Result Review KOHC posted 1QFY16 profit after tax of Rs945mn (EPS of Rs6.12/share), increased by 38% YoY. Major rise in earning primarily derives from the expansion in gross margin, which is clocked in at 45% (increased by ~9pp YoY).

Other than that KOHC has announced to set-up cement mill which will commence production by Sept-17. Details of the results are as follows

 Revenue increase was in-line with dispatches volume both increased by ~11% YoY

 Gross margin increased ~by 9pp mainly due to decline in coal and energy cost

 Due to significant investment in T-bills (~Rs2.2bn) and mutual funds, other income increased by 1.7x to Rs106mn

Outlook:

 KOHC has decided to add new cement mills of 105tph at a cost of Rs650mn (Debt to equity ~70:30) which is expected to bring operational efficiencies and enable the company to operate at higher utilization level. KOHC is currently running at avg. annual utilization level of 62%

 Local cement demand is expected to remain upbeat due to massive infrastructure development projects being taken on by the Federal Government, including CPEC and real estate development projects by the private sector

 Cement sector has underperformed the market, due to increasing concerns on potential hike in Federal Excise Duty (FED) or imposition of Special Excise Duty (SED) of Rs25/bag on the cement sector. We estimate this may shrink the gross margin by 275bps if industry is unable to pass on the price increase (EPS impact Rs3/share). We have not incorporated the impact in our estimates

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 Long awaited 15MW WHRP is set to get operational in Dec 15. The plant will run across 30% of company electricity requirement and reduce reliance on the Grid (previously 85%). It will result in an annualized cost saving of Rs439mn (ESPS impact of the ~ Rs2.8/share)

 Higher investment in a money market fund

Recommendation

The continuous fall in coal prices (15% YTD), lower electricity price and commissioning of WHRP plant will further improve margins in the coming periods. We expect KOHC to post EPS of ~Rs27.32 and ~Rs28.7/share respectively in FY16/17. Currently trading at a 7.5x/7.1x of FY16/17 estimates respectively.

We recommend “BUY” stance on the script with target price of Rs273/share (Jun-16). It offers potential upside of ~33%

Downside risk of the study

 Further delay in commissioning of WHR Plant

 Higher than estimated increase in coal and energy cost

 Delay in materialization of key infrastructure projects i.e CPEC

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