Equity Analysis /

Pakistan Cement: Strong rebound in September sales; optimism on recovery is premature

    Intermarket Securities
    3 October 2019

    Sales up 12% yoy in September. As per APCMA data, local cement sales for Sep’19 came in at 3.47mn tons, up a healthy 12% yoy, after dismal performance since July’19. We believe subdued demand in the preceding months (Jul-Aug’19) – post protests by retailers against increased documentation requirements – led to strong rebound in Sep’19. However, we think it is still too early to be optimistic about growth in cement demand as there will be more supply pressures until end of 2019 and government may have to cut PSDP further to address fiscal slippages.

    Exports continue to be strong, up 12% yoy to 0.8mn tons in Sep’19. This brings total cement sales in Sep’19 to 4.27mn tons, up 12% yoy. In Q1 FY 20, local cement sales remained flat at 9.1mn tons. 

    Regional sales growth pattern has reversed during Q1 FY 20, where dispatches in the North picked up by 9% yoy (7.8mn tons) while the South region recorded a substantial decline of 32% yoy (1.3mn tons). Recall that regional divergence in FY 19 was due to some South-based plants selling in the South Punjab market (which falls under the North region). However, post commissioning new capacities in North (MLCF and CHCC, cumulatively 4.5mn tpa), some North players are now selling in South (mainly MLCF) to capitalise on wide difference in cement prices in the two regions (about PKR150/bag). If this continues, pricing in the South is also likely to come under pressure (which have thus far been immune to pricing indiscipline in the North).

    Overall industry utilisation based on Q1 FY 20 sales is 75% (vs 80% in the same period last year). The upcoming expansions are LUCK (2.6mn tpa in Q2 FY 20), KOHC (2.3mn tpa in Q2 FY 20) and PIOC (2.6mn tpa slated for Q3 FY 20). Since these are all North-based expansions – with limited scope for growth in exports – utilisation levels may continue to come off in the coming months. Though prices in the North have improved lately, albeit marginally, the possibility of another run down in prices cannot be ruled out particularly as local demand in Q2 FY 20 will face challenges from a seasonal slowdown and influx of new capacities in the North will build up further pressure.   

    We maintain our Underweight stance on the sector, given the above-outlined pressures. We think clarity on pricing consensus will arise only after all new capacities are added (excluding PIOC, which is likely delayed). Until then, intermittent pressures on prices will limit any rally in stock prices, in our view. We prefer LUCK (TP: PKR543/sh) and KOHC (TP: PKR83/sh) in the space.  

    Risks: (i) Breakdown in pricing consensus, (ii) further rise in coal prices and (iii) levy of additional taxes.