Renewed interest in the sector would continue into 2005


Mar 07 - 13, 2005



The cement sector exhibited tremendous growth in 2004. Analysis of 18 companies (10 in North and 8 in South Zone) listed on the Karachi, Lahore & Islamabad Stock Exchanges reveals 41.82pc growth in sales to Rs29,787m, 19pc growth in cement production to 13.64mnMT, 160pc growth in exports to 1.11mnMT and exports contributing 8.20pc to total production. This level of production was attainable due to a whopping 80.70pc capacity utilization, up from 66pc in 2003. The following analysis does not include Chakwal Cement (recently acquired by Orascom Intl.) and Mustehkam Cement that have been out of operation for many years.

Taking a longer view, CAGR from 1999-2004 comes out to 10.74pc. Having breached the CAGR by over 30pc in 2004 is a strong indication where the cement sector is headed. Operating profits industry wide grew by 290pc to Rs6,174mn. Gross profit margins improved to 36.89pc from 23.40pc in 2003. Operating profit margins improved to 20.73pc from a mere 7.54pc in 2003. Most significant improvement was seen in the bottom line growth, with net profit margins becoming positive from 0.23pc in 2003 to 13.14pc in 2004. The renewed impetus comes from increased construction and housing activity in the last year, budgetary support in form of reduced CED, import duty cuts on paints and building materials, consistent raw material prices for steel and cement, positive developments in construction of infrastructure projects, and opening in export markets of Afghanistan, Dubai and Qatar.

Benefits of aforementioned growth have led DG Khan to report a market share of 13pc, followed by Maple Leaf at 11pc. In the export market, Cherat Cement operating at 100pc capacity proved successful in attaining a 17pc market share, followed by DG Khan at 15pc. Better export prices have also supplemented growth.

Region wise, North Zone took 74pc of the chunk of production at 11.775mnMT, while South Zone took the rest at 5.099mnMT. The South Zone share could have improved but remained subdued due to low capacity utilization at 57.25pc compared to 71.22pc in North Zone. DG Khan, Maple Leaf, Lucky, Bestway, and Cherat in aggregate contributed 66.6pc to North Zone production, while Attock Cement, Pakland, Javedan, Dadabhoy, and Zeal Pak contributed 81.15pc to South Zone production. It is imperative to mention the leading role of Attock Cement in the South Zone, which contributed 25.75pc in sustaining the South Zone share. For the first time, Attock was able to export 41,500 tons to Qatar.

Most of the companies averaged a sales growth of 30-40pc, while Bestway and Fauji beat the industry growth with an upside of over 50pc. Few of the under-performers included Pakland and Saadi, which faced heavy restructuring as their ownership control was taken over by Dewan Mushtaq Group. Profitability-wise, Bestway emerged as the cheapest cost producer with gross profit margin of 47.43pc. On the operating expenses front, Bestway was again triumphant with operating profit margins of 37.29pc. However, Pioneer emerged as the net profitability leader with a commendable net profit margin of 32.07pc. Pioneer was able to use deferred tax assets worth Rs193mn to improve profitability this year.

Conversion to coal firing system from that based on furnace oil helped to half operating costs by over 50pc this year, whereas the average fuel costs per ton have improved to Rs1,000/-. Nearly all of the companies have shifted to coal firing system with the exception of Dadabhoy, Essa, and Gharibwal while the latter proposes to switch to a less costly gas system by next year.



Based on the sample of 18 companies, the cement industry employs around 8,500 persons. Workforce efficiency averages 1,300 tons per person. Out of this, Bestway, Pakland, DG Khan, Saadi, Maple Leaf, Fauji, and Lucky proved extremely workforce efficient concerns.

A few of the companies enhanced capacities in the outgoing year, while a great number of them have planned significant expansions on or before the end of 2007. DG Khan and Lucky Cement enhanced their capacities by 100,000 tonnes each in 2004.

The cement sector graduated from being a net borrower to a net lender in 2004, after retiring Rs7,528mn in debt. Out of this, Rs7,034mn or 93pc constituted long-term loans. Most of the long-term loans have also been restructured or re-profiled resulting in improved coverage at a reduced level of debt. Industry wide financial expenses were lower by 38pc from Rs2,192mn in 2003 to Rs1,356mn in 2004. As a result of this, the industry wide interest coverage ratio improved from 1.80 to 7.06x in 2004. The greatest beneficiary from debt re-profiling was again DG Khan with an estimated interest saving of Rs.265mn followed by Fauji with an estimated interest saving of Rs.185mn.

There was nominal growth in assets (3.55pc), which is expected to grow manifold after upcoming capacity expansion programs materialize. At present, Attock, Lucky, Cherat, DG Khan, and Kohat are strongly capitalized companies. However, once civil works on capacity enhancements commence, these companies would make heavy cash calls to fund expansion plans. Funds will come from a mixture of sources including internal cash from operations, fresh or quasi-equity, and long-term debt from banks.

The industry expects a supply of 34mnMT by end of 2007 against a demand of 21mnMT at that time, thus creating an over-supply situation much like that of the sugar industry today, though less inelastic in nature. In view of this, the export markets of Afghanistan have become future prospects for sustained growth and profitability of the cement sector. Out of the expanding companies, Lucky has proposed the highest increase in capacity yet at 5mnMT per annum by year end 2007, out of which 2.5mnMT is expected online in 2005.

Looking ahead, Lucky will probably emerge as the market leader after it runs more successful attempts aimed at the cartel. Other serious contenders for market share in the short-run also include Pioneer Cement, which is expected to enhance capacity by 1.2mnMT in 2005, second highest after Lucky at 2.5mnMT. Pioneer expects 7.5pc market share post-capacity enhancement from 4pc currently.

Analysts at major brokerage houses believe that the renewed interest in cement sector would continue into 2005, where demand is expected to touch 19mnMT, up 18pc from 16mnMT last year. Exports are expected to jump 70pc compared to 160pc in 2004, however, pressure on cartel will be magnified as new capacities come online. On the profitability front, the cement sector is expected to earn 10-12pc on the back of volume growth. Announcement for construction of dams would add another 1.35mnMT of cement requirement each. However, in the long-term, 2007 will be a period of over-supply at a lower estimated utilization of 65pc and demand CAGR of 11pc. These pressures will likely push prices below current levels and saturate the local market causing manufacturers to hunt for opportunities outside Pakistan.