CHCC’s Margins Crack As Costs Outweigh Stable Revenue
Result Announcement Date: 29 April 2026
Quarter Covered: 3QFY26 (Third Quarter Fiscal Year 2026)
The quarter reflects a clear mismatch between stable revenue growth and deteriorating cost structure, where energy mix and export disruption drove margin compression despite higher other income and lower finance cost.
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Why did profitability decline even though sales remained positive?
Net sales increased slightly by 1% YoY to PKR 7,884mn, which suggests demand remained broadly stable during the quarter. However, this top-line stability did not translate into earnings stability due to a sharp rise in the cost of sales by 17% YoY. Cost of sales increased to PKR 5,440mn, which directly reduced gross profit by 21% to PKR 2,444mn. This led to a gross margin contraction from 40% to 31%, indicating structural cost pressure rather than revenue weakness. Key cost drivers included higher imported coal usage and a shift toward grid electricity. Additional levies on gas and furnace oil further amplified production cost inflation. As a result, EPS declined 16% YoY to PKR 7.24 despite stable revenue.
What actually explains the sharp gross margin erosion?
Gross margin dropped by 9 percentage points YoY, falling from 40% to 31%, which is a significant structural shift. This decline was primarily driven by energy-related cost inflation rather than pricing pressure on the sales side. Higher imported coal usage increased fuel cost intensity across production. The shift from dual-fuel generators to grid electricity further raised per-unit energy expense. Export disruption from Afghanistan reduced the efficiency of the sales mix and utilisation benefits. Additional government levies on gas and furnace oil added further fixed cost pressure. Together, these factors created a layered cost shock rather than a single isolated issue.
Where did growth or stability still exist in the business?
Despite margin pressure, certain operational indicators remained relatively stable or improved. Local dispatches increased by 2% YoY, showing resilience in domestic demand. Net retention also increased by 3%, indicating stable pricing power in local markets. Other income grew strongly by 67% YoY to PKR 447mn, providing non-operating support. Finance cost declined by 34% YoY due to lower borrowings, which reduced financial burden. Borrowings decreased from PKR 5.4bn to PKR 3.7bn, improving balance sheet structure. However, these positives were insufficient to offset operating margin compression.
What does the QoQ performance reveal about momentum?
| Particulars | QoQ Change |
|---|---|
| Earnings | -30% |
| Net Sales | -16% |
| Local Dispatches | -18% |
| Gross Margin | -5 ppts |
| Export Trend | Sharp decline (Afghanistan) |
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The QoQ performance highlights that weakness was not only structural but also sequential. Earnings declined 30% QoQ, showing accelerated pressure beyond YoY trends. Net sales dropped 16% QoQ, reflecting weaker short-term demand conditions. Local dispatches also declined 18% QoQ, indicating a domestic slowdown in the quarter. Gross margin contracted further by 5 percentage points QoQ, reinforcing cost pressure. Export decline to Afghanistan continued to weigh on overall utilisation and mix. This indicates that both demand and cost sides deteriorated simultaneously.
Why did net income not fall as sharply as gross profit?
Net income declined 16% YoY to PKR 1,407mn, which is less severe than the gross profit contraction. This relative cushioning came from strong growth in other income, which increased 67% YoY. Other income rose to PKR 447mn, partially offsetting operating weakness. Additionally, finance cost declined 34% YoY due to reduced borrowings. Lower interest expense helped protect bottom-line profitability. Taxation also declined in line with lower pre-tax earnings, limiting further drag. Despite these supports, core operating pressure remained the dominant factor in earnings decline.
⚠️ This post reflects the author’s personal opinion and is for informational purposes only. It does not constitute financial advice. Investing involves risk and should be done independently. Read full disclaimer →
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