Despite closing FY19 a touch better than many of its peers in the cement industry, it was long decided that Attock Cement (PSX: ACPL) not unlike other cement manufacturers will witness a continued decline in earnings as FY20 rolls in. (read: “No joy for Attock and Lucky", July 10, 2019) Though Attock saw its top-line during FY19 grown by 26 percent on account of much higher exports (particularly, clinker), the company was not able to sustain this growth in its first quarter of FY20, likely due to domestic demand compression.

Unconsolidated: Quarter ending Sep-19Attock Cement (ACPL)
(Rs mn)1QFY201QFY19chg
Sales4,968.15,680.0-13%
Cost of Sales3,668.24,482.9-18%
Gross Profit1,299.91,197.18.6%
Distribution cost488.2470.34%
Administrative cost131.1129.41%
Finance cost158.5122.729%
Other operating expenses36.025.044%
Other operating income20.461.3-67%
Profit before taxation506.4511.0-1%
Tax expense148.7588.069%
Profit after taxation357.7423.0-15%
Earnings per share (Rs)2.63.08-16%
GP Margin26%21%24%
NP Margin7%7%-3%
Finance costs as % of revenues3.2%2.2%48%
Indirect expenses as % of revenues13%11%20%
Source: PSX

In fact, in 1QFY20, dispatches in the south fell by 32 percent year on year according to cement's association's official numbers. During FY19, the demand in the local market of the south zone had shown considerable resilience. Attock ran on 110 percent capacity utilization with all of its three lines running above capacity ratings. The company was also selling a lot of clinker overseas. It seems while exports have maintained momentum, domestic demand may not have.

Indeed, the transition taking place in the cement industry is critical—it is going from insufficient capacity unable to meet growing demand to diminishing demand unable to keep up with increasing capacity and stock. In the south, companies are exporting excess clinker abroad, but at much cheaper rates than if they were exporting cement, or selling cement in local markets. There is a difference of over $50 per ton between prices fetched in domestic and exporting markets. This may have impacted revenue growth as sales mix shifted.

On the costs side, coal prices are down which allowed Attock to improve its margins, unlike the declining trend over the past two years of margin attrition due to rupee depreciation and higher input prices. The company improved margins to 26 percent during the quarter. However, higher exports led to higher distribution costs. Overall, as a share of revenue, indirect expenses rose by 20 percent. Though the company is now availing an export refinance facility (according to its FY19 annual report), its finance costs still rose by 48 percent (as a share of revenue) due to higher mark-up on account of the monetary policy tightening.

Despite these cost overruns, the company managed to keep profit margins on the same level as last year which is commendable given the decline in the top-line. Any turnaround in domestic demand will be much appreciated going forward.