A 30 percent growth in revenues should translate into a profit but not for MapleLeaf Cement (PSX: MLCF) and not under its current circumstances. Lower retention prices, and higher costs have created a challenging dynamic for most cement manufacturers, many sliding into losses. Mapleleaf is no different.

Rising industry capacity together with reduced demand in the market has pushed companies to compete on prices, racing to sell off excess cement. This is especially true for companies in the north zone of the country where capacities have increased substantially. Meanwhile, reduced development expenditure and spending in the private sector has shrunk demand. Companies with higher capacity have managed to grow market share but margins have ultimately suffered.

In the first quarter, volumetric sales grew nearly 72 percent, but revenue per ton fell 26 percent. Mapleleaf's new capacity has allowed the growth in volumes but revenues could not grow as much as it could have at last year's prices.

Coal prices internationally have rallied downward due to reduced global demand, particularly that coming from China. Average coal prices in the Jul-Dec19 period fell 32 percent against the corresponding period last year. Despite that, the company incurred higher costs associated to gas, power and transportation which helped slide margins to less than 4 percent from 27 percent in 1HFY20. At this rate, bottomline turning red was inevitable.

One major expenditure is also financial costs which went up to a whopping 10 percent of revenue against 6 percent last year. This is not only due to expansion related borrowing but higher cost of borrowing on account of tighter monetary policy.

Reduced indirect expenses as a share of revenue - down from 7 percent to 6 percent could not cushion the blow that lower price retention and higher cost of production together brought to profitability.

A major recovery in demand and an improvement in prices would help shore up the topline in relation to costs. This may come if the Naya Pakistan Housing Projects kick off soon and construction activities revive. By the looks of it, this is not happening nearly soon enough.