Even as the second coronavirus wave hits the island, market analysts anticipate a real estate boom which will change the fortunes of listed Tokyo Cement (Lanka) Plc. Investors are looking for safer and high-yielding asset classes with interest rates in decline and equity too volatile: real estate is emerging as that asset class. “Tokyo Cement is likely to experience a sharp revenue growth on the back of a revival of the construction sector. Cement volume growth which peaked at 20% in 2017 will decline to 7-8% before recovering to about 12% in 2022,” First Capital Research said in a October 2020 report. There are several compelling reasons why the property market will boom in a post-covid environment, as other pieces in this edition of Echelon will discuss at length.

First, the government is keen to get some of the large infrastructure projects off the ground as soon as possible like the Colombo Port City, a deep-water terminal at the main port, and several road expansions projects. Second, investors are looking at investing in apartments and housing. The main reason for this is because fixed-income assets like bank fixed deposits and government Treasuries are giving unyielding returns. Equities fail to live up to expectations as a long-run, high-returns option. Investors expect windfall returns from housing in the medium to long term. “In 2015, the average bank prime lending rate (AWPR) was at similar levels, resulting in an expansion in private credit while creating a housing boom. We expect a similar trend in 2020 because the AWPR has significantly declined in the second and third quarters of 2020.

Interest rates will hoveraround 7%-8% levels until March 2021,” First Capital Research said. According to the research division of listed investment house First Capital Holdings Plc, a similar housing boom was seen in 2010 when interest rates were in a declining phase.

Third, the global pandemic has pushed the Sri Lankan Diaspora and foreign nationals to consider investing in retirement or second homes, resulting in appreciating property values. Tokyo Cement’s prospects look encouraging. “We expect the construction of Port City to resume relatively faster, amidst the investment commitment already made by the Chinese investors. The Highway Ministry has also decided to expedite the construction work of Ruwanpura highway project,” First Capital said. As the country’s primary supplier of concrete, Tokyo Cement will benefit from these projects. The cement maker will also benefit from recent import restrictions imposed by the government to conserve foreign exchange. Tokyo Cement also enjoys better economies of scale and has a portfolio of high margin products. The first half of the year was depressing for the cement industry. Production ceased in March and April 2020 due to the first covid wave. First Capital said latent demand manifested since June, however. “Hence, the third quarter of 2020 is expected to be a strong quarter for Cement manufactures such as Tokyo Cement”.

“CESS imposed on imported cement makes it less attractive, making a strong case locally produced cement. Accordingly, used capacity at Tokyo Cement’s local manufacturing will rise to 85% in the 2021/22 financial year. Its local production plant was at 65% capacity in the year to March 2020”. The adoption of a coastal shipment distribution model between Tokyo Cement’s factory in Trincomalee and the Colombo Port Terminal will reduce distribution costs. Falling interest rates and settlement of borrowings through generated profits will help Tokyo Cement contain its finance costs. As a result, Tokyo Cement’s profitability will spike and be maintained over Rs3 billion with volume growth and cost efficacies during the year to end March 2022, First Capital Research forecasts.

Tokyo Cement reported a 13% revenue growth from a year earlier to Rs11.4 billion during the September 2020 quarter while profits surged 160% to Rs2 billion, interim accounts filed with the Colombo Stock Exchange showed. In the six months to end September, revenue had grown marginally from the previous year to Rs13 billion, and profits doubled Rs2.7 billion. Tokyo Cement has over 20 concrete mix designs, 11 batching plans across the island and 125 truck mixers and pump-cars. Its cumulative supply capacity is 384ms/hr and provides uninterrupted supply around the clock. The company published its 2019/20 annual report in late September 2020. Revenue fell 30% on reduced demand but reported a profit of Rs817 million, compared to a loss of Rs332 million the previous year. “Overall, national cement consumption continued on its downward trend totalling to 5.9 million MTs for the financial year, which is a decline of 10% year-on-year. Tokyo Cement Group could not increase sales in this environment. However, profitability improved in part due to years of investment into process engineering at our factories and continued integration with our Enterprise Resource Planning system,” Tokyo Cement’s Managing Director S.R. Gnanam told shareholders.

The construction industry experienced increased costs, reduced liquidity, and continuous disruptions to seasonal consumption behaviour. The year had several market disruptions. Commencing with the Easter Sunday Attacks, followed by extended monsoons, presidential elections, volatile policy environment, and ending unceremoniously with the onset of the pandemic,” he said. Tokyo Cement said in its annual report that factory modernisation was on track. Its Central Control Room in Trincomalee has automated most of the production process. Tokyo Cement’s Construction Research Centre is also making a name for itself as an industry specialist in concrete designs. During the year, it worked with Japanese contractors and consultants to develop custom concrete designs “that a few years back would not have been possible in Sri Lanka”.