Pakistan cement sector have lost considerable value in recent trading sessions – BMA Research
By: Farid Aliani,
(9221) 111 262 111
BMA Capital Management Ltd.
The largest domestic cement producer has resigned from APCMA supposedly due to disagreement regarding price response to the power/gas tariff hike. This development has given rise to speculations concerning break down of price discipline.
Recall that cement producers heavily reliant on grid for power face more than twice the cost impact from power/gas tariff hike than the producers having significant power generated from gas based captive plants.
The worst case logically gauged from the situation can only be a minimal increase in cement prices most likely effective Sep13 (PKR5-15/bag) rather than the maximum impact from power tariff hike (PKR25-35/bag). We thus downplay the possibility of price wars.
Even if the infrastructure projects envisaged by the ruling party partially materialize in their 5 year term, the resultant demand growth (~8%pa) will force the sector to bring additional capacities online within four years, hence further endorsing the case for price consensus.
We maintain OVERWEIGHT on Pakistan Cements – favoring DG Khan (DGKC) and Maple Leaf Cement (MLCF) as our top picks at current prices.
Pakistan cement sector have lost considerable value in recent trading sessions(down 9% MTD, underperforming the broader index by 5%) on the back of various perceived risk factors. These include 1) declining domestic sales trend witnessed in 2MFY13 and 2) an overwhelming increase in electricity and gas tariffs. On top of these, recent news (confirmed from our industry checks) is that the largest domestic cement producer has resigned from All Pakistan Cement Manufacturers Association (APCMA)supposedly due to disagreement regarding price response to the power/gas tariff hike. This development has given rise to speculations concerning break down of price discipline and a parallel to the depressed scenario of price wars witnessed in FY10 is being drawn by the investing community. We downplay these concerns and reiterate that the sector’s fundamentals remain compelling enough to build positions for medium to long term.