PRO 11-04-2012_Layout 1 4/11/2012 12:59 AM Page 1
Doctor prescribes new medicine Page 02
profit.com.pk
Wednesday, 11 April, 2012
CHICKEN SOUP FOR THE SOULLESS
Is the bid in cement sustainable? How tax-free budgets win you elections, T Book 3, Chapter 12 SITUATIONER Shahab Jafry
KaraChI
O
ISMAIL DILAWAR
ne can aptly smell politicking on the part of the present democratically-elected government which is all set to present a tax-free federal budget for FY13 on the eve of general elections expected to be held in March next year. The federal government on Tuesday unveiled its four-point budgetary “priorities” for next fiscal year which, the finance minister said, include economic stability, unemployment and inflation, welfare of “forgotten” segments and the improvement of taxation system. Also, Federal Finance Minister Dr Abdul Hafeez Sheikh said the government in an indiscriminate action was able to collect around Rs 4 billion embezzled by “some of the biggest” names of Pakistan on account of tax adjustments with the Federal Board of Revenue (FBR). Talking to reporters at the 28th Corporate excellence Awards ceremony here, the finance minister said the forthcoming Budget 2012-13 would neither bring any new tax nor would the existing tax rates be increased. However, the finance minister said, the rich but untaxed would be brought into the tax net to make the resource-constrained country financially self-sufficient. Outlining the four priorities his government had “principally” set for the new fiscal budget, Dr Hafeez said the international and national negatives, like global contraction in economic growth, backbreaking floods etc., warranted Islamabad to focus on budgetary measures that could lead the country to
economic stability. “Of course, (economic) austerity is essential,” for economic stability, he noted. The finance minister said ensuring that its tax collection policies be improved and implemented in letter and spirit, his government would tax the country’s rich for achieving economic self-sufficiency. “The existing taxpayers would not be burdened any further nor the existing tax rates would be increased,” said he adding “So, naturally, there would be no new taxes or increase in the existing ones.” Also, Dr Hafeez said like this year’s allocation of Rs 50 billion under Benazir Income Support Program (BISP) the country’s “forgotten” segments would not be forgotten in the new budget. It would be ensured that the “weak” and the poor are provided with insurance, small loans and other basic facilities. Unemployment and the present double-digit inflation were cited by the finance minister as a fourth priority of his government. Other areas the budget would focus are: law and order, health, education, availability of drinking water and infrastructure development. earlier, the finance minister told the best performing corporate giants at the awards ceremony that the government was determined to take indiscriminate action against those involved in financial irregularities of any kind. Recalling a list comprising the names “who is who of Pakistan” show to him by the ex-FBR Chief Salman Siddiqui, he said he had ordered the lodging of an FIR against the bigwigs without any hesitation. “Rs 4 billion were collected from that one act alone,” the minister said.
He cement sector’s recent bull run is an interesting extension of the market’s current behaviour – stellar uptrend decoupled from the real economy. It outperformed the wider market by approximately 30 per cent, even as 8M-’12 y-o-y growth in total dispatch was an unimpressive 3.5 per cent (exports actually dropped 5.6pc!). Yet the sector posted healthy gains, mainly because leading companies employed costcutting measures just in time to leverage higher retention prices in both local and international markets. EXOGENOUS FACTORS, DEMOGRAPHICS: Of course, it helped that the international price of coal – the main cost driver – fell 22 per cent (y-o-y) as weakening global growth dimmed demand for commodities across the board. “Higher retention prices, along with reduced input cost, improved margins across the sector”, notes Husain Asghar of Synergistic Financial Advisors, a Lahore based consultancy. “Investors started mounting as prices rose in the local market, reaching around Rs410-430”. Signs of marked improvement have also appeared on the external side, despite dismal numbers so far in the outgoing fiscal. There is a sudden spike in demand owing to imminent postnato reconstruction in Afghanistan, where Pakistani cement furnishes approximately 90 per cent of the market, and unprecedented improvement in trade relations with India. Demographics will now determine company earnings in the immediate term, says Hamad Malik, market strategist at First national equities. Companies in the north will cash in on the Afghan trade while the likes of DG Khan, closest by road to India, will benefit from phasing out of the India-specific negative list. RUSH TO EXPORT: exports to Afghanistan alone have risen 11.5 per cent month-on-month, and seven per cent y-oy. Increased cross-border demand has obviously bid up prices, leaving supply bottlenecks in the local market. “The rush to export is interesting, to say the least,”
says Hamad, adding that “margins are higher locally, yet there is an overwhelming focus on increasing exports, which is difficult to explain in normal market conditions”. Analysts including the Fne strategist believe local companies are happy exploiting higher prices in the international market, especially since the supply shock leaves subsequent internal prices higher, much to the benefit of manufacturers. And this practice will continue at least so long as reconstruction momentum remains in Afghanistan, and Indian market demand reacts favourably. HOMEGROWN DEMAND, GOING LONG: Domestic off-take, which has formed the basis of the sector’s profitability so far, is set to continue strongly as the last quarter plays out. “A number of factors are converging just as election year compulsions demand an expansionist, people-friendly budget,” says Hussain. “You have post-flood reconstruction in affected areas of Sindh, setting up of new hydral projects, and cyclical uptick in demand that generally follows the end of winter”. And since these factors coincide with increased external demand – Afghanistan, India, even Saudi Arabia and Qatar – market sentiment is strongly in favour of long positions even as the sector is clearly overweight, raising expectations that the bid in cement is tied to the strong uptrend in the wider market. Yet a closer look shows that bullish fundamentals might not hold beyond the current fiscal, though brokers remain divergent. POTENTIAL HEADWINDS: “There are potential headwinds that can put a halt to the current sprint-run in the cement sector, or even turn the tide the other way around,” according to Sarfraz Abbasi, senior analyst at the Karachi based Summit Capital. One, the sector’s capacity utilisation is 71 per cent, the lowest in five years. Two, increased production from Iran threatens blunting our competitive advantage in our most lucrative markets (Afghanistan, India, Iraq). Three, depletion in foreign inflows due to financial and security breakdown has caused a hemorrhaging of funds from the development budget, squeezing room for fiscal expansion. Four, unnatural and perhaps engineered rise in cement prices has started
unnerving consumers and authorities alike, and chances of continued abnormal bid that catapulted the sector in the last few quarters are practically zero. Five, the government’s incurable addiction to borrowing continues to crowd out private sector investment, compromising the sector’s most ambitious point of leverage. “Thus we believe with modest growth in demand and cement prices, cement stocks might lose excitement in FY13,” concludes Abbasi. TAKE PROFITS?: It’s still difficult to figure exactly which bit of fundamental news will best signal profit taking, since market analysis is limited by near complete absence of technical tendencies chartists can leverage. Mid-level punters have had repeated experiences of getting their fingers burnt in times of furious selling, and an untimely repeat will send worrying signals about the market. Hamad notes clear bubble-tendencies, that too in the near burst stage. “There are clear abnormalities in cement,” he says. “When DGK increases 100 per cent in two months, for example, I tend to doubt there is long term fundamental bid”. He eyes an end-June deadline for the sector to return to stable earnings. SEASONAL, CYCLICAL: There are still contrarian views though. Synergistic Financial doubts the trend is likely to peter out with the change of fiscal year. With increasing demand both internally and externally, input costs reduced and companies nicely positioned to exploit underlying advantages, they expect the bullish sentiment to waltz into the new fiscal. The only threat, notes their sector newsletter, is unforeseen rise in the international coal price. “If coal price rises and cement players are unable to pass it on, margins could come under pressure,” it notes. But for the more prudent, especially those sitting on healthy gains, perhaps its best to avoid unnecessary uncertainty. Sometimes seasonal and cyclical signals are best to take cue from. “April onwards is a good time to shift interest to the fertiliser sector,” says Hamad. “ Demand increases as cultivation season approaches, and market interest shifts to fertiliser scrips.” There’s a good chance that return of rationality to cement will coincide with a bull rampage in fertiliser.