will be going back towards the power discussion that we had which was, of course, very prominent since Financial Times also highlighted your progress towards the BESS project. What will be the percentage of renewable, nonrenewable post implementation of that and the wind power plant that ran for 9 months in the previous year?

So the 55%, [ Sarmad, ] that I'm mentioning is the mix of renewables after including the latest wind power project of 28.8 megawatts that came online in Karachi in October 2024. As far as the battery storage systems are concerned, as I mentioned, you cannot say that it adds additional capacity to the power mix. It basically optimizes the use of -- from different sources because I'll give you a very simple example. So let's say, if you have to keep a generator, a small generator of 5 Megawatt operational 24 hours a day just to account for the droppage in renewable energy at any point in time, right? So that generator would be using energy 24/7, right? But if you now have this battery, which is -- which has taken its charge from the renewable energy and even if you're -- now you don't have to run that redundant generator. So you keep this battery and that battery picks up that surge or the reduction in renewable energy mix. So the renewable energy mix even post this battery remains the same. It is just that operationally, it becomes more efficient, economic and it eliminates that redundant use of thermal fuel generators.

[Foreign Language] Sir, just wanted to know your outlook on exports front. [Foreign Language] ?

This is what happened where Egypt was unable to export cement and clinker from its own country because there were certain subsidies and just like our country, they went to -- went into an IMF program and IMF discontinued those subsidies. So the market share that was left, Pakistan became one of the beneficiaries. But please keep in mind that whenever such a situation arises, it always leads to some surplus or available capacity becoming more economical than it was previously. So I mean, while this situation is very good, and we are optimistic that this surge in prices and this surge in volumes will continue for the foreseeable future. But we would again like to remain grounded and competitive in terms of our costing so that the margins are maintained. So as far as the outgoing year is concerned, there was hardly a gain in the last, I would say, 2 to 3 months in terms of export pricing. So I would not like to quote any specific price because, again, it's a very competitive landscape in clinker and cement exports. But our average cement exports for the outgoing year were priced at $41 and clinker was at $31.

Right, sir. Right. Sir, just one more thing on the power front. I understand [Foreign Language]. But the thing you mentioned, 55% is renewable and remaining 45% is thermal, so in thermal FO is out of the calculation [Foreign Language]?

[Foreign Language] By bringing in 55% renewable, now wherever it comes from, it's such a small number [Foreign Language] because if you see our total cost of cement, right, the cost of production of cement, 55% is coal, right? Then another 15% is power and then 10% is packaging. So 15% [Foreign Language] 2%, 3% here and there [Foreign Language].

[Foreign Language]?

So my comment of 95% on Iraq was for both sides combined because one side, you know, [Foreign Language] cement capacity 95% use in Iraq and Congo is also 80%, 85%, and the outlook is more or less the same as last year. [Foreign Language]

[indiscernible] please unmute yourself.

[Foreign Language]?

[Foreign Language].

[Foreign Language]?

40%.

[Foreign Language]?

[Foreign Language].

[indiscernible] please unmute yourself.

[indiscernible]. I just wanted to ask what's the storage capacity of your battery system in any [indiscernible]?

[indiscernible]. Do you have those numbers? If you can just send that to me, I will brief it to them.

My next question is, both of your cement plants, do you have a grid connection at your -- both sites or any of the sites?

[Foreign Language].

So what's the time line that you can start taking electricity from the grid?

So whenever we need it [Foreign Language].

[indiscernible].

When local coal from SECMC would be available for Lucky Electric?

Sorry?

When local coal from SECMC would be available for Lucky Electric?

Okay. So SECMC, yes, so I mean, that's very important. [Foreign Language] So because the Lucky Electric power plant, because it's currently temporarily, I would say, relying on imported coal, therefore, in the merit order, it is high, but it is not as high where it should be if it gets local coal. So because the imported coal is expensive, once we get the locally mined coal from Thar coal, which is basically the Phase 3 of the SECMC, where the mine will cross the capacity of around 10 million tonnes. So that coal, which would be much more cheaper and economical for Lucky Electric and its number in merit order will enhance. [Foreign Language] We are expecting that this would start coming in within FY 2026. [Foreign Language]

[indiscernible].

[Foreign Language]?

Sorry, your name is [ Osama, ] right?

Yes.

[Foreign Language].

[indiscernible].

[Foreign Language]?

[Foreign Language] So BESS becomes useful when there is a surge or reduction in renewable energy, right? So at that point in time [Foreign Language].

Sir, another question, sir, what do you expect -- I know it's a very long-term investment. What do you expect [Foreign Language]?

[Foreign Language] you need to continue drilling in this area. So for example, let's say, if you've gone down, let's say, a couple of hundred meters in the ground [Foreign Language].

Rahman.

[Foreign Language] My question is [indiscernible] investor base. Lucky Cement has had a mix history of dividend payout. So could you please elaborate the company's current dividend policy, especially should investors expect a regular payout going forward?

So I mean, I do understand that your perception is right that in terms of dividend payout compared to our earnings, the payout ratios have been, I would say, very conservative. And I think -- but I would say that as a result of that, Lucky has been able to add back that -- those earnings to the capital gain that you're seeing in the stock price of Lucky. So while we do not -- unlike some companies who can say that we would target to distribute 50% of our earnings, we don't have that policy. But I would say that there would -- there is no major shift in our policy in the previous years, and I don't expect that to change in the foreseeable future.

[ Amir Malik. ]

[Foreign Language] So I have 2 questions. One is short. Can you just tell me the cost of the grid at the moment? What is the per unit cost?

So the per unit cost is around PKR 36 right now based on an average of peak, off-peak rates and the fuel adjustment surcharges that are levied. But we expect that going forward, as the reliance on the national grid increases because of the discouraging of the thermal fuel, what will happen is that the user base of the national grid will increase and which will result in a higher absorption of the capacity charges of the power producers. So we expect that, that should come down to around PKR 33 in the near future.

All right. That's very encouraging. Second question is, can you elaborate on the PIA investment considering it's a very competitive business if you look at it internationally, and you also have regional competitors as well. So -- and of course, this is a new different area where the company and the people that you're investing with the consortium doesn't have any experience in this area. So it's a bit -- I just wanted to get your thoughts on this investment, if you can...

So as far as -- Rehan, right?

[ Amir. ]

Okay. So as far as experience is concerned, there are 3 major, I would say, conglomerates that are involved in this with us at least. It is us, it is HUBCO and then there's Kohat Cement. All 3 have made announcement of the interest in this investment. And so I think we have undertaken this conglomerate and along with the consortium has undertaken several businesses where we did not have experience. So the formula is to bring on board consultants, advisers and professional management who have that requisite experience. So I mean, that formula exactly applies to aviation also. But -- now when you said that this business is highly competitive internationally, that's correct. And -- but PIA has a very big advantage of a diaspora in the North, for example, in U.K., in Middle East and somewhat in North America. So their preference is to have flights without any connections because of lack of availability of safe air travel, we have become used to Middle Eastern airlines, but there's no reason why that cannot change. And we've done our analysis, and we feel confident that if there is safe and reliable and good quality aviation option available to the Pakistan's people, they will definitely opt for PIA in going for the international side. And plus, once we engage with the government, this is what we are trying to advocate that globally, air travel is not a luxury anymore. It is a necessity. And in Pakistan, because of the heavy FED and taxes compared to the GDP per capita that we have, Pakistan has one of the highest taxes on air travel. So it is one of our proposals to the government to bring these taxes down. So -- and once acquired, whether we acquire or any other consortium acquires it because there are so many areas that can be improved in PIA. So I feel very confident that whoever buys it, it would turn out to be a good investment, provided the structure of the transaction for which we've given our feedback to the government is met.

So one last question, [ Ravia, ] please unmute yourself.

[Foreign Language]...

We can't hear you, [ Ravia ].

[ Ravia, ] maybe you can WhatsApp -- sorry, put your questions in chat to [ Arsalan. Arsalan ] were you able to get the capital cost of BESS?

I have sent you the megawatt capacity of BESS, it's 20.7 in Karachi.

Okay. So whoever wanted to note it, it's 20.7 megawatts in Karachi.

[Foreign Language] I have a small question. One of your product as per your annual accounts is 32.5 cement. I just want to know what is the feedback of the market? Are you selling it domestically or you are exporting this product to foreign countries?

So 32.5 is our original cement that is domestically sold, and it is doing very well in the domestic market.

And it is only for plastic purposes due to its lower strength, what I believe.

That I and Rehan have to check. I don't recall the usage...

This was mentioned in the annual report in the product profile.

Okay.

Okay. Thank you very much. I hope you found this session informative and look forward to our next engagement next quarter [Foreign Language]. Thank you. [Foreign Language]