Present review of FY13 budgetary measures supporting the cement sector of Pakistan, along with their impact on our sample universe companies coupled with outlook and recommendations on the same.
Better PSDP utilization to keep cement demand solid
The government has allocated Rs873bn in budget FY13 for Public Sector Development Program (PSDP), earmarking a total of Rs873bn (Rs360bn for Federal and Rs513bn Provincial). Due to having the pre-election year, we expect this time around, the government will be making enough efforts to utilize around ~50-60% of the total PSDP allocation against the historical utilization levels ranging from 24% to 40% witnessed during the last four years with increasing resource constraints. Therefore, this time around, we expect the demand of cement to remain firm during FY13 owing to greater utilization of the PSDP funds (infrastructure portion holds 55% of the total PSDP while Social sector makes up about 38%).
Federal Excise Duty (FED) reduced by Rs100/ton to Rs400/ton
With the government planning to gradually phase out FED on the Cement sector by FY14, the FED has been slashed by Rs100/ton to Rs400/ton in the budget FY13. Though lower, this reduction came in line after Rs200/ton made last year to Rs500/ton. As cement profitability varies with other more influencing factors i.e. coal/fuel prices and interest rates, we do not expect any impact on cement volumes due to this reversal in FED (only Rs5 per bag impact).
Custom duty on scrap of rubber/shredded tyres reduced to 10%
The shredded tyres are another alternate fuel for cement manufacturers in place of coal, therefore, reduction in import duty in shredded tyres bodes well for the cement sector. The big players in particular, LUCK and DGKC, and the whole sector in general, will reap the maximum benefit from this reduction in the duty. In case of increase in coal prices the maximum benefit will be for these two giants, as both of them have successfully implemented Tire Derived Fuel (TDF) and Reduce Derived Fuel (RDF) technology at their plants. LUCK has already converted ~20% of its plant on TDF and RDF, which would result in estimated savings of around Rs292mn (EPS impact Rs0.57) in FY13 for the company. On the other hand, a trial run has already taken place at the DGKC plant and is expected to be operational in 1HFY13.
Outlook and recommendation: ‘Overweight’
After reviewing the above measures, we believe that the on-going year will be more eventful with respect to infrastructure development and, thus, entails further positivity for the cement industry of Pakistan. As per FY13 valuation perspective, the impact of FED reduction on our sample companies provides a sufficient upside potential from current levels. However, at current levels, we recommend our investors to 'Overweight' DGKC and FCCL and 'Marketweight' LUCK with Jun-12 target price of Rs48, Rs8.10 and Rs129 respectively.
(InvestCap)
No comments:
Post a Comment