JS Securities Limited – JS Research (January 20, 2023)

Karachi, January 20, 2023 (PPI-OT): Cement: December dispatches marginally down MoM; 2QFY23 still reports 26% QoQ jump

Cement dispatches for Dec-22 clocked in at 3.9mn tons (-16% YoY), taking cumulative dispatches for 2QFY23 to 12.1mn tons, down 17% YoY. Dispatches for 2QFY23 however jumped 26% QoQ, as the Sep-quarter had the impact of monsoon and heavy flooding resulting in a lower base.

Ongoing decline in South African coal prices, would in normal course of business, benefit the sector’s margins. In the current scenario however, we believe country’s restricted imports would make it difficult to avail lower imported coal prices and also impact overall construction sector demand. This is in addition to any potential increase in local coal and/or Afghan coal prices.

We believe the Cement sector prices in much negatives as stocks currently trade at P/E of around 3x. We reiterate Lucky Cement Limited (LUCK) and Maple Leaf Cement Factory Limited (MLCF) are among our top picks.

Dispatches remain dull in Dec-2022 as well

Cement dispatches for the month of Dec-2022 are reported at 3.9mn tons, showing a fall of 16% YoY. Dispatches were also down on a MoM basis by 3%. The tally for 2QFY23 came in at 12.1mn tons, lower by 17% on a YoY basis owing to slow-down in construction activities due to winter season. Dispatches however jumped on a QoQ basis, up 26%, as Sep-quarter had the impact of monsoon and heavy flooding resulting in a lower base.

Cheaper international coal, but import restrictions a hurdle

Richard Bay coal prices are down by ~55% compared to their recent high of c.US$360/ton in early Sep-2022. International coal prices have been on a downward trajectory despite winter season. In the instance of South African coal costing similar to current arrangements, we believe local manufacturers would want to switch back to the South African variant due to its consistent product quality and stable supply chain. However, given the impediments in imports, procuring South African coal may not be likely for some months.

While local coal prices continue to increase

Local coal prices have recently jumped by c. 30% due to higher demand as Afghan coal supply has been slow owing to snowfall in northern areas. Most cement producers have increased their consumption of the relatively cheaper Afghan coal and local coal from Darra Adam Khel and Dukki, reflected in recent quarters’ stable and/or rising gross margins. Moreover, some players have also started to test with alternative fuel arrangements using Tire-derived fuel, rice husk, poultry feed waste etc. to save up on costs.

Stocks at attractive valuations in the listed space

We stick to our Overweight stance on the sector, where Lucky Cement Limited (LUCK) and Maple Leaf Cement Factory Limited (MLCF) are among our top selections from the sector given their respective timely expansions that have the potential to capture higher market shares. We also have a liking for Kohat Cement Company Limited (KOHC) given its outstanding gross level performance broadly due to its aggressive cost control and low leverage ratios.

Unfavourable effects of anticipated capacity expansions by cement makers continue to be among the top qualms. However, any decrease in coal costs is a positive to our base case.