July 23, 2020 (MLN): The Cement Industry has been grabbing the attention and headlines lately, for mostly the right reasons. With the results of the companies listed on the Pakistan Stock Exchange looming, the market spectators have already started giving out their verdict regarding the sector, most of it being in a good taste.
The Cement sector, along with most of the major sectors operating in Pakistan, suffered a lot in terms of lower production and operational activity during the brief lockdown period implemented in the country at the backdrop of COVID-19 outbreak. Not just cement, but almost all the companies were forced to pause their operations and wait until the situation got better (which it did not), which resulted in a major loss of revenue and earnings.
Due to that momentary lockdown and the after-effects of it, the Cement sector along with its counterparts was naturally expected to post not so favorable results for the quarter ended June 30, 2020. However, the verdicts and previews that have come out recently by some of the brokerage houses have indicated somewhat otherwise.
According to a report by BIPL Securities, the factors that have been credited for causing the sector to recover include restoration of pricing arrangement, cuts in Discount Rate by 625 basis points, lower fuel prices, a decline in Federal Excise Duty by Rs. 25/bag, and the various programs introduced by the State for the upliftment of the sector which will be discussed shortly.
Before diving into further details, it is imperative to see how the sector performed during the period under review. The sector contributed around 715 points to the KSE-100 index during the quarter, with LUCK providing the highest gains at 259 points, followed by companies like DGKC, PIOC, CHCC, KOHC and MLCF, which contributed 126, 97, 74, 66 and 55 points, respectively.
However, the highest return on stock provided during the period was by PIOC, which generated a whopping quarterly return of 128%. While KOHC and CHCC provided returns of 58% and 57% respectively, DGKC posted returns of 44%. LUCK on the other hand, despite having contributed the highest to the index, provided returns of 25% only.
In terms of average volume traded, MLCF emerged as the most preferred stock during the period with over 14,6 million shares traded, followed by FCCL, DGKC, PIOC, CHCC, LUCK, and then KOHC.
With regards to dispatches, the Cement Sector sold nearly 10.7 million MT during the quarter, i.e. around 12% lower than the amount sold in same period of last year. Out of this total figure, 9.37 million MT was sold locally while 1.4 million MT was exported. Furthermore,
Coming to what expectations most of the analysts hold, it is being speculated that the local demand is likely to see a substantial increase from FY21 to FY23, owing to an improvement in GDP growth rate, along with an increase in demand by the private sectors as well as the government due to the construction of dams and housing projects.
The international demand for cement is also expected to grow during the next two years, as Pakistan has found its new customers in China and the Philippines. Other international avenues that carry the potential of being the largest importers of cement include Bangladesh, Sri Lanka, Qatar, Maldives as well as some African countries. These countries are likely to compensate for the loss incurred from suspension in trade activities with India.
This optimism surrounding the sector, however, has been questioned as many market onlookers believe that the country is not in a position to afford or even expect a surge in demand. Pakistan saw a negative GDP growth rate for the first time in 68 years, that too after the outbreak of COVID-19. This was followed by a rise in unemployment as the lockdown restrictions resulted in several companies sacking their employees.
Under such circumstances, one can only wonder how the demand for cement will be boosted in the coming years as stated by most of the analysts. Talking about the same to Mettis Global News, Mr. Shankar Talreja from Topline Securities said: “People have this perception that the entire Fiscal Year 2020 comprised of unfavorable economic dynamics and financial performances, which is not the case. The economy was doing well until the COVID-19 situation in the country transpired, which happened in March. So, the last 3 to 4 months of the year could be said to have contributed to the current economic situation of Pakistan.”
He continued: “The fiscal and monetary stimulus provided by the government in terms of lower interest rates would be more than enough to counter the adverse impact the pandemic had on the economy in these 4 months. Due to lower rates, we believe that consumers will have access to cheaper housing finance and thus, the recovery would tantamount to nearly 7.5% in FY21.”
The gross margins of the cement companies are also likely to go upwards, on the back of stability in prices due to higher demand. The rate in the southern region, according to BIPL Securities, is expected to be higher than the northern region. When asked to elaborate on the same, an analyst from BIPL Securities said that the Northern Players are at an advantage due to lower variable costs, as compared to their Southern counterparts, which gives them an opportunity to exploit the latter.
As mentioned before, the commencement of the Naya Housing Project by the Government, for which the government has received $500 million from the World Bank besides the Rs. 30 billion that has been set aside as part of the Federal Budget, is expected to generate a demand of 10.0MT cement for every single story 2.5 marla house that will be constructed, BIPL Securities added.
The drastic increase in Pakistan’s population is again a plus point for the sector, as it would stimulate higher demand for housing projects. Going by the figures provided by the State Bank of Pakistan, there would be a demand for nearly 0.6 million houses every year if the population continues to grow at the same rate. Likewise, the construction of Diamer-bhasha and Mohmand dams, which are likely to be completed over the course of five years, may result in an increased demand by 1.2 million per year.
Talking specifically about the financial performance of the sector for the quarter ended June 30, 2020, a report by Topline Securities has suggested that the cement companies would continue to report losses for the period, but the quantum of those losses would be almost the half of that reported in the previous quarter. The factors attributed to the decline in losses for the period include savings from lower power, transportation, and fuel costs due to the imposition of lockdown.
Despite an underwhelming performance on the Pakistan Stock Exchange, several analysts have placed their bets on LUCK and KOHC mainly on the back of better retention prices, low-cost structure, strong balance sheet, attractive valuations, and diversified investments.
FFCL is likely to register losses this time too, mainly owing to a fall in volumetric sales during the quarter. Nonetheless, the company is expecting a slight decline in losses due to higher local sales and improvement in fuel/power dynamics.
Similarly, DGKC is expecting a decline in its losses owing to the absence of heavy exchange losses, but the impact of it will be restricted by the fall in the volumetric sales. Riding on the same boat, MLCF is likely to register losses lower than the quarter of the previous year, due to the absence of one-off items.
With the COVID-19 situation easing in most parts of the world, the long-term picture for the sector seems quite favorable. However, the benefits transpiring from a surge in demand in local and international markets would be limited by factors such as excess supply, control of prices by the state, PKR depreciation, and an upward revision in electricity/gas tariff.
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