Turnaround in macroeconomic situation is accelerating local demand. PHOTO: FILE
KARACHI: Pakistan’s cement industry will continue to grow over the next few years due to strong pricing power and contraction in supply and demand gap, a Topline Securities report said on Tuesday.
The capacity utilisation of Topline Cement Universe - a sample of cement companies listed on Pakistan Stock Exchange (PSX) - is likely to reach 96% in fiscal year 2018 from 78% in fiscal year 2015.
Gross margins of Topline Cement Universe will reach 47% by fiscal year 2020 (which were 34% in fiscal year 2015) while earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins will reach 46% by fiscal year 2020 (34% in fiscal year 2015).
Resultantly, Topline Cement Universe’s profitability is expected to grow at 4-year (fiscal year 2017 to fiscal year 2020) Cumulative Annual Growth Rate (CAGR) of 24%.
Pakistan’s cement industry has entered into a new paradigm. The turnaround in macroeconomic fundamentals, mega projects under the umbrella of China-Pakistan Economic Corridors (CPEC) and booming private sector spending are accelerating local cement demand.
“We believe economic recovery will continue to bolster domestic demand. Based on past trend, we have applied a factor of 2 times to our average real GDP growth forecast of 6% during fiscal year 2017 to fiscal year 2020 in order to arrive at average local cement growth forecast of 12% during the same period,” the report said.
This should take per capita cement consumption of Pakistan from 147kg in fiscal year 2015 to 250kg in fiscal year 2020.
Major capacity additions of 19 million ton (42% of current capacity) worth around Rs192 billion are in pipeline (from fiscal year 2017 to fiscal year 2020) in Pakistan. “Despite these additions, we see no price war risk as additional capacities will easily be absorbed due to buoyant cement demand.”
The government in budget for fiscal year 2016-2017 has changed the federal excise duty (FED) on cement bags from variable 5% of retail price to fixed Rs50 per kg while duty on imported coal is reduced from 6% to 5%. “Thanks to strong pricing power, we believe that, the net impact of Rs33 per bag will be gradually passed on,” the report added.
However some developments can change the present scenario including price competition, imported cement, higher than anticipated rise in gas tariff, delay in construction projects and change in economic policy.
Published in The Express Tribune, June 15th, 2016.
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