Cement: Volumes likely to disappoint amid the political crises

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Cement Sector

  • Our industry channel checks suggest that August 2014 domestic cement dispatches are likely to decline by 2% YoY & 10% MoM to 1.55mn tons.
  • Cement exports are likely to decline by 23% YoY; however, on a MoM basis export volumes are anticipated to witness a 3% up-tick.
  • Incorporating expected August sales, overall 2MFY15 volumes are expected to clock in at 4.3mn tons, down by 11% YoY.
  • Lower domestic cement offtake is anticipated on the back of (1) the prevailing political crises and (2) shortage of labor as most of the migrant urban labor-force is away for an extended leave post Eid holidays.

Cement sector vs KSE-100 Index

  • For now, we maintain our full year FY15F local sales growth target of 4% YoY. However, we flag higher risk of lower-than-expected cement dispatches due to the prevailing political uncertainty.
  • That said, current political crises might hold back manufacturers’ expansion plans, leading to strengthening of the pricing power of the sector.

Political deadlock likely to take its toll on local cement sales

Our industry channel checks suggest that domestic cement dispatches are likely to decline by 2% YoY and 10% MoM to 1.55mn tons. We believe prevailing political crises has slowed down construction activities in the country, particularly in Pakistan’s biggest province of Punjab.

Cement Offtake

Moreover, shortage of labor was also prevalent last month, as most of the migrant urban labor-force is away for an extended leave post Eid holidays. Incorporating expected August sales, 2MFY15 local cement sales are likely to decline by 4% YoY. Nevertheless, we believe this is partially a seasonal dip, exacerbated because of the current political crises. Hence, we expect once the political deadlock is resolved, domestic cement demand is likely to recover.

Exports likely to recover on a MoM basis

As per our industry channel checks cement export volumes in August 2014 are likely to recover by 3% MoM to 0.52mn tons. Anticipated recovery is likely to stem from higher dispatches to Afghanistan after forming of the National Unity Government in Afghanistan. That said, cumulative 2MFY15 exports are likely to be unimpressive with volumes expected to dip by 28% YoY to 1.02mn tons.

Cement Sector

Outlook

For now, we maintain our full year FY15F local sales growth target of 4%YoY. However, we flag higher risk of lower-than-expected cement dispatches due to the political uncertainty. That said, current political crises might hold back manufacturers’ expansion plans, leading to strengthening of the pricing power of the sector. We continue to flag DGKC and MLCF as our preferred plays within the JS Cement universe with respective Target Prices of Rs104 and Rs43.

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