Despite a nearly 30 percent growth in revenues, DG Khan Cement (PSX: DGKC) watched its 9MFY19 earnings nearly drop to half of what they were this period last year. This is despite an effective tax of 9 percent against 26 percent this period last year. One of the top players in the industry who now enjoys access to both the south as well as the north markets after its expansion into Hub Balochistan, DGKC is suffering as cement market demand and cost-price dynamics have not been on its side.

There are a number of factors that have contributed to the flipped relationship between revenues and profits. Domestic demand has been slow due to PSDP cuts, and overall slowdown in development as well as commercial and real estate activity. Ban on non-filers to purchase property above Rs4milllion has deterred demand as well. Players particularly in the south, which now includes DGKC, are exporting excess production to different markets overseas.

While access to open markets is positive for the sector, majority of the exports consist of clinker which fetches about $20-30 per ton less than cement exports and upwards of $60 per ton than domestic cement sales. That price differential itself shows that higher off take is in lower priced items. Though DGKC’s revenues have grown, with the new expansion, it should have grown a lot more had the right sales mix existed.

Greater price competition in the north zone has also resulted in local cement retention prices drop. Between Feb and March, in Islamabad alone, prices dropped on average by Rs35 as per PBS. In other markets, prices have registered a drop of Rs20 and above according to sources (read more: “cement cartel: do not resuscitate”, April 11, 2019). Having said that, since July-18, prices improved, remaining constant between Oct and Nov-18 and were higher in Mar-19 than they were last year. Some major fluctuations have come in but they have also passed.

Nevertheless, the company’s margins have dropped to 16 percent, from 31 percent which is abysmally low. Coal imports have been expensive on account of devaluation, and international coal prices themselves have cost more (until very recently when they came down). They averaged $94 per ton in 9MFY19, against $91 per ton during 9MFY18. The rupee has also depreciated by 13 percent between July-18 and Mar-19 and by 27 percent since Jan-18. Indirect expenses have come down to 7 percent of revenues (9MFY18: 8%), though a major expense item has become the company’s ballooning finance costs due to expansion related borrowing further exacerbated by higher cost of borrowing. The worst news is, there isn’t a major turnaround in sight. Domestic demand will remain subdued as FY19 comes to an end.