The two southern cement manufacturers Lucky (PSX: LUCK) and Attock (PSX: ACPL) are really headed south from the looks of their financials for FY19, but there is not much anyone can do about it. On the one hand is Attock with margins contracting to 23 percent; while on the other is market leader Lucky that has also witnessed its margins shrink to 29 percent—a level that is a new low for the company’s historically stellar performance. Earnings have fallen, though Lucky manages to come out it looking much better than Attock and—as we will find out in the next few weeks—other players in the industry.

The cement industry is going through a difficult transition—from capacity unable to meet growing demand to depleting demand unable to keep up with rising capacity. Even then, the industry managed to grow its sales by 2 percent, thanks to increasing volumes of exports, particularly clinker. In FY19, as per Lucky’s director report, industry clinker exports rose over 600 percent. Lucky is contributing to 36 percent of these clinker exports; 28 percent of all industry exports. Of all its own exports, clinker constituted 45 percent of its sales going abroad. Despite this growth, Lucky’s revenues only grew 1 percent owing to lower prices fetched in the global market as clinker falls lower in the cement value chain. High priced domestic sales for Lucky fell by 12 percent.

However, the company’s revenue per ton grew by 3 percent which given the current dynamics is decent. Part of the reason is also that southern players enjoy higher prices than the more competitive cement sold in the north. The fact that Lucky is not leveraged helps its cause as unlike other players it is not incurring high finance costs owing to expansions and exacerbated by rising borrowing costs. High distribution costs due to sales mix tilted towards exports means the company’s expenses as a share of revenues have increased. Even then, Lucky manages to hold a net profit margin of 22 percent which is not too bad after all.

As a comparison, Attock’s profit margins have had a mighty fall, coming down by 53 percent. Its expenses after gross profit have grown to 13 percent of revenues—which includes higher cost of borrowing the company now incurs. Though Attock’s revenues have grown significantly—it is also contributing heavily to clinker exports—its costs have increased that much higher. Cost of imported fuel, local power and inputs like coal have all gone up due to the unfavorable exchange rate. Coal prices in the global market have also been shaky. Together these factors have led to a margin attrition. Attock’s earnings have almost halved since last year as well and while part of the reason is rising costs of production, and higher distribution and finance expenses, the other part is an effective tax of 14 percent whereas last year, the company received a rebate.

A storm is brewing. Earnings will not recover unless domestic demand changes its tune, currency becomes more stable, and inflation is under control.