The Bell about Pakistan research – Elixir Securities Limited

Karachi, June 11, 2014 (PPI-OT): Cements – FY15 budget; a non-event

Elixir Securities Limited believes that the impact of Federal Budget FY15 shall be neutral for cements. Key measures for the sector include: (i) Revision of methodology for calculation of Federal Excise Duty (FED), (ii) Increase in GIDC from PKR100/mmbtu to PKR300/mmbtu, and (iii) Increase in PSDP allocation to PKR525bn (↑24%) against PKR425bn in FY14.

Higher FED to be passed on: The methodology for calculation of FED on cement shall be revised from a flat rate of PKR20/bag to 5% of retail price.

Elixir Securities Limited’s discussions with industry sources indicate that the impact of this revision shall be neutral since cement producers intend to pass on the entire impact of increase in FED.

Increase in GIDC to have asymmetric impact: Hike in GIDC will result in a cost hike for LUCK, DGKC and MLCF. Elixir Securities Limited’s discussions with industry sources hint that this cost hike shall also be passed on.

If the cost hike is in fact passed on, it shall allow margin expansion for all players in Elixir Securities Limited’s universe excluding LUCK, DGKC and MLCF.

Higher PSDP allocation to support cement demand: The GoP has increased allocation of PSDP for FY15 to PKR525bn. In addition to this, in the budget speech, the government also announced its intention to utilize the entire federal PSDP for FY14 within the current fiscal year.

This, in Elixir Securities Limited’s opinion, shall be beneficial for cements since it improves credibility of the government’s infrastructural development agenda and strengthens demand outlook for the sector going forward.

Higher FED to be passed on

According to Federal Budget FY15, the methodology for calculation of FED on cement shall be revised from a flat rate of PKR20/bag to 5% of retail price.

This revision will cause an asymmetric increase in FED paid by industry players depending on their final retail price. Specifically, due to higher prices, southern players shall now pay higher FED than northern players.

However, Elixir Securities Limited’s channel checks indicate that the impact of this revision shall be neutral since cement producers intend to pass on the entire impact of the FED increase once the revision becomes applicable.

Increase in GIDC to have asymmetric impact

As mentioned earlier, GIDC on gas shall be increased by PKR200/mmbtu to PKR300/mmbtu. This will result in a PKR8/bag, PKR4/bag and PKR4/bag cost hike for LUCK, DGKC and MLCF. Elixir Securities Limited’s discussions with industry sources indicate that this cost hike shall also be passed on since its impact falls on the primary market leaders.

If the cost hike is in fact passed on, it shall allow margin expansion for all players in Elixir Securities Limited’s universe excluding LUCK, DGKC and MLCF. However, Elixir Securities Limited awaits further clarity on the matter and have not yet incorporated the effect of this in Elixir Securities Limited’s estimates.

Higher PSDP allocation to support cement demand

The GoP has increased allocation of PSDP for FY15 to PKR525bn, up 24% against FY14 revised estimate of PKR425bn. In addition to this, in the budget speech, the government also announced its intention to utilize the entire federal PSDP for FY14 within the current fiscal year.

This, in Elixir Securities Limited’s opinion, shall be beneficial for cements since it improves credibility of the government’s infrastructural development agenda and strengthens demand outlook for the sector going forward.

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