MLCF: Coasting on prices

Mapleleaf Cement published its quarterly financial accounts for the very first quarter of the fiscal year enjoying an earnings growth of 2.1x year-on-year, which is not entirely surprising but still something shareholders must relish. Turns out, in an economy like this, demand has little to do with it.

Domestic demand and exports are both down, yet revenues for the seasoned cement player rose 30 percent on the back of improved and rising cement prices in the market. Cement monthly price index according to the Pakistan Bureau of Statistics (PBS) rose 47 percent between Sep-21 to Sep-22. This is compared to a wholesale price index (WPI) increase of 39 percent. The company’s own revenue per ton sold rose by an estimated 66 percent during the period.

What really tilted favors toward the company was also considerably lower costs associated with coal which included a reasonable share of domestic coal into the mix that subdued costs. By comparison with revenues, costs per ton sold (estimated) rose 49 percent. This contributed to margins growing to 28 percent—a substantial upgrade from last year’s 19 percent.

With both overheads and financial costs higher than earlier, the gross profit margin turned to single-digit net profit margins of 9 percent; still higher than 1QFY22’s of 6 percent. Finance costs due to long-term debt on books and higher interest rates rose from 3 percent to 5 percent of revenue while distribution/administration as well as other expenses grew to 9 percent (1QFY22: 8%).

Reduction in new construction activities due to substantially more expensive construction costs, flood-related halts for ongoing activities, and Naya Pakistan Housing’s mark-up subsidy evaporating in thin air with PTI exit (though SBP indicated it might reintroduce a revamped version of the same), have all contributed to demand subsiding. Export markets have also dried up. Mapleleaf enjoys the advantage of having a plant entirely devoted to white cement which has limited demand but is almost entirely served by the company.

Demand on all fronts is expected to remain down as the economy trudges to snail's speed. However, flood-related construction and rehabilitation may eventually raise demand, the operating term here being “eventually”. Finance costs will remain elevated as the policy rate stands high and is still at 15 percent. Coal prices globally are coming down which is good news for cement players, given also that they have a fall-back plan in the form of domestic and Afghan coal which are cheaper. An optimally priced coal mix and inventory management will go a long way. How long will cement prices stay at the levels they are at right now comes down to how far the demand will fall.