Maple Leaf Cement Company

Maple Leaf Cement Company (PSX: MLCF) was incorporated in Pakistan as a public limited company in 1960. The company is engaged in the manufacturing and sale of cement. Besides catering to local market, the company also exports cement to Afghanistan, Middle East, and other African countries. Kohinoor Textile Mills Limited is the holding company of MLCF.

Pattern of Shareholding

As of June 30, 2023, MLCF has a total of 1073.346 million shares outstanding which are held by 14,556 shareholders. Kohinoor Textile Mills Limited (the holding company) has the major stake of 56.5 percent in the company followed by local general public holding 22.07 percent shares of MLCF. Moradabas & Mutual Funds account for 7.48 percent of the company’s shares while foreign general public holds 5.06 percent shares. Around 4 percent of MLCF’s shares are held by Banks, DFIs and NBFIs and 2.65 percent by the Insurance companies. Maple lead Capital Limited 1.12 percent stake in the company. The remaining shares are held by other categories of shareholders.

Financial Performance (2019-23)

MLCF’s topline has been riding an ascending path since 2019. Conversely, its bottomline eroded in 2019 and 2020 whereby it posted net loss in the latter year. In 2021, MLCF’s bottomline registered a staggering turnaround only to slip back in 2022. The subsequent year was characterized by a reasonable bottomline growth. MLCF’s margins drastically dropped in 2019 and 2020 followed by a sound recovery in 2021. In the following years, while gross margin continued to rise, net margin followed a downward trajectory. On the contrary, operating margin nosedived in 2022 followed by a slight recovery in 2023 (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.

In 2019, MLCF’s net sales registered a trivial 1.2 percent year-on-year rise. While export off-take grew by 21.1 percent during the year, local off-take slid by 4.27 percent, culminating into 2.41 percent year-on-year slide in the overall sales volume of MLCF which clocked in at 3,673,278 metric tons in 2019 (see the graph of domestic and export sales volume). Sluggish local sales were the effect of cuts in PSDP budget as well as low private sector spending in the sector on account of economic uncertainty after the new government held the reins of the country in July 2018. On the other hand, depreciation in the value of local currency proved to be the major driver in boosting export sales. However, the company was not able to maintain its GP margin which plunged from 27.3 percent in 2018 to 18.9 percent in 2019 due to high input cost on account of inflation, hike in energy tariff and Pak Rupee depreciation. Gross profit shrank by 30 percent in 2019. Rigorous branding and dealer engagement activities resulted in 26.8 percent higher distribution expense incurred by the company during 2019. MLCF was able to keep a check on its administrative expense which inched up by a paltry 0.4 percent despite increase in the number of employees from 1388 in 2018 to 1569 in 2019. Lower profit related provisioning and unrealized loss on re-measurement of short-term investment drove down other expense by 20.3 percent in 2019. Operating profit marched down by 43.7 percent in 2019 with OP margin slipping from 19.6 percent in 2018 to 10.9 percent in 2019. Finance cost multiplied by 82 percent in 2019 on account of high discount rate and long-term loan obtained for its new production line. MLCF’s debt-to-equity ratio soared from 31 percent in 2018 to 37 percent in 2019 as a result of increased borrowings. The consequence was a bottomline slide of 59.7 percent in 2019. MLCF’s net profit clocked in at Rs.1,465.30 million in 2019 with EPS of Rs. 2.13 versus EPS of Rs.6.29 in 2018. NP margin also eroded from 14.1 percent in 2018 to 5.6 percent in 2019.

MLCF’s topline rose by 12 percent year-on-year in 2020 which was the result of 41.61 percent enhancement in the company’s sales volume during the year which clocked in at 5,201,820 metric tons. While local sales volume registered a robust growth of 50.37 percent during the year, export sales volume tumbled by 45.78 percent in 2020. The stunning rebound in the sales volume isn’t depicted in the topline because of low retention on account of cut-throat competition in the local industry. 200 percent import duty imposed in India on any goods coming from Pakistan along with reduced demand and prices in the international prices played havoc on company’s exports in 2020. Higher landed cost of coal, axle load restriction, Pak Rupee depreciation as well as shift of discharge port from KPT to PIBTL resulted in 41.4 percent hike in cost of sales. As a consequence, MLCF registered gross loss of Rs.699.21 million in 2020. Distribution expense declined by 9.4 percent in 2020 due to slashed advertising and promotional budget. Administrative expense escalated by 7 percent in 2020 on account of increased payroll expense despite the fact that the company ended 2020 with a smaller workforce of 1461 employees versus 1501 in the previous year. No profit related provisioning done during the year coupled with no exchange loss and loss on disposal of fixed assets trimmed down other expense by 80.3 percent in 2020. Conversely, exchange gain, gain on disposal of fixed assets and higher interest income drove up other income by 206.9 percent in 2020. Despite keeping a check on operating expense, MLCF registered operating loss of Rs.2287.32 million in 2020. To make things even worse, finance cost amplified by 154 percent in 2020 due to higher borrowings for BMR projects. The company eventually recorded net loss of Rs.4,843.27 million in 2020 with loss per share of Rs.5.30.

In 2021, MLCF’s topline spiraled by 22.1 percent year-on-year despite the fact that its overall sales volume plummeted by 3.43 percent to clock in at 5,023,444 metric tons. While export sales volume mounted by 80.42 percent during the year, it was offset by 6.46 percent slide in local sales volume. Evidently, the superior topline was the effect of improvement in selling prices and resumption of export avenues post COVID-19 restrictions were eased globally. Amid heavy import duty imposed by India on Pakistani goods, the company shifted its focus to Afghan market and received tremendous response. MLCF registered gross profit of Rs.7,402.88 million in 2021 which translated into GP margin of 20.8 percent. Distribution expense spiked by 19.9 percent in 2021 primarily due to branding and sales promotions drives conducted by the company during the year. Administrative expense inched up by 3.7 percent in 2021 due to higher payroll expense despite streamlining its workforce to 1428 employees. The company booked hefty provision for WWF and WPPF, resulting in 482.4 percent hike in other expense in 2021. However, it was offset by 2727.8 percent escalation in other income due to dividend income from subsidiary company. MLCF posted operating profit of Rs.8,783.53 million in 2021 with OP margin of 24.7 percent – higher than its GP margin for the year and also the highest OP margin among all the years under consideration. Finance cost tumbled by 49.9 percent in 2021 due to monetary easing and early payment of its outstanding loan obligations. MLCL posted net profit of Rs.6,254.11 million in 2021 with EPS of Rs.5.69 and NP margin of 17.6 percent – the highest among all the years under consideration.

In 2022, MLCF’s topline grew by 36.5 percent year-on-year despite the fact that both local and export sales volume shrank by 0.95 percent and 66.31 percent respectively during the year. This culminated into a cumulative sales volume of 4,761,512 metric tons, down 5.21 percent year-on-year. The topline growth was merely the consequence of upward revision in selling prices in the local market to incorporate higher input cost particularly fuel and power. The local demand was subdued due to skimpy demand in the housing sector, lesser than the budgeted PSDP spending and slower execution of large-scale projects. Export sales volume suffered as a result of weaker demand from Afghanistan on account of sluggish economic activity after American evacuation from the region. The company couldn’t export the excess stock to the rest of the world because of high cost of production in Pakistan which makes cement exports uncompetitive when compared to the regional counterparts. The company sourced its coal from local and Afghan market and relied on its in-house power generation. This resulted in 65.8 percent year-on-year rise in MLCF’s gross profit in 2022 with GP margin climbing up to 25.3 percent. Distribution expense magnified by 46.4 percent in 2022; due to higher branding & advertising expense as well as travelling & conveyance and payroll expense. A bigger workforce comprising of 1531 employees versus 1428 employees in the previous year meant higher payroll expense which ultimately led to 19.4 percent higher administrative expense incurred during the year. Higher profit related provisioning, exchange loss as well as debtors written off during the year translated into 41.6 percent hike in other expense in 2022. Other income didn’t prove to be favorable either due to absence of dividend income from subsidiary company as well as no exchange gain recorded during the year. MLCF also booked net impairment loss worth Rs.209.92 million on its financial assets in 2022 which further deteriorated its operational performance in 2022. Operating profit mustered 1.6 percent growth in 2022 with OP margin sliding down to 18.4 percent. Finance cost surged by 16.5 percent in 2022. MLCF’s debt-to-equity ratio which shrank to 28 percent in 2021 bounced back to 36 percent in 2022 due to increased long-term borrowings to finance its BMR activities. The imposition of super tax pushed up tax expense for the year by 243.5 percent. All these factors trimmed down the company’s net profit by 42 percent in 2022 to clock in at Rs.3,626.34 million with EPS of Rs.3.3 and a radically low NP margin of 7.5 percent.

In 2023, MLCF’s net sales posted 27.9 percent year-on-year rise which was the impact of higher selling prices to pass on the impact of unprecedented level of input cost particularly, fuel, power, packing material and interest payments. The cumulative sales volume of the company clocked in at 4,273,444 metric tons, down 10.25 percent year-on-year. Local off-take plunged by 10.92 percent due to politico-economic upheaval which put brakes on PSDP spending, demand in housing sector and implementation of large-scale infrastructure projects. Export sales mounted by 17.84 percent in 2022 due to resumption in demand from Afghan market. However, it is to be noted that the demand hasn’t since reached the American pre-exodus level in Afghanistan. Due to import restrictions, the company couldn’t use imported coal although its prices came at par with the Afghan coal due to global recession. The company relied on Darra coal during 2023. Lower coal prices and internal power production resulted in 33.8 percent rebound in MLCF’s gross profit in 2023 with GP margin reaching up to 26.5 percent. Distribution expense multiplied by 34.9 percent in 2023 as the company was engaged in rigorous branding and advertising drives. Administrative expense also mounted by 42.1 percent in 2023 as the number of employees reached 1636 which meant higher payroll expense. Significantly higher provisioning for WWF as well as higher exchange loss resulted in 34 percent higher other expense incurred in 2023. Other income was up by 159 percent in 2023 as a result of superior interest income and gain on sale of fixed assets, net impairment loss on financial assets also slid by 8.8 percent in 2023. All these factors translated into 34.5 percent higher operating profit in 2023 with OP margin slightly improving to clock in at 19.3 percent. Finance cost multiplied by 58 percent in 2023 due to more borrowings and higher discount rate. This coupled with the levy of 10 percent super tax in 2023 versus 4 percent in 2022 drastically diluted the growth of MLCF’s net profit for the year which clocked in at Rs.449.67 million, up 23.9 percent year-on-year. EPS clocked in at Rs.4.18 and NP margin stood at 7.2 percent in 2023.

Recent Performance (1QFY24)

MLCF’s topline posted year-on-year rise of 30 percent in 1QFY24. This came on the back of 15.77 percent growth in local sales volume and 67.87 percent growth in export sales volume which clocked in at 1,009,518 metric tons and 50,466 metric tons respectively in 1QFY24. Overall sales volume grew by 17.5 percent year-on-year in 1QFY24. During the period the company commenced its line 4 operations which added to its production capacity. Gross profit increased by 27 percent year-on-year in 1QFY24, however, GP margin ticked down from 30.4 percent in 1QFY23 to 29.8 percent in 1QFY24. This was the consequence of higher indigenous inflation, elevated fuel and power charges as well as surge in raw and packing material cost which couldn’t be passed on to the consumers due superfluous supply in the market. Distribution and administrative expense surged by 53 percent and 9 percent respectively in 1QFY24 which was apparently the effect of increased operational activity due to commencement of new production line which required additional resources and hence might have driven up the payroll expense. Inflationary effect might also have come into play. Other income rebounded by 877 percent year-on-year in 1QFY24 apparently due to superior exchange gain as MLCF’s export sales considerably improved during the period. Operating profit registered 32 percent year-on-year rise in 1QFY24 with OP margin clocking in at 19.1 percent versus 18.8 percent during the same period last year. Finance cost hiked by 66 percent in 1QFY24 due to higher discount rate as well and increased borrowing due to capitalization of its line 4. Then super tax of 10 percent during the period also took its toll on the bottomline growth. MLCF’s net profit clocked in at Rs.1330.41 million in 1QFY24, up 10 percent year-on-year with NP margin of 8 percent versus 9.4 percent during the same period last year. EPS clocked in at Rs. 1.24 in 1QFY24 versus Rs.1.13 during the same period last year.

Future Outlook

Cement companies have been expanding their capacities in the recent years. As a consequence, the cumulative capacity utilization has dropped to 57% in 1QFY24 and stabilized at 58% in 2QFY24. Overcoming current demand and utilization challenges seems a far-fetched dream given existing dampeners such as high construction costs causing delays and project slowdowns, along with reduced public development spending. If cement prices soften for the rest of the year like it did in January 2024, the ongoing fiscal year may prove to be gloomier for the cement manufacturers who have been navigating the economic challenges quite successfully by keeping their prices up.