Strong fundamentals: With low coal prices, cement sector’s prospects look bright

Cement stocks likely to outperform KSE-100 index with 75% return.

KARACHI:

The continuous increase in cement prices has surely irritated the consumers but it has made cement stocks more attractive on the Karachi bourse.

Cement sector in Pakistan is one that enjoys strong fundamentals but its prospects are also bright because of low international coal prices, increase in cement prices and stable sales.

Analysts suggest that investors’ interest in cement stocks is primarily because of the expected increase in margins of cement companies owing to the recent jump in retail prices.

Summit Capital analyst Sarfaraz Abbasi believes that apart from the continuous increase in cement prices, what is important is that the outlook of cement sector is positive because of expected high expenditure on big projects by the government.

Cement prices have gradually moved up in the last three months. Prices in southern zone (Sindh and Balochistan) have reached Rs520-525 per 50kg bag while prices in northern zone (Punjab and K-P) have jumped to Rs495-500.

Cement prices, in the southern zone, shot up from Rs500-502 per bag in the third week of September, an increase of 4% in almost three months.

Traditionally, cement prices in the northern zone remain low compared to the southern zone owing to better supply since over 80% of the cement is being produced in Punjab and Khyber-Pakhtunkhwa.

Cement companies say prices of inputs have jumped sharply following the electricity price hike for the industrial sector in August this year and hence the increase in cement prices for the consumers.

Last year, domestic cement sales stood at 25 million tons while exports were nine million tons. Analysts are predicting that local sales will surpass last year’s record levels due to high allocations for the Public Sector Development Programme (PSDP) for which the government has set aside  over Rs530 billion in the budget for fiscal year 2013-14.

“Both domestic dispatches and exports are expected to increase by the end of the year,” Abbasi said. “Cement exports through sea will particularly increase owing to an expected jump in Pakistan’s exports to Gulf countries.”

He added cement exports through sea in the first five months (July-November) of FY14 have already jumped by a sharp 15% to 1.61 million tons from 1.39 million tons in the same period of FY13.

Lucky Cement, the largest cement maker with over 18% market share, has seen a big jump in its share price in the last three months. Its stock closed at Rs292.34 on the KSE on December 18 compared to Rs241.5 on September 18, a rise of 21%.

The stock price of Pioneer Cement – a second-tier company – has enjoyed a jump of 31% from Rs28.81 to Rs37.75 during the same period.

The broader picture shows a brighter story for the cement sector. It has already outperformed the KSE 100-Share Index in the current calendar year and is expected to post over 75% return compared to 49% for KSE-100.

Published in The Express Tribune, December 19^th, 2013.

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