Sep 20 - 26, 2004





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.

PAGE: How do you see the demand and supply situation of cement sector in the long-term?

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 last year.

PAGE: 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?

SHAGUFTA: The 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.

PAGE: Do you see materialization of any of the big dam projects?

SHAGUFTA: Despite 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.



PAGE: What is your recommendation about the cement stocks performance in the stock market?

SHAGUFTA: We 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.

PAGE: What are your top picks from the sector and why?

SHAGUFTA: 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.

PAGE: What are your views regarding export of cement from Pakistan?

SHAGUFTA: Though 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.

PAGE: 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.