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Pakistan Cement: Earnings revised up; Overweight Maintained

• We are revising up our earnings forecasts for Pak Cements from FY21E-23F by 1-65% on the back of (1) higher than expected sales and (2) cost efficient projects like coal power plant, Waste Heat Recovery (WHR) and BMR by various players.
• Volumetric sales beating expectations: We revisit our volumetric sales numbers for FY21, wherein we now expect growth of 18-21% in local dispatches (vs. earlier estimate of +7.5%).
• Upward revision in dispatches stems from robust construction activities across the country on the pretext of (1) the construction package, (2) initiation of civil works on dams, (3) injection of additional liquidity via housing loans (up 7.5% MoM in Sep- 2020), (4) continuation/extension of CPEC projects, and (5) pent up demand of last two years as local dispatches remained stagnant.
• Cost efficient measures to augment margins: Post the third expansion cycle, some players have announced efficiency projects.
• Maple Leaf Cement (MLCF) is planning to increase its WHR capacity to 25MW by Sep-2021, which is expected to add Rs0.4/share (or 9%) to its bottom-line.
• Kohat Cement (KOHC) has also announced a BMR of its cement line and an addition of 16.2MW coal fired power plant. These key initiatives will have a positive contribution Rs3.0-5.4/share (13-26%) in FY21E-23F profitability.
• DG Khan Cement (DGKC) is also set to start its WHR and coal power plant at its Hub plant, which will result in savings of Rs4.23-4.78/share in FY22F/23F.
• We maintain our Overweight stance on Pakistan Cements, wherein our Top Picks are Fauji Cement (TP: Rs29.5, upside 43%) and LUCK (TP: Rs905, upside 38%). We also upgrade DG Khan (TP: Rs128) from HOLD to BUY.
• LUCK offers well-round diversification to investors through investments in Autos (KIA), Chemicals, Cement, Power, and Consumer businesses. In KIA, company will start its double shift to meet demand of successful SUV model Sportage as its AWD variant has a lead time of 4 months. The company is likely to launch high end model Sorento (SUV) by the end of this year or early next year, as per our dealer checks.
• FCCL is enjoying market share of 8.0-8.5%, higher than its capacity market share of ~6.4%. This higher share has kept company’s utilization at over 100% in 4MFY21.

Key Risks to our valuation includes (1) higher than expected capacity expansions, (2) COVID-19 led lockdown, (3) lower than expected cement price increase, (4) higher than expected coal & FO price and (5) any untoward decision of CCP case.