The market remained volatile ahead of the Monetary Policy Statement (MPS) during the week with investors’ favourite and actively-traded cement sector posting a substantial return in 2014. According to experts, cement sector market capitalization posted a gain of 70pc versus benchmark, KSE-100 Index return of 27pc in 2014. This is the third consecutive year that cement companies have performed better than the broader market. Someone who took exposure in cement sector 3 years ago will be richer by approximately 6.0x.
Profit-taking was witnessed at fresh highs, resulting in the benchmark KSE-100 closing up by only 0.7pc WoW at 34,027. Average trading volumes declined by 9pc WoW to 302m shares, while foreigners returned as net buyers of $1.7m. The OMC sector remained green with Hascol (+13.6pc) and PSO (+5.9pc) rallying on the back of market expectation that the government will inject liquidity into the energy chain. K-Electric’s (KEL) stellar run at the bourse came to a halt, as the time period for receiving consent from majority shareholders to waive off their right on the proposed dividend lapsed on Thursday. Other key highlights of the week were, (1) Bestway Cement (BWCL) announcing its intention to acquire 50pc of the remaining free float of Lafarge Cement (LPCL) via Public Offer versus market’s anticipation of 75pc; (2) Cotton arrivals increasing by 10.6pc YoY in YTD FY15 to 14.3m bales; (3) Broadband subscribers growing by 40pc YoY to 3.79m in 2014; and (4) cut-off yields in T-Bills auction declining by 18-28bps. According to experts, investors kept on trimming their portfolios ahead of monetary policy announcement However, Engro witnessed healthy volumes of $23m amid institutional interest.
Profitability of the cement sector improved due to improvement in margins coupled with hike in cement prices as average net retention price (per bag) increased by 12pc in 2014 from Rs367 to Rs409. Moreover, focus of Sharif’s Govt on development projects, and start of mega projects like motorways, housing and small dams has helped cement industry to post decent growth of 9pc in local sales in 1HFY15. Moreover, SBP (State Bank of Pakistan) in its last monetary policy cut discount rate by 50bps which will also help leveraged companies like FCCL and MLCF to get some relief from lower financial charges. During FY14, the sector posted profit growth of 12pc to Rs43b against Rs38b in FY13, while in 1QFY15, the sector profits grew by 4pc to Rs8.9b versus Rs8.5b in 1QFY14.
Out of 17 cement companies, 13 outperformed the benchmark index. Pioneer Cement (PIOC) was the star performer due to improvement in net margins. LPCL outperformed the benchmark index by 107pc due to potential divestment of shares by Sofimo SAS. Kohat Cement (KOHC) was the third best performer as its growth was led by improved production efficiency and swift deleveraging. The largest cement manufacturer and market leader Lucky Cement (LUCK) generated return of 70pc during 2014, led by foreign buying.
Moreover, Bestway Cement (BWCL) and Fecto Cement (FECTC) generated returns of 94pc and 83pc respectively. One surprise was the underperformance of DG Khan Cement (DGKC) which posted return of 33pc, underperforming the sector by 37pc due to investors concern over rights issue for construction of a new cement plant.
According to experts, ever since the unfortunate Peshawar event took place, the focus of all political parties has shifted towards countering terrorist activities in the country. Political tension between Govt. and opposition party PTI (Pakistan Tehreek-e-Insaf) also eased. Other major political parties including PPP, MQM and ANP also joined hands with the Govt. to fight against terrorism.
Moreover, in a Dharna (sit-in) convention held on Jan 18, 2014, Imran Khan indicated a shift in PTI stance as he stated that he will not return to sit-in again and will now focus on improving the governance in Khyber Pakhtunkhwa (KPK), a province where his party is in majority. This has effectively ended political noise in the country and is reflected from the benchmark KSE-100 index which has increased by 6pc (6pc in US$-terms) in 2015 and has closed above 34,000 points level for the first time.