Research house predictions on Pakistan’s cement sector after COVID-19

Pakistani research house Spectrum Securities Ltd has taken stock of mitigation efforts against the coronavirus in the country’s cement sector. The measures to stop the spread of the virus had prompted the closure of number of plants to suspend production. The analysts review the pandemic impacts on stocks, demands in 2Q20, profits, future outlook and other aspects.

According to the research house, given the current circumstances, the future looks uncertain about where this pandemic will lead the world to. In the meantime, cement demand is expected to remain gloomy in the coming quarter (April-June 2020) due to the ongoing slowdown in the economy and some plant shutdowns due to COVID-19. However, with the approval of the cabinet, the government predicted the spending level of the Public Sector Development Program (PSDP) for the next three years between PKR700bn to PKR900bn (US$4.1-5.3bn) over the next three years.

Cement scripts in Pakistan stock exchange
As the number of coronavirus patients around the world started to increase at an alarming rate, the stock market indices were moved by negative sentiments. A similar pattern was followed by the Pakistan Stock Market as investors started to mimic the loss averse behaviour of international investors.

Between 27 January-31 March 2020 the KSE 100 took the strong negative impact and posted a considerable decline of 13,218 points. The major sectors that felt the heat of the pandemic included oil gas exploration, commercial banks, oil marketing companies and cement sectors. The investors opted for a sell strategy in these sectors with the anticipation of lower profitability.

Demand drivers
Pakistan’s PSDP is one of the major demand drivers for the cement industry as 20-40 per cent of domestic demand is through PSDP projects. The government maintained PKR701bn for PSDP for FY20 and indicated a 15 per cent (PKR100bn) cut this year, which could adversely affect local dispatches. However, megaprojects like low-cost housing schemes, construction of dams and the second phase of CPEC are key factors in cement demand. With the beginning of the global recession, the short-term outlook seems to be gloomy. Similarly, exports have been left with limited number of markets because of challenging competition from neighbouring countries and the closure of the border with Afghanistan. As a result, exports are likely to remain sluggish in 2Q20.

Substantial cut in the policy rate to provide a breather to cement sector
The cement sector is among the highly-leveraged sectors. Among familiar names, DGKC and PIOC are among the high-debt companies, followed by BWCL, MLCF and CHCC. The recent cut in interest rate from 13.25 per cent to 11 per cent, would cushion the finance cost in the coming quarters.