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Lucky Cement (PSX: LUCK) being market leader in the south is meant to outperform its peer, which it has. It’s financial position in FY20 however, provides a good indicator of what is to come for other cement firms—massive declines in profits and in many cases, companies recording losses. The year was tough—earnings for the company have more than halved since last year.

Demand in the domestic market was down as construction projects—both public sector and private—remained lower due to the slowdown in economic activity. Performance of exports has been considerably better as demand for clinker abroad remained positive. Lucky is in a geographically strategic position to export clinker overseas due to its proximity to the port and linkages to key markets. This helped shore up overall volumetric sales for the company—total exports for the company were up 19 percent in FY20 with clinker exports up 32 percent. However, domestic sales dropped by 6.7 percent. The cumulative drop in volumes was less than 1 percent shielded by export growth.

The company also maintained its market share with only nominal declines despite industry wide expansions. But while it retained its market position, the company saw its margins shrink. Prices bagged in exporting markets for clinker is always lower than cement while retention prices in domestic markets (both north and south) had also reduced on average. Moreover, cement prices in exporting markets were also trailing lower than last year. As a result, revenues declined. The company’s average revenue per ton sold declined by 12 percent in FY20 which reflects the sales mix leaning on clinker more than last year—share of clinker in total sales was 14 percent this year against 10 percent last year.

On the cost front, due to the depreciation of rupee and other inflationary impact (even though imported coal prices were down), estimated per ton cost was up 6 percent that together with reduce revenue drove down margins to nearly half of last year’s.

The company’s overheads are also expectedly up—indirect expenses as a share of revenue are up 21 percent (FY20: 13%, FY19: 10%). Though the financial costs for the company are negligible as a share of revenue (FY20: 0.42%, FY19: 0.05%), expensive cost of borrowing also brought finance costs up.

Moving forward, demand is expected to be resuscitated due to improved investment climate in construction and real estate—directly as a consequence of the government’s efforts to boost construction in the form of the construction package and housing subsidy. Things are also heating up in the Naya Pakistan Housing program which will provide a strong impetus to domestic demand for cement—which in turn would improve price retention in the local markets. Though earnings have declined, Lucky is luckier than most in the industry and is expected to recover from this recent letdown quickly.