Cement industry of Pakistan: Impact of recent developments on earnings

Pakistan’ leading brokerage house, Topline Securities, has revised earnings forecasts of its Cement Universe, primarily incorporating: 1) earlier-than-expected relaxation (amidst COVID-19) in construction activities in the Northern region by the government, 2) drop in international coal prices and freight expenses and 3) fall in KIBOR due to recent surprise cut of 200bps in Policy Rate by the central bank – which was beyond market expectations.

Sales in the Northern region are showing resilience as during the last 15 days of March 2020, offtake was 35,000 to 40,000 tons/day. In April 2020 sales have averaged at 100,000 to 110,000 tons/day, but still down 15-20% from pre corona levels.

The brokerage house believes that the construction package may also support cement demand to some extent in FY21. Likely improvement in construction activity will help cement demand to witness growth of 5-7.5%, after falling 4% in FY19 and FY20 cumulatively against double digit (10%) growth over the last five years.

Cement prices are likely to increase in North by Rs80 to Rs130/bag over the next couple of weeks in a staggered manner as price competition along with increase in cost of production and increase in excise duties has turned manufacturers’ profit into loss over the last few quarters. To highlight, Fauji Cement (FCCL) posted quarterly loss of Rs210 million for 3QFY20, first time in last eight years.

The brokerage house believes that existing level of prices can’t be sustained for longer period as retention price of few manufacturers has gone below Rs250/bag against accounting breakeven price of more than Rs280/bag.

The brokerage house has revised down coal price assumption from US$70/ton to US$60/ton for FY21, keeping in view overall weakness in commodity market. A decline of US$10/ton can increase cement prices by Rs10 per bag.

Following surprise cut by the central bank, brokerage house has revised down its KIBOR target to 9% and 8.6% for FY21 and FY22 respectively.

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