Cement manufacturers likely to enjoy better pricing power

Equity analysts are busy in revising up their earnings forecasts for cement sector due to changing market dynamics and cost of inputs. Cement prices have increased by Rs50/bag over the last three months, mainly because of the increase in international prices of coal. Analysts believe that margins will improve from paltry 10% in FY20. In years of rising cement demand and prices (FY16-18), margins have averaged in range of 28-40%.

Cement prices currently hover around Rs600/bag in North and Rs640/bag in South. Analysts expect prices in North to average at Rs650/bag and in South Rs700/bag over the next couple of years. Manufacturers are likely to enjoy better pricing power as most of the players in North will be operating at their maximum capacity utilization. As against this, prices in South may witness uptick in next few months as cement from South may be transported to North, because of plants in the region already operating at high capacity.

AKD Securities has revised earnings of its Universe by 64% for FY22 and by 56% for FY23 on the back of local prices increasing by Rs57/bag over the last two months while demand also remains upbeat, increasing by 17%YoY to 27.6 million tons during 7MFY21. The upward revision in price comes on the back of successful pass-on of increase in coal prices. However, due to the strong demand growth, analysts expect the prices to maintain the high ground even as coal prices lose steam with commencement of summer. Some jolts in prices cannot be ruled out particularly in seasonally weak periods of the year. In the Southern region, only partial pass on in prices has been witnessed. The prices in the region did not decrease during the last expansion cycle either, unlike Northern region. The brokerage house expects prices in South to hover around Rs720/bag over the next couple of years.

Local cement demand has been going through a purple patch, increasing by 17% during 7MFY21 as demand from private sector leads the way on the back of various incentives being provided to the construction sector. The brokerage house has revised its local demand forecast as compared to earlier forecast.

Though, various projects are being registered under construction sector package, but these have yet to commence construction, particularly those announced under the flagship program of Naya Pakistan Housing Scheme. Moreover, commencement of construction of dams can provide additional impetus, but the brokerage house has not incorporated these in its estimates. North has outperformed South with a growth of 17%YoY in dispatches for 7MFY21 against 16%YoY growth in South. COVID-19 related measures were strict in South as compared to North hence a low base effect during 2HFY21 is expected to make South post a growth of 25%YoY in local demand against 17%YoY for North. Manufacturers located in North are resisting supply to South as any price difference will also augment growth.

The brokerage house maintains its overweight stance on the sector as continued demand growth and improving margins will keep the sector in limelight. LUCK, DGKC and MLCF remain top picks with MLCF offering highest upside as the Company being one of the lowest cost producers enjoy competitive advantage due to high usage of petcoke for line-III and a 40MW coal power plant. On the other hand, LUCK offer a perfect mix of booming sectors where in the local cement segment, it is the largest producer while KIA’s resounding success has been another feather in the cap for the Company with LMC providing highest operating margins of 7.5% (1QFY21) amongst local automobile manufacturers in just second year of operations. Moreover, upcoming Lucky Electric Power Plant is a major near term trigger with the project expected to add Rs24.5/share to the bottom line for FY22.




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