AKD Quotidian about — Cement Dispatches Feb’14! BMFY14

Karachi, March 06, 2014 (PPI-OT): Total cement dispatches for Feb’14 registered an increase of 4%YoY to 2.1mn tons where local cement dispatches registered an increase of 9%YoY to 2.2mn tons, led by a sharp uptick in dispatches from the north. Exports, however, continued to suffer due to declining off take to Afghanistan resulting in exports of 583k tons in Feb’14, lower by 11%YoY.

According to AKD Securities, as a result, total cumulative 8MFYI4 dispatches came in at 21.6mn tons, up by 2%YoY, with local dispatches registering an Increase of 3%YoYto clock in at 16.3mn tons while exports are down by 2%YoY to 5.3mn tons. Going forward, increasing dispatches on the local front and likely Improvement in gross margins should drive the bottom line higher for cement manufacturers during 2HFYI4. In terms of risks, the coming expiry of the moratorium on capacity expansions remains a question mark. That said, AKD Securities is unlikely to witness an immediate capacity expansion bonanza as witnessed in the past, with MBA activity also likely to be in the mix. In this regard, unconfirmed news reports suggest that PIOC and LPCL may be available for sale. Within AKD Securities’ coverage, AKD Securities maintains AKD Securities’ liking for DGKC which offers an upside of 15.3% to AKD Securities’ TP of PkRIO6.9/share.

Feb’14/8MFYI4 dispatches: According APCMA’s press release, total cement dispatches for Feb’14 have docked in at2.7mn tons, up by4%YoY. En this regard, local cement dispatches increased by 9%YoY to 2.1 5mn tons led by a sharp growth in dispatches from the north (*13%YoY to 176mn tons). Local dispatches from the south however posted a decline of 7%YoY to 369k tons. Exports continued to suffer as off take from the north came off by 14%YoY to 381k tons led by a sharp decline in exports to Afghanistan. As a result, total export dispatches in Feb’14 posted an 11%YoYdedine to clock in at 583ktons. Total cumulative BMFY14 dispatches have come in at 21 .6mn up by 2%YoY, with local dispatches registering an increase of 3%YoY to clock in at 163nin tons while total exports are down by 2%YoY to 5.3mn tons.

Margins to improve during 2HFY14~ Gross margins for the cement sector at large are expected to improve in 2HFYI4 due to a sharp 13%CYTD fall in coal prices coupled with appreciation of the PKR vs. the US$. While retail prices in the south were increased in the range of PKR15-20/bag in Dec’13 AKD Securities is unlikely to witness any further sharp increases in prices in the south considering falling coal prices. That said, prices in the north may increase by PKR5-1 0/bag during the current month should manufacturers seek to pass on the impact of increase in utility costs.

What’s the next move? With the expiry of the moratorium on capacity expansions (import of plant & machinery) around the corner, DGKC will be one of The key players in deciding how the cement industry moves forward. n this regard, DGKC’s planned Greenfield capacity expansions in the south could trigger capacity expansions by other cement manufacturers as well, either through M&A or through new lines. While M&A may not affect cement pricing, additional capacities could potentially impact cement pricing from a medium-tell perspective. That said, considering the high costs of selling up a new plant AKD Securities expects some of the larger local manufacturers to opt for M&A where unconfirmed news reports suggest that P100 and LPCL may be available for sale. As a result, AKD Securities retains AKD Securities’ preference for DGKC which offers an upside of 15.3% to AKD Securities’ TF of PkRIO6.9/share.