Despite a 105 percent growth in exports, the company’s revenue shows a growth of about 6 percent in 9MFY19. Meanwhile, the company’s margins shrank to 30 percent, which for Lucky are the lowest margins it has seen in the past decade—in 2010 when other players were incurring gross losses, Lucky was at 33 percent margins. But even at the steep decline in margins, the company lands at a net margin of 22 percent—which is second to Bestway cement in 9M. Is it a mixed bag result, or is Lucky tumbling downhill like the rest?
What factors reconcile the high growth in exports with low margins? Though exports have grown—they are now 26 percent of the total sales for the company—they have grown primarily in clinker which is a semi-finished product used to make cement. Clinker exports were 50 percent of Lucky’s total exports—much higher than the industry average of 32 percent (based on data from APCMA). The problem is, clinker fetches about $20-30 per ton less than cement exports and upwards of $60 per ton less than domestic cement sales. High priced domestic sales have declined by 13 percent.
The revenue per ton (as calculated for Lucky) grew by 4 percent garnering a renewed sense of respect in the existing sales mix. The reason is the price competition that has been seen in the north zone has not occurred in the south zone. Retention prices per cement bag have remained the same, or moved upwards. During the period when prices were dropping in the north, southern zone prices were going up. In Hyderabad, prices went up by Rs10 per bag between Feb-19 and Mar-19, in Islamabad, they were coming down to Rs35 per bag. Other markets showed similar drops of Rs20 per bag.
The graph shows the upward movement of per bag cement prices in Karachi demonstrating while despite a drop in domestic sales, revenues have still shown the growth that it did. The growth in exports has helped bring overall sales up.
The other major factors are fuel and input costs, of which coal is a primary member. Costs per ton sold (as calculated) for Lucky rose 14 percent in 9MFY19. For Lucky, nearly 65 percent of all costs are fuel and power based (coal etc.), while packing materials (paper and board etc.) are about 10 percent. Exchange rate affects the cost of imported goods while the global price movements of the commodities also impacts overall costs. Though coal prices have come down recently—they averaged $94 per ton in 9M against $91 per ton during 9MFY18. While the rupee depreciated by 13 percent between July-18 and Mar-19 and by 27 percent since Jan-18. The margin drop of 19 percent makes sense.
The company also incurred higher distribution costs due to greater exports—resulting in indirect costs going up from 9 percent to 10 percent as a share of revenue. The bottom-line drop of 15 percent (17% drop per ton) is despite the lower effective tax rate of 15 percent, against 18 percent this period last year.
Lucky has its fingers pretty spread out and dipped into different paint boxes—a coal based power project and a clinker facility in Iraq are set to produce in 1QFY21 as well as the launch of Kia Lucky Motors that will soon start booking for Sportage and Picanto soon. However, the cement business will remain under pressure from both falling demand and rising costs as the economy struggles its way out.
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