Cement companies: Rate cut, high development spending spark interest

Bya897204973

Updated Tue, 25 Nov 2014 11:12:42 GMT

Karachi: The recent reduction of 50 basis points in the benchmark interest rate and a sharp increase in the release of funds for the government’s development schemes have helped spark significant interest in cement companies on the Karachi Stock Exchange (KSE).

According to a research report issued by Shajar Capital on Monday, cement companies recorded a high trading volume last week (Monday-Friday) at an average of 47.1 million shares, up 41% from a week earlier.

The rise in activities on the KSE was the result of mixed recent developments for the cement sector, the report added.

The State Bank of Pakistan (SBP) has cut the benchmark interest rate to 9.5% from 10%, which bodes well for the cement industry, especially heavily leveraged companies like Maple Leaf Cement, Fauji Cement and DG Khan Cement. This indicates a positive impact on their earnings of 1.4%, 0.4% and 0.3% respectively for fiscal year 2014-15.

Furthermore, with another expected rate cut in the second half of the fiscal year, these companies could see a further profitability surge, the report said.

According to the country’s fiscal operations, in the first quarter (July to September) the federal government released only Rs39.5 billion under the Public Sector Development Programme (PSDP) out of the budgeted Rs525 billion (approximately 8%). However, the figure has shot up to Rs111 billion, approximately 21%, in November this year.

The increase in the disbursement of funds will further push up cement consumption and support its manufacturers.

Meanwhile, international coal prices have also not picked up despite the commencement of winter season, providing the cement companies an opportunity to save much on their fuel consumption in coming months.

Gas tariff hike

Although, according to news reports, Prime Minister Nawaz Sharif has rejected plans to raise the gas tariff, it seems to be the case of delaying the inevitable as the International Monetary Fund’s directives are straight forward regarding gas tariff. Apart from this, there has not been any significant progress pertaining to the collection of Gas Infrastructure Development Cess (GIDC).

“With the talk of gas price hike at the forefront, we believe the tariff rise to have an impact of Rs2, Rs0.37 and Rs0.21 on earnings per share of Lucky Cement, DG Khan and Maple Leaf respectively,” the report said.