Update Pulse

May 10, 2011

Cement Sector: Poor demand continues to hamper dispatches

Pakistan Research

Synopsis
Total industry dispatches experienced a sharp decline of 9% YoY to 25.72m tons. Local dispatches declined by 7% YoY to 18.06m tons versus 19.36m tons in 10MFY11. Exports 10MFY11 dispatches registered a negative growth of 13% YoY to 7.65m tons Rising input costs has emerged as another big test for cement manufacturers. Total exports dispatches may show some growth on the back of demand from India and Afghanistan. We suggest a BUY stance on LUCK, DGKC and ACPL.

18.06m tons versus 19.36m tons in 10MFY11. On monthly basis, during the month of Apr11, local dispatches showed a slight improvement of about 3% YoY to 2.04m tons as against 2.00m tons in April10. On MoM basis local dispatches during the month of Apr11 were seen lower by 8% to 2.04m tons against off-take of 2.23m tons in the previous month. Local dispatches showed poor trends in comparison of the last year. The reason behind this sluggish performance was slow down in construction activities across the country.
Local demand trends 2.60 2.10 M. Tons 1.60 1.10 0.60 Sept Oct Nov Dec Aug July Feb Mar Jan Apr FY10 FY11

BUY
Market Snapshot Index KSE 30 11609.34 KSE 100 11932.68 KSE ALL 8300.21 Key Data (DGKC) Market Cap(PRs bn) Shares Outstanding (m) Bloomberg 12M Avg. Volume (m) Key Data (LUCK) Market Cap(PRs bn) hares Outstanding (m) Bloomberg 12M Avg. Volume (m) Key Data (ACPL) Market Cap(PRs bn) Shares Outstanding (m) Bloomberg 12M Avg. Volume (m) Chg 76.83 52.72 32.90 % 0.67 0.44 0.40

8.34 365.10 DGKC PA 3.30

Total dispatches in 10MFY11 (M.Tons)

Tons
Local Exports Total

10MFY10
19,376 8,799 28,175

10MFY11
18,065 7,656 25,721

Y-o-Y -7% -13% -9% Y-o-Y 3% -1% 2% M-o-M -8% 14% -2%

22.73 323.38 LUCK PA 1.33

Tons
Local Exports Total

AprFY10
1,992 939 2,931

AprFY11
2,047 932 2,979

Total exports down by 13% YoY

During 10MFY11 export dispatches also registered a negative growth of 13% YoY to 7.65m tons as against 8.80m tons in same period last year. The country exported about 17% YoY lower cement to India this year as total cement exports to India declined to 0.47m tons as against 0.56m tons in 10MFY11. Exports through sea also posted a substantial decline of 32% YoY as through sea dispatches reached 3.25m tons as against 4.76m tons in same period last year. On the other hand, demand from Afghanistan remained intact as total cement export to Afghanistan posted a sharp rise of 17% YoY to 3.78m tons in comparison of 3.24m tons in corresponding period of the last year. On monthly basis, exports to Afghanistan and India in Apr 11 recorded a strong growth of 21% and 18% YoY to 0.50m tons and 0.08m tons respectively. As far as the MoM dispatches are concerned, total dispatches showed a handsome growth of 14% MoM to 0.93m tons as against 0.82m in previous month. The major impact came from

4.50 87 ACPL.PA 0.53

12M relative performance vs KSE

155%

KSE-100
125%

LUCK ACPL

Tons
Local Exports Total

MarFY11
2,223 820 3,043

AprFY11
2,047 932 2,979

DGKC

95%

65%

Source: APCMA, Summit Capital Research

35% Sep-10 Aug-10 Dec-10 Oct-10 Feb-11 Jun-10 Jan-11 Apr-11 May-10 May-11 Nov-10 Mar-11 Jul-10

Total dispatches declined by 9% in 10MFY11

A few days back, All Pakistan Cement Manufacturers Association (APCMA) released monthly numbers for the month of Apri11. As per the data, during the 10MFY11 total industry dispatches experienced a sharp decline of 9% YoY to 25.72m tons against 28.17m tons in the corresponding period of last year. Local dispatches declined by 7% YoY to

Muhammad Sarfraz Abbasi Sarfraz.abbasi@summitcapital.com.pk 021-35376125 B-209, Park Towers, Clifton, Karachi

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Summit Capital (Pvt.) Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty and Summit Capital (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.

through sea and to India posted a substantial rise of 17% and 36% MoM to 0.43m tons and 0.08m tons respectively. In our view, this upsurge in dispatches to India and through sea would contribute greatly in remaining two months.
FY11 vs FY10 Export demand Trends 1.20 M. Tons 1.00 0.80 0.60 0.40 Aug Sept Mar Feb Jan Oct Nov July Dec Apr FY10 FY11

Nevertheless, international coal prices have started stabilizing gradually as currently per ton coal prices in international markets are hovering around US$122 from US$141 during Jan 11. We believe, the factors behind the YTD lackluster performance of the sector are 1) lack of new public sector development projects 2) rising input costs and 3) reduced private consumption due to prevailing higher inflation. Thus, poor demand conditions would remain to be a serious cause of concern for the industry as a whole. Future Outlook and recommendation We believe that demand from India and Afghanistan will continue its current pace. However, for through sea exports, cement exporters have shifted their focus from gulf countries to Iraq, Sri Lanka and some other African countries. As a result, beside, 10% and 36% higher export to Afghanistan and India, through sea exports also registered a decent 17% MoM growth. As far as local demand is concerned, we believe that construction activities for the rehabilitation of the flood affectees might increase demand in remaining months of the FY11. We also expect normal construction activities to see some rise as post harvesting Rabi crops farmers are also in a better position to carry out regular construction activities. Our top picks from the sector are LUCK, DGKC and ACPL. We recommend a BUY stance for the LUCK (Fair value of PKR85, upside potential 21%), DGKC (Fair value of PKR39, upside potential 71%) and ACPL (Fair value of PKR69, upside potential 33%)

Exports (tons) 10MFY10 10MFY11 Y-o-Y

Aghanistan India Through Sea Cement Exports Clinker Total Exports Aghanistan India Through Sea Cement Exports Clinker Total Exports Aghanistan India Through Sea Cement Exports Clinker Total Exports 3,235,553 563,877 4,755,797 8,555,227 243,884 8,799,111 414,900 71,330 439,229 925,459 13,223 938,682 458,765 62,033 294,223 815,021 4,671 819,692 3,780,876 466,468 3,249,174 7,496,517 159,586 7,656,103 503,717 84,198 343,836 931,750 296 932,046 503,717 84,198 343,836 931,750 296 932,046

PP a k i s t a nRR e s e a r c h akistan esearch

17% -17% -32% -12% -35%

-13%

Source: APCMA, Summit Capital Research

Exports (tons) AprFY10

AprFY11 Y-o-Y 21% 18% -22% 1% -98%

-1%

Rising input costs - another big challenge to the profitability

In our view, on going unprecedented power crises, rising electricity & gas tariffs and increased coal and furnace oil prices have emerged as a challenge for the sector to deal with. A massive 37% YoY rise was observed in coal prices as per ton coal prices reached US$141 in Jan 11 against per ton price of US$103 in Jan 10. Due to worst flooding in Australias Queensland coal supplies to the world were tight, resultantly, per ton coal prices at the beginning of the year were seen highest since mid-08 when per tons were hovering around US$190 per ton.
2 Years coal prices Trends
150

Exports (tons) MarFY11 AprFY11

M-o-M 10% 36% 17% 14% -94% 14%

Per ton price (US$)

120 90 60 30 0 Dec-09 Dec-10 Aug-09 Aug-10 Jun-09 Feb-10 Jun-10 Feb-11 Oct-09 Oct-10 Apr-09 Apr-10 Apr-11

Source: APCMA, Summit Capital Research

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Summit Capital (Pvt.) Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty and Summit Capital (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.