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Double-digit growth in both top- and bottom-line appears to have proven insufficient for Rafhan Maize (PSX: RMPL) to hold margins steady, which received slight beating in CY19 led by increase in raw material prices.

Will it be fair to blame Rafhan’s profitability attrition on macroeconomic headwinds? Partly, because interim management reports note that the company struggled to maintain unit economics due to ‘dismal’ demand from major consuming segments.

However, the year-on-year jump in cost of sales – largely in line with topline growth – came on the back of maize prices touching an all time high in the domestic market, with prices in the global commodity market also kissing a 60-month peak.

International prices have been here before. The commodity price had averaged between $200 – $325 per ton for a long stretch of four years beginning Sep-10, backed by a long-term shift in global demand led by increased consumption in Chinese and APAC market. But back then, the domestic wet-milling industry, including Rafhan, had remained insulated from the bull run in global prices as the country still produced a modest exportable surplus of corn.

Much has changed since. While Pakistan’s domestic corn output grew at a CAGR of seven percent during intervening years – highest among all major crops – the wet milling industry has faced stiff competition in securing raw material. Reportedly, demand for corn from poultry industry is growing at over ten percent per annum, which has placed upward pressure on domestic corn prices. As a result, corn prices in the domestic market are finally trading at a premium of 25 percent over international market, a first in recallable memory.

While disclosures for full year CY19 financials are so far awaited, maize procurement cost has constituted 95 percent of cost of raw material for RMPL historically, and two-thirds of its cost of sales. Barring any substantial change in cost of sales composition during CY19, the 20 percent year-on-year increase in headline number is indicative that the company was only partly successful in passing on the increase in raw material prices, which as per news reports rose by as much as 30 percent in the domestic market.

Beyond that, the 350bps differential between GPM and PBT margin is a testament to Rafhan’s efficient management of overheads, a tight lid over distribution expenses, and lean financial management thanks to zero bank borrowing.

While the macroeconomy may be headed towards an inflection point, it looks like Rafhan’s struggle for margins will continue in the coming period. If the demand trends from poultry industry persist, country may no longer remain self-sufficient in maize production, an issue that may be compounded by loss of bonus corn acres to cotton crop in 2020.