Foundation Research Equities

PAKISTAN

Cement update
7MFY11A 7MFY10A 12.02 12.98 10.00 11.13 2.02 1.85 5.20 6.58 2.55 2.17 0.24 0.38 2.40 4.03 17.21 19.56 YoY -7.4% -10.2% 9.0% -21.0% 17.7% -37.2% -40.6% -12.0%

10 Feb 2011
APCMA dispatches data
Mn. Tons Local sales North South Export sales Afghanistan India Others Total sales

Seasonal trend and reconstruction work to boost local sales

Event
According to the provisional numbers released by All Pakistan Cement
Manufacturing Association (APCMA), cement sales have declined by 12% YoY (domestic sales down by 7.4%, exports lower by 21%) to 17.21mn tons in 7MFY11. Due to continuous hike in international coal prices on the back of strong demand from China and India, recent supply concerns arising from floods devastation in Australia and rise in global crude oil prices, margins for local cement manufacturers are expected to compress in the coming quarters.
2012E 2013E 47.5 1.6 45.9 29.9 7.5 7.8 (0.2) 37.7 5.8 8.1 82.2%

Investment fundamentals 2009A

Total capacity Dead capacities Effective capacity Local demand Growth Exports Growth Total demand Growth Excess Cap. utilization m m m m % m % m % m m 2010A 44.8 1.6 43.2 23.5 14.6 10.7 (0.9) 34.2 9.3 9.0 79.1%

2010A 2011E 47.5 1.6 45.9 23.5 (0.1) 8.4 (21.0) 31.9 (6.6) 14.0 69.5%

2011E 2012E 47.5 1.6 45.9 27.8 18.4 7.9 (6.6) 35.7 11.8 10.2 77.7%

Impact
Local sales declined by 7.4% YoY: During 7MFY11, domestic sales
have witnessed a drop of 7.4% YoY to 12.02mn tons, due to 1) recent flash floods in rural areas that affected the rural economy, 2) low work on public development projects owing to 56% cut in federal component of PSDP to only PKR110bn for FY11 and 3) slowdown in private construction activity. However, sizeable recovery in local cement demand is expected during the remaining FY11 on the back of reconstruction activities in the floods affected areas and unprecedented agriculture income cycle. We expect domestic cement demand to remain flat at 23mn tons in FY11.

Exports growth projected to be negative going forward: For 7MFY11

exports have declined by 21% YoY to 5.2mn tons primarily due to regional expansions becoming operational. However, exports to Afghanistan showed an increase of 17.7% YoY, despite double digit decline in cement exports to all other regional destinations. Going forward, we expect current trend to continue in the near-term owing to limited short-term avenues in the regional markets, as well as regional expansions becoming operational. We expect total cement exports for FY11 to show a decline of 21% YoY to reach 8.4mn tons.
RB

Coal Price benchmarks

$/ton 200 150 100 50
Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11

NEWC

Recent increase in local cement prices is unlikely to offset coal price

hike: Recent increase in cement prices (during past 1 month) by around PKR20-25/bag in the North (to PKR340-345/bag) and PKR30/bag in the South (to PKR330-335/bag) is unlikely to offset the incessant increase in coal prices. A significant 46% YoY increase in coal prices (60% of production cost), without a corresponding increase in selling price, is likely to squeeze margins for cement manufacturers in the coming quarters.

Action and recommendation

Source: Bloomberg, Foundation Research, Feb 2011 (all figures in PKR unless noted)

We expect local cement demand to pick up in the remaining months of

FY11 due to seasonal trend, reconstruction in the floods hit areas and strong agriculture income cycle. On the export front, we remain less optimistic in the short term. Whereas Football world cup in Russia and Qatar in 2018 and 2022, respectively, could increase cement demand in the long term. We maintain our Outperform stance on ACPL (T.P PKR68.9) owing to its low leverage and proximity to the port. Whereas our liking for DGKC (T.P PKR37.8/share) emanates mainly from its portfolio.

Analyst
Mansoor Khanani 92 21 5612290-94 Ext 345 mansoor.khanani@fs.com.pk

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