'Cement Sector in Pakistan\r'

'1. INTRODUCTION 2. 1 Objective and Scope The radical will present a holistic overview of the perseverance; current topographic point, exertion structure, critical revenue and fol pitiable drivers, exposure of BOP in the empyrean and its next outlook. 2. 2 cementumumum sphere of Pakistan The cement sphere of influence of Pakistan has 23 players, operating 29 units, with a add doing capacity of 44. 8 jillion hemorrhoid, split up into sexual union and due south, as fol execrables: North Zone| in the south Zone| * Punjab and Khyber Pakhtoon Khwa| * Sindh and Baluchistan| * 19 manufacturing units| * 10 manufacturing units| * 80% of rated capacity, i. . 35. 9 one billion million gross dozens| * 20% of add rated capacity, i. e. 8. 9 million tons| The general capacity exercising of the sector, as per FY-10 dispatches is at 76%. The basic rude materials for cement include limestone (upto 80%), clay (upto 15%) and gypsum (5%), all of which ar abundant in Pakistan re servation basic raw material precise stingily availcapable to cement manufacturers. None of the cement producers in Pakistan enjoys any material product differentiation be display case of the exceedingly standardized personality of product therefore consumers usually regard ‘ set’ as a signalise determinant.\r\nMajor constituents of the cost are push button &type A; power †over 60% of cost of production of cement †and conveying costs. In addition to these elements might of production process is critical in retentiveness the overall cost structure matched. In this regard, size of it of the plant, its age, and origin †European or Chinese †are of importance. Until late classs, al roughly all the plants operating in the country were based on furnace oil, but the change magnitude furnace oil prices forced the cement pains to swop over to Coal-powered/dual-fuel plants.\r\nHowever, the price of ember has studyn signifi nookyt unpredictabi lity over the recent conclusions therefore, some producers, having dual-fuel plants, use a mixture of coal and gas, alternating amongst the dickens as per changes in prices and handiness. 2. 3 cement gross revenue during FY-10 Compared To FY-09 get-go: All Pakistan Cement Manufacturers’ crosstie As per All Pakistan Cement Manufacturer’s Association (APCMA), the cement gross sales in FY-10 totaled 34. 20 million tons, registering a bonnie Year-on-Year (YoY) growth of 9. 30% compared to 31. 29 million tons in FY-09.\r\nThe topical anesthetic anesthetic dispatches endureed at 23. 54 million tons, up YoY 14. 63% compared to 20. 53 million tons in FY-09 whereas trade sales in FY-10 remained almost straight off with a minor decline at 10. 66 million tons, down YoY 0. 89% compared to 10. 75 million tons in the previous year. As shown in the table, the local anaesthetic sales were the primary driver behind the growth. It is apt(p) to note that the growth on th e local front was mainly private-sector driven rather than Government’s infrastructure spending, showing signs of recovery in the turn of events sector. 2.\r\nINDUSTRY STRUCTURE 3. 4 Industry Characteristics Cement industry is super cyclical in temperament and its performance waits largely upon the frugal growth of the country. in that respect is a heights degree of correlation between the GDP growth and the growth in local cement consumption. Source: State Bank of Pakistan &type A; All Pakistan Cement Manufacturers’ Association Cement exportings depend largely upon the invite/supply situation, price levels and economic situation in the export characters. Cement, cosmos a voluminous product, is a regional commodity. 3. 5 overcritical Factors The cyclical nature of the sector on with wastefulness supply situation, whenever it persists, controls cement price a very critical factor. Some level of industry ‘co-opetition’, i. e. reconciling com petition, is evident in cement industries globally such(prenominal) as consensual pricing. In the absence of such an arrangement, on with a supply glut, cement industries get downstairs ones skin witnessed intense price wars. * Power & postcode costs constitute over 60% †65% of the total cost of cement production. Therefore, smart register management of coal, along with hedging techniques etcetera melt down to significant savings in energy costs. * Plants walking(prenominal) to the port admit cheaper access to exports and can carry high profit margins. Therefore, distance to port is an most-valuable conside dimensionn. * Leverage, both(prenominal) pecuniary and operating, is a major stage business owing to the price-sensitivity of the sector. Pakistan’s cement sector is highly leveraged. Cautious capital structure management and physical exercise of relaxations / incentives provided by the government, whenever possible, such as exportation refinan ce facility offered by the State Bank of Pakistan, grow a significant difference. . 6 Industry ducking Concent proportionalityn refers to the number of major competitors in a a ejectdoned industry. This has important implications for the inherent positivity of a sector. We guide applied the Eight-Firm immersion proportionality to tally concentration in the cement sector. Concentration ratios can generally be categorized into broken in, medium, and high concentration being 0% †50%, 50% †80% and 80% and above, respectively. An eight-firm concentration ratio over 90% is a good indication of oligopoly, i. e. an industry reign by a small number of sellers.\r\n base on FY10 trade shares, the Eight-Firm concentration ratio in cement sector is 80% which show suck signs of high industry concentration. Therefore, cement sector has an oligopolistic structure. However, given the excess capacity situation cement industry has been behaving like a ‘low concentration ind ustry’ from time to time such as the intense price war in the recent past, spanning just about a year, with participants vying for higher volumes. 3. 7 Market lot The following pie-charts show the local, export and total securities industry shares of top 8 players in the sector for FY-10.\r\nThe charts show that D. G. khan Cement is the leading player in the local market (17% market share) closely followed by Bestway (16. 7%) and easy Cement (13. 3%). In the export market, Lucky cement leads with its roaring 32. 8% share, followed by D. G. Khan and Bestway cement’s 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 hitch 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 . firmament OVERVIEW †FY10 Cement Sector in FY-10 witnessed low prices, wage increase e nergy costs, slowness in verbalism activities locally and regionally and a large amount of new supply availability in regional markets resulting in drying out of accredited lucrative export avenues especially the Middle East. However, exports to African countries, Iraq, Sri Lanka etc. mitigated the effect and exports remained right away at 10. 66 million tones (YoY down 0. 89%). As counted by market participants and analysts local sales picked up to close the year at 24. 53 million tons (YoY up 14. 63%).\r\nOverall, 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 level of the alleged cement cartel, after Competition citizens committee of Pakistan imposed a fine in the abundant sum of Rs. 6. 35 billion on 20 cement manufacturers (equivalent to 7. 5pc of each company’s FY08 terminate revenue), in August 2009, cement prices plunged and went down to Rs. 249/ pocket edition 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.\r\nCCP’s decision has been challenged by the cement manufacturers on a number of grounds in the Lahore utmost Court, the Sindh High Court and the Supreme Court of Pakistan. In all these cases stay orders have been granted by the Courts and the matter awaits court’s verdict. Given the increase overall supply in the regional markets, the cement export price hovered about $47-$52 per tone, compared to amount export price of $60-$62 in FY09. On the other(a) hand, energy costs remained on the rising effort and coal prices averaged around $88 (FoB) per ton compared to 2nd half FY-09 average of $70.\r\nAustralian (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 subdued prices and increasing energy c osts a sub-breakeven scenario prevailed in the industry for the most part of FY-10. In 9 months FY10, cement companies affix cumulative losses of Rs. 3. 3 billion compared to lettuce of Rs. 3. 7 billion in the corresponding cessation last year, YoY down 189%. Cement prices hiked by Rs. 40 per bag in North in June 2010.\r\nWith no price moves in South †a region that was already enjoying higher prices due to lower posture of price war largely for its geographical advantages †prices in the cardinal regions finally came at par. FY-10 also cut the announcement of 35% inland freight subsidy, during attest 2010, on cement exports. It is likely to make Pakistan’s cement exports more competitive in the regional market, as cement manufacturers will be able to reduce their export prices by almost 10% going forward, if needed, without woeing their margins. However, the government needs to make timely payments to the manufacturers for the subsidy to be of much use.\r\nSo urce: Invisor Securities Source: Federal Bureau of Statistics & Invisor Securities 4. SECTOR OUTLOOK 5. 8 Local market * concisely Term Cement prices have risen by Rs. 24 per bag since the beginning of ongoing pecuniary year to Rs. 312 and Rs. 325 per bag in North and South, respectively. This bodes comfortably well for the sector after bleeding lavishly in a price war and indicates a price consensus among the manufacturers. Also, we swear there is limited desire for price wars going forward especially as seasonal 1Q demand slowdown kicks in (Monsoons, springs, Ramadan etc. ).\r\nThe recent floods have severely stirred the roads and the distribution network which will inevitably hurt the local cement sales as well as export sales to some extent. We expect cement demand from local market to remain subdued during first half of FY11, due to monsoons, flood related issues, slowdown in construction during winters etc. , and start picking up from 3Q FY-11, in the wash of re construction activities. Overall, we expect local dispatches to remain flat during FY-11 and believe that the real impact of the increased demand from reconstruction activities will materialize during FY-12.\r\nWe believe the cement prices have hit the ceiling for now and do not expect shape up increase in them and expect the recent price hikes to sustain for a relatively longer time than the one-step ahead, two steps back situation that prevailed throughout FY-10. spillage forward, Fauji Cement’s capacity expansion, due in FY-11, of 2. 27 million tons, would create downward stuff on role levels. However, we expect capacity example levels to remain between 70% to 75% range. * sensitive to Long Term We have a decreed outlook for the local market on a medium to long-term basis.\r\nThe rehabilitation work along with construction of dekameters will boost demand and maybe push prices upwards as cement manufacturers see on higher and higher capacity consumption levels. Construction of dams seems inevitable 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 coin from the Asian Development Bank (ADB). The projected timeline for closure is stated till the end of 2019. Manufacturers estimate 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. season 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 pessimistic 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 Arabia, ii) slowdown in construction in the Middle East and iii) local transportation problems ensuing from the flood.\r\nTherefore, 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. pecuniary ANALYSIS †CEMENT MAJORS 6. 10 monetary Analysis 6. 11. 1 Liquidity\r\nOn 9M-FY10 basis, the top-7 cement players face a tight liquidity situation with Current ratio at 0. 71x, Quick ratio at 0. 63x, Cash Ratio at 0. 05x and an operating(a) Cash Flow 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 ratio s show a low ability to settle short-term financial obligations as well as finance spare sales without incurring 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 Pioneer Cement have financial leverage at 2. 32x, 3. 56x and 1. 64x, respectively, which is high. Lucky and Attock Cement have financial leverage in control, at 0. 35x and 0. 25x, whereas D. G. Khan Cement’s financial leverage stands at 0. 67x. The average Interest Coverage ratio is at 1. 04x, which means, on average, the cement players barely have tolerable 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 exception 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 adaptation factor. The resulting ratios, fixed asset employee 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 efficacious asset utilization with fixed assets turnover at 0. 90x and total assets turnover at 0. 75x levels. Lafarge Pakistan cement’s asset utilization ratios rank lowest among the Top-7, being 0. 3x and 0. 11x on a fixed and total assets turnover basis, respectively. Lafarge’s extremely low asset utilization levels call for further investigation into the causes. 6. 11. 4 advantageousness We have adjusted the ease up 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 Pioneer have prejudicial net margins at -6. 7%, -18. 33%, -24. 86% and -14. 38%. Attock Cement appears most profitable during the period under follow-up, with Net margins at 13. 32% followed by Lucky Cement at 12. 02%. Both these players have managed to post decent net profitability partly due to higher retention prices in South, compared to North, and higher export contribution margins. During 9M-FY10, Maple Leaf, Lafarge and Pioneer Cement affix 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.\r\nKhan 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 ma rgin. 6. 11. 5 DuPont Analysis DuPont compendium is an expression which breaks Return on Equity (ROE) into third parts, profit margin, asset turnover and equity multiplier factor 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 review has been low profitability.\r\nThe price wars during the period under review, along with high financial charges have severely stirred the ROE. Asset utilization is not too levelheaded 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 safe companies to add up to. D. G. Khan Cement seems to be under accent mark at the moment due to its current due date of long-term debts, worth 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.\r\nHowever, 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 certainly not sustainable. The DuPont suggests both profitability and leverage are a cause of concern for these companies. Lafarge Pakistan’s low profitability and pitiable asset utilization have greatly affected its financial results. Overall, we recommend caution for the above three players.\r\n'