Cement Sector : Challenges Ahead

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PHONE : +92 21 3432 6917-19 WEBSITE : www.alt-research.com EMAIL : [email protected]

Cement Sector : Challenges Ahead Neutral

Market Data

Average Daily T/O (PKR-mn) 1,104

Average Daily Turnover (USD-mn) 10

Average Daily T/O (Share-mn) 42

Market Cap (PKR mn) 183,217

Market Cap (USD mn) 1,728

Index Weightage (%) 6.31

P/B 1.11

P/E 6.63

EV/ EBITDA 4.56

Free Float (%) 45%

Source: KSE, Bloomberg

Stock Performance (52 weeks)

(%) 1M 3M 12M

Absolute -7% 3% 65%

Relative to mkt 6% -4% 20%

Tuesday, 01,Oct-2013

Sector Report

Increased cost push sector outlook to Neutral

In the past two years, cement sector gained traction from an improvement in core dynamics (upward trend in cement prices , downward pressure in int’l coal prices and improved domestic demand) which reciprocate outperformed the benchmark KSE-100 Index by ~70% and 60% in FY12 and FY13. However, the FY14 came up with solid challenges (increased GST rate to 17%, tariff rationalization and increased rate on gas supply to captive power plants) which defy pricing power of producer. Nevertheless, demand side pressure in the first two months amid (Rains, floods, Ramadan/Eid holidays) also accumulates risk for the 1QFY14 earnings. Resultantly, our sample companies (LUCK, DGKC, FCCL, MLCF, LPCL, ACPL, KOHC, CHCC, PIOC, and FECTC) prices have declined by on average 8%YoY in FY14TD. Despite of hefty PSDP allocation in FY14, we conservatively expect cement demand to stand out at ~33.1mn tons (24.8mn local, 8.3mn export) in FY14 (down 0.7%YoY) in view of likely cut in PSDP during the period under review.

In the midst of excess capacity of over 10mn tons DGKC and CHCC announced 3.6mn tons (DGKC 2.6mn tons and approx. 1mn tons of CHCC) expansion plans which will enhance the country’s production capacity to over 47mn tons in FY16-17. While expansion announcement from other manufacturers cannot be ruled out. Consequently, industry’s effective utilization is expected to be below 80% in the next 3-4 years despite massive mega projects ,if implemented.

AsiaPac | Pakistan | Equities Construction & Materials | Cement

Cost escalation expected in FY14~

As the government is trying to enhance tax collection (in form of increased GST), and by removing subsides (increasing the electricity tariff and natural gas rates for captive power plants), cement sector has been facing cost escalation of around Pk40-50/bag. However, manufacturers have already increased cement prices by PkR30-35/bag FY14TD, whereas we expect increasing costs will exert pressure on prices in the outgoing financial year

Per Share Impact (PKr/sh) PKR30 PKR20 PKR10

LUCK 6.69 4.46 2.23

DGKC 3.83 2.56 1.28

FCCL 0.92 0.61 0.31

MLCF 2.02 1.35 0.67

LPCL 0.73 0.49 0.24

CHCC 5.99 4.00 2.00

ACPL 7.13 4.75 2.38

FECTC 5.67 3.78 1.89

PIOC 2.73 1.82 0.91

KOHC 6.84 4.56 2.28


Impact of Increase in cement price per 50KG bag


Source: APCMA, Alternate Research Source: APCMA, Alternate Research

Relative Performance

Visit our Bloomberg page ARPL < go >

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Cement KSE100

Senior Analyst Yawar Uz Zaman [email protected]

Analyst Kumail Chevelwalla [email protected]

Table of Contents

1. Increased cost push sector outlook to Neutral

2. Cost escalation- Expected in FY14

3. Discount rate- Taking U-turn

4. FY13 - A year to be remembered

5. Lucky Cement-The industry vanguard

6. D.G. Khan Cement- Exponential earnings growth despite subdued dispatches

7. Fauji Cement Company Limited - Reaping fruits of favorable demand

8. Attock Cement Pakistan Limited - Cementing earnings on better brand image

9. Cherat Cement Company Limited - Expansion on the way

10. Fecto Cement- cheaper than peers

11. Kohat Cement- All well from all corners

12. Lafarge Pakistan Cement Limited - 1HCY13 NPAT up 6%YoY

13. Maple Leaf Cement- From extreme losses to abnormal profits

14. Pioneer Cement Limited - Earnings grew by an immense 155%YoY in FY13

15. FY14 Outlook

AsiaPac | Pakistan | Equities Construction & Material - Cement

Discount rate – Taking U-turn:

The cement sector is one of the most highly leveraged industrial sectors in Pakistan with outstanding loans of over PkR40bn (FY13). Cement companies have historically attracted a higher cost of debt as compared to companies in other sectors. That being said, almost all leveraged companies have been favorably impacted by the State Bank of Pakistan’s (SBP) easy monetary stance as the sector saved PkR3.2bn during FY13. However, Discount rate has taken U-turn after ~34 month of monetary easing, where upside risks to the interest rate environment exist in FY14, In this regards, we have run a sensitivity analysis on our sample companies assuming DR hike of 100-300bps in FY14, where our sample companies would have to bear bottom-line impact of on average 2% in F14. (See table)

Per Share Impact (PkR/sh) 1% 2% 3%

LUCK 0.02 0.04 0.06

DGKC 0.14 0.28 0.43

FCCL 0.04 0.09 0.13

MLCF 0.16 0.32 0.48

LPCL 0.02 0.04 0.06

CHCC 0.04 0.08 0.12

FECTC 0.10 0.20 0.30

KOHC 0.05 0.10 0.15

FY13 - A year to be remembered

Local dispatches up 4.7%YoY in FY13, exports down 2.26%YoY:

As per the data released by APCMA (All Pakistan Cement Manufacturers Association), cement dispatches during FY13 increased by 2.8% and settled at ~33.4mn tons). Despite hefty decrease of 2.26% in exports volume, local demand has supported the industry dynamics at large. In this regards, local dispatches witnessed 4.7%YoY growth to ~25.06mn tons as compared to 23.9mn tons in last year, while export sales went down to 8.3mn tons mainly because of 20% and 7%YoY decline in sale to Afghanistan and India.

FY13- Earnings up by 65%YoY: As low tier cement companies were facing massive loses during the last few years, the remarkable FY13 came up with improved sector dynamics like 1) upsurge in domestic prices (up 9%YoY), 2) Improved margins amid lower cost of coal coupled with monetary easing of 300bps in FY13. As a result, sector witnessed 10%YoY increase in topline to PkR142bn compared to PkR129bn in FY12.

Similarly gross margins have improved by 600bps to 37% in FY13 owing to upsurge in prices and declined coal prices. Moreover, improved bottom-line was further led by downtrend in financial cost to PkR5bn (down 43%YoY) amid de-leveraging of PkR7.4bn during the year in the midst of easy interest rate environment. In the end, bottom line for the sector experienced an upsurge of 65%YoY to reach NPAT of PkR29.6bn in FY13 from NPAT of PkR18bn recorded in the corresponding period last year.

Income Statement (PkR mn) FY13 FY12 YoY

Sales-net 142,376 128,988 10%

Cost of sales 89,687 89,172 1%

Gross profit 52,689 39,816 32%

Distribution cost 7,621 7,775 -4%

Admin Exp. 2,417 2,348 3%

Other opp. Exp. 2,517 1,481 58%

Other opp. Income 2,313 1,491 55%

Opp. Profit 42,648 29,694 44%

Finance cost 5,055 8,635 -43%

Profit/Loss after tax 29,514 17,910 65%

Impact of increase in discount rate

FY13 – Result Review

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Lucky Cement-The Industry vanguard

Ever high earning in FY13

Lucky Cement Limited (LUCK) announced its FY13 results recently. In this regard, the company posted NPAT of PkR9.7bn (EPS: PkR30.04) in FY13 compared to NPAT of PkR6.7bn (EPS: PkR20.97) in FY12, (up 43%YoY). Top line of the company posted 13%YoY growth to reach PkR37.8bn compared to revenues of PkR33.2bn in the same period last year. This growth was despite a meager 1.4%YoY advancement in dispatches which reached 6.1mn tons in FY13 compared with 5.97mn tons dispatched during the same period last year. On the back of an improvement in the net retention prices and likely lower cost of coal, gross margin of the company continued to trend upwards with a growth of 600bpsYoY to settle at ~44% in FY13 (highest in the cement industry).

Similarly, the operating profitability of the company improved encouragingly by ~40%YoY to PkR12.6bn in the period under review. Additionally, electricity supply to HESCO improved other income to PkR248mn against only PkR5mn in FY12. On a QoQ basis, topline of the company declined by ~1%QoQ due to a 0.6%QoQ decline in cement dispatches. LUCK posted marginally high NPAT of PkR2.73bn (EPS: PkR8.45) in 4QFY13 (up 2%QoQ) compared to NPAT of PkR2.69bn (EPS: PkR8.32) recorded in 3QFY13. The company has announced cash dividend of PKR8/share during FY13.

Expanding & Diversifying:

Following the implementation of TDF technology at Karachi plant, company intends to introduce the same at PEZU. Whilst, vertical grinding mills at Karachi plant has already been installed and successfully operating since last quarter FY13 and subsequent will be operational by Sept-14. The equipment’s for cement grinding facility in Iraq has arrived and the plant will start its trail production from Nov-13. Meanwhile, LUCK reported financial close of Congo project in Dec-13.

Outlook:

The Company has started realizing other income from electricity supply to HESCO (20MW) which has provided the company with an alternate avenue for income. Post-acquisition of ICI Pakistan, LUCK has several plans in the pipeline including up-gradation of existing cement grinding plants, expansion in Africa, Iraq and possibly Sri Lanka to unlock the growth potential of these markets.

Income Statement (PkR mn) FY11 FY12 FY13 FY14E

Sales-net 26,018 33,323 37,810 38,725

Cost of sales 17,306 20,601 21,089 21,293

Gross profit 8,711 12,721 16,721 17,432

Distribution cost 3,236 3,237 3,666 3,754

Admin Exp. 313 474 447 919

Other opp. Exp. 325 438 616 631

Other opp. Income 2 5 248 260

Opp. Profit 5,161 9,010 12,608 12,759

Finance cost 518 253 89 140

Profit/Loss after tax 3,970 6,782 9,714 10,411

EPS@323mn sh 12.20 20.94 30.04 32.19

Sponsor Profile: Lucky Cement Limited is part of the “Yunus Brothers” company. In addition to its investment in cements, the group holds investments in textiles (Gadoon Textile Limited) and chemicals (ICI Pakistan Limited). Currently, the group holds a listed PkR66bn of asset base with market capitalization of over PkR6.7bn.


LUCK High Low Avg.

Price 265 131 180

Vol (mn) 5.4 0.1 1.1


Industry Positioning

Unrivaled Operational Efficiency: The industry bellwether, LUCK holds a 15% share in total local dispatches with a 27.3% share in export dispatches. The company holds 17% of the total industry capacity and has a strong ability to capture both local and export demand due to its strategic location. On the cost efficiency front, LUCK has successfully implemented WHR plant as well as the TDF (Tire Derived Fuel) . The local and export share ratio of the company stands at 62:38.

Source: Company financials, Alternate Research



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Source: Company Accounts – Alternate Research

D.G. Khan Cement

Exponential earnings growth despite subdued dispatches

As the company’s effective utilization remained over 90% in FY13, growth in cement dispatches remain on lower side. However, Topline of the company grew by ~9%YoY to reach PkR24.9bn primarily owing to improvements in domestic prices compared to the past year. Additionally, sequential decline in international coal prices coupled with cost rationalization measures via switching to alternate fuels lead to margin expansion. In this regard, DGKC’s gross margin expanded by 470bpsYoY to reach ~37% in FY13.

Similarly, the operating profitability of the company improved encouragingly by ~42%YoY to PkR7.1bn in the period under review. While 40%YoY decline in financial cost triggered bottom line. As a result, company posted NPAT of PkR5.5bn (EPS: PkR12.56) in FY13 compared to NPAT of PkR4.1bn (EPS: PkR9.38) in FY12. On QoQ basis, DGKC recorded NPAT of PkR1.26bn (EPS:PkR2.88) in 4QFY13 against NPAT of PkR1.32bn (EPS:PkR3.03) in 3QFY13. The company has announced cash dividend of PKR4.5/share during FY13.

Outlook and Investment Perspective:

Fundamentally, cost rationalization measures (Waste Heat Recovery (WHR) Projects, alternate fuels - Tire Derived Fuel (TDF) coupled with firm cement prices should provide sustainability in margins for DGKC going forward. Additionally, income diversification through dividend (particularly MCB bank) and other group companies provide an edge during industry downtrends. DGKC has two cement plants located in the northern region and is the main beneficiary of any new mega dam building projects and exports to India. Moreover, company has announced expansion in the southern region to gain benefit of low cost exports and expanding foot prints.


DGKC High Low Avg.

Price 96 49 68

Vol (mn)

19.8 0.5 5.6

Sponsor Profile: DGKC is part of one of the most diversified groups in the country i.e. “Nishat Group”. In addition to investment in the cement industry (D.G. Khan Cement), Nishat group is engaged in financial services (MCB Bank), textiles (Nishat Mills and Nishat Chunian), power (Nishat Power, Nishat Chunian Power, Pakgen and Lalpir plants), insurance (Adamjee Insurance), as well as some unlisted companies. As far as the asset size of the group is concerned, the group holds PkR1.4trn in its asset base with market capitalization of over PkR270bn.



The industry 3rd largest player, DGKC holds a 12% share in total local dispatches and in exports also. The company holds 9% of the total industry capacity and has a strong ability to capture both local and export demand due to its strategic location The local and export share ratio of the company stands at ~74:26.


Sales-net 18,577 22,950 24,916 25,350

Cost of sales 14,192 15,443 15,590 15,861

Gross profit 4,385 7,507 9,326 9,488


Admin Exp. 211 268 406 413

Other opp. Exp. 157 501 545 554

Other opp. Income 1,134 1,188 1,466 1,540

Opp. Profit 1,703 5,036 7,169 7,294

Finance cost 2,079 1,671 995 1,012

Profit/Loss after tax 171 4,108 5,502 5,450

EPS@438mn sh 0.39 9.38 12.56 12.44




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Fauji Cement Company Limited

Reaping fruits of favorable demand

Through its timely expansion of 7,560tpd of cement plant in FY11, FCCL enjoyed favorable demand scenario during FY13. Likewise other players in the industry, FCCL witnessed vigorous advancement of 39%YoY growth in revenue to PkR5.9bn parallel to same period last year. GMs improved by massive 520bps to 32% owing to better realized price of cement and upsurge in dispatches. Grouped benefits of strong topline and reduced financial cost, FCCL posted NPAT of PkR2.1bn (EPS:PkR1.42) in FY13 compared with NPAT of PkR553mn (EPS:PkR0.29) in the same period last year. Similarly, on a QoQ basis, FCCL posted NPAT of PkR527mn (EPS:PkR 0.24) in 4QFY13, down 19%QoQ. The company has announced cash dividend of PKR1.25/share during FY13.


FCCL is expanding its presence in Pakistan’s neighboring regions/countries such as Sri Lanka, India, South Africa, the Middle East & Africa. Additionally, increased demand expected from the local front amid an election year via enhanced development activities in the country coupled with firm prices are expected to drive bottom-line growth.


With the addition of 2.16mn tons per annum, FCCL has a ~7% share in total industry capacity, 6% in industry exports and 8% in the domestic dispatches. Capitalizing on its premier location, FCCL’s utilization levels remained top notch at 73% in FY13. The local and export share ratio of the company stands at 80:20.


FCCL High Low Avg.

Price 17 6 10

Vol (mn) 113.7 0.7 16.6

Sponsor Profile: FCCL is part of one of the leading groups of the country i.e., the “Fauji Foundation” with diversified investments in fertilizers (Fauji Fertilizer Company and Fauji Fertilizer bin Qasim) and other sectors. In this regard, Fauji foundation also has stakes in the Mari Gas Company and is expected to stake a stake in Askari Bank Limited (AKBL). The group holds PkR149.3bn of asset base with market capitalization of over PkR207.7bn.



Sales-net 4,743 11,523 15,968 16,943

Cost of sales 3,920 8,455 10,887 11,889

Gross profit 823 3,068 5,080 5,054

Distribution cost 74 102 144 153

Admin Exp. 148 129 205 218

Other opp. Exp. 37 72 229 243


Opp. Profit 601 2,838 4,732 4,684

Finance cost 104 1,825 1,512 1,277

Profit/Loss after tax 426 553 2,097 2285

EPS@1331mn sh 0.32 0.42 1.42 1.55




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Attock Cement Pakistan Limited

Cementing earnings on better brand image

Attock Cement Limited (ACPL) posted ~49%YoY growth in earnings to reached NPAT of PkR2.1bn (EPS: PkR21.45) in FY13 compared to NPAT of PkR1.4bn (EPS: PkR14.43) in FY12. On an unconsolidated basis, top line of the company posted ~8%YoY growth to reach PkR11.5bn compared to revenues of PkR10.5bn recorded in the same period last year. The uptick in profitability was a direct result of record expansion in gross margin which posted a growth of 390bpsYoY to settle at 31% in FY13. The hefty margin improvement was likely aided by better efficiency metrics, PkR depreciation against the US$, lower transportation cost and low cost coal inventory. Similarly, operating profitability of the company improved by ~31%YoY to reach PkR2.69bn in the review period compared with PkR2.02bn recorded in the same period last year. Consequently, net margin enhanced by ~520bpsQoQ to ~21% in 4QFY13. ACPL posted unconsolidated NPAT of PkR657mn (EPS:PkRR6.6) compared to NPAT of PkR521mn (EPS:PkR5.23) in 3QFY13. The company has announced cash dividend of PKR13/share during FY13


With no long term debt on the company’s account, ACPL has the financial strength to take on expansion activities in the future, in our view. The company holds a strong brand image not only in the domestic market but also on the export front. Meanwhile, utilization level at par indicates that the company is reaping the benefits of relatively higher local demand compared to its competitors.


ACPL has a total clinker production capacity of 1.79mn MT. Due to its strategic location in the South, the company benefits from lower transportation costs related to importing coal and exporting cement. The company shares 4% in the total capacity while it shares 6% and 5% in domestic and export sales, respectively. Up till FY13 the company’s capacity utilization was ~103% compared to the average industry utilization of 75%. The local and export share ratio in company sales stands at 74:26.


ACPL High Low Avg.

Price 156 79 105

Vol (mn) 1.01 0.00 0.1

Sponsor Profile: In addition to the investment in the cement industry (Attock Cement Limited), Attock group has diversified itself in the energy sector through exposure in oil exploration and production (Pakistan Oil Limited), refining (National Refinery Limited), oil marketing (Attock Petroleum Limited,) real estate, and other sectors. Currently, the group holds an asset base of PkR94.9bn with listed market capitalization of PkR168.47bn.



Sales-net 8,554 10,503 11,508 11,813

Cost of sales 6,823 7,691 7,973 8,253

Gross profit 1,731 2,812 3,535 3,560


Admin Exp. 186 222 263 270

Other opp. Exp. 77 119 230 236


Opp. Profit 1,059 2,047 2,691 2,694

Finance cost 24 12 15 17


[email protected] sh 7.15 14.43 21.45 21.50




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Cherat Cement Company Limited

Expansion on the way

Cherat Cement Ltd (CHCC) posted a growth of 180%YoY to reach NPAT of PkR1.2bn (EPS: PkR12.81) during FY13 compared with NPAT of PkR437mn (EPS: PkR4.57) posted during the same time last year. Earnings growth was mainly driven by 1) topline growth, 2) cost efficiencies, 3) margin growth and 4) a lower interest cost profile. In this regard, topline of the company grew by 15% to reach PkR6.2bn during FY13. The increase in net sales was on account of both higher sales price of cement and better sales volume compared with last year. As a result, gross margin for the company clocked in at 35% in FY13. On QoQ basis, CHCC posted NPAT of PkR302mn (EPS: PkR3.16) compared to a NPAT of PkR315mn (EPS: PkR3.3) posted in FY12. The company has announced cash dividend of PK3.5/share during FY13.

Outlook

We expect CHCC to be a major beneficiary of mega development projects such as the Diamer-Bhasha Dam as it is located close to the proposed dam’s site and can potentially boost volume for the company. However, the current interest rate reversal poses long term risk to the company’s expansion plans. Furthermore, due to its healthy share in export sales, the company’s top line is favorably benefited by PkR depreciation against the US$


CHCC High Low Avg.

Price 81 37 54

Vol (mn) 3.5 0.0 0.5

Company Profile: CHCC is located in the northern part of the country and enjoys leading exports to Afghanistan due to its strategic location. The company is one of the leading producers and suppliers of cement in KP and Punjab enjoys strong brand value amongst its customers.



It has a total production capacity of 1.15mn tons. The company shares 2.5% in the total capacity while it shares 4% in industry exports and 2.5% in domestic dispatches. Owing to its relatively low capacity coupled with its strategic location, the company’s utilization levels remain top notch at 91% in FY13. The local and export share ratio of the company stands at 64:36.


Sales-net 4,244 5,457 6,294 6,635

Cost of sales 3,677 4,305 4,108 4,418

Gross profit 567 1,152 2,187 2,218


Admin Exp. 107 113 121 127

Other opp. Exp. 11 34 230 243


Opp. Profit 335 895 1,906 1,922

Finance cost 286 311 109 199

Profit/Loss after tax 69 437 1,224 1,197

EPS@96mn sh 0.72 4.57 12.81 12.52



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Fecto Cement

Still cheaper than peers

The sponsors have diversified interests in cements, sugar, tractor as well as paper sack & hardboard manufacturing units. Located at Sangjani (near Islamabad), FECTC has a rated capacity to produce 780,000 tons of clinker p.a.

FY13 Result Review:

BoD of FECTC cement announced FY13 results on 26th-Sept-13, FECTC posted topline growth of 6%YoY to reach PkR4.5bn in FY13 compared to the same period last year. Higher net sales are primarily expected to emanate from higher local prices of cement coupled with favorable demand growth as compared to last year. Following the industry trend, the company enhanced it gross margin to 27% (up 510bps YoY). Consequently, The company posted NPAT of PkR583mn (EPS:PkR11.63) during FY13 compared to NPAT of only PkR347mn (EPS:PkR6.91) posted during the same period last year. On a QoQ basis, the company posted NPAT of PkR75mn (EPS:PkR1.49) in 4QFY13 compared to NPAT of PkR184mn (EPS:PkR3.67) posted in 3QFY13. The company has announced cash dividend of PKR1.5/share during FY13


At current price level, the cement sector is trading at an average forward PER multiple of 6.63x. In our sample, FECTC stands out with significant upside potential compared to its current price. In this regard, FECTC is trading at PER of only 3.7x .


FECTC High Low Avg.

Price 64 24 39

Vol (mn) 1.8 0.0 0.2

Company Profile: The sponsors have diversified interests in cements, sugar, tractor as well as papersack & hardboard manufacturing units. Located at Sangjani (near Islamabad), FECTC has a rated capacity to produce 780,000 tons of clinker p.a.


FECTC shares 1.8% in the total industry capacity and has 1.8% and 2.6% share in the local and export sales respectively. Up until FY13, the company’s capacity utilization was 86% while the local and export share ratio in company sales stands at 68:32.



Sales-net 3,304 4,343 4,588 4,677

Cost of sales 2,698 3,377 3,334 3,387

Gross profit 606 966 1,255 1,290


Admin Exp. 128 127 143 154

Other opp. Exp. 7 22 52 54


Opp. Profit 242 502 881 886

Finance cost 150 206 143 132

Profit/Loss after tax 66 347 583 751

EPS@50mn sh 1.31 6.91 11.63 11.98




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Kohat Cement Limited

All well from all corners

KOHC recently announced its FY13 result where it recorded a topline growth of 21%YoY to reach PkR11.2bn during FY13, reflecting a sizable increase of PkR1.9bnYoY over last year. This upsurge in net sales was due to higher local prices coupled with improved local sales volume during the period under review. Moreover, the company secured gross margin of 38% (up 800ppsYoY) in FY13 compared to 31% posted in the same period last year. Despite an increase in distribution and administrative expenses, the company managed to post a NPAT of PkR2.6bn (EPS: PkR20.45) during FY13 compared to NPAT of PkR1.61bn (EPS:PkR12.9) last year. On a QoQ basis, KOHC recorded NPAT of PkR722mn (EPS: PkR5.61) compared to NPAT of PkR732mn (EPS:PkR5.61) posted in FY13. The company has announced cash dividend of PKR5/share during FY13


We see firm prices playing a bigger role in the profitability of the company going forward, coupled with an improved outlook in dispatches growth emanating from KOHC’s ability to capture growing demand in the Northern region. . While we do not foresee significant improvements in the export scenario for the company and flag favorable domestic dispatches as an important growth element in FY`14


KOHC High Low Avg.

Price 124 58 80

Vol (mn) 3.8 0.01 0.40

Company Profile: KOHC engages in the production, sale, and export of cement and offers both White and Grey cement. The cement plant is located about 60km from Peshawar. KOHC has an installed clinker capacity of 2.8mn tons of grey cement and 148.5k tons of white cement



KOHC has total capacity of 2.68mn tons. The company’s plants have been working with an average capacity utilization of 68% which is quiet low as compare to the industry average of 75%. The company has ~6% market share in domestic sales and only 3.7% in exports . The company's local and export ratio is 83:17 respectively.


Sales-net 6,085 9,316 11,297 11,671

Cost of sales 5,158 6,464 6,936 7,316

Gross profit 927 2,852 4,361 4,354


Admin Exp. 49 67 86 89

Other opp. Exp. 16 108 234 241


Opp. Profit 837 2,739 4,216 4,000

Finance cost 715 626 249 257


EPS@129mn sh 0.49 12.90 20.45 20.35




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Lafarge Pakistan Cement Limited

1HCY13 NPAT up 6%YoY

In 1HCY13, LPCL posted top line growth of 6%YoY to reach PkR5.06bn compared to a top line of PkR4.7bn recorded in the same period last year. The increase in net sales is expected to be primarily driven by higher sales prices of cement compared to last year. Similarly, gross margin of the company enhanced by 390ppsYoY to 35% in the period under review. However, the company has not been able to cash the same quantum of benefit from a lower domestic interest rate environment compared to its peer group as PkR depreciation against the US$ continues to inflate foreign currency debt servicing for LPCL. Despite the fact, company recorded decline of 57%YoY in financial charges to reach PkR257mn. Resultantly, LPCL posted NPAT of PkR865mn (EPS: PkR0.66) during1HCY13 compared to NPAT of PkR164mn (EPS: PkR0.13) during last year.


Despite some temporary hoopla on the political front, relations between Pakistan and India should improve as Pakistan is considering awarding the MFN (Most Favored Nation) status to India and has also taken a step forward to improve its trade relations in the region, in our view. Cement exports to India through the Wagha border can act as a volume trigger for LPCL where the company's capacity utilization would also move towards peak levels.


LPCL High Low Avg.

Price 11 5 7

Vol (mn) 51.93 0.4 5.6

Company Profile: LPCL engages in the production, sale, and export of cement under the PAKCEM brand name in Pakistan. It offers ordinary Portland cement and Sulphate Resistant cement with the packaging options of 50 kg bags, 1.5 tons, 2 tons jumbo bags and bulk carriers. The company was formerly known as Pakistan Cement Company Limited and changed its name to Lafarge Pakistan Cement Limited (LPCL) in February 2009. LPCL is a subsidiary of Pakistan Cement Holding Limited where the ultimate parent of the company is Lafarge S.A., France. The major stake holders of the company are Pakistan Cement Holding Company which holds 51.55% share in the company followed by Camden Holding PTE Limited with a 21.67% stake.


The company's plant is located in Kalar Kahar, district Chakwal in the heart of the Punjab province, which is quite rich in limestone reserves (main raw material for clinker). The plant is near the M2 Motorway that gives it an edge in reaching all sides of the country as well as in facilitating regional exports. The company has a total production capacity of 2.4mn tons (5.4% of the industry capacity with local and export shares of 4.5% and 5% respectively).


Income Statement (PkR mn) CY11 CY12 CY13E CY14E

Sales-net 7,804 9,624 10,137 9,960

Cost of sales 6,149 6,489 6,588 6,608

Gross profit 1,656 3,135 3,548 3,352


Admin Exp. 488 628 860 774

Other opp. Exp. 4 87 138 158


Opp. Profit 921 2,282 2,396 2,250

Finance cost 1,064 1,053 515 453

Profit/Loss after tax (118) 1,488 1,729 1,588

EPS@1313mn sh (0.09) 1.13 1.32 1.21



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Maple Leaf Cement - From extreme losses to abnormal profits

Earnings up by massive 550%YoY

MLCF’s earnings momentum continued in FY13. In this regard, the company record NPAT of PkR3.2bn (EPS: PkR6.11) in FY13 as compared to a NPAT of PkR496mn (EPS: PkR0.94) recorded in the same period last year. Profitability of the company improves significantly as gross margins expanded by 860pptsYoY to 35% during FY13. The key reason behind this notable margin growth was healthy prices. Improvement in bottom-line is realized on account of the controlled administrative and distribution costs and declining financial costs which will decline by 27%YoY to reach PkR1705mn in FY13 as compared to the same period last year. The overall jump in the core earnings of the company trickled down to the bottom-line resulting in a massive 550%YoY growth during the period. On a QoQ basis, MLCF posted a NPAT of PkR1035mn (EPS: PkR1.96) in 4QFY13, compared to PkR840mn (EPS: PkR1.59) recorded in the previous quarter.

Outlook and Recommendation

MLCF is one of the highly leveraged companies in cement universe, where the upside risk to company’s valuation would remain high cost of borrowing as compared to other peers. Similarly, owing to high DFL and DOL, MLCF would advantage of the increasing local demand due to its favorable strategic location. The capacity utilization for the company would be around 75% during FY13.


MLCF High Low Avg.

Price 33 8 19

Vol (mn) 44 1 10

Sponsor Profile: MLCF is also equipped with a capacity of 100tpd white cement and has captured almost 80% of the white cement market. In addition to the Kohinoor Group’s investment in the cement industry (MLCF), the Kohinoor group is also engaged in textiles (Kohinoor Textiles). The current listed asset size of the group is ~PkR38.5bn with market capitalization of over PkR8.86bn.


MLCF has a capacity of 11,235 tpd, while the total capacity of the company stands at ~3.37mn tons. MLCF has a 9% share in the total installed capacity in the north region, whereas the Company holds 8% share in the country’s total capacity The company has 7% share in local dispatches and 3% share in exports.



Sales-net 13,073 15,461 17,357 17,443

Cost of sales 10,898 11,447 11,312 11,498

Gross profit 2,175 4,015 6,045 5,945

Distribution cost 1,647 846 798 786

Admin Exp. 231 258 254 253

Other opp. Exp. 162 150 167 141


Opp. Profit 298 2,910 4,993 4,906

Finance cost 2,166 2,351 1,705 1,629

Profit/Loss after tax (1,769) 496 3,225 2,949

EPS@528mn sh (3.36) 0.94 6.12 5.60




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Pioneer Cement Limited

Earnings grew by an immense 155%YoY in 1FY13

During FY13 PIOC posted topline growth of 17%YoY to reached PkR7.5bn in FY13 compared to a topline of PkR6.48bn recorded during FY12. Despite subdued growth in its topline, the gross margin of the company is expected to clock in at 32% (up 732pptsYoY). Meanwhile, Distribution and administrative expenses swelled by 14% and 1% respectively during the review period .Therefore, PIOC witnessed 155% YoY upsurge in bottom line recorded NPAT of PkR1535mn (EPS: PkR6.76) during FY13 compared to NPAT of PkR601mn (EPS: PkR2.65) during the same period last year.

On a QoQ basis, the topline of the company swelled by 1%QoQ owing to a better local demand and improved retention, whilst, PIOC posted NPAT of PkR470mn (EPS: PkR2.07) in 4QFY13 compared to NPAT of PkR417mn (EPS: PkR1.84) posted in 3QFY13. The company has announced cash dividend of PKR3/share during FY13

Outlook and Recommendation

In line with its peer group, firm prices aided by relatively higher public sector spending should drive PIOC’s revenue growth this year. Moreover, the depreciating PkR against the US$ with range bound coal prices should serve as another positive driver for the company’s margin profile


PIOC High Low Avg.

Price 38 13 23

Vol (mn) 11 0 1

Company Profile: PIOC’s production facility is situated at Chenki, District Khushab in Punjab. The company commenced its operations with an installed capacity of 2,000 tons clinkers per day. During 2005 the capacity was enhanced to 2,350 tons per day. During April 2006, another production line with a capacity of 4,300 tons clinkers per day was streamed online.


The company has a market share of 5% in the overall industrial capacity while it shares 4% and 3% in local and export sales respectively. Up until FY13, the company’s capacity utilization was ~63% as compared to the average industry utilization of 75% during the period. The company's local and export ratio is 83:17 respectively.



Sales-net 5,273 6,487 7,568 8,062

Cost of sales 4,531 4,900 5,163 5,581

Gross profit 742 1,587 2,405 2,481


Admin Exp. 52 62 62 66

Other opp. Exp. 16 58 144 154


Opp. Profit 539 1,446 2,253 2,293

Finance cost 471 485 (19) 50

Profit/Loss after tax 23 601 1,535 1,525

EPS@227mn sh 0.10 2.65 6.76 6.72




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Cement Sector : Challenges Ahead Cement dispatches declined 5%YoY in 2MFY14

As per APCMA (All Pakistan Cement Manufacturers Association), cement dispatches during first 2MFY14 stood at ~4.85mn tons (down 5%YoY), which were realized at ~5.09mn tons in the corresponding period of last year. Similarly, local dispatches during the period went down by 6%YoY to ~3.4mn tons against ~3.65mn tons in the same period last year, while export sales remain sluggish on account of lower demand from Afghanistan. In that regards, export sales went down by 2%YoY to settle at ~1.42mn tons. The prominent reason behind sluggish demand was lower public sector spending by government amidst Ramadan/Eid season along with heavy floods have dampened the demand during the said period.

FY14- Cement sector earnings to increase by meager ~2% in FY14

We anticipate cement dispatches to clock in at 33.1mn tons (local 24.8mn tons and exports 8.3mn tons) in FY14. The key reason behind sluggish dispatches were 1) Cut in the allocated budget for PSDP 2) more gov’t focus towards power sector reforms than construction activities 3) last but not least, mega dam building projects are expected to be linger-on in FY14. Staying conservative, we anticipate small 0.7%YoY fall in dispatches during the said period.

Moreover, current increase in cement prices would only off-set swelling cost pressure (on account of increase in power/gas tariff), while margins could slightly decline by the timing difference of pass-on the impact. Meanwhile, we assume coal prices to prevail in the range of US$70-80/ton in the outgoing year. On the flip side, we incorporate 200bps upsurge in DR for calculating company’s financial cost. Consequently, we estimate the sector to record marginal growth of 3%YoY increase in topline to PkR146bn compared to PkR142bn in FY13. Similarly gross margin is projected to prevail at current level of 37% in FY14. However, financial cost would cut by PkR93mn to PKR 4.9bn in FY14 (down 2% YoY). The bottom-line would experience marginal ~2%YoY growth to reach NPAT of PkR30bn in from NPAT of PkR29.6bn recorded in the corresponding period last year.


Sales-net 97,675 129,122 142,376 146,221

Cost of sales 75,353 89,172 89,687 92,799

Gross profit 22,322 39,950 52,689 53,422


Admin Exp. 1,914 2,348 2,417 2,925

Other opp. Exp. 813 1,589 2,517 2,565

Other opp. Income 1,846 1,491 2,313 2,445

Opp. Profit 11,696 29,706 42,648 42,480

Finance cost 7,578 8,791 5,055 4,962

Profit/Loss after tax 3,613 17,936 29,514 30,056

Source: APCMA, Alternate Research

Source: Bloomberg, Alternate Research

Source: PBS, SBP, Alternate Research Cement Sector – Projected Income Statement FY14


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Company wise Relative Performance




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FECTC KSE100

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The analyst primarily responsible for the content of this report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is or will be directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

Important disclosures and disclaimer

Information has been obtained from sources believed to be reliable but Alternate Research does not warrant its completeness or accuracy. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. Investors should consider this report as only a single factor in making their investment decision. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. All prices are those at the end of the previous trading session unless otherwise indicated. Additional information will be available upon request. Any opinions expressed herein are statements of our judgment as of the date of publication and are subject to change without notice. Reproduction without written permission is prohibited. Readers are advised that this analysis report is issued solely for information purposes and is not to be considered as an offer to sell or as the solicitation of an offer to buy. Past performance is no guarantee of future results. This report is not an offer to buy or sell or the solicitation of an offer to buy or sell any security or to participate in any particular trading strategy. Alternate Research may have an investment or trade securities or other instruments of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Alternate Research may enter into transactions with companies mentioned in this report and there may be a potential conflict of interest. Employees of Alternate Research not involved in the preparation of this report may have investments in securities or other instruments of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Alternate Research and its affiliate companies do business that relates to companies covered in its research reports, including corporate finance advisory, underwriting, fund management, investment services and investment banking. This document is issued to the person to whom Alternate Research has issued it. This document is intended for general information purposes only, and may not be reproduced or redistributed to any other person. This document is not intended as an offer or solicitation with respect to the purchase or sale of any security. This document is not intended to take into account any investment suitability needs of the recipient. 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Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this document. To the maximum extent permitted by applicable law and regulation, Alternate Research shall not be liable for any loss that may arise from the use of this document or its contents or otherwise arising in connection therewith. Any financial projections, fair value estimates and statements regarding future prospects contained in this document may not be realized. All opinions and estimates included in this document constitute Alternate Research’s judgment as of the date of production of this document, and are subject to change without notice. Past performance of any investment is not indicative of future results. The value of securities, the income from them, the prices and currencies of securities, can go down as well as up. 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16

Documents

Cement Sector : Challenges Ahead