Karachi, April 22, 2020: Cement industry clocked in sales of 3.7 million tons during Mar’20 against 4.3 million tons SPLY, down 14 percent YoY. However, for 9MFY20 dispatches were up by 7 percent YoY. The 9MFY20 increase in numbers is attributable to double digit growth of 25 percent in exports, along with local dispatches posting a slight increase of 4 percent YoY to 30.6 million tons.
Meanwhile, on a sequential basis sales declined 17 percent MoM primarily owing to the spread of the Coronavirus and the lockdowns imposed throughout the country. In the later half of Mar’20, Government imposed lockdowns which resulted in complete halt of construction activity.
For Mar’20, local dispatches clocked in at 3.2 million tons posting a decline of 17 percent YoY. Closure of the Afghan border to restrict the spread of COVID-19 also affected exports of the players in Northern region. Exports for Northern players posted a decline of 19 percent YoY.
Company-wise performance
Company wise dispatches data shows MLCF, PIOC and CHCC have outperformed the industry. MLCF almost doubled its market share registering a growth of 55% in total dispatches. Similarly, PIOC and CHCC registered an increase of 11 percent YoY and 6 percent YoY, in total dispatches, respectively.
Elsewhere, majority of the remaining players in the industry posted a decline in sales. FCCL and ACPL registered declines of 37 percent YoY and 31%YoY, respectively—the most.
Consequently, we expect TSL Cement Universe earnings during 3QFY20 to decline.
3QFY20 earnings to decline
We expect earnings for TSL Cement Universe during 3QFY20 to register a decline of 1.3xYoY/2xQoQ on account of slump in dispatches led by: i) efforts to contain COVID-19 i.e. lockdowns; and ii) Overall decline in retention prices—putting pressure on margins.
Construction package ordinance promulgated
Ordinance effecting general amnesty for investments made into the construction sector along with other tax incentives has been singed into law by virtue of an Ordinance.
Our initial estimates suggest that local dispatches may increase by about ~0.95 million tons annually assuming construction of 50,000 low cost housing units by virtue of the introduction of the relief package.
Construction activity has also been allowed to resume after the pandemic imposed shutdown.
Outlook
According to the State Bank of Pakistan, Pakistan’s economy could shrink by 1.5 percent in FY20. These estimates are the lowest in the history of Pakistan. As a result of strong correlation between construction activity and the overall economy, we believe this will put a downward pressure on sector earnings for 4QFY20 as we expect only slight recovery in dispatches in the final quarter.
However, long-term prospects for the sector seem promising. Recent 200bps of further reduction in the policy rate, which brings CY20 TD cuts to 425bps, will support earnings of highly leveraged players like PIOC, CHCC and DGKC. Earlier commencement of monetary easing along with the relief package for the construction sector are expected to improve earnings for the Cement sector going forward. However, the effect of stimuli is contingent on the length and severity of the COVID-19 lockdown.
