December 2008

CEMENT PAKISTAN

Pakistan Cement Sector Review
Industry Update

Sarah Junejo

+92-21-111-234-234 sarah.junejo@igi.com.pk www.igisecurities.com.pk 0800-2-34-34

Securities

Cement Pakistan

Securities

Table of Contents
Investment Consideration Industry Overview D.G. Khan Cement Company Ltd. Lucky Cement Limited 3 4 9 14

2

we expect local demand to subside by 10% to 20. Outlook remains cautious due to abnormal equity market conditions Out of the total of 24. On the flipside.45mn MT are likely to come online during FY09. while the IGI Cement Universe underperformed the benchmark index by 20% during the period under review. while total capacity is expected to reach 51mn MT by FY11. owing largely to the deteriorating fundamentals of the cement companies and liquidity constraints in the market. this decline in demand is likely to be cushioned by a 25% increase in exports to 9. Interest rate hike will take its toll on debt obligations With the industry debt-to-asset ratio averaging at 55% and LTD-to-assets averaging at 35%. This is largely on account of an expected cyclical slowdown in demand in lieu of the expected GDP growth stabilization around the 3. manufacturers are likely to witness a manifold increase in their financial charges on account of the recent 200bps interest rate hike.5% level. Going forward. Market Activity (Relative Comparison) 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 KSE100 Index Total Cement Sector IGI Cement Universe Source: Bloomberg & IGI Research 3 . causing net profit depletion. In view of diminished demand.Cement Pakistan Securities Investment Consideration Exports to support diminishing local demand During the prevailing year.6mn MT.1mn MT in FY09 against 22. we advise a cautious approach on the sector on account of both liquidity and regulatory risk. we expect prices to decline by PKR 15/bag in Dec08 and average at PKR 325/bag during FY09 resulting in a lower topline and compressed gross margins. 19 companies are currently listed on the stock exchange. the obligation of meeting debt payments is likely to mitigate some risk of a price war as manufacturers strive to maintain a positive bottomline. Upcoming expansions to contract margins Additional capacities of approximately 5.4mn MT in FY08. Higher margins on exports are likely to benefit export-oriented manufacturers up until FY10 which is when regional capacities come online. The cement sector has underperformed the KSE100 Index by 5% since Jan08 to date. However.

we forecast export dispatches to reach 9. the cement industry faces an excess supply situation with local FY08 consumption standing at 22. Regional demand to support volumetric growth The construction boom has given rise to an acute cement shortage in the region. while total capacity is expected to reach 51mn MT by FY11. regional 4 .1mn MT). development spending cuts and a growth slowdown in line with global trends. We expect external aid and infrastructure development to maintain at current levels during the Obama regime.000 4. The transactional cost of expansion has increased unprecedentedly with both interest rates and exchange rates on the rise. GDP 7. However. the government slashed PSDP utilization to just 88% of the PKR 520bn target in FY08. Kohat (2. which shifts the onus demand onto regional markets of India.1mn MT in line with inflation. local FY09 consumption is expected to decline to 20. Meanwhile PSDP spending was slashed by 69% in 1Q FY09 to PKR 40bn. which is likely to lend support to Pakistan’s cement exports. However we have now entered a cyclical trough with GDP growth expected at the lowest level in 5yrs at 3.000 2. Gharibwal (2.6mn MT by the end of FY09. Consumption pattern 150 120 90 60 30 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Per capita consumption GDP Growth (kg) 10% 8% 6% 4% 2% 0% PSDP allocation vs. Consequently manufacturers attempted to compensate for compressed margins by operating at full capacity and increasing volumetric growth. Afghanistan accounted for 34% of total cement export receipts during FY08 and is the leading exportable market for Pakistan. Moving forward however we expect capacity utilization to average at a mere 47%.000 6.5% in FY09.000 3.000 1. which is likely to increase the combined (export and local) capacity utilization to approximately 70%. According to our estimates.1mn MT) are likely to come online during FY09.16mn MT by Jun08. resulting in increased demand for Pakistani exports.03mn MT in FY07.45mn MT by Lucky (1. Due to the deteriorating fiscal position.25mn MT). The growth slowdown was a result of stalling public and private investment in infrastructure and housing sectors. Going forward. we are bullish on domestic demand in the medium term as the economy stabilizes and enters a new growth phase.Cement Pakistan Securities Industry Overview Local demand trajectory depicts bleak ST profitability prospects With a wave of supply expansions bringing total cement manufacturers’ capacity to 37.4mn MT.000 0 FY03 FY04 FY05 FY06 FY07 (PKR bn) 600 500 400 300 200 100 0 FY08 FY09E PSDP (RHS) GDP (LHS) Source: Economic Survey & IGI Research Source: Economic Survey & IGI Research Upcoming expansions likely to compress margins Additional capacities of approximately 5. GCC and Africa in addition to the already captive Afghanistan. Demand correlation with GDP indicates slowdown ahead Pakistan witnessed robust economic growth is the past 3yrs as GDP growth marked a 5yr CAGR of 7% in FY07. Local demand showed sluggish growth of 6% YoY from 21. However.000 5. This raises the stakes against future infrastructure development and is likely to dent cement dispatches going forward. the impact of which is likely to materialize fully by mid CY09.

With local demand dwindling due to the law and order situation in the country. However. when expansions of approximately 231mn MT are expected to come online in the surrounding countries.00 0.Cement Pakistan Securities demand only shows promise till FY10. low per capita consumption of 139/kg in the country suggests a revival in demand growth which can be expected around FY11 as inflationary pressures ease off and the recessionary phase of the economy comes to an end.00 1. manufacturers are likely to target higher margin exports to improve their retention rates and offset sluggish local demand.50 Oct 07 Dec 07 Feb 08 Apr 08 Jun 08 (mn MT) 20 10 0 65% FY04 Capacity FY05 FY06 Demand FY07 FY08 FY09E 60% Capacity Utilization (RHS) Aug 08 Oct 08 Local Export Source: APCMA & IGI Research Source: APCMA & IGI Research Low per capita consumption indicates demand revival in the medium term Overall dispatches for FY08 marked an all-time high at 30.22mn MT in FY07. Industry Supply & Demand 50 40 30 (mn MT) 95% 90% 85% 80% 75% 70% Cement Dispatches 3.00 2. primarily on the back of surging exports.50 2. the last wave of expansions is expected to further aggravate the supply-demand imbalance in the country and adversely affect the pricing power of manufacturers resulting in margin compression. FY08 share in export receipts South Africa 1% Others 2% Afghanistan 34% Sudan 3% Iraq 1% United Arab Emirates 15% Kuwait 3% Yemen 4% India 6% Oman 6% Djibouti 10% Qatar 15% Source: FBS & IGI Research 5 .3mn MT. local consumption for 2mo FY09 declined by 15% to 3. reducing reliance on Pakistani cement.50 3. Meanwhile. while exports continued their upward trajectory to grow by 57% as compared to the corresponding period last year.50 1.11mn MT as compared to 24. In the mean time.

However. Depending on plant configurations (European vs. cement companies’ are likely to witness a manifold increase in their financial charges. an unprecedented 12% depreciation of the PKR against the USD by Jun 30’08 led MLCF.50/MT in Jul08. FOB coal prices were recorded at USD 93/MT (Newcastle Port Index). the largest consumer and producer of the commodity. the companies realized a positive interest rate differential between KIBOR and LIBOR. causing depletion in profitability. the companies’ 6 Aug-08 Oct-08 . However in the long term. DGKC and LUCK to suffer losses on their cross currency swap agreements in 4Q FY08. owing to the agreement. We expect the downtrend in coal prices to continue in tandem with the decline in crude prices. some companies. During the previous year.Cement Pakistan Securities Slide in global coal prices to ease margin pressure Coal prices have started a downward trend from a record high of USD 192. With the cement industry debt-to-asset ratio averaging at 55% and LTD-to-assets averaging at 35%. including DGKC. thus offsetting total financing costs of the company. with the exception of MLCF have since then retired most of their cross currency agreements which led them to incur a one-time exchange loss during 1Q FY09. marking a decline of 34% from the peak. the manufacturers are likely to witness a slight improvement in the margins as the positive impact of declining energy costs on gross margins is likely to remain muted due to the deteriorating exchange rate parity. Coal Prices (Newcastle Port Index) (USD/MT) 250 200 150 100 50 0 May-08 Aug-07 Sep-07 Aug-08 Sep-08 Nov-07 Dec-07 Feb-08 Mar-08 Jan-08 Jun-08 Oct-07 Apr-08 Oct-08 Jul-08 International FO Prices (FOB) 850 750 650 550 450 350 250 150 Feb-08 Mar-08 Jan-08 May-08 Sep-07 Jun-08 Nov-07 Dec-07 Oct-07 Aug-07 Apr-08 (USD/MT) Jul-08 Sep-08 Source: Bloomberg Source: Bloomberg Profitability to contract in higher interest rate environment Long term debt is usually pegged to the 6M KIBOR which has risen by 620bps to 15. Chinese).7% since Jun07 and is expected to remain near current levels during FY09. The companies. amid news of increased supply from China. For the week ended Nov 14’08. LUCK and MLCF had entered into cross currency interest rate swap agreement linked to LIBOR to offset finance costs through savings from the interest rate differential. Leverage FY08 200% 150% 100% 50% 0% BWCL MLCF PIOC LUCK DGKC ACPL FCCL Debt-to-Asset Long Term Debt to Equity Long term debt to assets Source: Company Reports & IGI Research PKR depreciation results in exchange losses on cross currency swaps Moreover.

2 2% FY11E 23.2 6% FY12E 26. 6M KIBOR has been assumed at 15. Given the lower capacity utilization levels. Currently.4x some risk of a price war will remain restrained as the manufacturers strive to maintain a positive bottomline.Cement Pakistan Securities balance sheets now bear the risk of higher financial charges through expected hikes in interest rates. A recessionary phase in our exportable countries may dampen export demand.7 148% 30.8 -2% 35.7%.7 -1% FY10E 21.1 25% FY09E 20. cement retail prices average at PKR 365 – PKR 375 per 50kg bag in different parts of the country. is likely to result in a slowdown in cement prices.1 107% 24.6 25% 29. Risks to our valuations A lower than expected slowdown in coal prices could result in depressed margins and a downside to our valuations. According to latest data by the FBS.1 -10% 9.1 5% 9. In the immediate term. a breakdown of the implicit pricing arrangement may result in a price war and compress margins for the manufacturers. with the industry’s leverage ratio averaging at 1. However. we expect cracks in the implicit price arrangement which.0 24% 3. increasing interest rates and a rise in the Federal Excise Duty (FED) by PKR 250/MT have led to skyrocketing retail cement prices in the local market.2 10% 8. for LT loans with floating interest payments. coupled with nose-diving coal prices and higher construction costs. l l l l Demand Outlook Local Demand Growth % Export Demand Growth % Total Growth % FY07A 21. followed by the religious holidays in the immediate term. while average retail prices for FY09 are expected to range at PKR 325/bag. Given the surplus capacity and lower capacity utilization by manufacturers.7 15% 8. A further increase in the same could lead to erosion of company bottomlines.1 31% FY08A 22.5 10% Source: APCMA & IGI Research 7 Oct-08 Jul-07 Jul-08 . a massive rise of 48% from Feb08 levels of PKR 235 – PKR 245 per 50kg bag. Interest Rate Volatility 18 15 12 9 6 3 0 (%) Apr-07 May-07 May-08 Aug-07 Sep-07 Aug-08 Sep-08 Nov-07 Dec-07 Feb-08 Mar-08 Jun-07 Jan-08 Jun-08 Oct-07 Apr-08 6 mo KIBOR 6mo LIBOR Source: Bloomberg Sustainability of implicit price agreement remains questionable amid demand slowdown Escalating coal prices.9 -2% 32.4 7% 7. we expect cement prices to decline by PKR 20/bag during Dec08 as the winter season commences.1 -5% 30.

Stock Summaries .

8 0. surpassing the industry capacity utilization by 30%.8 2. Khan Cement Company Ltd.December 2008 CEMENT PAKISTAN D. European plant to reward operational efficiency DGKC’s plant configuration as per FL Smidth technology enables the manufacturer to obtain a high run factor.0% FY10E 1.66mn MT. Afghanistan and India through land routes.7 Price/Earning 12. capacity utilization for DGKC is likely to average close to 100%.3 4. DGKC’s exports surged by 4x to reach 0.0 5.01 DGKC Relative Price Performance 40% 20% 0% -20% -40% -60% -80% KSE100 DGKC Jan-08 Mar-08 Jun-08 Aug-08 Source: KSE & IGI Research Securities www.22mn MT of capacity and a 17% market share in terms of total dispatches.G.6 Dividend yield 1.5% Recommendation: Fair Value: BUY PKR 49 Bloomberg Code Current Price (PKR per share) Average Daily Volume (mn shares) Market Capitalization (PKR mn) Shares Outstanding (mn) Weightage in KSE100 (%) Average Price (PKR per share) DGKC PA 39.pk 0800-2-34-34 .05 253. We expect DGKC’s dividend income to increase marginally by 1% to 858mn during FY09 and support weak earnings from core operations on account of declining cement demand.465 1.0 6. Investment Consideration Pioneering exports through land routes For FY08. Valuation A drastic drop in stock market valuations has resulted DGKC’s stock to trade a 25% discount to our fair value of PKR 49/share based on SOTP valuation. DGKC has the ability to cater to the local market while also exploring avenues in NWFP. export growth for FY09 is likely to range around 25%. During FY09. DGKC’s bottomline is highly dependant on dividend income from subsidiaries primarily MCB.3 6.8 2.igisecurities. We recommend BUY on DGKC however encourage investors to remain cautious in view of liquidity constraints.23 9. Adamjee.2) Price/Book 0.8 2.717 1.5 Earning per share (PKR) 6.5% FY12E 2. However.094 1. Low fuel and power costs coupled with fewer maintenance shutdown periods are likely to result in improved margins in the long term.4 (0. export growth through sea routes remains muted due to location disadvantage which may subject DGKC to a stagnant or a shrinking bottomline in the long term. a decline in public development spending and a potential slowdown in demand for cement in DGKC’s exportable countries particularly India and Afghanistan.3 5.6 0. Investment portfolio to hedge against bottomline erosion Having a strong backing by the Mansha Group.6 0.4 1.com.8 0.54 0. Nishat Mills and Nishat Chunian.3 66.3 0.0 8.5% FY11E 1. Being the market leader in the northern region with 4.9 0.40% 56.9% Source: Company Reports & IGI Research FY09E 149 0.7% 1.28 1. allowing cost efficiencies through economies of scale.959. DGKC: Estimates FY07A FY08A Net income (PKR mn) 1.622 (53) Dividend per share (PKR) 1. In line with the industry’s expectations.

Cement Pakistan . 16% GST and are eligible for a PKR 25. for DGKC while the industry capacity utilization was recorded at 81%.DGKC Securities Company Update Dampening local dispatches to be offset by higher margin exports Post expansion. Moreover. For FY09.83mn MT.08/MT export rebate. while the industry averaged at approximately PKR 1. as local demand eases. Local dispatches marked an increase of 52% to 3. capacity utilization for FY08 averaged at 103%. Likewise. surpassing the industry capacity utilization by 30% during FY09. DGKC’s fuel and power costs averaged at PKR 1.500 (PKR/MT) 100% 90% 2. DGKC has been operating above their installed capacity by operating the plant for 340 days a year against the average of 300 days. allowing it better fuel efficiency and capacity utilization as compared to peers.4mn MT while exports are likely to post a 25% increase to 0. DGKC is likely to increase the share of exports in their total sales mix in an effort to boost topline through improved margins on export sales which are currently exempt from the PKR 900/MT FED. DGKC dispatches 5 4 3 2 1 FY05 FY06 Local FY07 FY08 Export FY09F FY10F 80% 60% 40% 20% 0% -20% (mn MT) Growth Source: APCMA & IGI Research Plant’s operational efficiencies to give a competitive edge over industry players Both units of DGKC plants run on 100% FL Smidth technology (European).500 3.474/MT. Capacity Utilization 110% Operational Efficiency FY08 3. we expect a 5% decline in local sales to 3.57mn MT.000 2.000 1. Going forward.000 80% 70% 500 ACPL MLCF PIOC FCCL BWCL LUCK DGKC 60% FY04 FY05 FY06 FY07 FY08 DGKC FY09E Industry Fuel Costs/MT COGS/MT Source: APCMA & IGI Research Source: APCMA & IGI Research 10 . with higher exports. The high run factor enables DGKC to realize better margins than the industry. During FY08. while exports surged by 4x to 0.66mn MT during the period under review. DGKC will incur higher distribution costs which may offset the higher margins earned by the company. However. capacity utilization for DGKC is likely to average close to 100%.500 1. DGKC’s overall dispatches increased by 71% YoY during FY08.641/MT.

100 DGKC & MCB Relative Price Performance 40% 20% 0% -20% -40% -60% 8-Oct-07 8-May-08 -80% DGKC MCB Source: Bloomberg & IGI Research Location restricts export growth DGKC’s presence in the north enables it to maintain a dominant position in the northern market.770 17. However. Meanwhile an immediate downside risk also lies in INR depreciation against the USD which could result in higher landed cost of Pakistani exports and a consequent reduction in demand for the same.34. GCC and South Africa.157. DGKC may be subjected to a stagnant or a shrinking bottomline in the long term. Although exports to India through the Wagah Border may provide some respite to the sluggish bottomline.068. we expect DGKC’s dividend income to increase marginally by 1% to 858mn during FY09 (assuming no change to the portfolio and MCB’s DPS to amount PKR 14 during FY09).Cement Pakistan . For FY08. Moreover.733 6. In view of the weak outlook surrounding the textile and the banking sector.421 2. with the excess capacity surrounding the industry indicating lower retention rates and consequently margin compression in the medium term. DGKC is in an advantageous position to further penetrate into the northern market.875. DGKC’s bottomline is largely insulated by the investments in sister concerns.658 151.732. we expect DGKC’s investment portfolio to give its bottomline a distinct advantage over competitors in the event of insufficient income from core operations.391 7. South Dispatches Growth 35% DGKC dispatches 5 4 3 2 1 (mn MT) 80% 60% 40% 20% 0% -20% 20% 5% -10% -25% May-08 Aug-08 Sep-08 Nov-07 Dec-07 Feb-08 Mar-08 Jan-08 Jun-08 Apr-08 Oct-08 Jul-08 -40% - FY05 FY06 Local FY07 FY08 Export FY09F FY10F Growth North South Source: APCMA & IGI Research Source: APCMA & IGI Research 11 8-Aug-08 8-Nov-07 8-Dec-07 8-Feb-08 8-Mar-08 8-Jan-08 8-Jun-08 8-Apr-08 8-Jul-08 . North vs. Consequently.926. penetration in the north provides hindered access to sea routes leading DGKC to incur an additional USD 20/MT in freight charges in the event of exports through sea.026.926. Indian demand is likely to subside by FY10 as their local capacities come online. while also exploring avenues in NWFP.840 20. Moreover.281. after set up of the new plant in Chakwal.620 2. Afghanistan and India through land routes. dividend income amounted to PKR 847mn creating a per share impact of PKR 3.199 Total Shares 57.299 18. However. as local demand subsides and retention rates continue to decline.706.917. particularly MCB.100 AFS 45.770 17. DGKC Investment Portfolio Strategic MCB NML NCL AICL Others Source: Company Reports 12. it makes DGKC highly dependant on local consumption and does not allow the manufacturer to capture booming export markets such as China.DGKC Securities Investment portfolio to hedge against lower income from core operations Being the only company in the cement sector with a diversified portfolio of assets.541 1.

00 36. At current levels. while that from the equity portfolio comes up to PKR 36/share.679 14.842 8.700 32.815.543. PV of Term Val.9% 15.105 1.206 30.003 7.279 20.393 Portfolio Value (PKR/sh) 36.398.630.398 929.950.715 23.288.369 10. For valuation purposes.660 24.463.9% 21.097.00 36.5% 23 20 17 14 11 9 7 5.9% 24.9% 23.481.566.281.143 11.464 18.595.912 12.9% 20.977.147 24.9% 20.00 (PKR’000) Equity Value (PKR/sh) 85 75 67 60 54 49 44 40 36 33 30 14.5% 19 16 14 11 9 7 5 4.Cement Pakistan .641.543 7.450.176.9% 21.109.994.9% 35.271 -1.408 4.953 28.844.9% and a growth rate of 4%.515 28.671 18.785.598.012.276 17.382.9% 18.669.0% 21 18 15 13 10 8 6 4.284 Source: Company Reports & IGI Research DGKC: Sensitivity analysis (Core Operations) Terminal growth rate 18.306 12. 18.00 36.044.4% 3.498 10.120.921 10.655.041 16.177.914 Equity Value 12.186.547.459.893.00 36.00 36.580.577 11.478. the scrip is trading at a 25% discount to our fair value and we hold a BUY stance on DGKC.4% 19.603 Enterprise Value 30.827.609 10.9% 16.833.922 10.635.696.9% 19.418.646 23.9% 22.420.907 7.DGKC Securities Valuation Based on our SOTP valuation of DGKC.9% 19. we arrive at a fair value of PKR 49/share.310 26.0% 18 15 13 10 8 6 4 3.00 36. Value from core operations amounts to PKR 13/share.897 26.612.849.751 21. while core operations have been valued using a DCF model with a WACC of 19.631 11.481.674.9% 17.600.031 -871. DGKC: Sensitivity Table WACC NPV of FCF 12.0% 24 21 18 15 13 10 8 Source: Company Reports & IGI Research 12 W A C C .574.445 3.4% 20.138 11.4% 18.036 16. we have applied a 35% discount factor to the NAV of the equity portfolio.00 36.00 36.363.914 9.157 -19.451 19.00 36.840 6.863 10.705 19.113 6.311 Term Val.971.00 36.247.223.412 20.990.841 11.829.646 9.752 21.

627 (161.41% 172.520 34.23% 36.027 FY10E 16.16% 2.273.318.44 18.676.08 0.49% 28.400 148.784 FY11E 16.933.873 (4.79% -2.94 15.103 34.89 0.717.18% 36.836.744.04 24.00 64.96 19.56 (4.35% 0.541 137.69 0.923.051 30.088.32 23.530.437.34 -2.53% 1.858 12.79 35.904.36 17.G.22 31.36 25.097 16.75% 23.146 903.80% 25.89% 38.243 2.380 FY09E 16. Khan Cement Company Ltd.954 22.03 -2.995.77% 85.759 22.761 22.43% -0.654 13.224 30.Cement Pakistan .686.11% 87.698.268 163 163 4.429 271 3.12% 17.257.91 2.18% -0.417 72 5.00% 100.97% 6.296 12.147.928 9.96 37.48% 10.06% 35.48% 26.20 37.475 2.60 0.19% 135.23% 4.44 36.813 140 141 7.59 0.723 1.40 0.862.400 4.480 1.66% 17.718 5.64 (382.50 49.464 73 70 4.02% -0.61% 6.097 25.577.43 0.03% 12.959.520 253.215 574.60% 11.541 124.71% 152.69% 12.849 18.307 20.474 174 174 3.08 1.17 12.894.541 118.70 19.45% 15.681.07% 4.40% 119.175 150 153 9.78 6.19 -1.210 4 4.51 0.469.102 205 3.80 3.34 13.174 4.68% 1.758 1.57 4.100 67 66 4.62% 1.80 3.668 20.49% 0.896 97 100 6.541 129.977.930.974 97 99 11.05 1.301.551 8.718 (2.126.116 206 2.56 22.16% 7.56 13.32 3.084 13.445.645 282 4.959.625 4.919 296 4.81) (26.70 15.73) 0.70% 35.19% 10.35 0.568.106 253.33 20.55% 240.00% 1.86% 5.940 147 2.946 1.014.22% 14.96% 72.68% 113.45% 30.629 256 3.023 82 5.05 1.47% 23.96% 61.53% 14.27% 4.694 9.978.530.93% 17.65% 29.541 119.150 68 5.14% 15.325 2. Of Share Book Value Earning Per Share (EPS) DPS Sales Per Share Price per Sales per Share (PSR) Price Earning Ratio (PER) Price Per Cash Flow (PCF) Price to Book Value (PBR) Profitability Gross Profit Margin Operating Profit Margins EBITDA Margins EBIT Margins Pre.98% 27.49 12.763 22.694 2.39% 9.622.487 4.117.953 13.868.033 FY08 12.78 -7.093.228.61 5.82% 27.092.266 15.22% 3.68 15.61 66.884.24 0.233.321 3.663 158 4.268 3.489.78% 3.452.591 22.937 9.DGKC D.30% 0.35% 9.47% 814.465.580.319 1.54 0.229.94% 1.748.37% 21.072 2.30 21.931.40 1.675 13.64 (0.82 28.21) 1.314.465.20% 15.49% 0.46) 0.387.010 2.440.996 10.72% 6.419.Tax Margins Net Profit Margins Return On Equity (ROE) Return On Assets (ROA) Return On Common Stockholders Equity (ROCE) Dividend Payout Retention Rate Asset Turnover Liquidity Current Ratio Acid Test Ratio Quick Ratio Days' R/B Days' Inventories Days' Payables Operating Cycle Solvency Debt to Total Assets Total Debt to Equity Long Term Debt to Equity Net Debt to Equity Interest Coverage Ratio Asset to Equity Net Debt Market Value of Equity Enterprise Value (EV) EV/ EBITDA EV/ Ton of Sales EV/Ton in $ EV/ Share EV/ Ton of Capacity EV/Ton in $ Gross Price per Ton (Ex-Fact) Gross Price per Bag (Ex-Fact) Net price per ton Net price per bag CGS per ton CGM per ton CGS per Bag CGM per Bag Working Capital Change in Working Capital Capital Expenditure Source: Bloomberg FY07 6.150 3.14% 18.531 (53.146.10% -0.74% 16.35% 52.85% 27.31% 78.541 133.45 40.09 1.30% 82.35 15.425 (617.19% 7.230) 19.192.76 3.55 58.257 253.99% 130.88% 16.756 188 2.707) 739.127.91% 500.77 1.113 9.78% 21.462 31.09% 32.53% 25.961 229 138 15.080.00% 44.448) 1.84 17.958 81 80 5.884.61% 42.919.69 23.26% 25.386 253.85% 18.842 253.53% 5.721.796 190 3.855.725 7.278 14.377.034 3 4.277.62 6.242.640 1.090.624 181 181 4.14% 144.894 8.202.842 767.791 6 5.25% 23.03% 4.35% 626.46% 30.60 31.097 20.66% 3.231 262 3.959.03% 12.07 1.98 0.02% 44.72% 0.289.139 21.00 68.447 33.757.80 6.82% 18.09 -2.04 1.556.092) 633.662.42% 50.78 1.00% 33.31 0.097 17.223.809 1.649 32.565 128 1.71 37.103 38.846.806 2.91% 0.49% 63.299 215 3.411.824.19 0.139 4.185 253.471 19.771 12 13.472 3.206 Securities FY12E 17.95% 13.38% 163.12% 21.00% 19.51% 1.14% 4.00 63.965 198 3.313 166 166 6.23 0.797.04 2.41% 2.590.959.410 11 9.29 21.04 8.01 5. Income Statement (PKR '000) Net Sales Cost of Goods Sold Operating Profit EBITDA Net Income Balance Sheet (PKR '000) Current Assets Operating Assets Long Term Loans Total Equity Per Share No.70% 409.59 64.288 103 5.41 -20.26 1.18% -714.025 4 4.852) 2.622 3.214.44 16.377.593 13 .

9bn in the corresponding period last year. However.3% FY12E 3.1 2. with a terminal growth rate of 4% and a WACC of 18.766 1.2% ROE 9.681.3 1.3 11.2% 12.5 0.9 13.70 18.158 9.December 2008 CEMENT PAKISTAN Lucky Cement Limited Investment Consideration Revenue growth of 29% expected in FY09 With capacity expansion of 1. while saving on inland freight costs of approximately USD 10/MT. LUCK: Estimates FY07 2. For FY09-FY13.1 0.4% 7.320 7.77.2% 13.14 LUCK Relative Price Performance 40% 20% 0% -20% -40% -60% KSE100 LUCK Jan-08 Mar-08 Jun-08 Aug-08 Source: KSE & IGI Research Securities www.0% 13.75% 112.0% Dividend yield 27.3 11. we expect exports to range around 50%-53% of LUCK’s total sales mix. LUCK’s presence in both north and south has put it in a favorable position to fulfill exports by rail and through sea.25mn MT expected in the southern plant during FY09.4 0.1% 6. Conversion of existing plants from FO based to a mix of gas and FO is also likely to reduce cost of sales in the long term. LUCK is expected to post revenue growth of 29% during the period under review.2% 9.695 1. Location benefits export growth With rising export demand.9 8.9% 14.5% 10.33%.6 0. net sales are expected to range at PKR 21.38 0.9 0.6 5.7 Price/Book 9.7% FY10E 3.77 6. we value LUCK at PKR 57/share. therefore we maintain a NEUTRAL stance on the scrip.pk 0800-2-34-34 .7 5.9% ROA Source: Company Reports & IGI Research FY08 2. Additionally.com.9bn against PKR 16. With the price floor intact. export demand may taper off post FY10 as regional capacities commence operations. LUCK is currently trading at PKR 57.9% FY11E 3.9 Price/Earning 1.1% 8.8% Recommendation: Fair Value: NEUTRAL PKR 57 Bloomberg Code Current Price (PKR per share) Average Daily Volume (mn shares) Market Capitalization (PKR mn) Shares Outstanding (mn) Weightage in KSE100 (%) Average Price (PKR per share) LUCK PA 57.547 Net income (PKR mn) 1. the Refuse Derived Fuel project may result in cost savings of approximately 60% when implemented.igisecurities.8 5. Consequently.8 0.8% FY09E 2.0 2.0 Dividend per share (PKR) 9. coupled with an increase in cement prices and a concentration towards higher margin exports.2 0.7 Earnings per share (PKR) 2.66 323.0 8.0% 11. cheap electricity will be generated by recycling waste heat from the process. Valuation Based on DCF approach.678 1. New projects likely to improve margins The Waste Heat Recovery project is expected to cost around USD 40mn and is set for completion by the end of FY09 whereby.

48% is still likely to account for export which will boost the topline through higher retention prices.LUCK Securities Company Update Exports to support margins Lucky Cement’s simultaneous presence in both the northern and the southern region has put it in a favourable position to fuel topline growth by catering to local demand through its northern plant. This expansion will increase the total capacity to 9mn MT and will boost production. thus leading to a surge in sales revenue through volumetric growth. Nonetheless. export demand is likely to taper off after FY10 on account of regional expansions while LUCK’s export dispatches are expected to post a CAGR of 2% till FY13.75mn MT.Cement Pakistan . enabling it to guarantee future off-take and utilization of 8%-10% at current capacity of 6. we expect utilization levels to fall to around 60% from the 75% expected during FY09. Excess capacity in both regions led the manufacturer to secure a 12% local market share and a 35% export market share in FY08. LUCK dispatches 6 100% 4 (mn MT) Export Market Share DGKC 10% PCCL 9% 70% LUCK 35% MLCF 8% 40% 2 10% FCCL 4% ACPL 1% PIOC 2% BWCL 7% - FY05 FY06 Local FY07 FY08 Export FY09F FY10F Growth -20% Others 24% Source: Company Reports & IGI Research Source: Company Reports & IGI Research New projects to boost bottomline through volumetric growth and cost efficiencies The planned expansion of 2. One plant of 1. while leaving the southern plant to explore export avenues through sea routes. However. of LUCK’s total sales mix. LUCK Capacity Utilization 110% 100% 90% 80% 70% 60% FY04 FY05 FY06 FY07 FY08 FY09E Industry LUCK Source: APCMA & IGI Research 15 . enabling them to save inland freight charges of approximately USD 10/MT. and 7%-8% of post expansion capacity of 7. a trend which is expected to be maintained in the medium term.25mn MT is expected to be operational by Dec08. Post expansion. LUCK has also entered into a Memorandum of Understanding with Noor Financial Investment Company for supply of 500. while the other plant will commence operations during FY10.000 MT of clinker per year for a period of 5 years. This expansion is expected to cost USD 135mn and is financed from the USD 109.3mn raised through the GDR issue while the deficit is raised through debt financing.5mn MT. Additionally.5mn MT in LUCK’s southern plant is expected to come in two phases.

60 0. The swap arrangement had enabled the company to realize a positive interest rate differential between the KIBOR and the LIBOR. The Waste Heat Recovery project is expected to cost around USD 40mn and is set for completion by the end of FY09 whereby. LT debt vs.600 1.7% and is expected to be curtailed at current levels despite the recent 200bps hike in the discount rate. LUCK incurred losses of PKR 800mn on its cross currency swap agreements during FY08. Finance cost 9 8 7 6 5 4 3 2 1 FY07 FY08 Total LT debt FY09E FY10E 0. On account of this.400 1. the long-term loans have now been refinanced and linked solely to the KIBOR which currently averages at 15.20 0. we expect the company’s financial charges to increase to PKR 703mn. However. the Refuse Derived Fuel project is still in initial stages and is expected to result in cost savings of approximately 60% when implemented.200 1. while a one-off exchange loss of PKR 420mn incurred during 1Q FY09 will boost other charges to PKR 604mn during FY09. cheap electricity of about 15 MW at Karachi Plant and 10 MW at Pezu Pant will be generated by recycling waste heat from the process. In order to mitigate the risk of the further depreciation in the PKR. the company has also initiated two new projects that are likely to reduce cost of sales in the long term. Additionally.40 600 400 200 - Finance cost FY05 FY06 FY07 FY08 FY09E FY10E Source: Company Reports & IGI Research Source: Company Reports & IGI Research 16 .Cement Pakistan .000 800 (PKR/MT) 0. post termination of swaps. according to industry sources.LUCK Securities In an effort to fight soaring energy costs. LUCK terminated its swap agreements during 1Q FY09 leading to one-time loss of approximately PKR 318mn. Going forward. Termination of cross currency swap agreements to increase interest rate risk Owing to a 13% depreciation in the PKR against the USD.00 EBITDA/MT 1.80 (PKR bn) 1. the refinancing may provide a hedge against exchange rate volatility while exposing the company greatly to interest rate risk in case of a further appreciation in the discount rate and subsequently KIBOR.

817 26.642.0% 64 60 57 53 50 47 45 3.345 11.302.283 34. At current levels.33% a terminal growth rate of 4% and a share capital of 323.3% 19.33% 18.389.33% 20. inflationary pressures and fears of a global growth slowdown. Nevertheless.816.Cement Pakistan .327.799.610 30.343.011.232.33% 21.588.255 31.131.8% 17. owing to high prices of cement and increased exports. Based on the prevailing law and order situation in the country.386 37.404 20.568.466.744 12.8% 18.705 35.431.227 20.616 Enterprise Value 52.915.443. LUCK: Sensitivity Table WACC 12.652.528.262.625. 40.989 13.954 41.65 96.514.064 33.430.074.976 23.088 10.341.142 28.59 57.978 9.41 44.117 9.343.751.345 26.00 50.873 Equity Value 42.174 (PKR’000) Equity Value (PKR/sh) 130. However the burden of financial obligations falling due during to next 5 years acts as a dampener to the scrip’s valuations.0% 69 65 61 57 54 50 47 4. merely 1% volumetric growth is expected for FY09 compared to the corresponding period last year due to dwindling local demand slowdown in export growth.66 39. the scrip is trading at par to our fair value.594 61.788.364 23.946 15.4mn shares.33% 19.273.002 PV of Term Val.175.554.930 46.041 55.5% 72 67 63 59 56 52 49 5. this is likely to translate into top line growth of 29% compared to FY08.041 10.252.33% 14.33% 16.8% 3.835.683.787 11.364 14.230 36.118 16.032 46.5% 66 62 59 55 52 49 46 4.316.621. According to DCF approach.509 12.90 73.444 23.08 Source: Company Reports & IGI Research LUCK: Sensitivity analysis Terminal growth rate 16.227 50.8% 19.214.832 10.0% 75 70 65 61 58 54 51 Source: Company Reports & IGI Research 17 W A C C .103 31.LUCK Securities Valuation Going forward.567.58 35.457.320.052 40.177.33% 22.097.33% NPV of FCF 11.33% 15.3% 17.855.416 9.401 16.487 21.912.099.686 27.455 9.025 43.756.41 83. we reiterate a cautious approach on the sector in the long term.3% 18.927 33.442 18.963.105. therefore we hold a NEUTRAL stance on LUCK.084.265 37.33% 17.887.212 31. at 2012 69.784.440.646 11.697.342. we estimate LUCK’s fair value at PKR 57.60 111.282.45 64.257 Term Val.310 18.846.063 24.876 10. using a WACC of 18.33% 13.

341 7.06% 6.83 20.550 263.95 31.734 28.158 3.93% 0.73% 20.141 18.303 18 .761 323.372 3.907.913.09% 8.40% 12.520 7.90% 27.079 3.798 FY08 16.372 29.77 69.743 (371.35 -0.943 5.508.840 516.780) (1.375 64.544 554.708 3.02% 11.052.908 6.02% 89.113 4.598 30.660.840 3.846.211.80% 22.79% 14.40% 28.141) 2.770 26.681.90 0.161.279 3.01 9.511 90 95 4.375 84.20 11.53% 1.83 20.00% 62.84 5.26% 9.547.23% 10.03 29.302.53% 10.61 29.426.473 224 3.694.08% 47.65 4.295 265 4.13 1.67 1.93 25.02 32.45 (8.61 34.090 5.821.255.74 54.985.367 4.938.65 1.059 2.445 6.253 7.21 25.74% 24.404 170 170 3.75% 19.403 25.753 6.056.985 3.168 3.975.22 0.56% 54.85 8.92% 18.159 52 5.92 6.333 7.768.050.173 Securities FY12E 25.613.74 54.09 0.906 130 139 5.53% 35.003.64 23.635.52 130.806 36.15% 6.670 8.954.26% 14.34% 13.57% 11.750 5.897 6.25 78.35% 7.747 187 3.96 3.283 70 4.30% 18.109 105 105 (949.801.023.879 12.513 4 5.51 9.940.18 67.550 5.375 74.79 5.847 143.919 196 3.650.00% 100.68% 0.209 8 7.54% 65.052) 270.447 2.197.385 20.90% 22.64 0.88 -0.77 4.766.423 323.69 8.91 0.884.650 4.754 18.715.49% 36.52 2.261) 6.68 29.629 126.LUCK Lucky Cement Company Ltd.27 0.22 25.972 46.347 5.392.03 29.085 11.342 4.41 16.402.28 275.371.975.169 158 158 (558.320.292 9.87 7.281 7.00 47.375 4.64% 6. Of Share Book Value Earning Per Share (EPS) DPS Sales Per Share Price per Sales per Share (PSR) Price Earning Ratio (PER) Price Per Cash Flow (PCF) Price to Book Value (PBR) Profitability Gross Profit Margin Operating Profit Margins EBITDA Margins EBIT Margins Pre.00 54.682.basic & diluted Balance Sheet (PKR '000) Current Assets Operating Assets Total Fixed Assets Current Liabilities Long Term Loans Total Non-Current Liabilities Total Equity Per Share No.045.60% 15.203 703.521.27% 66.15% 13.583 179 2.82% 14.486.731 1.681.915 5 5.076.231.75 0.69% 4.23% 9.719.677.15 0.76% 12.145 84 88 3.477 90 92 3.756 238 3.50 0.47% 10.67 5.135 117 3.24 124.595.05 53.472 73 79 2.136 207 3.896.235.655.763 323.700 FY09E 21.83% 14.25 73.81 11.212 FY11E 23.83% 29.18 5.30% 28.04% 25.666 241.727 3.614 4.300 5 5.51% 21.65 27.06 5.90 45.63 34.871.597.695 3.482 1.59 0.424.29% 0.201.64% 175.192 7.28 1.22 1.543 18.578.73 4.89 26.235.551 5.981 2.60 19.81% 12.912.16% 11.84% 20.324.286 16.681.33% 22.052 153 2.201.544 58 4.74 0.17) 1.363.86 85. Income Statement (PKR '000) Net Sales Cost of Goods Sold Operating Profit EBITDA Finance Costs Taxation Net Income EPS .850 6.512.329.361.382.28 8.08 39.14% 23.372 28.98% 22.53% 1.695.372 30.71% 49.34% 89.78% 20.957.28 183.282 164 164 1.85 0.066.29% 87.77 29.09% 0.943.375 95.19% 58.527 862.053.070 154 153 (828.671 11 8.111 16.06% 66.52 61.681 3.091 2.69% 11.127 1.12 13.502.869 24.54 2.40 -1.23% 30.87 -0.09 12.43 4.108 255 4.36 0.554 9.850 96 3.353.47% 1.878) (653.35% 12.23% 9.735 3.00% 100.05% 14.379 21.49% 20.73% 18.224 18.956.28% 22.429 122 121 720.00% 63.855.46 63.30% 9.664.34% 22.699 135 2.51% 83.922 31.388 20.655 9.678 20.690.664 31.826.135.43 1.83 20.410 FY10E 22.47% 10.73% 15.06% 0.337) 4.119 25.116.076.133.56% 29.360 1.73% 89.296 17.158.74 29.596 3 4.878.44 2.407.115 11.310 216 3.681.Tax Margins Net Profit Margins Return On Equity (ROE) Return On Assets (ROA) Return On Common Stockholders Equity (ROCE) Dividend Payout Retention Rate Asset Turnover Liquidity Current Ratio Acid Test Ratio Quick Ratio Days' R/B Days' Inventories Days' Payables Operating Cycle Solvency Debt to Total Assets Total Debt to Equity Long Term Debt to Equity Net Debt to Equity Interest Coverage Ratio Asset to Equity Net Debt Market Value of Equity Enterprise Value (EV) EV/ EBITDA EV/ Ton of Sales EV/Ton in $ EV/ Share EV/ Ton of Capacity EV/Ton in $ Gross Price per Ton (Ex-Fact) Gross Price per Bag (Ex-Fact) Net price per ton Net price per bag CGS per ton CGM per ton CGS per Bag CGM per Bag Working Capital Change in Working Capital Capital Expenditure Source: Bloomberg FY07 12.09% 10.68 29.937 4.556 8.923 246 4.927 18.671 323.77% 24.931.12% 45.840 47 5.549.321 136 143 7.835.569.401.60 59.375 35.55% 13.23% 20.640 773.290 28.00 147.75% 35.34% 27.543 29.89% 13.Cement Pakistan .361.855.88 0.012 10.574.01 45.686.63 9.670.69% 14.056 1.861 8.375 57.814.74% 28.312 15.90 -0.805 323.829.660 2.318.56 76.278 1.12% 13.35% 24.23% 10.112.929 1.403 3.50 31.54% 22.732.27 14.05% 123.66% 48.017.433 2.23% 10.372 25.699 36.352.64% 9.26 165.169 27.94% 89.633.042 9.02 52.20% 22.

pk usman.pk ejaz.:813 Tel: (92-21) 111-234-234 Ext.pk Equity Sales Azhar Ahmed Batla Sher Afgan (LHR) Shafqat Ali Shah (ISL) Chaudhry Usman Javed (SKT) Muhammad Ejaz Rana (FSD) Tel: (92-21) 530-1713 Tel: (92-42) 630-0082 Tel: (92-51) 280-2243 Tel: (92-52) 3242689 Tel: (92-41) 254-0854 azhar.sajid@igi.com.pk sarah. IGI Finex Securities Limited makes no representation as to the accuracy or completeness of the information. Securities Disclaimer This document has been prepared by IGI Finex Securities Limited (formely Finex Securities Limited) and is for information purpose only.pk abdul.Research Team Zainab Jabbar Sarah Junejo Abdul Sajid Mansoor Ahmed Investment Strategy. This document takes no account of the investment objectives. securities and issuers. Whilst every effort has been made to ensure that all the information (including any recommendations or opinions expressed) contained in this document is not misleading or unreliable.com.pk mansoor. I also certify that no part of my compensation was. distributed or published by an recipient for any purpose. directly or indirectly.jabbar@igi. Layout Tel: (92-21) 111-234-234 Ext.pk Analyst Certification I. . officer or employee of IGI Finex Securities Limited shall in any manner be liable or responsible for any loss that may be occasioned as a consequence of a party relying on the information.ahmed@igi.:812 zainab. is.rana@igi.batla@igi.javed@igi.com. Neither IGI Finex Securities Limited nor any director.:810 Tel: (92-21) 111-234-234 Ext. Sarah Junejo. hereby certify that the views expressed in this research report accurately reflect my personal views about the subject.:823 Tel: (92-21) 111-234-234 Ext.pk shafqat.com. Economy Refinery.ali@igi. financial situation and particular needs of investors.pk sher. Cement Database Design.com. related to the specific recommendations or views expressed in this research report.com.com.com. This document and the information may not be reproduced. who should seek further professional advice before making any investment decision.junejo@igi. or will be.com.afgan@igi.

Lahore Phone: (92-42) 5707411-33 Fax: (92-42) 5748935 Mezzanine Floor. 1st Floor. Syed Maratib Ali Road. Sialkot Cantt. Faisalabad Phone: (92-41) 2540843-45 Fax: (92-41) 2540815 Room No: 206. Karachi Phone: (92-21) 111-234-234 Fax: (92-21) 111-567-567. Phone: (+92-21) 5309258-60 Fax: (+92-21) 5309168 Karachi (Clifton) Room # 70. 2 – Liaqat Road. The Forum. Clifton. Karachi. Sialkot Trading floor. 2802241-43 Fax: (92-51) 2802244 9th Floor. Suite 701-713. Main GT Road.C. Multan Cantt. Karachi Phone: (92-21) 2429601-06 Fax: (92-21) 2429607 5-F. 2nd floor. 5777861-70 Fax: (92-42) 5762790 75-T.KSE Lahore Lahore . Phone: 052 -4566032-36 Dir. 90 – Blue Area.DHA Islamabad Faisalabad Sialkot Office Multan Office Gujranwala Office Peshawar Office Securities . DHA (near Lalak chowk). State Life Building. Gulberg. Hassan Arcade. Block 9. 1st floor. KSE Bldg. Phone: (92-61) 4784401-02 Fax: (92-61) 4784403 Nasir Plaza. 35. Razia Sharif Plaza. Cantt Plaza.4566035 C-2. Lahore Phone: (92-42) 5756701. Khayaban-e-Jami. Phase 2. 5301729 Branch Offices F-5. Clifton. Gujranwala Phone: (92-55) 3841346-48 Fax: (92-55) 3257453 Mall Tower. Ground Floor. (Adjacent to New Railway Station). Karachi Stock Exchange Road. Islamabad Phone: (92-51) 111-234-234.C.Head Office 7th floor. The Mall Peshawar Phone: (92-91) 5253980-88 Fax: (92-91) 5253989 Karachi .: 052 – 4566034-36 Fax: 052. G-7.

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