As per numbers reportedly quoted by a member of the All Pakistan Cement Manufacturers’ Association (APCMA), cement offtake in 2MFY13 within the country declined by 0.61%YoY to stand at 3.64mn tons. That said, offtake in Aug’13 showed improvement as dispatches are estimated to have grown by 1.9%YoY to 1.59mn tons. At the same time, exports witnessed a decline of 5.9%YoY in 2MFY13 to stand at 1.46mn tons. In Aug’13 alone, exports are estimated to have remained flat at around 700k tons. While the dispatches are disappointing, note that these numbers came on the back of holiday season within the country (Ramadan, Eid) as well as later rainfall within the Northern region. As such, going forward, we expect local dispatch situation to improve wherein we maintain our forecast of a growth of 5%YoY in local volumes. Exports, however, are a completely different ballgame, where we remain pessimistic with respect to Afghan volumes (our biggest individual export destination). While a US$16bn 3-year civilian aid program was announced recently, Afghan exports have remained jittery over the last year, witnessing declines in 8 of the 12 months. The trend continued with a 10.4%YoY decline in Jul’12. Currently, we forecast a decline of 6% in export volumes for the country. That said, despite current seemingly low demand, sector profitability in full year FY13 will reach record levels as cement prices remain firm coupled with collapsed coal prices. Nevertheless, short term investors may be advised to book profits and re-enter later as 1HFY13 profitability could disappoint. In this regard, while 2M volumes have already disappointed, 2Q volumes could also potentially be on the lower side depending on the arrival of winter season. At current levels, we have ‘Accumulate’ calls on LUCK and DGKC with target prices of PkR154.1 and PkR56.6, respectively.
Volumes disappoint – Trend to continue? Cement volumes in 2MFY13 have continued with their disappointing trend, with local volumes declining by 0.61%YoY to stand at 3.64mn tons. At the same time, exports witnessed a decline of 5.9%YoY in 2MFY13 to stand at 1.46mn tons. While the numbers looks disappointing at a cursory look, a closer analysis reveals stability within the month of Aug’13. Local volumes in Aug’13 improved by 1.9%YoY to stand at 1.59mn tons while exports remained flat at around 700k tons. It must be noted that the numbers disappointed due to i) delayed arrival of monsoon season particularly in the Northern region and ii) holiday season within the country on account of Ramadan and Eid. Going forward, dispatches on the local front are likely to improve followed by a seasonal dip with the advent of winter season. Tentatively, we maintain our expectation of a 5%YoY increase in local cement volumes and 6%YoY decline in exports.
So will profitability suffer? The million dollar question though we believe the answer is a big ‘No’. Even if volumes decline (and they are likely to on the export front), FY13 will likely be a year of record profitability for the cement sector. Our optimism stems from i) firm product prices, ii) low coal price levels that were last witnessed during the commodity bust of 2008-09, iii) improving interest rate environment and iv) lower turnover tax starting FY13. That said, risks remain particularly with regards to a possible upturn in coal prices. While the scenario looks unlikely in the short term, supply controls globally could lead to an upturn in coal prices. Low demand from the US is being countered by expected high demand for thermal coal from China. At the same time, while worries on a possible tax on coal exports from Indonesia have been allayed, Australia has reportedly abandoned its multi-billion dollar Galilee Basin thermal coal mining project, which would have made the country the largest coal exporter, surpassing Indonesia.
Investment Perspective: While risks remain, we believe fundamentals remain intact over the medium term hoirzon and FY13 will likely be a year of record profitability for the Cement Sector. At current levels, we have ‘Accumulate’ stances on LUCK and DGKC with target prices of PkR154.1 and PkR56.6, respectively.