Two cheers for Cherat

The country's construction appetite is reflected in the cement industry's expansion plans. While there had been inside word about Cherat Cement's expansion, the company chose to make an official announcement a day before Eid. Expectedly, the news has remained largely unnoticed in the press since.
The expansion is being pursued in light of expected rise in domestic demand for cement. To recall, the sector had registered the highest-ever domestic despatches during FY14. Cherat's new production line, being acquired from Tianjen Cement Industry Design and Research Institute Company Limited, is to be installed at the company's existing site in Nowshera and will have a production capacity of 1.3 million tons per annum.
With the expansion, Cherat's capacity would increase to 2.4 million tons. The new plant is expected to come online in 2017, while the project would cost the company Rs12 billion. Currently, at Rs183 million, Cherat's long-term debt per ton comes at Rs166. This is comparably far less than the per ton long-term debt of Bestway before Lafarge's acquisition, which amounted at Rs1,043. According to Nabeel Khurshid, Research Analyst at Top line Securities, up to 75 percent of the financing is being raised through debt.
So, how does the expansion bode for the industry at large? Furqan Ayub, Research Analyst at JS Global Securities, suggests that while it is difficult to predict the distribution of pricing power, the cartel is likely to remain intact. According to Ayub, not only has the industry's capacity utilisation been high, Cherat itself has been operating close to 100 percent lately, which is why an expansion was already on the cards. Further, Cherat had also not been part of the previous expansion phase in the industry back in 2006-2007.
Khurshid agrees, arguing that even with conservative estimates of growth in domestic demand, the industry would require expansion and, therefore, Cherat's decision does not come as a surprise. Industrial capacity utilisation is likely to hit 85 percent by 2017, and so, expansion decisions have been timely, given that the gestation period lasts for about 2-3 years.
As for the industry, a price war is more likely to be short-lived even if it were to happen. Khurshid posits that with a 20-25 percent reduction in prices, as had happened back in 2009-2010, profitability could be hurt by up to 50 percent. And so, industrial players are now more likely to tread with caution as far as pricing is concerned.
Given that the Cherat does not have in-house electricity generation, a price war could be even more harmful for the company, unlike a few of the bigger players with in-house power generation.
With another major expansion plan in the offing, the sector does seem to be on a joyful ride. Fingers crossed for DGKC's move!