June 13, 2012 (JS Research)
As per All Pakistan Cement Manufacturer Association (APCMA), cement volumes in 11MFY12 stood at 29.5mn tons as against 28.5mn tons recorded in the same period last year, up by 3%YoY. The modest growth is largely driven by improved local sales (up by 8%YoY). In May-12, local dispatches surged by 10%YoY while exports were down 6%YoY. On a MoM basis, trend in local sales was weaker on account of limited availability of labour due to the wheat harvesting season. Local sales fell sharply by 7%MoM to 2.1mn tons. Encouragingly, like last month, exports showed an improving trend (increasing by 6%MoM) mainly due to robust demand from Afghanistan . We maintain a ‘Market-Weight’ outlook on the sector with DGKC as our top pick.
Local sales remain solid
Sufficient utilization of PSDP abetted the local volumes to grow by 8%YoY to 21.6mn tons in 11MFY12. The growth remained impressive in May-12 as well with local volumes augmenting by 10%YoY. However on a MoM basis, domestic volumes plunged by 7% as shortage of labour in the construction industry restricted volumes. The shortage was due to the wheat harvesting season as labour was diverted away from the construction industry during the first half of the month.
Exports showing signs of partial resurgence
Export volumes continued its rising trend surging for the fourth consecutive month in May-12. Export sales increased by 6%MoM to 0.8mn tons due to a seasonal uptick in cement demand from Afghanistan . Dispatches in Afghanistan grew by 3%YoY and 11%MoM. Another encouraging aspect is the stable trend in exports via sea as demand from East Africa and South Africa remains firm. The growth in African markets has countered the dwindling exports in Iraq as excess capacity in the Gulf Cooperation Council (GCC) region led to shrinkage of market share for Pakistani cement manufacturers.
Outlook
High PSDP allocations for FY13 coupled with robust remittances are likely to support domestic cement demand. Additional impetus is expected from the construction of Diamer-Bhasha Dam as the project is expected to create additional demand of 8-9mn tons over a period of 7-8 years. The project is expected to commence some time in 1QFY13 as residential colonies for workers of the project have already been constructed. Hence for local sales we expect a growth of 8%YoY in FY13. On the export front, consolidating trend is a positive sign and we believe demand from established export markets (i.e. Afghanistan , South Africa and East Africa ) in FY13 is likely to remain steady.
Overall though, the key to profitability remains the pricing power of the industry which has grown stronger in recent times. In addition, low coal prices and steady volumes are likely to keep the sector profitability intact, in our view. At current levels, we have a ‘Buy’ call on both DGKC and LUCK offering an upside of 36% and 15% to our respective target prices of Rs53.6 and Rs135. Currently, DGKC trades at a FY13F PE of 5.2x while LUCK trades at an FY13F PE of 5.5x.
92 (21) 111-574-111 (ext. 3103)
Also in focus
Cotton sowing target for FY13 missed by 15%
As per news reports Pakistan has missed its cotton sowing target for next year by 15%. The target has been missed mainly on account of water shortage in the country and farmers shifting to other cash crops as cotton prices have tumbled in recent times. Ministry of Textile and Industry has set a production target to surpass 14mn bales for FY13. With sowing now coming in lower than expected, the 14mn bales target seems a bit difficult to achieve.
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