LAHO RE - Growth in the cement sales, which was 23 per cent in the last three years, slumped to just 2 per cent in FY09 to 30.6 million tons. According to the latest provisional statistics, local dispatches arrived at 19.3mn tons (down 14%YoY), however exports depicted an astounding jump of 47%YoY to 11.3mn tons. Furthermore, on month on month basis both local and export dispatches were up 5% and 1% respectively. Cement analyst Atif Zafar from JS Captial Market said that amid record PSDP allocation (Rs621bn) in the budget FY10, reduction in excise duty by Rs10 per bag and declining interest rate scenario he remained optimistic on the cement sector outlook. Amongst the major scrip we flag Lucky and DG Khan Cement as preferred plays trading at an FY10E PE of 4.2x and 9.9x respectively, he pointed out. Economic slowdown, uncertain political and security situation along with budgetary constraints hampered infrastructure activities as well as private sector development projects in FY09. Resultantly, local cement dispatches dropped 14% to 19.3mn tons. However this trend has started to reverse as local dispatches for June 2009 came in at 1.7mn tons, up 5%MoM. We believe Rs219bn PSDP allocation for infrastructure development and materialization of dam construction activities announced in Budget FY10 remain major demand triggers which would boost local dispatches going forward. On the export front, demand from the Middle Eastern region and Afghanistan drove exports sales upwards during FY09 as exports rose to a record 11.3mn tons, up 47%YoY, with June sales posting a 1%MoM increase to 1.2mn tons. That said, anticipated capacity expansions in the Middle East (likely to come online by end FY10) remain major downside risk to earnings beyond FY10. GCC region is set to increase its cement capacity of 49.8mn to 109mn tons, an increase of 119% by FY10. However, our major export markets, Qatar and Oman are to increase their capacities by only 51% and 77% respectively with $304m worth of projects in the pipeline. Therefore below than expected capacity expansions in Omar and Qatar along with untapped markets (African countries and Sri Lanka) will provide stimulus to exports going forward. Atif Zafar said that we are currently bullish on the cement sector and anticipate a strong recovery mainly on account of high PSDP allocation. Our economists expects 300bps cut in discount rate by Dec 2009 which will reduce interest cost of the cement companies. According to our analysis, reduction by 100bps is likely to improve earnings by 0.24/share and 0.31/share of Lucky and DG Khan Cement respectively.