Pakistan Synergistic Financial Advisors Research

27 March, 2012 Cement Sector Review

Industry Outlook

According to recent figures released by APCMA (All Pakistan Cement Manufacturing Association),
total dispatches were up by 3.5 percent, YoY, and stood at 20.35 million tons during 8MFY12. While
local dispatches depicted a healthier trend rising by 7.4 percent, export sales were reported at 5.6
million tons depicting a YoY fall of 5.6 percent. Despite this fact, export from the southern region
jumped up by 13.4 percent to 0.18 million tons compared to last year. Similarly, growth contribution
from the southern region as a component of local sales also remained healthier. However, total
dispatches remained flat for month of Feb-12 at 2.5 million Tons experiencing a MoM fall of 1.5
percent. This decline was contributed by a 4.2 percent MoM decline in local dispatches in the south
region accompanied with MoM decline of 15.5 percent in export via sea. Although exports have
shown a downward trend, it is still backed by healthier demand from Afghanistan which trailed
upwards by 11.5percent MoM.

Local Off Take Kept Cement Sector in Lime Light

Cement remained in the lime light for last 3 months by outperforming the broader index by
approximately 30 percent although total dispatches have shown an unimpressive YoY growth of 3.5
percent for period of 8MFY12. Local sales contributed a growth of 7.4 percent while the export sales
declined by 5.6 percent compared to last year. The cement sector gained the attention of investors
as local cement prices mounted significantly to an all time high of PKR 410-430 per bag. Moreover,
KSE vs. Cement Sector Price Performance an improvement in export prices, primarily for Afghanistan, posted a MoM growth of 11.5 percent in
volumetric sales opening a new growth horizon for cement plants in the North region. The outlook
50% for cement plants operating in North appears healthier and companies are resultantly expected to
post healthier margins.
40%
Local Demand Trajectory
30%
With an installed capacity of 44.5 million tons, the cement industry is operating at a significant
underutilization (69 percent YTD). Local dispatches have shown a rise of 7.4 percent (YoY). Whereas,
20% the federal government has also started to pace up developmental expenditure in the last couple of
months, our future outlook for local dispatches remains positive. Following are the driving factors
10% for local demand:
 Post flood reconstruction in rural areas of Sindh
0%
 Post winter season construction from March-12 onwards
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12  Start up of new Hydral projects
 As 2012 is an election year and there are expectations of escalation in government
-10%
developmental projects

-20% Based upon the above mentioned factors, our outlook for cement sector remains positive and the
KSE-100 Cement sector above mentioned factors will play vital role in accelerating growth of local dispatches.

Export Demand Trajectory

Source: APCMA, SFA Research Exports sales showing a downward trend for period of 8MFY12 has raised a concern regarding the
cement sector outlook. The following factors will drive the export demand of cement:
Monthly Dispatches 8M FY-12
Pak Cement Booms as Afghan War Rests
3,500 80%
As Nato forces are planning to evacuate from Afghanistan after a long wait of 11 years, the Pakistani
cement sector has a great opportunity to benefit from post war construction activity. Construction
3,000 76%
activity in Afghanistan has already started accelerating due to which cement exports to Afghanistan
has shown a healthy growth rate of 11.5 percent (MoM) and 7 percent (YoY). Currently, Pakistan's
2,500 72% exports to Afghanistan stand at 3 million Tons per annum and Pakistan has approximately 90
"000" Tons

percent share in the Afghani Cement Market. As we expect Afghanistan cement demand to elevate,
2,000 68% this uptick in demand and increasing cement prices in export market by 20 percent during 8MFY12,
will benefit players.
1,500 64%
India to Remove Barriers to Pak Cement
1,000 60%
During 8MFY12, cement exports to India have shown significant growth of 40 percent. Recent
development on the MFN status will eliminate non tariff barriers in terms of allowing exports to
India through Wagha border. Pakistan’s cement export to India also appears healthier and is
Local Export Utilization expected to accelerate in last quarter of FY12.
Source: APCMA, SFA Research

www.sfaresearch.com

Disclaimer: This report has been prepared by SFA. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such
information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without
notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an
offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. SFA may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such
material is disseminated to Public. This document may not be reproduced, distributed or published for any purposes.
 Pakistan

Dispatches 8M FY-12 Demand in GCC Spills Over to Pakistan

MM Tons 8MFY12 8MFY11 YoY

As per the Qatar ministry of environment which has decided to stop operations at 14 gravel
crushing units, a severe shortage of cement will arise leading to increased prices in region. Recently,
Local 14.83 13.82 7.40% KSA is also facing a shortage in cement supply because of gas curtailment in some regions. GCC
North 12.03 11.36 5.90% cement demand is also expected to rise from its current level of 83 million tons to 95 million tons by
South 2.81 2.46 14.20%
2013 in light of the KSA announcement of SR 690bn for developmental projects in the 2012 budget.
These expenditures are expected to enhance construction activity. Qatar should also continue to
Export 5.62 5.95 -5.60%
report higher cement demand due to an expected start of new infrastructural projects for hosting
North 4.05 4.11 -1.40% the football world cup in 2022. CNF export price for the Pakistani cement to GCC countries ranges
South 0.18 0.16 13.40% from USD70-75/Ton which is quite competitive in comparison with regional players and the local
price prevalent in GCC countries. In light of growing demand of cement in GCC countries and
Source: APCMA, SFA Research Pakistan’s competitive export price, our outlook for cement sector remains healthier as export
activity via sea is expected to revive in the near future.
Dispatches FEB-12
(MN tons) Feb-12 Feb-12 YoY New Spots
Local 1.94 1.79 8.40%
Major export players of Pakistani cement have tapped new markets for export. One of largest
North 1.54 1.4 10.50%
markets they have recently explored is Ethiopia, whose potential as an export market is quite vast.
South 0.4 0.39 0.90% We expect Pakistani cement exports to increase in the last quarter of FY12 and this upward trend
Export 0.57 0.71 -20.20% will also continue during FY13.
North 0.39 0.55 -29.80%
Higher Retention price supported higher margins
South 0.18 0.16 13.40%

Source: APCMA, SFA Research The domestic cement off take provided much of the required boost to the sector profitability.
During 8MFY12, the average selling price of cement was up by 23.8 percent YoY. Recently, ex-port
retention price to Afghanistan has improved significantly, which provides an opportunity to Pakistani
Share in Export Receipts players to tap into the Afghanistan market. DGKC is steadily increasing its market share in the export
market by increasing its exports to Afghanistan at improved retention prices. Recently, international
coal prices have shown a slight dip that will also help in improving margins of cement sector. Though
cement sector has shown profitability in recent years, this was mainly due to company specific cost
reduction strategies adopted by major players of the industry (DGKC, LUCK & ACPL). In 1HY FY12,
broad based recovery was witnessed in the entire cement sector due to improved margins of the
cement sector primary because of higher retention prices in the local as well as export market.
38%
54% Outlook

8% Our outlook for cement sector remains bullish. The following factors will drive profitability of sector:

 Higher and sustained cement prices in the local market

 Growing volumetric sales to Afghanistan as well as increasing export price for the Afghani
market
Afghanistan Via Land India Via Sea & Land Other Countries Via Sea  GCC growing demand, Pakistani exports becoming competitive with UAE
 Local dispatches outlook seems healthier due to election year impact, developmental activities
Source: APCMA, SFA Research are expected to rise
 Cost reduction strategies implemented by major players, provides them room to capitalize
export opportunities and small players can reap benefits from increasing their capacity
Coal Prices
utilization
FOB NewCastle USD/ MT  Recent drop in international coal price from USD124/Ton during 1H FY12 to USD109/Ton during
2H FY12 will further amplify cement sector margins
140
 Industry is operating at high financial as well as operating leverage. Volumetric sales growth will
130
have a greater impact on net income and if interest rates decline, it will also have huge impact
on the bottom line
120
Threats
110
Margins could come under pressure if international coal price increase as coal prices hiked to
100 USD127/ton during FEB-12 due to the floods in Queensland, Australia. If coal prices rises and cement
players are not able to pass on increase in prices, margins could come under pressure.
90
Dec-11
Mar-11

May-11

Mar-12
Feb-11

Jul-11

Sep-11

Feb-12
Apr-11

Oct-11
Nov-11
Jan-11

Jan-12
Jun-11

Aug-11

Source: APCMA, SFA Research

Pakistan

www.sfaresearch.com

Disclaimer: This report has been prepared by SFA. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such
information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without
notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an
offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. SFA may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such
material is disseminated to Public. This document may not be reproduced, distributed or published for any purposes.
 Comparable Analysis Pak Cement Companies- A Comparable Analysis
Description Uint DGKC LUCK APCL CHCC Attock Cement (ACPL) announced sales of PKR 4,552mn showing a YoY increase of 20 percent
wereas COGS increased to PKR 3,408mn, a 7 percent YoY hike, Gross Profit of PKR 1,143mn (up 94
P/E Ratio "ttm" 11.21 6.04 9.06 27.63 percent YoY) and Net Earnings of PKR 507mn (EPS PKR 5.86, up 116 percent YOY) for 1HFY12.
Company’s volume sales declined by 5 percent YoY, but the sales figure increased by 20 percent YoY
P/B Ratio "Mrq" 0.54 1.19 1.07 0.81 to PKR 4,552mn due to a 26.3 percent YoY increase in net retention price of PKR 275/bag. High
D/ Y %/"ttm" N/A 3.87% 6.29% N/A
prices of coal in the global market led to a 12 percent increase in COGS on per ton basis.

EV PKR "MM" 22,278 38,91 5,528 4,064 D.G. Khan Cement (DGKC) announced a YoY 31 percent increment in sales to PKR 10,701mn ,
5 COGS mounting to PKR 7,225, 11 percent higher as per last year, Gross Profit of PKR 3,477mn (up
E V /EBITDA "ttm" 4.05 5.31 3.1 6.79
106 percent YoY) and Net Earnings of PKR 1,279mn (EPS PKR 2.92, up 566 percent YoY) for 1HFY12.
P/S Ratio "ttm" 1.01 1.33 0.72 0.83 Company’s volume sales declined by 10 percent YoY, but the sales figure increased by 31 percent
YoY to PKR 10,701mn due to a 36.7 percent YoY increase in net retention price of PKR 276/bag.
EV/Tons Production 5,959 6,733 3,079 5,649 DGKC’s production cost increased by 11 percent YoY to PKR 7,225mn due to a 20 percent YoY
increase in global coal prices (USD116/ton).
EV/Tons Capacity 5,542 5,021 3,079 5,529
Lucky Cement (LUCK) announced sales of PKR 15,374mn (up 28 percent YoY), COGS increased
Source: KSE, SFA Research
to PKR 9,560mn (19 percent up YoY), Gross Profit of PKR 5,815mn (up 47 percent YoY), and Net
Earnings of PKR 3,018mn (EPS PKR 9.33, up 107 percent YoY) for 1HFY12. The company’s volume
Financial Leverage sales increased by 2 percent YoY and sales figure also increased by 28 percent YoY to PKR 15,374mn
due to a 25 percent YoY increase in net retention price of PKR 278/bag. Higher coal prices
*Debt includes only interest bearing liabilities
**Most Recent Quarter (USD112/Ton) led to a 16 percent increase in COGS on a per ton basis.

Unit DGKC LUCK APCL CHCC

Cherat Cement Company Ltd (CHCC) announced sales of PKR 2,497mn (up 37 percent YoY),
COGS increased to PKR 2,080mn (31 percent up YoY), Gross Profit of PKR 417mn (up 81 percent
D/E Ratio* "Mrq" 53% 26% 0% 112% YoY), and Net Earnings of PKR 90mn (EPS PKR0.94, up 695 percent YoY) for 1HFY12. The company
D/A ratio* "Mrq" 32% 18% 0% 49% registered a volumetric growth of 14.7 percent in 1HFY12 which consequently resulted in a better
market share of 2.5 percent. Volumetric growth along with better retention prices resulted in better
profitability.
Source: Company Financials, SFA Research

Dispatches Growth of Key Players

LUCK ACPL CHCC

DGKC

1HFY11 1HFY12 YoY% 1HFY11 1HFY12 YoY% 1HFY11 1HFY12 YoY% 1HFY11 1HFY12 YoY%
Dispatches
Domestic 1,425,291 1,289,525 ‐10% 1,514,734 1,682,051 11% 616,113 589,742 ‐4% 242,468 288,060 19%
Exports 600,439 664,850 11% 1,290,878 1,185,328 ‐8% 253,310 237,864 ‐6% 194,878 213,364 9%
Total 2,025,730 1,954,375 ‐4% 2,805,612 2,867,379 2% 869,423 827,606 ‐5% 437,346 501,424 15%
Sales 8,175 10,701 31% 12,028 15,374 28% 3,786 4,552 20% 1,823 2,497 37%
GP Margin 21% 32% 58% 33% 38% 15% 16% 25% 61% 13% 17% 32%

Average Retention of Key Players

LUCK ACPL CHCC

DGKC

1HFY11 1HFY12 YoY% 1HFY11 1HFY12 YoY% 1HFY11 1HFY12 YoY% 1HFY11 1HFY12 YoY%
Avg Retention Price
Per Bag 202 274 36% 214 268 25% 218 275 26% 208 249 20%

Cost of per bag 160 185 16% 144 167 16% 184 206 12% 182 207 14%
Margin Per bag 42 89 70 101 34 69 26 42
Margins 21% 32% 33% 38% 16% 25% 13% 17%

www.sfaresearch.com

Disclaimer: This report has been prepared by SFA. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such
information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without
notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an
offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. SFA may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such
material is disseminated to Public. This document may not be reproduced, distributed or published for any purposes.