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Pakistan Cement_Double digit growth - a new normal

After posting record high dispatches in previous month (reach a monthly peak of 4.65mn tons in Mar'18), Pakistan cement sector extended its impressive FY18 run in Apr18 as well, where total dispatches registered a robust growth of 17.1%YoY to reach 4.19mn tons. Enhanced dispatches were led by, 1) continued double digit growth in domestic dispatches to stood at 11.8%YoY in Apr'18 (3.71mn tons), and 2) strong recovery on the export front, where total export dispatches  clock in at 0.476mn tons (up 65.2%YoY/21.5%MoM). On a cumulative basis, total dispatches growth enhanced to 15.0%YoY in 10MFY18 led by domestic demand growth of 17.3%YoY. With the elections drawing close, we anticipate total dispatches to remain on the higher side (despite seasonal slowdown in the month of Ramdan - May to Jun'18) for the remainder of the year. We derive our thesis from: 1) strong PSDP and provincial spending in upcoming months ahead of national polls (36% unutilized federal PSDP at the end of Apr'18) and 2) impressive growth in private sector credit related to construction activity (+26.9%YoY in Mar'18). While risk of pricing indiscipline prevails with each expansions (particularly for South players) coupled with higher coal prices, we believe recent cement price recovery (+PkR40/bag in North), offer attractive entry points especially when growth dynamics remain intact. While maintaining our preference for the sector (particularly North players), our top picks include well diversified, energy efficient companies like LUCK (TP: PkR849/sh), MLCF (TP: PkR108/sh), PIOC (TP: PkR109/sh) and DGKC (TP: PkR198/sh) in our Cement Universe.

Domestic dispatches continues double digit growth: According to provisional statistics, domestic dispatches growth during the month continued its impressive upward trend, growing by 11.8%YoY to reach 3.71mn tons in Apr'18. On a cumulative basis, domestic dispatches growth remained robust to reached 17.3%YoY in 10MFY18, significantly higher than 10.7%YoY growth recorded in 10MFY17. In this regard, players in the northern region were able to grow more rapidly (+18.5%YoY in 10MFY18) as compared to the southern region (+11.9%YoY in 10MFY18). Companies outperforming the industry during 10MFY18 included CHCC (+77.8%YoY) and MLCF (+21.6%YoY) while LUCK (+17.9%YoY), ACPL (+18.7%YoY), DGKC (+13.3%YoY) and PIOC (+10.3%YoY) also posted impressive double digit growth in 10MFY18.

Exports showed strong recovery: Continuing with its last month performance, industry exports remained strong in Apr'18 as well to clock in at 0.476mn tons, an uptick of 85.7%YoY/21.5%MoM. However, on an overall basis, exports are still down 2.2%YoY in 10MFY18 compared with 18.6%YoY decline in 10MFY17.

Investment Perspective: Backed by expansion led volumetric growth, continued focus of GoP on infrastructure (PSDP spending of PkR644bn in 10MFY18, up 7.7%YoY) and impressive growth in private sector credit related to construction activity (+26.9%YoY in Mar'18), we believe the demand dynamics of the cement sector remain sound. With the elections drawing close, we anticipate total dispatches to remain on the higher side (despite seasonal slowdown in the month of Ramdan - May to Jun'18) for the remainder of the year. We derive our thesis from strong PSDP and provincial spending in upcoming months ahead of national polls (36% unutilized federal PSDP at the end of Apr'18). Though risks in the form of pricing war (especially in South region) and higher coal prices (up 28%YoY to stand at US$98/ton) exist, we believe recent cement price recovery (+PkR40/bag in North), offer attractive entry points especially when growth dynamics remain intact. While maintaining our preference for the sector (particularly North players), our top picks include well diversified, energy efficient companies like LUCK (TP: PkR849/sh), MLCF (TP: PkR108/sh), PIOC (TP: PkR109/sh) and DGKC (TP: PkR198/sh) in our Cement Universe.