At 3 percent net margins during 1QFY23, unfortunately for DG Khan Cement (PSX: DGKC), things are looking as bad as only two years ago when the company turned over a loss. This is not quite a loss but certainly close to it and not nearly close to last year when the company turned over substantial earnings of nearly Rs1 billion during the quarter. Earnings now are down almost 60 percent. What happened?

For one, demand is chronically declining. During the quarter, the company’s volumes dropped 23 percent (of the total volumes, about 12 percent was clinker sale). However, due to strong and stable increase in cement prices in the markets, the company secured a revenue growth of 22 percent. This translates to a revenue per ton sold growth of 58 percent which certainly shielded the company from ballooning costs of production but not enough apparently.

Rising energy costs despite the company moving to alternative fuels and using domestic and Afghan coal and runaway inflation had the costs of production beat with costs per ton sold increasing by 65 percent during the quarter year on year. Resultantly, the company’s gross margins dropped to 15 percent from 19 percent in 1QFY22.

The rest of the story is also a familiar one. Though the company incurred lower “other expenses” due to a decline in exchange loss leading to an overheads plus other expenses share in revenue of 4 percent, a substantial decline from last year’s 7 percent, the expanding finance costs more than made up for it. In fact, finance costs as a share of revenue rose to nearly 12 percent from 6.6 percent in 1QFY22 on account of the increase in policy rate.

The costs and overheads were enough to lead the way for the company to slide into a loss but “other income” (from higher dividend on cash and investments) saved the day, increasing 22 percent during the quarter (year on year) and contributing 1.1x to DGKC’s before-tax earnings.

Overall, it is a sad looking income statement incapsulating the current dynamics the cement industry is operating in. Despite utilizing cheaper Afghan coal and saving precious foreign exchange, demand slump will continue to put pressure on revenue streams and eventual earnings. While flood related rehabilitation is expected which may lead to an incremental increase in construction spending, cement companies shouldn’t be holding their breath for this spending to come very soon.