JS Securities Limited – Morning Briefing

Karachi, January 02, 2018 (PPI-OT): Cement: Domestic dispatch growth expected at 2% YoY in Dec-2017

We expect total cement sales for Dec-2017 to clock in at 3.5mn tons, up just 0.4% YoY.

Exports are likely to continue its downward trajectory (down 14% YoY), while domestic dispatches are expected to grow by 2% YoY.

Region wise distribution suggests that domestic sales during Dec-2017 in North and South are expected to depict mix trend, where we estimate the former to post growth of 3% YoY to 2.7mn tons and latter to decline by 4% YoY to 0.5mn tons, respectively.

Projecting company wise dispatches, we expect Cherat Cement (CHCC) and Bestway Cement limited (BWCL) to outperform with expected total sales growth of 54% YoY and 6% YoY, respectively.

Our top picks from the sector includes Lucky Cement (LUCK, TP: Rs826), Kohat Cement (KOHC, TP: Rs244) and Cherat Cement (CHCC, TP: Rs137).

Winters to keep Dec-2017 growth muted

We expect subdued cement sales for Dec-2017 largely due to the winter season, clocking in just 0.4% YoY higher at 3.56mn tons, compared to 5MFY18 average growth of ~14% YoY. Domestic sales are estimated to grow at a meagre rate of 2% YoY to 3.25mn tons (North/South: +3%/-4% YoY). Exports are likely to continue its declining trajectory (down by 14% YoY to 319K tons), resulting in improvement in local to exports ratio by 1ppts YoY to 91:9 vs. 90:10 in the same period last year. Overall utilization is expected to remain unchanged at around 91%-92%. Cumulatively, sales for 1HFY18 are anticipated to paint a better picture, where we expect total dispatches to grow by 11% YoY to 22mn tons (1HFY17: 19.8mn tons) with major contribution emanating from local sales (up 17% YoY to 19.68mn tons). Utilization levels for 1HFY18 are anticipated to improve to ~95%, up ~10ppts YoY, with local to exports sales ratio improving to 89:11 (vs. 85:15).

CHCC and BWCL to outshine its peers

Projecting company wise dispatches, we expect Cherat Cement (CHCC) and Bestway Cement limited (BWCL) to outperform with expected total sales growth of 54% YoY and 6% YoY to 190k tons and 711k tons, respectively. On the other hand, Kohat Cement Limited (KOHC) and Maple Leaf Cement Factory Limited (MLCF) sales are likely to decline by 6% YoY and 5% YoY to 176k tons and 278k tons, owing to expected plunge in export sales. During 1HFY18, CHCC is expected to top dispatch growth chart by depicting a substantial accretion of 103% YoY to 1.2mn tons owing to increase in market share (new plant online since Jan-2017).

Picking Up Diversified and North Based Players

Given that domestic dispatches have already posted a 20% YoY growth in 5MFY18, we see limited downside risk to our FY18 domestic demand growth assumption of 9.7% YoY. We remain overweight on the sector with our liking tilting towards North Based manufacturers with diversified portfolios. Our top picks from the sector includes Lucky Cement (LUCK, TP: Rs826), KOHC (TP: Rs244) and CHCC (TP: Rs137). Key risk to our case include more than expected decline in retail prices from our base case.

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