In many ways, FY19 is turning out to be a year of uncertainty—more than the usual share at least. For cement manufacturers, even for market leaders like Lucky, they can’t say they saw it coming from afar. After all, they have been planning for a boom, and landing in a bust. Considering that, Lucky’s (PSX: LUCK) half year financials are not to be scoffed at, simply because it could have been worse. Both the stagnation of demand, and rising costs have put Lucky in the headwinds, which has put the brakes on the company’s bottom-line, a screech that will follow well into the next half of the fiscal year.

The company locked a moderate 7.5 percent net revenue growth brought forth by 6.8 percent overall sales growths. Since the company operates in the North and the South regions, it does enjoy some stability in retention prices though nearly all the companies have raised prices in the past six months. On average, the industry has raised prices from Rs580 per 50-kg bag, to Rs610 per 50-kg bag between July and Dec-18 though retention prices were different in different cities—for instance, in Karachi, per bag price went up by Rs14, in Hyderabad by Rs30, in Islamabad by Rs20 and in Lahore by Rs5 (as per PBS).

Despite the hike, Lucky’s revenue per ton sold went up by only 1 percent (as calculated). The culprit? The demand mix. Local sales have not helped, particularly in the north. With slower PSDP releases and private sector commercial activity, local demand fell by 8 percent. To compensate for this, cement companies have been selling their cement and clinker abroad. Lucky has been exporting (up 109%) to African countries and while it enjoys the proximity to the port, exported cement always fetches less prices.

The other major factors are fuel and input costs. Costs per ton sold (as calculated) for Lucky rose from Rs3824 per ton to Rs4367 per ton (up 14%) during the period. Nearly 65 percent of all costs are fuel and power based (coal etc.), while packing materials (paper and board etc.) are about 10 percent for Lucky. Since coal is mostly imported, its own international price effect, plus the effect of the weakening currency is large enough given the importance of this fuel.

South African imported coal prices grew on average by 10 percent. In the first half of FY19, they averaged $99 per ton up from $90 per ton in 1HFY18. Now, couple that with higher grid and other fuel costs and a 14 percent depreciation of rupee against dollar between Jul-18 and Dec-18, and we have a case of plummeting margins on our hands. Margins fell from the already fallen levels of 38 percent in 1HFY18 to 30 percent in 1HFY19—margins per ton sold (as calculated) fell by 22 percent. To go back a little in time, margins in the half years of FY16 and FY17 were a whopping 47 percent and 50 percent respectively.

Indirect expenses as a share of revenue (as calculated) also went up 10 percent in 1HFY19 from 9 percent due to higher distribution costs that are incurred due to higher exports. Overall, the bottom line fell by 21 percent per ton sold which isn’t a cause for celebration.

However, as far as planning goes, Lucky has created a wall of diversified investments to pose as a buffer for a rainy day. From the coal based power project which starts production in Mar-21, a clinker facility in Iraq which starts production in 3QFY20 and its stake in Kia-Lucky Motors which starts production in 1QFY20, these projects reduce Lucky’s concentration risk from the ever shifting dynamics of the cement industry.

And shift they are. On the costs side, there may be some relief. Coal prices may decline because of the excess supply in the international markets and rupee may not depreciate further, but if this outlook changes, costs will be pushed further up. Meanwhile, sluggish local demand will persist; higher exports will not yield as much revenue, and while some hopes can be latched onto the mega PM housing plan and dam constructions, neither plan will reap results just yet, if they even do. Brokerage houses are positive about Lucky, but mostly because of its three major investments.