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Looking ahead: What FY14 will be like

Looking ahead: What FY14 will be like

By Our Correspondent / Farhan Zaheer
Published: October 27, 2013
Cement companies have used the last two years to extensively de-leverage their balance sheets, using their healthy operating cash flows. PHOTO: AFP/FILE
KARACHI: 
Despite a slow start in the first quarter of fiscal year 2014, industry officials and analysts say that the cement industry will rebound strongly in the remaining three quarters.
Industry officials are banking on steady cement prices (that are expected to rise soon) and stable or better sales in domestic market and exports.
Despite financial constraints by the government, analyst say higher spending on public sector development programmes (PSDP) will increase cement consumption in FY14. Positive sentiments among investors for a government being led by pro-business leaders is one of the factors that make investors are upbeat on spending more on infrastructure projects, mainly on big dams, bridges and roads.
“One of the reasons why investors are banking on the cement industry is the high allocation of Rs530 billion for the public sector development program (PSDP) for fiscal year 2014. That is expected to increase cement consumption in country,” Summit Capital analyst Sarfaraz Abbasi told The Express Tribune.
Owing to strong fundamentals, the cement industry has been in the limelight at the Karachi Stock Exchange (KSE) for over a year or so, Abbasi said, adding that the positive sentiments of investors are expected to remain intact with the industry in the near future.
Economists say coal prices are likely to hover in lower range in the remaining months of fiscal year 2014 because of slow economic recovery in China and India.
However, any significant increase in coal prices will hit the earnings of cement companies, especially the less efficient ones (like Maple Leaf, Fecto, Pioneer). While companies like Lucky cement and DG Khan are likely to remain unhurt because of their higher levels of efficiencies compared to other companies.
Analysts say high cement prices are going to support the profit margins of cement companies compared to the growth in sales. Cement companies intend to increase their prices from the present Rs500 per 50-kg bag to at least Rs530 per bag.
For instance, JS Global has recently reported that the domestic cement sales are expected to grow modestly by 4% in FY14 compared to the 4.6% growth in FY13 but it is also mentioned that better cement prices would be key to cement sector’s profitability.
“The pace of growth will be slower in FY14 owing to the high base affect of FY13 but the cement industry stands on strong fundamentals like better cement prices and low international coal prices,” the brokerage house added.
Stronger balance sheets
With the gradual decrease in cost of production and increase in the profitability due to better prices and low interest rates, most companies have cleaned their balance sheets by either reducing or shedding off their debts completely. This is why the cement sector has come closer to a very stable outlook for near future.
Cement companies have used the last two years to extensively de-leverage their balance sheets, using their healthy operating cash flows.
“Most companies (some 70%-80%) did well in recent years and improved their balance sheets by reducing debts. Those cement companies that did not do well in the last three have in-built issues and hence they failed to grow because of their own problems,” Abbasi said.
Chances of price war have diminished
Recently growing mistrust amongst industry players on the price mechanism grew so much that major players threatened to leave the All Pakistan Cement Manufacturers Association (APCMA) – the cement company’s lobbying group – resulting in the sector underperforming at the KSE-100 Index, dropping at least 4-5% in the first three months of FY14.
Investors were fearful of the re-emergence of a price war. Sensing growing crisis that could hurt all the companies, the cement companies have adopted a more accommodating attitude and are now settling their issues to try to, and remain, on the same page.
Energy costs Rs/bag
1)      DG Khan Cement (DGKC)        90
2)      Lucky Cement        (LUCK)      110
3)      Attock Cement      (ACPL)        123
4)      Cherat Cement      (CHCC)        126
5)      Fauji Cement          (FCCL)        129
6)      Kohat Cement        (KOHC)       137
7)      Maple Leaf Cement (MLCF)      141
8)      Pioneer Cement    (PIOC)           148
9)      Fecto Cement         (FECTC)     154
Published in The Express Tribune, October 28th, 2013.

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