It is now clear to all the market watchers that this is not going to be the year of cement. The most cement manufacturers can do is shielding themselves from the fall, because oh, how the mighty have fallen (also read: “Unlucky times for Lucky”, Feb 1, 2019). It has been especially rough for players in the north zone who are losing not only in the domestic market but also overseas. In 1HFY19, dispatches in the north fell by 6 percent; while exports to Afghanistan and India declined by 23 percent and 6 percent respectively. With that background in mind, while Maple Leaf financials (PSX: MLCF) for the first half are understandably dismal, Kohat’s (PSX: KOHC) are not nearly as bad.

The pivotal change has come from the decreased domestic demand after the new government slashed the PSDP spending while overall commercial and housing sector also starting experiencing a slump as economy cooled down. There is a ban on non-filers to purchase property which may have contributed to lower private sector commercial activity. Moreover, Afghanistan is no longer the most attractive market for Pakistani cement as it has been opening its borders to Iran and other Central Asian countries. The share in total exports for that market is down to 35 percent when it used to be over 55 percent before.

Cement prices have fluctuated significantly since expansions started to come through. Cement companies have raised prices on average by 7 percent between July and Dec-18—cites in the north like Islamabad, Multan and Peshawar have experienced 8-12 percent increase in prices counting from July-18. Since Jan-18 however, the price increase is between 15-25 percent across different cities in the north. Companies have tried to increase prices as much as they could.

However, the price hike itself does not seem to have helped. While revenue for Kohat grew by 22 percent (off take was much higher than expectations), its margins fell to 29 percent (1HFY18: 37%). Meanwhile, the decline in margin has been even worse for Maple Leaf for whom demand remained somber: 23 percent against 31 percent this period last year. Higher cost of production has further put a dampener.

Imported coal (South African) went up on average by 10 percent which makes up for 60 percent of all costs together with grid and other fuels. Higher fuel prices as well as the 14 percent depreciation of rupee against the dollar in the July-Dec-18 period led to the fall in margins, despite some of the cost effect being passed onto consumers in the form of higher prices.

Kohat has kept a tight hold on its indirect expenses bringing them down to 4 percent of revenues in 1HFY19, against 5 percent last year. The same cannot be said for Maple Leaf that saw indirect expenses remain at 7 percent. The company also incurred higher borrowing to finance its upcoming expansion which has been even higher due to the hike in policy rate.

The difference in the financial performances of Kohat and Maple Leaf are telling. While Kohat exceeded brokers’ expectations in the top line, Maple Leaf remained in line with estimates. Kohat continues to rein in its indirect expenditures while Maple Leaf’s are still relatively higher. Kohat is fetching better prices for its cement bags. Meanwhile, the fall in exports to India have not helped Maple Leaf since it is one the major exporters to that market.

Moving forward, domestic demand may improve as PSDP releases are now coming back on track, but overall economic slowdown does not bode well for higher private sector spending on housing and real estate development. It is unlikely that the PM housing plans (if they do) will materialize this year. The outlook on coal prices is downward due to excess supply in the global markets which may help costs but any further rupee depreciation will balance that out. Lastly, exports to Afghanistan are not expected to recover while to India they are going to get much worse, possibly even get banned which again is not positive for the top line. Kohat may produce better financial results but ultimately all the north players are in the same boat.