CEMENT TREND - FFC IS THE BEST AFTER LUCKY

The rising prices of raw materials such as coal, diesel, electricity etc have grabbed the
cement companies by the throat, who are trying to develop new means of production
to cut as much as cost of production as they can. However in this time of augmenting
inflation good news has surfaced, for the cement companies i.e. Rs30 per kg bag
increase in the selling prices of cement in the northern zone. This constitutes a 7.8%
rise in prices in just one month. Newspapers are reporting retail price of Rs 415/50kg
bag.
This increase in price would benefit the northern players including major players such
as DG Khan Cement (DGKC) and Fauji Cement (FCCL). We cover both the companies.
The revenue base would witness a jump which would also compensate for any decline
in local sales or exports in the situation of a supply glut. Particularly, we expect Fauji
Cement to gain high profits on the back of increasing prices. Moreover, a discussion
with the FCCL management highlighted that FCCL’s production has increased
manifolds along with sales booming substantially in recent times. Moreover, the new
German line is fully operational thus making FCCL making one of the better players in
the industry.
We expect FCCL to yield FY12EPS in the range of Re 0.7/sh with a DCF target price of
Rs8/sh ‐ Rs9/sh.
P&L a/c Rs '000 FY09 FY10 FY11
Sales 6,953,323 4,902,396 5,788,302
Gov. levy (1,638,785) (1,093,941) (1,045,709)
Net sales 5,314,538 3,808,455 4,742,593
COS (3,627,110) (3,292,871) (3,919,540)
GP 1,687,428 5 15,584 823,053
Distribution cost (50,260) (47,737) (74,149)
Administrative expenses (103,186) (103,490) (147,938)
PBIT 1,533,982 3 64,357 600,966
Other income 1 90,424 27,220 28,053
Other operating expenses (78,173) (25,460) (36,944)
Finance cost (224,716) (41,206) (103,922)
PBT 1,421,517 3 24,911 488,153
Taxation (413,894) (74,732) (62,492)
PAT 1,007,623 2 50,179 425,661
EPS 1.43 0.31 0.52
Margins and ratios FY09 FY10 FY11 FYE12
EBIT margin 28.9% 9.6% 12.7% 14.7%
PBT margin 26.7% 8.5% 10.3% 12.5%
PAT margin 19.0% 6.6% 9.0% 9.6%
cost/sales 68.2% 86.5% 82.6% 81.9%
Source: Standard Capital Research
We continue to maintain “BUY” for FCCL and now consider it our top pick in
cement sector after Lucky Cement (LUCK).

Lucky Cement Company Ltd. (LUCK)-Result Preview

Lucky Cement Company Ltd. (LUCK)-Result Preview

Lucky Cement Ltd. (LUCK) board is expected to announce its 1HFY11 result on January 31, 2010. We expect the company to post PAT of Rs1,643 mn (EPS: 5.08) in 1HFY11 versus PAT of Rs1,908 mn (EPS: 5.90) in corresponding period last year, a decline of (-13.9% YoY).

Lucky tackling all odds smartly

Lucky tackling all odds smartly

LUCKY cement likely to post PAT of Rs3,703 mn (EPS: 11.45) for FY11, up by (+18% YoY) versus PAT of Rs3,137 mn (EPS: 9.70) in corresponding period last year. Growth in profitability to stem from higher local / export cement prices by (+38.38% / +20.40% YoY) respectively, consequently topline would propel by (+19.43% YoY).

We recommend ‘BUY’ for the stock currently trading at P/E 5.97x - FY11E, our target price is Rs85.76/ share, offers upside of 25.38%.

Cement Sector Update-4Q profitability outlook

Cement Sector Update-4Q profitability outlook

Outgoing FY11 for cement sector was a negative growth year since 2001. Cement dispatches fell by -8.23% YoY to 31.3 mn tons, the accurate figure previously projected by our research team. In last 5 years the dispatches CAGR remained 6.66% with bulk of growth came from exports (+30.82% 5Yr CAGR). Exports were 3.2mn tons in FY07 and closed the year FY11 at 9.41mn tons where as local dispatches posted insignificant growth of 1.09% 5YR CAGR.
Culprits behind the downfall were; floods badly marred the demand for cements coupled with slowing down economy growth, political unrest and law & order.


4Q Profitability to upsize for IIS cement universe players


Cement dispatches for 4Q11 remained 8.6 mn tons (+7.4% Q/Q) and cement prices scaled up by +34% Q/Q for the quarter to Rs390/ bag. Subsequently retention prices for the cement players improved for the quarter and margins would remain on higher side. We estimate 4Q11 earnings for LUCK, DGKC and ACPL to remain 3.43/ share (+9% Q/Q), 0.71/ share and 2.85/ share (+30% Q/Q) respectively.


Price decline and 1Q12 dispatches outlook


Post budget price reduction was not fully passed on by the players with slight decline of Rs10-12/ bag on different brands. As per historical analysis for (Apr-Sep) period, 55-60% cement sector dispatches comes from this period (considering Apr-Mar financial year). We believe in 1Q12 dispatches momentum to continue and register further profitability growth for the sector. In our opinion Lucky and DGKC cement to benefit most from this likely scenario and would remain in limelight. We expect 1Q12 cement dispatches to grow by (+9% YoY) largely due to low base effect in 1Q11 (due to floods) and support to continue from summer season construction demand.


We believe going forward cement demand to stem mainly from much needed country wide infrastructure development and DAMs construction for energy needs. We expect sectors’ dispatches to grow by 3.5% CAGR for next 5 years.