Failing to cement prices

Whereas the manufacturers have increase cement prices by Rs 10 per bag, the market analysts foresee another hike of Rs 10 to Rs 15 on account of increased demand in the months ahead.
Much ahead of the increasing cement demand during summer season, cement manufacturers have raised cement prices by average Rs200 per ton.
The market observers, however, believe that the prices would further go up by another 10-15 rupees due to significant increase in the cement demand on the local market front during April-Jun period.
During FY12, cement prices have followed an upward trajectory and posted an increase of 9 percent FYTD (Jul-11 to date) to Rs 425 per bag, said the analysts at InvestCap.
“We have taken average at Rs 406 in our financial models for the companies we follow,” said Yawar Uz Zaman.
According to the InvestCap analyst, while local cement demand, during Jul-Feb12, stood at 7.4 percent YoY, it was expected to swell from Mar-12 onwards to settle at above 8 percent. “Thus, rising cement prices with improved dispatches will only fuel companies’ bottomlines further in FY12,” said Yawar.
The expected hike in cement prices would have a major impact on FCCL’s earnings and TP because of its high operating as well as financial leverage (the company’s P&L is facing huge depreciation as well as financial charges amid commissioning of new plant of 7,200tons/day in 1HFY12) while LUCK’s financial leverage is on the decline amid repayment of its long-term loans.
As far as DGKC is concerned, while financial leverage is also high but company’s huge other income helps normalize impact on its bottomline.
Therefore, our sensitivity analysis suggests a massive surge in FCCL’s expected bottomline for year FY12 and its target price given a price increase of Rs20/bag (see table alongside). On the other hand, DGKC and LUCK’s earnings are expected to climb by 21.2 percent and 21.5 percent with their target prices going up by 0.9 percent and 3.1 percent, respectively.
As discussed earlier, Yawar said cement demand in the domestic market is already up 7.4 percent YoY during last 8MFY12 while demand in the local market is expected to have shown further improvement in Mar-12 where dispatches are expected to clock in at 2.4 million tons (24 percent MoM, 8 percent YoY). At the same time, demand from exports front is also expected to move around 0.68 million (20 percent MoM, -17 percent YoY) during Mar-12.
As such, improvement in total dispatches along with the presence of healthy cement prices, cement sector is expected to post another eye-catching quarter. With the cement sector stocks trading at attractive multiples, we expect the out-performance to continue to extend as another result season i.e. 3QFY12 sets in.