The government decision to remove price controls on cement (MRPs or maximum retail prices) in October 2021 bodes well for listed cement maker Tokyo Cement Company Lanka Plc. However, challenging market conditions will continue to hound the company, First Capital Research said. In the June 2021 quarter, during which price controls were in place, Tokyo Cement reported a 38% growth in revenue from a year earlier to Rs10.6 billion, but with selling costs rising a faster 53%, gross profits contracted by 3% to Rs2 billion.

With distribution expenses soaring 139% and administration expenses growing 40%, earnings before interest and taxation halved to Rs548 million, despite a gain of Rs473 million from asset disposal during the quarter. The effects of interest and taxation expenses saw net profits more than halve from a year earlier to Rs298 million.

The removal of price controls could improve Tokyo Cement margins. It had been a victim of controlled prices as the company was contending with input and other costs, which saw a significant rise leading up to October, First Capital Research said in an October 2021 note to investors. Ballooning costs had stemmed from rising clinker prices, the depreciation of the rupee, and a significant increase in freight costs.

Following the MRP abolition, the price of a locally manufactured 50kg bag of cement has increased by Rs93 to Rs1,098. Not good news for consumers and the construction industry. Good news for Tokyo Cement?

First Capital Research noted, “With price controls of cement removed, Tokyo Cement could expect to see margin pressures relieve with the ability to pass down costs to customers to a certain extent”. However, the respite, if any, is short-lived.

“The removal of the MRP will likely increase competition, eventually leading to price-cutting in the industry,” First Capital Research contends. Also, Tokyo Cement’s ability to improve margins depends on several other factors outside of cement price controls, from currency volatility to fluctuating raw materials prices and higher freight charges.

The road ahead will continue to be bumpy for the company. Already, the September quarter is likely to be worse. The September 2021 quarter results were not out yet at the time of writing. First Capital Research expects Tokyo Cement to report weaker profits compared to the June quarter. Apart from rising clinker prices, the rapid depreciation of the rupee, and the significant increase in freight rates, the country was also in lockdown to contain the spread of the delta variant of Covid-19.