In 1HFY19, cement production and dispatches for Fauji Cement (PSX: FCCL) were down while clinker production and revenues were up. Three months on, the company’s revenues are under pressure likely owning to continue downward off take in local markets, and a higher share of low-priced exports. Fauji however is showing a growth in margins that is unthought-of in this industry. With a depreciating rupee and high input cost scenario, given it faces heavy competition in the north zone, Fauji’s margin growth from 24 percent to 27 percent in 9M is well-acknowledged.

Compare Fauji’s financials to Attock’s that saw its margins drop to 22 percent in 9M from 31 percent despite a 36 percent increase in revenues, the advantage of having better domestic prices, and proximity to the ports. Fauji’s higher margins are a function of operating its second production line to the maximum and comparatively higher retention prices in the first two quarters. In the third quarter, margins had actually dropped due to lower cement prices per bag and higher costs compared to the period last year.

Though imported coal costs have been higher during the period, Fauji seems to have managed its inventory well. Coal prices in the international market averaged $94 per ton in the 9MFY19, against $91 per ton during 9MFY18. However, on the upside, between Jul-18 and Mar-19, coal prices slid by 35 percent landing at $78.8 per ton in Mar-19 against $106 in July. The rupee also depreciated by 13 percent between July-18 and Mar-19.

Meanwhile, other income including income from deposits and the sale of property, plant and equipment was 4 percent of before tax profits, against 2 percent this period last year. Indirect expenses as a share of revenue has remained 5 percent which are generally lower from players in the south that have high distribution costs due to higher exports share. Finance costs have also become negligible.

Despite a somber third quarter, Fauji is set to experience positive growth during FY19 (up 15% in 9M), which is not something that can be said for most cement players in the north and the south zone. After tough two year run with one of its plant shutting down and the company having to produce cement with expensive clinker it bought from neighbours, this break for Fauji is well-deserved.