Equity Analysis /
Pakistan

Cherat Cement: Analyst briefing: Another year of subdued demand

    Intermarket Securities
    12 September 2019

    Cherat Cement (CHCC) held its analyst briefing today to discuss the financial performance during FY 19 and shed light on industry dynamics.

    Key highlights:

    • The local dispatches of the company remained flat at 2.1mn tons during FY 19 in contrast to a decline in industry demand of 2.2% yoy in the same period. We expect local cement demand to post negative growth of 3% yoy for FY 20.
    • CHCC’s management expects another year of subdued demand where local demand may post negative single digit growth in FY 20 as well. The government’s documentation drive (CNIC condition) may also hamper sales activity especially in the North as most retailers still have reservations.  
    • Being the closest to the Torkham border, CHCC has access to the export market of Afghanistan. Export volumes have increased lately (15% yoy growth in FY 19) post PKR devaluation (improved retention price on exports). However, with the mammoth increase in capacity (2.0x) and limited demand in exports, accessibility to this market may not change the sales mix drastically, in our view.
    • For its newly installed dual fired captive power plants, CHCC is in negotiations with relevant authorities to get inexpensive uninterrupted gas supply in order to reduce its dependence on expensive power supply from PESCO (which is expected to be resolved within 1-2 months). To highlight, the withdrawal of the Prime Miniter's relief package (subsidy of PKR3.0/kwh on power for industrial consumer) from July has increased power cost by PKR3.0/unit (excluding the increase in power tariff). Availability of gas for these CPP will reduce production cost and provide cost savings of PKR2.9/sh (assumed at natural gas rates), in our view. Moreover, a feasibility study with regards to renewable power supply is also underway. 
    • Axle load implementation has led to steep rise in transportation cost especially for North-based producers – average transportation cost has increased by PKR3000/ton. This will translate to additional cost of PKR25-30/bag for cement manufacturers, which will likely erode margins.

    Risks: (i) Drastic increase in coal prices, (ii) decline in local dispatches growth, and (iii) break-down in pricing mechanism.