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Cement manufacturers likely to enjoy bright prospects

The onset of the winter season is likely to have adverse impact on cement sales in November 2020 due to local dispatches likely to decline up to 27%MoM. Northern region is expected to witness a contraction up to 30%MoM, while sales in the South are likely to fall max by 15%MoM. The sequential decline is likely to be higher than the past two years’ average decline of 15%MoM during the month of November.

It is believed because of restricted development work in the Northern region due to early onset of the winter season and increasing number of COVID-19 cases. That said, local sales are likely to be up 2-6%YoY during November2020. The exports are likely to decline by 1-3%MoM, while they are expected to be higher by 6-8%YoY.

Capacity utilization in November 2020 is expected to fall to 82% as compared to over 100% for October 2020 (adjusted for dead capacities of Flying Cement, Dewan Cement Hattar and Dandot Cement). For 5MFY21, industry utilization is likely to hover at 86%.

Cement prices in the North region during November 2020 have averaged at Rs545/bag, down Rs5/bag. In the South region, prices remained same as last month at Rs611/bag.

November 2020 numbers should not dampen investors’ expectations. Pakistan’s leading brokerage house, Topline Securities has revised its earnings forecasts for cement sector on the back of higher than expected sales and cost efficient projects like coal power plant, Waste Heat Recovery (WHR) and BMR under taken by various players.

The brokerage house has revised volumetric sales numbers for FY21 and expects growth of 18-21% in local dispatches as against earlier estimate of 7.5%.

Upward revision in dispatches stems from robust construction activities across the country ushered by: 1) the construction package, 2) initiation of civil works on dams, 3) injection of additional liquidity via housing loans, 4) continuation/extension of CPEC projects, and 5) pent up demand of last two years as local dispatches remained stagnant.

Cost optimization measures are expected to augment margins. Post the third expansion cycle, some players have announced efficiency projects. Maple Leaf Cement (MLCF) is planning to increase its WHR capacity to 25MW by September 2021, which is expected to add Rs0.4/share to its bottom-line.

Kohat Cement (KOHC) has also announced a BMR of its cement line and an addition of 16.2MW coal fired power plant. These initiatives will have a positive contribution Rs3.0-5.4/share in FY21-23 profitability.

D.G. Khan Cement (DGKC) is also set to start its WHR and coal power unit at its Hub plant, which will result in savings of Rs4.23-4.78/share in FY22-23.

The brokerage house maintains its Overweight stance on cements manufacturers and its pick include, Fauji Cement and LUCK. It has also upgraded D. G. Khan, from HOLD to BUY.

LUCK offers well-round diversification to investors through investments in autos (KIA), chemicals, cement, power, and consumer businesses. In KIA, company will start its double shift to meet demand of successful SUV model Sportage as its AWD variant has a lead time of 4 months. The company is likely to launch high end model Sorento (SUV) by the end of this year or early next year.

At present FCCL is enjoying market share up to 8.5%, higher than its capacity market share of 6.4%. This higher share has kept company’s utilization at above 100% in 4MFY21.

The key risks facing the manufacturers include: 1) higher than expected capacity expansions, 2) COVID-19 led lockdown, 3) lower than expected cement price increase, 4) higher than expected coal & FO price and 5) any untoward decision of CCP case.

Thatta Cement Company

Thatta Cement Company (THCCL) conducted it analyst briefing to discuss FY20 and 1QFY21 results and future outlook. The management expects the cement industry to continue to improve due to support packages announced by the government. Retention prices of the Company is currently at Rs7,500/ton, while maximum retail price (MRP) is Rs650/bag. The Company sells power to HESCO at Rs15/kwh. Power requirement of the company is 95-100 Kwh/ton, while fuel requirement is around 780 Kcal/ton. The Company exports cement/clinker to Bangladesh and China. Export price for clinker is at around US$32/ton. In total sales, export has a contribution of 10-15%. The Company witnessed 84% QoQ increase in cement dispatches to 52,700 tons in 1QFY21 due to low base effect amidst COVID-19 led lockdown in 4QFY20. Waste Heat Recovery (WHR) of 4-5MW was made operational in FY20. Alongside this, the Company also operates 23.1MW coal power through its subsidiary Thatta Power.

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