LAHORE - Around 25 per cent increase in average cement prices coupled with decline in coal prices by about 23 per cent in last one year has considerably improved the operating environment of the cement sector.
Cement industry experts stated that quarterly profits of listed cement companies as per latest accounts (1QFY13) have increased to Rs7.2 billion compared to Rs1.6 billion during same period last year. Turnaround stories for cement manufacturers in 2012 started from sharp decline in coal prices which accounts for 50-60% of cost of production. With global recessionary woes, strict environmental laws in US have forced buyers to switch to more environmental friendly fuels which have reduced demand for coal which led prices to fall to almost 2-year low in 2012. Other than coal price, better demand for cement in local market has also supported earnings of local cement manufacturers, analysts from Topline Securities observed in a report.
They said that the investors who took exposure in Pakistan cement stocks at the beginning of 2012 have more than doubled their investment. Cement stocks at Karachi bourse have rallied and posted an abnormal return of 156pc in the calendar year 2012 with only 4 trading sessions remaining.
They maintained that Pakistan listed cement sector valuing Rs164b ($1.7b), which comprises of 21 companies, has outperformed the benchmark KSE-100 which is dominated by energy and banking firms during 2012YTD. Improved profitability of the sector due to record margins coupled with some improvement in local demand made the sector investors’ darling in the outgoing year. Besides improvement in sector dynamics, sharp decline of 450bps in policy interest rate during last 18 months also improved earnings outlook for cement companies as cumulative debt of all listed companies is approximately Rs98b ($1b). Thus with improved profitability, there is expectation that cement companies will retire their loan earlier and pay decent dividends.
Experts said that with one of the lowest per capita cement consumption of 180kg in the region, recovery in economy and improvement in infrastructure spending will continue to increase local cement demand to 25.5m tons in FY13 versus 24m tons in FY12.
However, exports will remain around 8m tons lower than last year level of 8.5m tons due to surplus capacity in Middle East. Thus going forward, firm cement prices, lower interest rates and stable coal prices will continue to attract investors’ attention towards cement stocks.