After the budget announcement, the cement sector has dominated the stock market backed by rising margins and the record PSDP allocation.
Moreover, a steep decline in interest rates also proved to be beneficial for the sector profitability as the same falls in the category of highly leveraged sectors.
“The cement sector remained the major beneficiary in the reducing interest rates scenario being one of the major leverage sectors,” viewed Abdul Azeem of InvestCap Research.
During FY13, the central bank vibrantly reduced the policy rate by 300bps to 9 percent.
“If the interest rate remains stable, the sector can fulfil its borrowing needs through low-cost financing,” said the analyst.
However, any upward trajectory in the interest rate in FY14 on account of higher expected inflation, increased taxation on different commodities and likely re-entry into IMF program could impact the profitability of the cement sector, he said.
During FY13 Richard Bay coal prices on international front has posted a decline of 20 percent to $76.55/tonnes. The coal is a major raw material that contributes 40 percent in total cost of production.
Being the net importer of coal to heat up burners, the declining coal price is another factor that contributes positively in the gross margins of the sector.
“We believe low coal prices coupled with stable rupee against US dollar would provide low cost raw material to the sector and would further strengthen the profitability of the same,” observed the analyst.
Moreover, during FY13TD, higher domestic cement prices, which stands at an average of Rs 9,768 per tonne, up by significant 10 percent YoY.
This phenomenon has attracted our attention towards tweaking the estimation for the sector.
As per expectation, net retention for FY14 to reach the level of Rs 7,815 per tonne, up by impressive 7 percent YoY.
“We see rejuvenation in the demand coming from local front to propel sectors’ profitability during the period under consideration.”
“DGKC provides a handsome upside potential of 28 percent against our Dec-13 target price of Rs107 and currently trades at FY14 PE of 5.7x.”
LUCK is trading at a forward PE multiple of 6.6x and currently the share is offering a potential upside of 20 percent against our TP of Rs 240.
