Tokyo Cement 1Q performance signals a faltering market

Tokyo Cement Group (Tokyo Cement) reported its financial performance for the first quarter ending on June 30, 2022, with a turnover of Rs.16,307 million, reflecting a year-on-year (YoY) growth of 53 percent. 
The group recorded a profit of Rs.535 million, reflecting a marginal profit after tax ratio of 3.3 percent. Profitability was primarily hampered by the increases in raw material prices and the exchange loss on imports. 
Despite the turnover growth, Tokyo Cement’s sales volumes slumped, primarily due to raw material shortfalls and the ongoing fuel crisis, which has impeded distribution and shutdown work sites. The cost of sales shows an increase of 24 percent in the accounts. 

However, it does not include the significant exchange loss impact that considerably tightens the margins. The group said it incurred an exchange loss of about Rs.3.1 billion for the quarter under review.
Furthermore, the AWPLR rose from 5.65 percent to 21.12 percent YoY, which increased the cost of financing raw material imports. This exchange loss and interest rate hike is reflected under finance expenses as a 2,180 percent increase, thereby erasing any gains in the GP margin. 

Whilst the distribution costs reduced overall in the comparative quarters, that can be largely attributed to reduced volumes. However, the distribution cost per unit increased considerably due to the scarcity and pricing of fuel. 
Over the course of the quarter, the cement prices were adjusted to reflect the increases in the raw material prices, production and operational costs, that was further compounded upon by the steep currency depreciation. 
The cement prices were increased from Rs.2,350 to Rs.3,000, reflective of the new VAT rate, transport expenses and the rupee depreciating from Rs.299 to Rs.367 to the US dollar.

Construction activities were stalled during the quarter under review, due to the shortages and sharp price hikes across all materials and services. Unable to buy fuel, workers and construction-related service suppliers were unable to reach worksites, leading to idle labour and machinery. The situation compelled consumers to pause construction or postpone new projects.
Sri Lanka’s economy is expected to undergo critical reforms in the short to medium term. While awaiting the International Monetary Fund staff-level agreement, wide-ranging structural reforms alongside tight fiscal policies are being implemented by the Central Bank of Sri Lanka. 

As part of this, further interest rate adjustments are expected to be introduced by the Central Bank, with the aim of curbing inflation. The Social Security Contribution Levy is expected to come into effect in the second quarter. 
Tokyo Cement said it has taken many proactive measures to minimise the impact of economic downturn on the group’s performance. Anticipating a challenging environment, the group has reforecasted the demand, rescheduled the sourcing and production plans and adjusted the cashflows accordingly. 

The group has deployed drastic cost-saving measures, streamlined operations and postponed capital expenditure. While the short to medium-term economic landscape remains uncertain, Tokyo Cement has a proven track record of resilience and resurgence and is committed to rebuilding the nation, stronger than ever before.