Karachi, June 14, 2023 (PPI-OT): Cements: Dispatches show some recovery in May-23
Cement dispatches for May-23 clocked in at 4.0mn tons showing a 19% YoY growth, however, cumulative dispatches for 11MFY23 clocked in at 40.5mn tons, a 15% YoY decline. Dispatches were down during the year due to dull construction activities owing to uncertain economic and political situation, rapidly rising construction costs and high financing costs.
The FY24 Budget has prioritized construction sector and announced several measures for the sector's promotion whereas no new taxes have been imposed for the sector in the outgoing budget as well. With some reported ease-off in LC establishment conditions of late, sector margins may improve resulting from the purchase of lower priced International coal.
We maintain an Overweight stance on the sector due to durable long-term fundamentals. Despite the potential risks associated with a prolonged period of weak demand, the sector is expected to remain in the spotlight, driven by the continuous decline in international coal prices and the anticipated relative improvement in volumes in the coming year.
Uptick seen in volumes for May-23; June likely to be dimmer
Cement dispatches for the month of May-2023 are reported at 4.0mn tons, showing an increase of 19% YoY. Dispatches were also up on a MoM basis by 34% due to low base effect as previous month of April had the impact of Eid-ul-fitr holidays. Cumulative figure for 11MFY23 stood at 40.5 million tons, lower by 15% YoY owing to slow-down in construction activities due to uncertain economic and political situation, high inflation triggering an increase in allied material costs and high financing costs.
We see local dispatches to remain dull in the month of June owing to Monsoon and Eid-ul-Azha. Moreover, any increase in input costs for the sector may limit the pass- on to a partial amount, given sector’s bleak demand, bearing a negative impact on margins.
Near term snags should not alter outlook
We have an Overweight stance on the sector, where Lucky Cement Limited (LUCK), Fauji Cement Company Limited (FCCL) and Maple Leaf Cement Factory Limited (MLCF) are among our top selections from the sector given their respective timely expansions providing them with the potential to capture higher market shares. We also like Kohat Cement Company Limited (KOHC) because of its active cost controls and low leverage ratios.
However, the adverse consequences of the recent capacity additions by cement manufacturers remain among the sector's concerns. This is in addition to the continued sluggish demand, which may continue to remain slow in the short term. Price swings in the Pakistan cement business have historically happened in stages where, during periods of excess supply, cement prices tend to move adversely, resulting in lower profit margins for the whole sector.
FY24 Budget, however, may provide some support to offtake with all-time high PSDP allocation of Rs950bn, in addition to several tax incentives to construction sector.