SHAGUFTA IRSHAD has
recently joined KASB Securities as an Investment Analyst. She mainly
covers Cement and Fertilizer sectors. She plans to pursue her career in
Equities Research. She was born in 1980. She is an MBA from Karachi
University Business School. She secured first position in MBA with
majors in finance and second position in BBA (Honors). She was also the
Treasurer of the university's students' society, BASS. She has done her
internship at Orix Investment Bank, Faysal Bank, Emirates Bank and NDFC
during the studies.
do you see the demand and supply situation of cement sector in the
SHAGUFTA IRSHAD: I
believe that the cement manufacturers are repeating the mistakes they
did in the early 90s. We foresee that the overall cement supply will be
increased to 38 million tons per annum (MTPA) by 2008 with the
completion of the expansion plans announced by the manufacturers.
However, cement demand is not expected to grow at a similar rate. Even
under the best-case scenario demand could go up to 21 MTPA. This will
bring down the capacity utilization rate to 56% as against 72% achieved
Given the 20% increase in cement demand this year and the present
government's focus on housing and infrastructure projects, how do you
foresee the demand growth for cement?
current upsurge in the cement demand is just the tip of the iceberg
owing to the increased government focus towards public sector projects.
However, the massive allocations for physical infrastructure development
in the budget will eventually be diverted to other components of
government spending. As regards housing sector, the construction pace
not really picked up. Rather, it is experiencing a slow down. The slow
down can be attributed to a number of factors. However, some of the key
issues facing construction industry are: soaring land prices, sky
rocketing steel prices and the reluctance of bankers to go beyond first
tier clients, when it comes to financing of houses.
Do you see materialization of any of the big dam projects?
the continuous positive news flow over this issue, I don't foresee
immediate implementation on these projects. There are two reasons for
this belief. First, it involves development of feasibility studies,
which will take at least couple of years. Second, the actual
implementation is dependent on the willingness of the two provinces,
Sindh and NWFP. It is understood that the Technical Committee is
emphasizing more on Kalabagh dam as compared to Bhasha dam. However,
achieving national consensus on Kalabagh dam will remain a critical
issue. Even if one assumes timely implementation of any of the big dam
projects, these can utilize up to maximum 750,000-900,000 tons of cement
every year as against the excess supply of more than 16-17 million tons
in 2008. Therefore, there would still an oversupply, which does not
justify the expansion plans being undertaken by the companies.
What is your recommendation about the cement stocks performance in the
are negative on the cement sector and also believe that the market
sentiments for the cement sector are getting matured. Investors have
started realizing the risk attached with investment in the cement sector
as compared to the market. Moreover, investors do not ignore the short
sightedness of cement companies in ignoring the deteriorating demand and
supply equation by going ahead with the implementation of their
announced expansion plans.
are your top picks from the sector and why?
Though, we are not really bullish about the cement sector, we have a
soft corner for Maple Leaf owing to its cheaper valuations. Maple Leaf
can be an ideal pick if the government decides to go ahead with any mega
size dam. Our price estimation for the next 12 months is Rs 44/share.
The stock offers 19% upside potential from current level. We suggest a
'Buy' for Maple at current prices.
What are your views regarding export of cement from Pakistan?
the recent surge in UAE cement prices and the exceptional growth in
neighboring countries have created a small window of opportunity for
Pakistani cement in Afghanistan and the UAE, we feel that investors need
to focus on the quantum of exports rather than MoM or YoY growth in
exports. Furthermore, we are of the opinion that the said opportunity
will only improve the profit margins on the exported products to the
level that has been achieved in the case of local products otherwise
there will be no significant impact on the sector as a whole.
Why there is a difference of opinion on the cement sector between your
recommendation and the other brokerage houses?
SHAGUFTA: I am
not the best judge to pass my ruling. However, I believe that all those
who are exceptionally bullish about the sector they are ignoring the
impact of the deteriorating demand and supply equation beyond 2007 as
well the increasing interest rates in the country.