Higher PSDP allocation to help boost cement sales

LAHORE - The higher allocation in next budget for Public Sector Development Programmes (PSDP) including construction of dams is likely to boost cement sales. Moreover, cement sales would get further support from any potential reduction in excise duty, experts said.
They said that the IMFs approval to accommodate recent external flows commitment will stimulate PSDP allocation next year. As a result, it is expected PSDP outlay of Rs550-650 billion as against Rs 550 billion last year.
Experts are of the view that economic revival and higher PSDP allocation bodes well for domestic demand. However, outlook for exports seems vulnerable on account of global recession and new capacity addition in the Middle East.
Given the risk of export demand slowdown, the Cement Manufacturers Association has put forward a host of proposals aimed at stimulating growth in the sector.
In Budget FY09, excise duty was increased from Rs37.5 to Rs45 per bag. All Pakistan Cement Manufacturers Association (APCMA) have now proposed that this duty be reduced to Rs20 per bag.
It is not expected the revenue-starved government to reduce the excise duty to Rs20 per bag. However, we expect excise duty to be reduced to around Rs33-35 per bag, said Atif Zafar, a cement market expert.
Cement manufacturers have suggested Rs200 per ton subsidy on exports by sea. In light of the countrys challenging fiscal deficit, government will not accept the proposal.
Experts said that cement sector has made a decent recovery in FY09 after witnessing difficult times in FY08.
Reduced cost pressures on account of a steep fall in coal prices coupled with high retention prices (up 64%YoY) have led turnaround in profitability with profits up 833% in 9M FY09.
Analysts are of the view that high retention prices have boosted cement sectors profitability in the outgoing fiscal year when compared to low profits last year. However, they believe current local demand supply dynamics do not suggest such high prices would continue in the local market.
Atif Zafar said that currently, we have a 'Market-weight stance on the cement sector. The sector is trading at FY09E and FY10F PE of 6.3x & 5.3x, respectively. On the back of robust export growth, we expect Lucky to post 72% and 2% earning growth in FY09E and FY10F respectively, while, DG Khans profits are expected to grow by 14% and 13% respectively. He recommended 'Buy on both Lucky and DG Khan Cement, as both stocks are trading at an attractive FY10F PE of 3.9x and 8.3x, respectively.