Industrials: Building & Construction Materials

Pakistan
November 04, 2016

US$ 5.2bn

10.3%

23.2mn

Market Cap

Index Weightage

Avg. Daily Volume

Underweight

Neutral

Overweight

Pakistan Cement Sector

Elixir Cement Universe Posted a Healthy
Earnings Growth of 8%YoY

Key Themes
Pakistan cements is currently at a sweet spot with
the sector expected to be a key beneficiary of GoPs
increased focus on infrastructure development vis-vis CPEC and stable costs amidst low inflation

Cumulative earnings of the Elixir Cement space expanded by

8% YoY in 1QFY17, discounting FCCL, earnings grew by a
robust 15%.

Revenue of the sector grew by 6%YoY during the outgoing

quarter on account of improving capacity utilization i.e. (78%
vs 72% in SPLY) due to i) 9% growth in local demand and, ii)
3% growth in exports.

Despite substantial rise in coal prices (Peaking to ~ USD

90/ton), margins of the sector swelled by 2.5ppts to ~43%,
while excluding FCCL results in which the company imported
expensive clinkers, margins of the industry expanded to ~46%.

We maintain our overweight stance on the sector on the back

of robust demand outlook at-least in the medium term.
Moreover we believe that higher coal prices are expected to
restrict margin accretion going forward. Our top picks in the
sector include; PIOC (Jun-17 PT of PKR 132/sh) and, KOHC
(Jun-17 PT of PKR 353/share)

Implications
KOHC and PIOC are our top picks in the sector
where low cost structures along with multiple
triggers in the offing is expected to deliver stellar
returns.

What Do We Think?
Stock
ACPL

Rating
Overweight

Price Target
PKR 329

FCCL

Overweight

PKR 47

CHCC

Neutral

PKR 120

PIOC

Overweight

PKR 132

MLCF

Overweight

PKR 112

DGKC

Overweight

PKR 200

LUCK

Neutral

PKR 710

KOHC

Overweight

PKR 353

Sector Performance
(%)

Cements

KSE 100 Index

170.0
160.0
150.0
140.0
130.0
120.0
110.0
100.0
90.0
80.0

Strong Volumes and Healthy Margins; Earnings accreted by 8%YoY:

Cumulative earnings of the Elixir Cement space expanded by 8% YoY in 1QFY17
however discounting FCCL, earnings grew by a robust 15% YoY during the
period. Bottom line accretion primarily emanated from i) improved capacity
utilization levels of 78% (vs 72% in SPLY) and ii) ~2.5ppts expansion in gross
margins to 43%. During 1QFY17 revenue of the sector grew by 6%YoY on the
back of dispatch growth of 8% YoY with local to export sales mix remaining
relatively flat, improving by 1pp to 83/17% (vs 82/18% SPLY). While local
dispatches (+9% YoY in 1QFY17) have consistently been on a rising trend,
continuous decline in exports appear to have bottomed out with export volume
rising by 3% YoY during the quarter. Turnaround in export volumes was largely
led by increased sales to India (+142% YoY) region despite export sales to
Afghanistan (-7%) and sea based volumes (-18.6%) declining. During the
quarter, average cement prices in North and South region increased by 6.7/5.3%
to PKR 544/567bag respectively owing to hike in FED rates, however retention
prices declined by 3%YoY on account of i) lower margin clinker sales by PIOC
and LUCK and, ii) lower retention on export sales owing to increased
competition.

EBITDA/Ton

Oct-16

Aug-16

Jun-16

Apr-16

Feb-16

Dec-15

Oct-15

Aug-15

Jun-15

Apr-15

COGS/Bag

Source: Elixir Research, PSX

Source: Elixir Research

Disclosures
Please refer to the important disclosures at the back of this report.

Source: Elixir Research

Elixir Research Department
Karim Punjani
T: +92 21 35694717, E: Kpunjani@elixirsec.com

Industrials: Building & Construction Materials

Pakistan
November 04, 2016

Low costs inventory supported healthy margins: Despite substantial rise in coal prices
(touching a high of ~USD 90/ton), up 16% YoY and 17% QoQ on average during 1QFY17,
margins of Elixir cement universe expanded by 2.5ppts to ~43%, excluding FCCL where the
company had to source expensive clinker, margins expanded by 5pp to ~46%. We attribute
higher margins to 1) low cost fuel stock (cement companies usually carry stocks of 2
months), 2) low power costs and 3) commencement of commercial operations of efficiency
enhancing projects at KOHC (15MW WHRP) and DGKC (30MW coal fired power plant).
Earnings were further supported by reduced finance costs during the period (-45% YoY) as
the sector continued with its deleveraging amidst robust operating cash flows. Tax rate
however normalized during the quarter owing to reduced tax credits and slight decrease in
export mix.
Outlook: We maintain our overweight stance on the sector on the back of healthy
volumetric growth primarily due to growing private sector developments and tangible work
in progress on Hydel and Coal projects falling under CPEC umbrella, while exports sales
can witness a steep decline trekking political heat between Indo-Pak relations. On the
margins front, swelling coal prices are expected to limit sectors expanding margins where
south region is expected to gradually pass partial impact on consumers, while north region
will follow the suit in peak demand session starting Feb-2016 onwards. Our top picks in the
sector include; PIOC (Jun-17 PT of PKR 132/sh) and KOHC (Jun-17 PT of PKR 353/share).

Disclosures
Please refer to the important disclosures at the back of this report.

Industrials: Building & Construction Materials

Pakistan
November 04, 2016

Disclaimer and Disclosures for Equity Research

Disclaimer
This research document has been prepared by Elixir Securities Pakistan (Private) Limited (Elixir).It has been prepared for the general
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Disclosures
1. Explanation of Elixir Securities Pakistan (Private) Limited Rating System
Elixir uses a three-tier rating system based on absolute upside or downside potential for all stocks under its coverage.
Overweight: Our Target Price is more than 10% above the current share price, and we expect the share price to reach the target on
a 1 year time horizon.
Neutral: We expect the share price to settle at a level between 10% below the current share price and 10% above the current share
price on 1 year time horizon.
Underweight: Our Target Price is less than 10% below the current share price, and we expect the share price to reach the target on 1
year time horizon.

2. Definitions
Time Horizon: Our analysts make recommendations on a 1 year time horizon. In other words, they expect a given stock to reach their
target price within that time.
Fair Value: We estimate fair value per share for every stock we cover. This is normally based on widely accepted methods appropriate
to the stock or sector under consideration e.g. DCF (discounted cash flow) or SOTP (Sum of the Parts) analysis.
Target Price: This maybe identical to estimated fair value per share, but is not necessarily the same. There may be very good reasons
why a share price is unlikely to reach fair value within our time horizon. In such a case we set a target price which differs from
estimated fair value per share, and explain our reasons for doing so.
Please note that the achievement of any price target may be impeded by general market and economic trends and other external
factors, or if a companys profits or operating performance exceed or fall short of our expectations.

3. Risks
The following risks may potentially impact our valuations/forecasts:
Interest Rate Risk, Exchange Rate Risk, and Regulatory Risk.

Contact us
Research Department
T: +92 21 35694716
E: research@elixirsec.com

Elixir Securities Pakistan (Private) Limited

Dawood Center, 8th Floor, M.T. Khan Road
Karachi 75530, Pakistan
Elixir Securities Pakistan (Private) Limited is Regulated by The Securities and Exchange
Commission of Pakistan, License No. 55
Elixir Securities Pakistan (Private) Limited is a Corporate Member of Pakistan Stock Exchange
Limited (Formerly Karachi Stock Exchange Limited) and Pakistan Mercantile Exchange Limited
Disclosures
Please refer to the important disclosures at the back of this report.