KARACHI – While the KSE-100 has recovered 777 points in last five trading sessions, the bourse is still five percent below from its recent peak on Jan 17, 2011. Interestingly, the cement sector performance has lagged behind the market’s performance by eight percent during this period. However, capital market analysts expect that the cement sector performance will improve while eyeing its historical performances in March. Data analysis of the past eight years has revealed that March has been the most lucrative month for the cement sector, gaining an average nine percent, outperforming the bourse by four percent.
Analysts foresee recovery in the domestic off-take post the winter season and subsequent improvement in local cement prices to have been the catalysts for these strong performances in March. While they maintain their ‘market-weight’ outlook on the sector, they highlight Lucky Cement (LUCK) and DG Khan Cement (DGKC) as potential out-performers, said a report of JS Research. Analysis of eight years data shows that the sector has gained an average nine percent during March (the most compared to other months) and has posted a negative return only once. The two major players, LUCK and DGKC, have outperformed the sector, gaining 17 percent and 10 percent, respectively.
Historically, local off-take in March has witnessed an improvement by an average 22 percent MoM while local prices have risen by an average four percent MoM.
Analysts expect industry’s local sales to decline by two percent YoY in FY11 largely led by unprecedented floods during the early part of the year and expect 29 percent improvement in off-take during 2HFY11 and a seven percent YoY rebound in FY12.
This should allow cement manufacturers to raise prices in the local market, which presently are hovering between Rs 340-350 per bag in the northern region, allowing them to cover for higher coal prices.
Analysts say they will remain ‘market-weight’ on the sector, with LUCK and DGKC being our top picks. Thal Limited conducted a briefing for the analysts to discuss its 1HFY11 result where it reported profit after tax of Rs 619 million (EPS Rs 10.08), up 20 percent YoY. The improved profitability was primarily down to improved operations of the engineering segment led by increase in sales of auto parts.
However, the company highlighted that the government’s decision to allow import of used cars of up to five years of age will have a negative impact. Also, margins are coming under pressure because of Yen appreciation against Pak Rupee.
Thal Limited’s paper sack business suffered during the 2Q due to the floods in the country, which reduced the demand for cement; however, the company remains optimistic over the long term as reconstruction in the devastated areas will improve demand, going forward. With regards to its Jute business, the production declined due to closure of production facility in August due to floods.
March – a lucrative month for cement
