Karachi, August 30, 2013 (PPI-OT): Cement sector stocks came under heavy selling pressure yesterday (3.9% decline on average) as investors reacted sharply to rumors of a possible derailment in industry pricing.
According to AKD Securities By way of background, cement producers without CPPs are at a relative disadvantage resulting in their push for an increase in cement prices so as to pass on the recent increase in electricity tariffs. In this regard, while LUCK has tendered its resignation from the APCMA in opposition to any immediate price hike, AKD Securities discussions with industry experts suggests that the current pricing consensus as well as production quotas will prevail which should allow cement sector stocks to register a swift rebound. Furthermore, price increases may occur beyond the next month or so, dovetailing with anticipated improved demand dynamics.
The larger, more efficient players, particularly those with CPPs will likely be clear winners. While AKD Securities investments case for LUCK is under review, DGKC (PYI4F PIE: 5.3x) offers an upside of 39% to AKD Securities TP of PkR1O8/share. Buy! Pricing concerns lead Cements lower: The listed cement sector shed 3.9% yesterday as investors reacted sharply to rumors of a possible derailment in industry pricing.
By way of background, recall that the GoP has recently raised electricity tariffs for industrial consumers by up to 55% while the increase in gas prices for captive power plants (CPPs) has been limited at 175%. This has put cement producers without CPPs at a relative disadvantage resulting in their push for an increase in cement prices so as to pass on the increase in electricity tariffs.
Concerns may be overblown: Channel checks suggest that LUCK was strictly opposed to the aforementioned move due to the recent PkR3S/bag hike in cement prices following the Federal FY14 Budget which imposed higher GST (at 17% versus 16% previously) and increase in transport costs within the backdrop of subdued demand due to Ramadan and monsoon rains.
In this regard, LUCK has tendered its resignation from the All Pakistan Cement Manufacturers Association (APCMA). That said, AKD Securities understands this may be more symbolic and largely intended to place pressure on smaller cement manufacturers. In this regard, channel checks suggest that current industry pricing should prevail, thereby enabling cement stock to register a rebound.
Outlook and Investment Perspective: Provided there is no untoward disruption in the pricing environment, AKD Securities expects cement sector stocks to swiftly shed the negative sentiment surrounding them (the listed cement sector has shed 136%MoM).
Within this backdrop, channel checks suggest that cement prices may actually be in for an increase beyond the next month or so, dovetailing with anticipated improved demand dynamics. In this regard, currently cement demand s passing through its seasonally slow period (August and September have historically been weakest for domestic demand).
However, demand should start recovering from Oct’13 onwards which should support price hikes. As such, AKD Securities flags the larger, more efficient players, particularly those with CPPs as clear winners. While cur investment case for LUCK is under review, DGKC (FY14F PIE: 5.3x) offers an upside of 39% to AKD Securities TP of PkR1 08/share. Buy!