Sector Update – Cement

Coal at 20-month low
Coal prices continue to slide further, breaching the USD 90/ton threshold since the start of the month. From the start of the quarter, coal prices have decline by a substantial 14% hovering around USD 89/ton. The decline in coal prices has started to accrue benefits to manufacturers as many manufacturers have started to hold less coal in inventory and place frequent orders of coal to accrue timely benefits of the declining price trend. Coal prices have come under pressure due to global supply overhang coupled with reduced demand in the North American region.

FED reduction, short of expectation
The government reduced FED by PKR 100/MT, to PKR 400/MT in the budget FY13. In the last budget the government reduced FED by PKR 200/MT and voiced its opinion to reduce FED by PKR 200-250/ton in FY13. Although the reduction in FED in this year's budget was less than expected, it stills bodes well for the sector. We expect the reduction in FED will have a meager impact of PKR 5/bag, which will be passed on the consumer. As a result we could see cement prices declining by PKR 5/bag on account of said pass on.

Duty on imported rubber reduced
Import duty on rubber scrap and shredded tire which is to be used as fuel has been reduced from 20% to 10%. This decline in import duty only benefits those manufacturers who currently have a RDF facility operational at their plants. In recent years tire or rubber scraps have been used to replace ~ 15-20% of coal used in kilns. Some manufacturers have been using rubber scraps with a mix of other recycled fuels to substitute the amount of coal used, the major impact of the duty reduction would accrue to LUCK which has a TDF facility which primarily uses tire and rubber scraps inputs to replace coal.

GIDC to hit the cement sector
GIDC has been increased by PKR 87/mmbtu on captive plants. Cement manufacturing requires ~100Kwh to manufacture 1MT of cement; many manufacturers have captive power plants at their manufacturing facilities. The said hike in GIDC would increase the cost of internal power generation by ~PKR 1.26Kwh keeping other factors constant. Taking industry average, this would increase cost of production by PKR 126/MT, which can be easily passed on with a price increase of PKR 5-10/bag.

Valuation
We recommend BUY for LUCK and DGKC with a Dec12 TP of PKR 139/share and PKR 48/share respectively. At current levels LUCK offer a dividend yield of 4% with a potential upside of 11% trading at FY12&13 PE of 6.0x and 5.3x respectively. DGKC is offering a potential upside of 17% currently trading at FY12&13 PE of 5.9x and 5.2x respectively.
(GLOBAL)

Sector Update – Cement