Morning Call about Construction and Materials – Arif Habib Limited

Karachi, November 14, 2012 (PPI-OT): Cement Sector; Price war seems a far cry!

Manufacturers eyeing local market, demand up 16% MoM in Oct-12

As per the latest data, domestic demand has improved 16% MoM in Oct-12 to 2.1 million tons, taking total domestic demand up by 4% YoY to 7.5 million tons in 4MFY13.

According to Arif Habib Limited, healthy gov’t spending can be attributed to this healthy growth, which Arif Habib Limited believes is expected to remain upbeat during the rest of FY13 as well amid general elections, which are due early next year. However, exports have suffered 17% MoM to 0.7 million tons in Oct-12, which was mainly on account of 16% and 10% drop in exports to Afghanistan and through Sea, respectively. In Arif Habib Limited’s discussion with the industry sources, Arif Habib Limited has learned that the major exporters are focusing more towards domestic market, where they yield better margins.

000 tonsFY13FY12YoYΔFY13FY12YoYΔFY13MoMΔ
Industry

10,474

10,436

0.4%

2,767

2,939

-6%

2,611

6%

Local

7,521

7,243

4%

2,086

2,082

0.2%

1,793

16%

Export

2,953

3,192

-7%

680

857

-21%

818

-17%

Source: APCMA        

Demand outlook remains healthy amid continued gov’t spending

With general elections around the corner, a renewed government’s interest has been witnessed in the overall infrastructural spending. The gov’t, despite fiscal challenges, did not cut its PSDP spending in FY12, which translated into a strong domestic demand growth of 8.8% to 23.9 million tons; highest ever domestic consumption in a year. Arif Habib Limited expects this momentum to continue in FY13 as well, where the gov’t has allocated a 19% higher PSDP in the last budget. Arif Habib Limited expects domestic demand to improve by 6% YoY to 25.5 million tons. Exports, on the other hand, are expected to suffer a 5.5% YoY, taking total dispatches to 33.6 million tons in FY13, up 3.2% YoY.

Strong pricing environment seems to persist

Cement prices in the domestic market remain resilient and, therefore, Arif Habib Limited continues to maintain Arif Habib Limited’s positive stance on the sustainability of product pricing, ruling out any price war at the moment, especially across the northern region. Arif Habib Limited’s confidence on price stability is solidified with the fact that no company in the industry appears in a position to afford decline in product prices given their stillheavily leveraged balance sheets. Moreover, while large cement companies are on the look to diversify into other business lines for which they need resource generation, relatively smaller players would find it difficult to survive as they have just been able to service their debt, thanks primarily to improving overall margins along with decline in coal prices and interest rates. Thus, Arif Habib Limited does not expect any big price cuts in near future though for small declines to spur further volumes cannot be ruled out.

Cooling off coal prices widening margins

Slugging demand growth from the emerging markets has been pushing the coal prices down since April-12, which currently have trenched to a 3-year low, below USD80/ton (RB Index). Being the largest cost component (~45%-50% of COGS), this falling trend in the coal prices is expected to further magnify the profitability of the sector. As per Arif Habib Limited’s estimates, a USD5/ton change in coal prices leads to an average 5% change in the bottomline of a typical cement manufacturer.

Outperformance to continue!

Arif Habib Limited reiterates Arif Habib Limited’s overweight stance on the sector with LUCK, KOHC and FCCL being Arif Habib Limited’s top picks within the sector.

Scrips (PKR)Market PriceTarget PriceUpsideFY13 EPSPER
FCCL

6.5

11.5

76%

1.3

4.9

KOHC

60.9

107.0

76%

18.9

3.2

LUCK

139.3

194.3

39%

27.7

5.0

Source: AHL Research     

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