Looking at Friesland Campina’s (PSX: FCEPL)’s six-year performance, it would appear that the downward spiral bottomed out in CY18, when the company took drastic price increases to keep profitability in the green. But the recovery has since been stunted, with the company ending Q1 in the red first time in at least a decade.

Margin attrition - that began in CY17 with the reversal of zero-rating in dairy and imposition of duties on import – has continued; with contribution margin almost dropping to half of peak levels seen in 2016. Further slippages appear to have been caused by increased cost of raw material, as both raw milk price and packaging costs gave into upward inflationary pressure.

Based on national CPI, fresh milk prices in Mar-20 have rise by over 9 percent, compared to same period last year. In fact, pressure on raw material prices has been so significant that even double-digit price increases across the dairy portfolio taken during the preceding quarter proved insufficient to keep the gross margin intact.

That is worrisome. While the company and industry association may be trying their absolute best to lobby a decisive reversal of adverse regulatory regime, the just ended quarter should have been particularly different. Firms across the dairy sector saw a significant upsurge in demand during March-20 amid panic buying instigated by countrywide lockdown. That appears to have put FECPL’s topline on wheels as well.

Considering that improved volume offtake came on the back of lower marketing spend per unit, operating profitability still failed to change direction. This indicates that volumes may never prove sufficient to drive sector to sustained profitability, even if the size of processed milk pie grows. And that speaks volumes (pun intended) about the distortions caused by price control in the loose milk market that limits category conversion.

Having said that, this may very well be the bottom. With monetary tightening going into reverse gear, debt servicing cost which ballooned nearly six times in the last four years will stop the bleeding. While it indicates that the worst may be over for FCEPL’s earnings, margin may very well remain stuck in the single-digit category unless the tariff regime gives in.