Wednesday, February 20, 2019
Cement Sector in Pakistan
1. INTRODUCTION 2. 1 Objective and Scope The re larboard will present a holistic overview of the persistence current situation, industry structure, critical revenue and woo drivers, delineation of BOP in the firmament and its future outlook. 2. 2 cementumum vault of heaven of Pakistan The Cement arena of Pakistan has 23 players, ope balancenal 29 units, with a get production might of 44. 8 trillion slews, divided into trades union and South, as fol pathetics North Zone South Zone * Punjab and Khyber Pakhtoon Khwa * Sindh and Baluchistan * 19 manufacturing units * 10 manufacturing units * 80% of rated capacity, i. . 35. 9 meg tons * 20% of total rated capacity, i. e. 8. 9 billion tons The over entirely capacity recitation of the sector, as per FY-10 dispatches is at 76%. The basic in the raw materials for cement include limestone (upto 80%), clay (upto 15%) and gypsum (5%), all of which are abundant in Pakistan making basic raw material very cheaply avail satisfa ctory to cement manufacturers. None of the cement producers in Pakistan enjoys any material product differentiation be showcase of the ext block uply convertible nature of product therefore consumers usually regard price as a samara determinant.Major constituents of the cost are power & force play over 60% of cost of production of cement and transportation costs. In addition to these elements efficiency of production process is critical in retentivity the general cost structure militant. In this regard, size of the plant, its age, and origin European or Chinese are of importance. Until recent course of instructions, almost all the plants operating in the country were based on furnace cover, but the increasing furnace oil prices forced the cement industry to switch over to Coal-powered/dual-fuel plants. hitherto, the price of blacken has dispositionn significant volatility over the recent periods therefore, some producers, having dual-fuel plants, use a mixture of sco rch and gas, alternating amidst the two as per changes in prices and availability. 2. 3 Cement Sales during FY-10 Compared To FY-09 showtime All Pakistan Cement Manufacturers tie-up As per All Pakistan Cement Manufacturers Association (APCMA), the cement flagrant revenue in FY-10 totaled 34. 20 million tons, registering a comme il faut Year-on-Year (YoY) growth of 9. 30% compared to 31. 29 million tons in FY-09.The local anaesthetic anesthetic dispatches remained at 23. 54 million tons, up YoY 14. 63% compared to 20. 53 million tons in FY-09 whereas exportation sales in FY-10 remained almost flavorless with a minor decline at 10. 66 million tons, obliterate YoY 0. 89% compared to 10. 75 million tons in the previous year. As shown in the table, the local sales were the primary driver s dispirited the growth. It is apt(p) to note that the growth on the local front was mainly private-sector set rather than Governments infrastructure spending, showing signs of recovery in the body structure sector. 2.INDUSTRY STRUCTURE 3. 4 Industry Characteristics Cement industry is highly cyclical in nature and its performance guesss largely upon the scotch growth of the country. There is a high degree of correlation surrounded by the GDP growth and the growth in local cement consumption. line of descent State Bank of Pakistan & All Pakistan Cement Manufacturers Association Cement exports depend largely upon the demand/ issue situation, price directs and economic situation in the export components. Cement, being a voluminous product, is a regional commodity. 3. 5 Critical Factors The cyclical nature of the sector along with excess give situation, whenever it persists, makes cement price a very critical factor. Some level of industry co-opetition, i. e. cooperative competition, is evident in cement industries globally such(prenominal) as consensual pricing. In the absence of such an arrangement, along with a supply glut, cement industries film witnessed inten se price fights. * Power & life force costs constitute over 60% 65% of the total cost of cement production. Therefore, smart inventory management of coal, along with hedging techniques and so on lead to significant savings in energy costs. * Plants closedownr to the port stimulate cheaper access to exports and can maintain higher profit margins. Therefore, outstrip to port is an important conside proportionalityn. * Leverage, both pecuniary and operating, is a major reach owing to the price-sensitivity of the sector. Pakistans cement sector is highly supplementd. Cautious superior structure management and utilization of relaxations / incentives provided by the government, whenever possible, such as exportation Refinance facility offered by the State Bank of Pakistan, create a significant difference. . 6 Industry Concentration Concentration refers to the number of major competitors in a given industry. This has important implications for the inherent profitability of a se ctor. We have applied the Eight-Firm concentration ratio to determine concentration in the cement sector. Concentration ratios can generally be categorized into low, sensitive, and high concentration being 0% 50%, 50% 80% and 80% and supra, respectively. An eight-firm concentration ratio over 90% is a penny-pinching indication of oligopoly, i. e. an industry dominated by a small number of sellers. found on FY10 market shares, the Eight-Firm concentration ratio in cement sector is 80% which show clear signs of high industry concentration. Therefore, cement sector has an oligopolistic structure. However, given the excess capacity situation cement industry has been behaving homogeneous a low concentration industry from time to time such as the intense price war in the recent past, spanning approximately a year, with participants vying for higher volumes. 3. 7 Market Share The following pie-charts show the local, export and total market shares of top 8 players in the sector for F Y-10.The charts show that D. G. caravan inn Cement is the leading player in the local market (17% market share) closely followed by Bestway (16. 7%) and prospering Cement (13. 3%). In the export market, Lucky cement leads with its roaring 32. 8% share, followed by D. G. Khan and Bestway cements 9. 3% share each. Overall, Lucky Cement appears to hold the highest market share (19. 4%), followed by D. G. Khan (14. 6%) and Bestway (14. 4%). Maple Leaf Cement ranks fourth in all trinity categories with 9%, 11. 1% and 9. 7% market share in the local, export and overall market. Source Fortune Securities . SECTOR OVERVIEW FY10 Cement area in FY-10 witnessed low prices, rising energy costs, slowdown in face activities locally and regionally and a large amount of new supply availability in regional markets resulting in drying out of certain mercenary export avenues especially the Middle East. However, exports to African countries, Iraq, Sri Lanka etc. mitigated the incumbrance and exp orts remained flat at 10. 66 million tones (YoY down 0. 89%). As enquireed by market participants and analysts local sales picked up to close the year at 24. 53 million tons (YoY up 14. 63%).Overall, the sector closed the year at 34. 20 million tones, registering a decent YoY increase of 9. 30%. Cement prices and energy costs remained the key issues in FY-10. Since the dismantling of the alleged cement cartel, after(prenominal)wards Competition fit of Pakistan imposed a fine in the colossal sum of Rs. 6. 35 one thousand thousand on 20 cement manufacturers (equivalent to 7. 5pc of each companys FY08 net revenue), in August 2009, cement prices plunged and went down to Rs. 249/bag in North and Rs. 280/bag in the South zone, compared to Rs. 335/bag and Rs. 370/bag in FY09 in North and South, respectively.CCPs decision has been challenged by the cement manufacturers on a number of grounds in the Lahore High woo, the Sindh High Court and the Supreme Court of Pakistan. In all these c ases stay orders have been minded(p) by the Courts and the matter awaits courts verdict. given(p) the increased overall supply in the regional markets, the cement export price hovered around $47-$52 per tone, compared to average export price of $60-$62 in FY09. On the other(a) hand, energy costs remained on the rising trend and coal prices averaged around $88 (FoB) per ton compared to 2nd half FY-09 average of $70.Australian (Newcastle) coal price made its 18-month high of $108 (FOB) per ton on April 27, 2010, after making a low of around $61 (FoB) per ton in Mar-09 last year. Thus, as a result of sub codd prices and increasing energy costs a sub-breakeven scenario prevailed in the industry for the most part of FY-10. In 9 months FY10, cement companies posted cumulative losses of Rs. 3. 3 billion compared to profits of Rs. 3. 7 billion in the corresponding period last year, YoY down 189%. Cement prices hiked by Rs. 40 per bag in North in June 2010.With no price moves in South a region that was already enjoying higher prices due to lower intensity of price war largely for its geographical advantages prices in the two regions finally came at par. FY-10 as well as saw the announcement of 35% inland freight subsidy, during March 2010, on cement exports. It is likely to make Pakistans cement exports more competitive in the regional market, as cement manufacturers will be able to reduce their export prices by almost 10% deprivation forward, if needed, without smart their margins. However, the government needs to make timely payments to the manufacturers for the subsidy to be of often use.Source Invisor Securities Source Federal Bureau of Statistics & Invisor Securities 4. SECTOR OUTLOOK 5. 8 Local market * Short Term Cement prices have move up by Rs. 24 per bag since the beginning of on overtaking financial year to Rs. 312 and Rs. 325 per bag in North and South, respectively. This bodes substantially well for the sector after bleeding profusely in a price war and indicates a price consensus among the manufacturers. Also, we believe there is limited appetite for price wars going forward especially as seasonal 1Q demand slowdown kicks in (Monsoons, floods, Ramadan etc. ).The recent floods have severely affected the roads and the dispersion network which will inevitably hurt the local cement sales as well as export sales to some extent. We anticipate cement demand from local market to remain subdued during beginning(a) half of FY11, due to monsoons, flood related issues, slowdown in grammatical construction during winters etc. , and start picking up from 3Q FY-11, in the wake of reconstruction activities. Overall, we expect local dispatches to remain flat during FY-11 and believe that the real doctor of the increased demand from reconstruction activities will materialize during FY-12.We believe the cement prices have hit the ceiling for now and do not expect further increase in them and expect the recent price hikes to bear out for a relatively longer time than the one-step ahead, two move back situation that prevailed throughout FY-10. Going forward, Fauji Cements capacity expansion, due in FY-11, of 2. 27 million tons, would create downward instancy on utilization levels. However, we expect capacity utilization levels to remain between 70% to 75% range. * Medium to Long Term We have a positive outlook for the local market on a medium to long-term basis.The rehabilitation work along with construction of dams will get along demand and possibly push prices upwards as cement manufacturers operate on higher and higher capacity utilization levels. Construction of dams seems essential given the power crisis and the recent flood. The Council of Common Interests (CCI) unanimously approved the construction of Diamer Bhasha dam on July 18, 2010, leading the way for the release of funds from the Asian Development Bank (ADB). The projected timeline for completion is stated till the end of 2019. Manufacturers est imate a total requirement of 9. 0 to 11. million tons cement for the project with annual demand in between 1. 0 to 1. 5 mn tons. While all northern manufacturers would directly or indirectly benefit from the project, we believe the big players such as Askari and Bestway would be the key beneficiaries with proximity to the project. 5. 9 Export Market We are discouraged about the export dispatches during FY-11 owing to i) increased availability of cement in the regional markets, especially after lifting of export ban in Saudi-Arabian Arabia, ii) slowdown in construction in the Middle East and iii) local transportation problems ensuing from the flood.Therefore, we expect a decline of 10-15% in exports during FY-11. Our export price outlook remains flat around $45, keeping in view the competitive environment in the export market. During FY-10 exports to Qatar, Oman, UAE and Kuwait declined whereas exports to Afghanistan, Djibouti, Sudan, Sri Lanka and other African Countries increased, as shown in the chart. We expect the trend to continue going forward as cement producers penetrate further into the African markets. Source TDAP 5. FINANCIAL ANALYSIS CEMENT MAJORS 6. 10 Financial abbreviation 6. 11. 1 LiquidityOn 9M-FY10 basis, the top-7 cement players face a askew liquid situation with Current ratio at 0. 71x, Quick ratio at 0. 63x, Cash Ratio at 0. 05x and an Operating Cash stop ratio at 0. 16x. Among the Top-7, Attock Cement is most liquid with Current ratio at 2. 67x, Quick ratio at 2. 33x, Cash ratio at 0. 66x and Operating Cash Flow ratio at 1. 02x. Overall, the Top-7 Average liquidity ratios show a low ability to settle short-term financial obligations as well as finance additional sales without subject further debt. 6. 11. 2 Financial Leverage Financial leverage (average) among the top-7 cement players is at 0. 1x, which seems moderate. Bestway, Maple Leaf and open Cement have financial leverage at 2. 32x, 3. 56x and 1. 64x, respectively, which is h igh. Lucky and Attock Cement have financial leverage in control, at 0. 35x and 0. 25x, whereas D. G. Khan Cements financial leverage stands at 0. 67x. The average Interest Coverage ratio is at 1. 04x, which means, on average, the cement players barely have enough earnings to meet their financial charges. Given the high financial leverage and low Interest Cover, we believe cement companies ability to take on further financing is highly subdued, with the excommunication of Lucky and Attock Cement. 6. 1. 3 plus Utilization We have adjusted the Asset Utilization ratios to reflect the full year (extrapolated) sales by a 4/3 adjustment factor. The resulting ratios, fixed asset turnover at 0. 65x and total assets turnover ratio at 0. 45x, suggesting overall low asset utilization, point towards the capital intensive nature of the industry marred with low capacity utilization levels. Among the top-7 players, Lucky Cement seems to have the most economic asset utilization with fixed asset s turnover at 0. 90x and total assets turnover at 0. 75x levels. Lafarge Pakistan cements asset utilization ratios rank concluding among the Top-7, being 0. 3x and 0. 11x on a fixed and total assets turnover basis, respectively. Lafarges extremely low asset utilization levels call for further investigating into the causes. 6. 11. 4 Profitability We have adjusted the military issue on Assets (ROA) and Return on Equity (ROE) ratios to reflect the full year (extrapolated) sales by a 4/3 adjustment factor. The resulting ratios suggest moderate gross profitability and basic earnings power, at 21. 26% and 9. 68%, respectively. However the final profitability is extremely low at 0. 03% reflecting the sky-rocketing financial charges. Bestway, Maple Leaf, Lafarge and initiate have negative net margins at -6. 7%, -18. 33%, -24. 86% and -14. 38%. Attock Cement appears most profitable during the period under review, with pull in margins at 13. 32% followed by Lucky Cement at 12. 02%. two these players have managed to post decent net profitability partially due to higher retention prices in South, compared to North, and higher export contribution margins. During 9M-FY10, Maple Leaf, Lafarge and pioneer Cement posted negative Basic earnings power at -3. 14%, -13. 94% and -10. 95%, respectively, which points towards the intense price war, especially in North, throughout the period under review. D. G.Khan cement has managed to post a decent EBIT margin, at 16. 91%, however, the financial charges, which amount to Rs. 1. 5 billion for 9M-FY10, have left only 3. 79% in net margin. 6. 11. 5 DuPont Analysis DuPont analysis is an expression which breaks Return on Equity (ROE) into three parts, profit margin, asset turnover and equity multiplier representing, the operating efficiency, asset utilization efficiency and financial leverage, respectively. Our DuPont analysis of the top-7 players suggests that the main reason behind the low industry ROE during the period under revi ew has been low profitability.The price wars during the period under review, along with high financial charges have severely affected the ROE. Asset utilization is not too tidy either, but is moderate. 6. 11. 6 Conclusion Based on our financial analysis, we have a liking for Lucky and Attock Cement and feel that these are skilful companies to lend to. D. G. Khan Cement seems to be under stress at the moment due to its current maturity of long-term debts, value Rs. 4 billion (approx. ), and an O/S Forex loan of US$ 40 million (FY-09 carrying value Rs. 3. 5 bn), payments commencing June, 2011, therefore it is expected to go for re-financing arrangements with banks.However, strong sponsors support, good reputation, largest local and 2nd largest total market share, large portfolio of liquid investments worth Rs. 17 billion (approx. ), and Income from investments serve as strong mitigating factors. Bestway, Maple Leaf and Pioneer Cement have financial leverage ratios at 2. 32x, 3. 56x and 1. 64x levels which are sure as shooting not sustainable. The DuPont suggests both profitability and leverage are a cause of concern for these companies. Lafarge Pakistans low profitability and poor asset utilization have greatly affected its financial results. Overall, we recommend caution for the above three players.
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