Cement Sector: The top eight companies in the sector (mkt‐cap basis) posted remarkable earnings growth in 1HFY16. The sector posted earnings growth of 24% Y/Y with FCCL, KOHC and MLCF be‐ ing the star performers. Higher retention prices coupled with low international coal and FO prices contributed significantly to earnings enlargement while lower interest rate envi‐ ronment bodes well for leveraged companies (FCCL and MLCF). Moreover, no major an‐ nouncements related to expansions or investments were disclosed in this season.  The key highlights of 1HFY16 results are discussed below.

Robust Domestic Sales; Exports in Terrible Shape: Domestic dispatches during the 1HFY16 touched record high at 15.20mn tons; up by 16% Y/Y that largely neutralizes the brunt of depressed export sales. Higher disbursement of PKR 270bn under PSDP (↑ 86 % Y/Y) along with development on CPEC and sizzling private sector consumption supported the demand. In contrast, exports are in dire straits as it receded by 26% Y/Y to 3.06mn tons caused by the influx of cheap Iranian cement in Af‐ ghanistan and imposition of 13%  ‐  69% anti dumping duty by South African authority.   With higher share of local dispatches in overall sales mix (83%), average retention prices surged by 6% Y/Y to PKR 355/bag against PKR 335/bag recorded in 1HFY15.

Gross Margins At A Decade High: The commodity rout in international market became a blessing for cement sector. In 1HFY15, international coal prices which were hovering around USD 67.88/ton have slipped to USD 52.76/ton during the period under review, down by 22% Y/Y. Moreover, decline in FO prices have also allowed the companies to operate their diesel engines due to the better feasibility, reducing their dependence on national grid. The cost of electricity purchased from national grid is now ~30% ‐ 35% expensive in comparison with electricity generated through in house FO engine. Thus, cost of production reduced by 4% Y/Y to PKR 204/bag against PKR 213/bag recorded in same period last year.

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By: Habib Metropolitan Financial Services Limited