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When MapleLeaf Cement (PSX: MLCF) announced its financial results for FY19, it also announced that it would be issuing 85 percent rights share to raise equity and improve its leverage position. The company saw tough times ahead. Its finance costs at the time had grown to 5 percent during the year against 3 percent. In the first quarter of FY20, the company’s finance costs stood at 11 percent of revenues (1QFY19: 4%). That’s a massive jump. Also, the company incurred a loss during the quarter.

The loss of Rs2.2 per share was expected since cement demand; price and cost dynamics have not been very conducive to making a profit. The company forecasted a loss for FY20 itself despite a 40 percent expected increase in revenue. In the first quarter, the revenue growth is 26 percent which is decent considering the circumstances in which MapleLeaf is operating in. Not only did the retention prices in the north drop in the July-Sep period (only recently in October have they started rebounding) but in the north zone, domestic sales also had paltry growth – less than 1 percent during the quarter. Meanwhile, exports to India have halted and growth in exports to Afghanistan are barely making up for that lost market share.

Unconsolidated First Quarter Mapleleaf
Rs (mn)  1QFY20  1QFY19 YoY
 Sales     7,147          5,655 26%
 Cost of Sales     7,356          4,466 65%
 Gross Profit       (209)          1,189 -118%
 Administrative expenses         184             189 -2%
 Selling and distribution         174             196 -11%
 Other operating expenses           10             162 -94%
 Other income           39                  2 1776%
 Finance costs         809             215 277%
 Profit (Loss) before tax    (1,348)             430 -413%
 Taxation           43                88 -52%
 Net profit for the period    (1,305)             342 -481%
 Earnings per share (Rs)      (2.20)            0.58 -479%
 GP margin -3% 21% -114%
 NP margin -18% 6% -402%
 Source: PSX notice 

In Sep, domestic demand is picking up despite contractionary government policies and lethargic domestic markets. It seems that planned projects are kicking off which is providing the much needed injection for the construction industry.

Costs are a different story. In fact, during the quarter, the company incurred a gross loss with costs of sales going up by 65 percent. This is despite coal costs dropping in the past year. However, gas and power tariffs are higher while transportation costs have also grown. The gross margin registered at negative 3 percent which also points towards a lack of consensus on prices in the north. The fluctuation in the prices as recorded by PBS is evidence of this. In order to sell off excess cement, companies also tend to dump commodities in the market through heavy discounts—which may or may not have been the case. Evidence of this cannot be corroborated as yet.

The company took its indirect expenses and shrank them—in 1QFY19, they were 10 percent of revenues while they have come down to 5 percent during the outgoing quarter. Other income has also grown. However, the blow from the gross loss emanating on top could only be cushioned by the company registered a net loss margin of 18 percent (1QFY19: +6%).

Going forward, higher debt burden and working capital requirements will put pressure on the company. It has already taken mitigating measures to keep debt to equity in check. However, any recovery from this current loss will have to come from a substantive recovery in demand—which could come over the next couple of months if Naya Pakistan Housing Projects launch construction.  Meanwhile, retention prices have started improving which must be sustained by the industry.