Lucky Cement Limited (LUCK) Earnings Call Transcript & Summary

So, welcome to Lucky Cement Analyst Briefing for First Quarter FY '27. My name is Arsalan. I'll be moderating the Zoom session. I have with me Executive Director and CFO, Mr. Atif Kaludi. Let's take a start.

[Foreign Language] Thank you, everyone, for joining our first quarter FY 2027 analyst briefing. So you -- some of you may have seen the results. So, apart from the results, the -- I think, major information or material information is that we have decided to continue our expansion plans at the Karachi project by adding another line of 3.2 million tonnes. Apart from that, we are also planning to add 22.5 megawatts to the existing 28.8 megawatt wind capacity at the Karachi plant. We have just commissioned another 15-megawatt Karachi solar plant at our Karachi plant. And in addition, we are also -- we also got approval from the Board of adding a 15-megawatt solar plant plus a 15-megawatt at our Pezu plant. So talking about the decision to expand our Karachi plant, the utilization levels, if you see for the domestic sales they have remained at less than close to 50%. And that has been true for both our North and South areas. However, if you consider the exports, then our Karachi plant has been operating at 95% plus capacity level. Over the last 3 years, exports have shown to be more profitable, barring the recent volatility in the commodity prices where the margins have slightly shrunk, but we decided to take a long-term view because right now, we feel that is the right time to take this decision. We had the available liquidity. We don't need to really resort to taking any debt for this expansion. Plus the other big thing is that the exchange rate has been stable for quite some time. So if we are able to get this plant installed at the current or at the exchange rate, which is closer to this and then over the long term, generally, there is a level of devaluation. So we will be better off in that terms. Plus, as we speak, because our Karachi plant remained completely utilized considering both exports and domestic sales, we felt that we were losing out on some export opportunities by refusing to entertain some of the export orders. Plus as you've seen that the South market is constantly improving. There was an improvement last year also at this time around, I think there's a 13% increase in the South sales, which is primarily coming from a mix of retail as well as infrastructure demand. So although this 14% is the first quarter number, and we feel that a more sustainable figure over a longer term should be 6% to 7%. So if you take account of all of that, we felt that this expansion at Karachi was justified. Plus obviously, this -- the plant that we are putting in our philosophy applies that our primary focus will be to cater to the domestic demand first and then cater to the profitable export orders. So, we are going to be very aggressive in terms of capturing, [Foreign Language], this market share that will be added to our capacity as a result of this. Plus, the other thing is that our completion time lines, Board has given us very aggressive completion time lines, and then we plan to fire the kiln, [Foreign Language], in December 2027. So it's not a very long-term project. [Foreign Language] in a few quarters, we will be seeing the kiln fired. So that was the biggest item for this quarter, I would say. And you may want to know the total capital outlay. So, because at the moment, we are under negotiation for all of these, whether it's the EPC contract for the new line or the solar BESS capacity. So it would be against the interest of the company to quote any specific number. But overall, we estimate that the capital outlay would be at least PKR 50 billion, which is going to be needed for all these excellence and expansion projects. Now talking about the current quarter, the local sales volume overall increased by 13%. The export demand has slightly decreased, but because the number is overall smaller. So the weighted average increase is still around 4% to 5% for the current quarter. So these are the details of the existing energy projects and the capacity not only in Pakistan, but in fact, globally also. So, [Foreign Language], after adding this 3.2 million capacity to our Karachi plant, our capacity in Pakistan would be 18.8 million tonnes, which will be the biggest any cement player has in Pakistan today. We are already 0.3 million tonnes higher by our next largest competitor, but this 3.2 million expansion will put us way ahead from the competition. Then we have these operating plants in Al-Mabrooka, Najmat Al-Samawah and NYA, where we are in the process of adding this 1.6 million tonnes of capacity, which is going to come online as per plan next year, [Foreign Language]. Then the WHR 10-megawatt, it will come online in second quarter FY 2028. It is for the Karachi project, which will supplement the renewable energy needs of Karachi. Then there is a solar of 15 megawatt. The target completion date is 4Q FY 2027. And wind, as I mentioned, 22.5 megawatt, it is also targeted to be completed as the new line's klin is fired. So no major change in the industry apart from what I have already mentioned above. There has been an aggressive, I would say, marketing by us in the North region where we have captured the new market. So as a result, you can see that our overall market share domestically has increased to 16.8%. So -- but it really depends on how the expansion pans out in the remaining quarters. So I feel that there could be a slight adjustment in the market share because especially now that the prices of cement have gone up. So we may see a reduction in the market share in the coming quarters. Arsalan, do we have the export destinations? I think the participants are always more interested in that. Yes. So these are our export destinations. As you can see, the percentage indicates Lucky's exports to these destinations. So we started off U.S. last year. And now we -- our 15% exports are going to the U.S., 82% in Africa, 3% in Sri Lanka. So those are our major destinations of exports. So primarily, we've seen a lot of volatility in the commodity prices, but because of proactive planning in terms of buying coal both from the international market, local market, the local prices of coal went very high during the quarter. So obviously, we stepped back from the local market. Now we are trying to source coal internationally and then move it to our market till the prices of the local coal again come down. But so far, we have not seen a real impact of the commodity prices in our profitability. It may impact our future quarters, but it all depends on how volatile the market remains. So the consolidated financial highlights, there is a slight dip in the operating profit. Overall, our Lucky Electric is doing fine, especially now that Lucky Electric is seventh in merit order. And they have now shifted entirely to local coal post 1st October 2027 (sic) [ 2026 ]. And the SECMC's Phase 3 of the mine COD has been completed. So now we are getting the local coal entirely. Our plant has faced some teething issues, again, due to shifting on local coal. But we've seen this behavior of the plant in the past, and we are confident that with the expertise of our O&M operator of Lucky Electric, we should be able to manage this. Apart from that, profitability headwinds are seen in autos due to competition, in our Chemicals segment due to challenges in polyester and Pharma segment where we are facing fierce competition from cheaper imports. And in the case of pharma, what we are seeing is there is a dwindling buying power of the consumer, which is resulting in a reduction in profitability of the Pharma segment. Apart from that, all our subsidiaries doing equal or slightly better than the comparable period. Arsalan, can you just give me a second? I just need to make an adjustment to my screen. Next slide, please. Outlook we will discuss in the Q&A portion, but I think more or less I've mentioned it all.

[Operator Instructions] Yes, Sarmad, please unmute yourself.

So I have a few questions regarding your cement operations. What is your current kiln requirement for coal in both North and South? And where do you target it to be after this expansion?

So our Karachi plant is obviously quite old. So which is why if I take an average of our coal consumption for both plants, it would be around 135 kg on a company basis. And once the new plant comes in, I expect it to drop to around 125 kg post the addition of the new plant.

Is this for clinker or cement?

This is for cement.

And what was your current coal cost in this quarter?

So, my current coal cost in this quarter is around PKR 40,000, both North and South combined.

Okay. And what was the ratio of imported to local coal?

So in our South plant, we are entirely depending on imported coal. But in our North plant, we are currently using, I would say, 30% imported, 70% local, but this mix may change depending on the price pattern of local coal.

And regarding the renewables in the previous interactions, you've mentioned that 55% is your mix in renewable -- in power mix and the remaining is the grid. So is it the same during the quarter? And where do you see it after these expansions?

So 55%, Sarmad, is an annualized number. If you talk about a specific quarter, this quarter, we faced a low wind season at our Karachi plant. And because wind is one of the biggest contributors, the renewable ratio was around 51%. We expect this ratio to remain 55% on an annualized basis. And post expansion [Foreign Language], it would be around 60%.

One more question from my side. What is the packing material cost? I've noticed that after the war, the U.S.-Iran war, it has gone quite high.

So, it used to be -- it used to be around PKR 35 per bag, and now it's averaging around PKR 50 per bag.

Yes, Abdur Rahman, please unmute yourself.

This is Fawad Basir from KTrade. So I just have 2 questions. One is relating the RLNG terminal that the group had invested in. Any update on that? What's happening on that front?

So, Fawad, that investment has been made by the family side of the group. So Lucky Cement is not a partner in that.

Okay. Okay. Thanks for that clarification.

But if you have seen the news item, I think the news item reflects the situation quite accurately.

Okay. Okay. Sir, secondly, I mean, the group has been performing phenomenally well over the past 1.5 years, and it holds roughly almost close to PKR 200 billion in cash right now. Is there any plans or possibility? I know the inherent working capital structure of the company is that it invests in the business. Is there a possibility of higher payouts going forward to sort of reward the investors to a certain extent?

So Fawad, as I just mentioned that this cash accumulation was always there for our -- as a contingency for future growth. And given the announcement that I've just shared, I've indicated that around PKR 50 billion of cash will go towards that. Now most of it is going to be equity. We don't really need any debt, but there is a possibility that our plant qualifies for this green financing that is being talked about. But that is not really going to be a major portion of it, maybe we only get around 30%, 40% from there. But rest is going to be equity financed. Apart from that, if you talk about our dividend pattern, our policy in terms of dividend has always tilted toward higher conservation of cash within the company and making the company much more stronger to withstand volatile times and take tough decisions in volatile times. We've demonstrated this in the past during COVID when we announced expansion of our Pezu plant. And right now, again, in the volatile times, we are again taking a call on Karachi's expansion. So I feel that this kind of risk-taking appetite cannot be there with a liberal dividend policy. So I mean, I have no -- I cannot give you any indication whether our dividends are going to improve in terms of payout percentage in the foreseeable future.

Zubair Ghulam, please unmute yourself.

If you can explain, lately [Foreign Language] almost 100% capacity. And there are talks that probably Egypt got out of -- in the IMF program in 2024 and subsidies were removed and they were disallowed subsidy on cement exports also lately, and that is why the exports has improved. So what is your -- basically what is the real reason that you can say that is leading to the utilization levels of 100% of -- which is being talked about by Power, by DG, by Attock Cement. This is one part. What is the real reason behind the high utilization? Second part is are their margins have also improved on the exports or they are still -- the prices are hovering around $38 to $40 a barrel -- $40 a tonne. So just if you could explain the increase in utilization and where do the margins stand in comparison to 3, 6 and 12 months ago on exports specifically?

So, Zubair, the export market, you're right that Egypt was the main event, which I recall, which moved -- really moved the needle on Pakistan's cement export margins. However, now that has kind of -- after the latest volatility, that has become, I would say, it's an old news now because the margins have again gone against us with the coal prices increasing substantially and the cement prices and freight working against us. So as of today, if I talk about versus last year, the same period, the exports margin are much, much less. And we expect that they will continue to shrink till the time this volatility does not go away. Having said that, primarily, when you talk about the high utilization of the South plant, it's yes, primarily because of our exports and exports margins for the last 1 year or so are good, which is why our utilization remains high. However, any new expansion cannot be solely made based on the export market. And when we have evaluated this project, like I mentioned, we have taken a very aggressive view on capturing the domestic market, [Foreign Language], very quickly and just placing the surplus capacity outside Pakistan. The other thing is that for us and maybe for Pakistan also, the U.S. market is relatively very new. The U.S. market is a huge importer of freight -- sorry, importer of cement despite the high freight. And Pakistan's cement has made a good name in the U.S. market. And our people who are responsible for selling cement over there because obviously, we sell through dealers who are in the U.S., they are saying that global giants like Tesla and others have also used our Pakistani cement brands. So we are -- our hope is that we will continue to penetrate in the U.S. market apart from capturing more share in the African markets, plus there are some untapped markets. So -- but overall, the profitability is completely dependent on the geopolitical situation on which we have taken a call for now. And just for your interest, the current export retention for cement, overall weightage, I won't be able to tell you country-wise, but it's $48 for cement and around $38 for clinker.

Okay. But one more thing. I have lately seen that the utilization for the South players have increased in the last 1 or 2 quarters. We've spoken to other manufacturers also. Of course, I don't expect you to answer on their behalf. But Power says they are running above 100. Attock is running above 100. What has changed which is leading to the incremental utilization in the last 1 or 2 quarters?

So I don't think anything has changed in the last 1 or 2 quarters. I mean, but you see the profitability of cement improved around, I would say, around 2 years back, we were selling cement, our contribution margin was negative, if you talk about 24 months back. So when we started seeing this profitability in case of Lucky, maybe we were more responsive to this change in scenario, and we quickly captured the export market. And I think everybody is right on the same path. Maybe they just joined it later, but that's the prime reason that the profitability has improved if you just minus the last 1 or 2 quarters, which is why there has been a tilt towards exports.

Anas, you can unmute yourself and ask.

I would like to congratulate you on publishing the profound results in the first quarter FY '27. However, my first question is what is the current status of Thar coal railway track and the construction cost related to that. And that would be included in the tariff or borne by the Lucky Cement independently?

So sorry, is this Sarmad who's asking the question?

Anas from Arif Habib.

Anas, so I can say that there are some fund allocation issues in the laying of the railway track. We are being told that more than half the work has been completed. Some of our people have visited the sites to witness that. But it's a bit difficult to put a percentage on this because the tracks are available, but when -- till the time the tracks are properly laid out and the connections are properly made, the fund allocation, I think, will be the main bottleneck for completion of this. Having said that, right now, we are celebrating the transition to 100% Thar coal. We are now the seventh in the merit order. Our dispatch levels are record high. The implementation of railway is going to -- first of all, the railway, there is no cost to be borne by Lucky Electric, the railway -- because everything is a pass-through just like the road transport. But what it will do is actually it will enhance our ranking in the merit order. So in that terms, it is relevant. But I think we are clearly a year or 18 months away from hearing any good news on that front. Anas, any more questions? Arsalan, I can see a lot of raised hands. Those questions have been answered, if they can just -- I mean, not raise their hands, so we can just go to the people who have questions.

I just had 2 questions. First of all, I just want to know that if the company wants to plan for a brownfield expansion in the North Pezu [Foreign Language].

Are you talking about Lucky Cement's Pezu plant?

Pezu on the north side, yes.

So, Mehroz, unlike our South plant, Lucky's North plant utilization remains at 50%. We still have our old lines, which we operate intermittently as and when the demand is there. So as such, in the foreseeable future, we don't need any land for expansion in that region. If there is expansion, maybe we'll have to buy land in another location.