Update Pulse

July 12, 2011

Cement Sector: FY2011 A year dominated by devils of poor demand and rise in input costs

Cement export remained lowest in three years

On exports front, export dispatches fell substantially by 12% YoY to 9.38 as against 10.65m tons last year. The gravity of the situation can be understand through this, export dispatches which were growing at a CAGR of 63% from FY06 to FY10 first time in past five years witnessed a double digit slump. The main reason behind the drop in exports was sluggish demand from India and lower export orders from through-sea channels as these recorded a decline of 18% and 31% YoY respectively. On the other hand, Afghanistan remained a safe heaven for the cement exporters as export to Afghanistan stood 18% higher than the last year. The key factor that drove cement exports down was lower construction activities in the GCC countries owing to economic slow down.
12.30 9.60 Million tons 6.90 4.20 1.50 FY07 FY08 FY09 FY10 FY11
Sour ce: APCMA, Summit Capital Research

BUY
Market Snapshot Index KSE 30 11731.96 KSE 100 12291.90 KSE ALL 8531.63 Key Data (DGKC) Market Cap(PRs bn) Shares Outstanding (m) Bloomberg 12M Avg. Volume (m) Key Data (LUCK) Market Cap(PRs bn) hares Outstanding (m) Bloomberg 12M Avg. Volume (m) Key Data (ACPL) Market Cap(PRs bn) Shares Outstanding (m) Bloomberg 12M Avg. Volume (m) Chg -58.09 -98.22 -65.09 % -0.49 -0.79 -0.76

Pakistan Research

Synopsis
Total dispatches declined by 8% YoY to 31.36m Local dispatches witnessed a drop of 7% YoY Export dispatches fell substantially by 12% YoY Coal prices touched the peak of US$142/ton in Jan11. Slashed levies may bode well in FY12. We recommend BUY stance on LUCK, DGKC, and ACPL.

Total dispatches dropped by 8% YoY

FY11 remained a difficult time for the cement industry as it remained a victim of decline in dispatches and increase in input cost. The industry performance in terms of dispatches was monotonous during the FY11 as the total dispatches declined by 8% YoY to 31.36m tons as against 34.20m tons in FY10. During the year decline in both local and export dispatches remained a key source of obstruction for the industry as local dispatches witnessed a drop of 7% YoY to 21.9m tons as against the 22.6m tons in FY10. On quarterly basis, 4QFY11 remained under the dominance of a hitch, as the local dispatches recorded a decline of 3% YoY to 5.98m tons in comparison of 6.16m tons in corresponding period of the last year. The decline in dispatches was mainly because of slack in domestic construction activity owing to 1) slow down in economy 2) higher interest rates 3) rising inflationary pressure on general consumers and 4) reduced public sector spending on development programs. Since there is a strong positive correlation between local dispatches and PSDP allocation, we believe, that the reduction in PSDP fund proved to be a bad omen for the industry.
5 years growth in PSDP, Construction & Local Dispatches Construction Local dispatches PSDP Allocation

8.53 365.10 DGKC PA 3.33

Export dispatches

23.28 323.38 LUCK PA 1.24

4.22 87 ACPL.PA 0.51

Rise in energy cost increased cost of production

Pakistan Cement industry is going through shakeout stage of industry life cycle as the growth and profitability is slowing down whereas its demand has saturated greatly. Due to an over supply situation there is an intense competition prevailing among the cement producing companies for the market share in local and export dispatches. As we have seen exporters sold cement to Afghanistan on a lowest prices in the range of US$55/ton to US$60 per ton, while in the same time, key input costs have increased substantially. Cost of sales of the sector is dominated by energy costs. Energy cost proportion is dependent upon international coal prices as the locally produced coal does not meet the defined standards for the usage as raw material due its poor quality because of the excess quantity of the sulphur in it and also due to lesser reliance on its availability. Due to all this, local cement manufacturers give preference to the imported coal.
175% 140% 105% 70% 35% May-11 Nov-10 Feb-11 Mar-11 Oct-10 Aug-10 Sep-10 Jan-11 Apr-11 Jul-10 Dec-10 Jun-11

12M relative performance vs KSE

KSE-100 DGKC ACPL LUCK

50% 30% 10% 2007 2008 2009 2010 -10% -30% 2011

Muhammad Sarfraz Abbasi sarfraz.abbasi@summitcapital.com.pk 021-35376125 B-209, Park Towers, Clifton, Karachi

Source: Global Cem ent, Sum m it Capital Research

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Summit Capital (Pvt.) Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty and Summit Capital (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.

International coal price have seen rising trends since April09 when per ton coal prices were hovering around US$68. The reason behind the upsurge in coal prices was attributed to the decline in coal production and increased demand from major coal consuming countries especially from China, prices had touched the peak of US$142 per ton during the month of Jan11. Nevertheless, coal prices have started settling down gradually after resumption of suspended operations in Queensland, Australia.

through buildings and infrastructure segment. Moreover, GCC construction might also see a boom as the countries are considering plan to develop six economic cities and other major development schemes. Qatar's successful bid to host the 2022 football World Cup is also expected to speed up the regional construction program. We believe this expected bounce back in construction activities in GCC countries would also benefit Pakistani cement industry among others.

Total dispatches in FY11 (M.Tons)

Tons
Local E xports Total

FY10
23,551 10,657 34,208

FY11
21,975 9,385 31,361

Y-o-Y -7% -12% -8% Y-o-Y -3% -5% -4% M-o-M 8% -3% 5%

Tons
Local E xports Total

4QFY10
6,167 2,797 8,964

4QFY11
5,958 2,658 8,616

PP a k i s t a nRR e s e a r c h akistan esearch

C o a l p e r to n p ri c e s ( U S $)
150 2010 115 80 45 10 Mar A pr May July Nov Feb Jan Aug Sept Dec Jun Oct 2011

Future outlook and recommendation

We believe, 58% YoY higher allocation to PSDP, reduced levies and improved retention prices would bode well for the industry in FY12. We also expect export to pick up in FY12 due to expected increase in demand in GCC countries. In addition to this, we believe initiation of the construction activities in Pakistan especially in flood affected areas might prove to be another source of recovery in local dispatches. Our top picks of the sector are LUCK, DGKC and ACPL. We recommend a BUY stance for the LUCK (Fair value of PKR85, upside potential 18%), DGKC (Fair value of PKR39, upside potential 67%) and ACPL (Fair value of PKR69, upside potential 42%)

Tons
Local E xports Total

MayFY11
1,879 876 2,755

JunFY11
2,031 850 2,881

Source: APCMA, Summit Capital Research

Exports (Mtons) FY10

A ghanistan India Through Sea Cement Exports Clinker Total Exports 4,014 723 5,643 10,3 79 278 10,6 57

FY11
4,726 590 3,910 9,225 160 9,385

Y-o-Y
18% -18% -31% -11% -42% -12%

S o u rc e : G l o b a l c o a l , N E W C I n d e x, S um m i t C a p i t a l R e s e a r c h

Slashed duties may bode well in FY12

Cement players have always been blaming government for the imposition of FED and SED on cement sales as it was being said by APCMA that the cement is a basic raw material for the construction industry and there is no justification for the imposition of FED and SED on its sales as such duties are usually imposed on luxury item or a product whose production curtailment is desired. In federal budget 2011-12 the GoP has honored this long time demand of the cement manufacturers by eradicating levies on cement sales. SED has been abolished completely, whereas, FED on cement would be phased out in three years times, thus, in FY12 the cement manufacturers will pay FED at a rate of PKR500/MT as against PKR700/MT in past years. In addition to this, downward revision in GST will also benefit the industry and consumers.

Exports (tons)
A ghanistan India Through Sea Cement Exports Clinker Total Exports

4QFY10
1,193 230 1,326 2,749 47 2,797

4QFY11
1,446 207 1,005 2,658 1 2,658

Y-o-Y
21% -10% -24% -3 % -98% -5 %

Exports (tons)
A ghanistan India Through Sea Cement Exports Clinker Total Exports

MayFY11
472 57 346 876 0 876

JuneFY11
470 66 314 850 0 850

M-o-M
0% 14% -9 % -3 % -42% -3 %

Source: APCMA, Summit Capital Research

GCC countries and demand expectations

We expect GCC construction market to show positive growth prospects in FY12. In our view key growth driver would be large spending on social infrastructure projects and it is expected that a great proportion of the demand can come
Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Summit Capital (Pvt.) Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty and Summit Capital (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.