It was projected and its been announced.

The budget proposal for the forthcoming fiscal year seems

favourable for the construction sector. Major plans are indeed likely to help domestic cement despatches
grow. This comes as welcome sign for the cement sector, which has so far experienced only a modest
growth of 1.17 percent in local despatches and negative growth in exports for the reported ten-month
period of the outgoing fiscal year.

The budget speech itself has a sizable portion reflecting the governments commitment to infrastructure
development in the country. Moreover, other priority areas highlighted in the speech, such as housing,
railways, water and power will be equally important in giving a substantial boost to cement sales.

In the water sector alone, over a dozen various projects have been identified for water storage, water-
courses lining schemes, reduction of water wastage and flood protection and drainage schemes. The
same goes for housing and urban development schemes that the government seems to be very keen
about.

It also appears that cement sales will remain dependent on public expenditure (see BR Research story:
PSDP to drive cement growth, published May 29, 2014). Therefore, any major setback in the political
situation may deter governments infrastructure development plans, consequently affecting the cement
sector more than it would others.

The government also envisions attracting investment in key areas with proposed reduction in corporate
tax rate from 34 percent to 33 percent. Sectoral analyses suggest that this will have a positive impact in
terms of improving bottom line of companies.

Similarly, the reduction in customs duty on pet coke, which is used as a substitute for coal, would reduce
fuel costs for those producers who have a significant share of this raw material in their input costs. The
reduction may also induce cement players to reconsider alternative fuels.

Again, it seems that the industrys suggestion has been well-taken by the government. APCMA suggested
in late May a zeroing of duty on pet coke from five percent (this duty has, however, been brought down to
one percent in the budget).

Not all is rosy, however. The introduction of Alternate Corporate Tax (ACT) at 17 percent will affect cash
outflows for cement players. Further, the increase in FED at five percent on retail price (from Rs400/ton
earlier) will create pressure on prices. If history is an indication, the pressure will be passed on to end-
users.

From constructing motorways to the Pak-China Economic Corridor, the governments plans appear to be
grand indeed. With the cement sector to be a major beneficiary; one can imagine market leaders lobbying
for positive change allowing maximum disbursements for mega projects.






Construction & Materials: Budget ripples on the cement sector
Budget FY14 was a mixed bag for the Cement industry where broad positives
for the sector were countered by significant negatives. In this regard, clarity has
emerged pertaining to the GIDC increase where as per our industry sources,
while the maximum limit of tax has been increased, it has yet to be implemented.
That said, all indications point towards an imminent increase in the tax rate to its
maximum limit potentially by Jul14, when the likely revision of gas prices
is to take place. Our numbers suggest an increase in manufacturing cost of
PKR5.3/bag and PKR4.9/bag for DGKC and LUCK, respectively owing to the
GIDC increase. Simultaneously, the GoP has also altered the mechanism for
determining federal excise duty (FED) wherein the new mechanism results in an
adverse PKR6.5 per bag impact on cement price (likely to be passed on). On the
positive side, the GoP has allocated PKR525bn for PSDP (FY14E revised:
PKR425bn) while the mark-up on export refinance facility (EFF) has also been
reduced to 7.5% from previous 9.4%. Given heavy infrastructure spending likely
in FY15 and beyond on account of mega projects such as the Karachi-Lahore
motorway and the Dasu dam, we portend local cement offtake to depict a 3-year
CAGR of ~7%. That said, profitability growth will be a factor of
manufacturers ability to pass on the cost hikes where we expect a gradual
phased pass-on over the course of 1HFY15. Investors should remain on the
cautious side.