AKD Quotidian about — Construction and Material: 11MFY13 Review and Outlook

Karachi, June 06, 2013 (PPI-OT): As per news reports, local dispatches for May-13 have witnessed an expected decline of 11%MoM to 2.lmn tons on account of wheat harvesting season in the Northern region, in addition to a temporary halt in construction activities due to general elections.

According to AKD Securities over the medium-term, AKD Securities eyes potential improvement in local cement demand with the new government’s anticipated focus on infrastructure development to drive local demand higher by 7%YoY-8%YoY.

This should all cement sector companies to counter any adverse impact on margins emanating from part absorption of possible tax/duty increases in the FY14 Budget. At current levels, AKD Securities flags LUCK (TP: PkR2O5/share) and DGKC (TP: PkRIO8/share) as AKD Securities preferred plays in the sector.

IIMFVI3 dispatches review: As per news reports, local dispatches for May’13 have witnessed an expected decline of 11%MoM to 2.lOmn tons on account of wheat harvesting season in the Northern region resulting in a shortage of construction labour, in addition to a temporary halt in construction activities due to general elections.

On a YoY basis however, May’13 local dispatches were flattish. Total dispatches for 11 MFY1 3 were up by 4%YoY to 3055mn tons driven by 5%YoY increase in domestic dispatches to 22.S5mn tons while export off take continued its downward trajectory, down by 2%YoY to 77lmn tons.

Dispatches outlook: AKD Securities anticipates local off take to recover in Jun’13 on the back of seasonal pick up in domestic demand, thereby enabling cement companies to end FY13 on a strong note. Over the med-term, AKD Securities eyes improvement in local demand (+7%Y0Y-8%Y0Y) with the new government’s anticipated focus on infrastructure development.

While AKD Securities expects exports to Afghanistan to continue declining in the short-term, AKD Securities anticipates improvement over the medium-term with reconstruction activities potentially picking up pace post withdrawal of Nato troops in 2014. AKD Securities also mark potential improvement is Pakistan-India relationships to be a positive trigger for exports going forward.

Cement Dispatches

 (mn tons)   11MFY13   11MFY12  YoY   May13  Apr13   MoM

 Domestic
 North       18.59      17.52   6%    1.71   1.95   -12%
 South        4.26       4.14   3%    0.39   0.42   -7%
 Sotol Local 22.85      21.66   5%    2.10   2.37   -11%
 Exports
 North        5.67       5.71  -1%    0.57   0.55    4%
 South        2.04       2.15   %%    0.21   0.28    5%
 Sotol ExpoOs 3.21       2.84  -2%    3.73   3.75    4%
 Sotol       33.55      39.49   4%    2.89   3.13   -8%

 Source: APCMA and AKD Resource

The upcoming budget: Recent news reports suggest that the cement sector could face headwinds in the FY14. In this regard, 1) GST may be increased by 1 ppt to 17%, export tax could be doubled to 1% and 3) a 1% custom duty may be imposed on coal imports.

While cement manufacturers have hinted that the impact will be fully passed on to the customers, AKD Securities believes that some of these unfavourable budgetary measures for the sector would likely have to be absorbed by the companies, leading to some margin attrition.

Investment Perspective: Although the cement sector has gained 32%CYTD, lust beating the KSE-100 Index, AKD Securities expect sthe sector to continue posting strong price performance within the backdrop of attractive valuations. At current levels, AKD Securities flags LUCK (TP: PkR2OS/share) and DGKC (TP: PkR1OS/share) as AKD Securities preferred plays in the sector.