Morning Briefing for December 06, 2013 – Standard Capital

Karachi, December 06, 2013 (PPI-OT): Cements case-to-case outlook of middle tier players Interest sensitive industry:

Cement industry is one of the most leveraged manufacturing industries of Pakistan with average total debt to equity ratio of above 75%.

According to Standard Capital, this creates the cement industry most interest rate sensitive industry. A slightly change in DR impact a lot on the cement manufacturers’ earnings and profitability. Standard Capital expects that there will be negative impact on the earnings due to expected increase in DR on the impending monetary policy.

Standard Capital has taken total debt in consideration since many companies are resorting to financial mismatch where their long term fixed is being adjusted through short term financing. Only CHCC stands out as a more efficient player. Though, its debt is expected to increase with expansion plan. Hence cement players does not present a very attractive case on the face of financial leveraging.

Cement sector- snapshot
Based on FY13 result
Script   1QFY14 EPS   Exp PE   Dividend Yield   GP margin   EBIT margin   NPAT margin   T. Debt to Equity   Book Value   PBV
FECTC        3.05      3.3            4%           27%         17%            13%              76%             38.1      1.1
PIOC         1.28      5.8           14%           32%         29%            20%              88%             27.2      1.1
KOHC         4.78      4.6            6%           39%         37%            23%              79%             39.1      2.3
CHCC         2.85      4.8            5%           35%         27%            19%              37%             38.8      1.4
FCCL         0.44      8.0            9%           32%         25%            12%              90%             12.0      1.2

Cement Dispatches: increases in cumulative terms in 5MFY14 – decreases in monthly terms Cement dispatches increases till 5MFY14 to 13.2mn tons as against 13.1mn tons reported in the same period last year. As per the data released, cement dispatches decreased by 6% MoM in Nov’13 to 2.6mn tons. The domestic demand dropped by 3% and export volumetric sales dropped by 16% on MoM.

Triggers: Some of the impending triggers that could come include probable decrease in coal prices. Standard Capital is hearing news about decrease in coal prices. On local front, Standard Capital sees government functionaries in planning division are active along with Punjab government which is releasing funds for small schemes in local towns and districts. Standard Capital sees this as good omen for cement consumption.

The government in centre is mindful about energy needs via hydel projects and hence funding is stated to be arranged from multilateral donors and US government. However, Standard Capital also sees many risks associated with political situation w.r.t. to abysmal economic indicators since situation on ground could be adverse for the government due to spiralling inflation. Standard Capital sees company wise case-to- case scenario where FECTC and CHCC remains on the limelight owing to small capacities. CHCC presents the case of efficient financial management.

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