Morning Pulse May 18, 2010

CEMENT SECTOR
LUCK – Re-initiating Coverage… Analyst:
Sarfraz Abbasi
♦ We re-initiate coverage on Lucky Cement Limited (LUCK) with a sarfraz.abbasi@atlascapital.com.pk
BUY recommendation as the scrip is an attractive pick at the (+92-21)-111-226-100 (Ext.403)
current levels based on our target price of PRs90.00, offering an
upside potential of 31.89%.
Pakistan Research

♦ Lucky Cement is the largest cement producer in Pakistan. The Market Snapshot
company enjoys leading position in the export market with Index Chg %
30.00% share in FY09. The company has two strategically located KSE 30 10100.94 -240.74 -2.33
KSE 100 10033.76 -237.95 -2.32
production units in north and south zones with 52.00% and 48.00%
KSE ALL 7053.90 -167.34
of the total production capacity respectively.
Key Data
♦ Over the last five years, the company has secured robust sales Market Cap(PRs bn) 22.08
and earnings CAGRs of 55.00% and 44.00% respectively. Shares Outstanding (m) 323.75
Bloomberg lUCK.PA
12M Avg. Volume (m) 1.712
♦ The company went through expansions aggressively taking the
production capacity to a maverick 7.75mtpa in FY09 against a
mere 2.97mtpa capacity in FY06, a gigantic 260.94% ascent.

♦ Owing to its prominent share in export market, the company has

been able to outperform its peers in terms of revenue generation.
12M Relative performance Vs KSE100
Volume LUCK KSE-100
♦ Lucky Cement is the first and the only cement producer having 25.00 160%
bulk loading facility at the port which gives it a strategic
18.75 120%
advantage of exporting loose cement from Pakistan.
12.50 80%

♦ Waste heat recovery projects of company will facilitate the 6.25 40%
company to cut its fuel cost by exploiting internally generated
waste heat and it would also lend a hand in earning further 0.00 0%
Aug-09

Apr-10
Nov-09
Jul-09
Jul-09

Jan-10
May-09
Jun-09

Sep-09
Oct-09

Dec-09

Feb-10
Mar-10

May-10
revenues in terms of sales of excess electricity for which the
company has recently signed an MoU with Karachi Electric
Supply Corporation for the sale of 49.50MW of electricity.

Lucky Cement Valuation Snapshot

Atlas Capital Markets (Pvt.) Ltd
FY07A FY08A FY09A FY10F FY11F FY12F FY13F FY14F
B-209, Park Towers, Clifton, Karachi
Net Income (PRs m) 2,547 2,677 4,596 3,490 4,765 5,815 6,724 7,716
Equity Research: Equity Sales:
EPS (PRs) 9.7 9.8 14.2 10.8 14.7 18.0 20.8 23.9 Tel: 92 (21) 5376125 Tel: 92 (21) 5368261-8
Fax: 92 (21) 5376126 Fax: 92 (21) 5376122
EPS growth 32% 2% 44% -24% 37% 22% 16% 15%
Money Market: Corporate Finance:
P/E 7.1 6.9 4.8 6.3 4.6 3.8 3.3 2.9 Tel: 92 (21) 5376128 Tel: 92 (21) 5824991
ROE 31% 19% 22% 14% 18% 20% 21% 22% Fax: 92 (21) 5376129 Fax: 92 (21) 5376122
ROA 10% 9% 13% 9% 11% 12% 12% 12% Financial Products Distribution:
Tel: 92 (21) 5376125
Source: Company Accounts, Atlas Research Fax: 92 (21) 5376126
Atlas Research is available on Bloomberg and
Thomson Financial

Disclaimer: All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time
of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Atlas Capital Markets (Pvt.)
Limited accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All
information is provided without warranty and Atlas Capital Markets (Pvt.) Limited makes no representation of warranty of any kind as to the accuracy or
completeness of any information hereto contained.
 ATLAS CAPITAL MARKETS (PVT.) LIMITED MORNING PULSE

Synopsis - largest cement manufacturer…

Lucky Cement Ltd is the largest producer of cement in Pakistan. The company
has two strategically located production units in north and south zones of the
country. North zone plant is situated at Pezu, Nowshera which has 4.00mtpa or
52.00% of the total installed capacity while south zone plant is located at
Karachi Plant which has 3.75mtpa or 48.00% of the total installed capacity. The
Karachi plant went though an expansion last year which added 1.75mtpa into
company’s total production capacity.

Sales performance– Exports running the show!

Lucky Cement has a stunning share in export industry sales. During the FY09,
the company had domestic and export market share of 13.00% and 30.00% Source: Company website
Pakistan Research

respectively showing slight improvement over the corresponding balances of Local Vs Export Volumes
the last year. Although the industry has been facing the immense pressure on
its demand due to rising costs and saturating sales orders due to pressure on Local Sale Volumes Export Sale Volumes
construction business, still company managed to grab 13.00% market share in 5.00
FY09 in domestic sales, while the company acquired title of market leader with
its substantial 30.00% share in exports.
3.75

M Tons
The company, unlike its competitors is harvesting fruits of its timely decision of
capitalizing its south zone plant near the port city in order to target the 2.50
overseas markets. Lucky Cement is the first and the only cement producer
which has the bulk loading facility at the port and hence it is the only 1.25
company which exports loose cement from Pakistan.

Cement industry has 80.00% of its installed capacity in the North Zone. In order 0.00
to export through seaports, other players incur additional cost on FY06 FY07 FY08 FY09
transportation while Lucky Cement’s Karachi plant enables the company to Source: Company reports, Atlas Research

incur lowest freight cost and fast track access to the port. In addition to that, Local Market Share
the company plans to tap new markets in African countries due to the rapid
capacity expansions and over supply situation in Asian and Gulf Markets. Luck Other industry

FY09
Financial Performance….
The company registered robust monetary sales and earnings CAGR of 55.00%
and 44.00% respectively over the last five years. During FY09, the Company FY08
registered an impressive 55.00% revenue growth against FY08 despite of a low
demand situation faced by the entire industry since the advent of the global FY07
financial crises in the FY08. Sluggish demand was mainly attributed to the
pressure on the construction businesses both in domestic and international
markets. During the FY09, domestic dispatches dropped by 14.00%, FY06
nevertheless, the industry managed to convene with the challenges through
export sales enhancement which recorded nearly 47.00% growth. 0% 25% 50% 75% 100%
Source: Company reports, Atlas Research

PRs (m) FY04 FY05 FY06 FY07 FY08 FY09 CAGR

Net Sales 2,908 3,980 8,054 12,522 16,958 26,330 55%
Export Market Share
Groth - 37% 102% 55% 35% 55%
Gross Profit 1,100 1,379 2,979 3,675 4,357 9,811 55% Luck Other Industry
100%
Growth - 25% 116% 23% 19% 125%
PAT 686 826 1,935 2,547 2,677 4,596 46% 75%
Growth - 20% 134% 32% 5% 72%
EPS 2.12 2.55 5.98 7.87 8.27 14.21 46% 50%

Growth - 20% 134% 32% 5% 72%

25%
Source: Company reports, Atlas research

0%
FY06 FY07 FY08 FY09
Source: Company reports, Atlas Research

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 ATLAS CAPITAL MARKETS (PVT.) LIMITED MORNING PULSE

Production Capacity – An invincible strength…

50.00 10.00
The Cement Industry which had total installed capacity of 20.95mtpa back in Industry Capacity
FY06, has become more than double of its size by FY09. Lucky Cement amongst Lucky Capacity
others added its strong contribution by enhancing its production capacity from
2.97mtpa back in FY06 to 7.75mtpa by FY09, a massive 260.94% increase. Taking 37.50 7.50
advantage of the export potential available, the company has been above its
peers in terms of revenue generation through export, FY09 share in monetary

(m tons)

(m tons)
sales at 58.00%). The main reason associated with this rise in exports’ share is the 25.00 5.00
freight cost advantage of over 16.00% to LUCK which keep others away from
giving competition to LUCK in export through port.

12.50 2.50

Waste Heat Recovery Project – A smart addition

Pakistan Research

The core purpose of the project (installed at the Karachi plant) is to recover the
0.00 0.00
waste heat from the clinker production process which would be utilized for
FY06 FY07 FY08 FY09
power generation. The benefits of the waste heat recovery projects are
multidimensional to the company. Firstly, it would increase the thermal
efficiency of the power plant, thereby, reducing the fuel cost by around 20.00%.
Secondly, it would generate additional revenue stream in terms of sale of
excess electricity to Karachi Electric Supply Corporation for which the company
has already signed an MOU. The company also qualifies to take the benefit
from carbon credits under the Kyoto protocol till 2012 as the company fulfilled
pre-requisites of the Kyoto protocol by financing CO2 emission reduction
project. As per our estimates, against production of one ton cement, almost
0.40 tons of CO2 is saved. Current installed capacity at Karachi plant is of the
Lucky is 3.75mtpa. We believe that going forward, the demand would permit
the company to run its Karachi plant at around 75.00-80.00% capacity utilization
and hence, with 75.00% capacity utilization, 50.00% reduction of the emission
and US$5.00 per carbon credit, the company would enjoy an additional benefit
of US$3.00m which we expect to put after - tax EPS impact of approximately
PRs0.51 on its bottom-line. We have the information that the heat recovery
project at north plant at Pezu is due to come on line by the middle of FY11. We
are keeping a eye on the project and will revise our valuation accordingly.

3
 ATLAS CAPITAL MARKETS (PVT.) LIMITED MORNING PULSE
Performance Review 9M/FY10 results…
Lucky Cement Limited has shown an exciting performance in terms of dispatches as
the company posted a robust volumetric growth during the 9MFY10. During the
period, local dispatches increased by 46.30% while its export sales witnessed a decline
of 14.10%, however, cumulative 9MFY10 performance in terms of exports was
adequate as the overseas sales have shown a boost of 3.50% compared to the same
period last year. Low prices in the domestic and international market kept the top line
of the company under pressure and hence revenue fell by 5.65% by 9MFY10 ending.
However, lower cost of sales and financial cost helped company to sail on the safe
surface. During 9MFY10, earnings of the company dropped by 16.65% to PRs2,561m,
translating into an EPS of PRs 7.92 as against profit after tax and EPS of PRs3,072 and
PRs9.50 respectively during the corresponding period of the last year. However, the
company has a strong 33% export market share as of 9MFY10 which is slightly above
than the 30.8% share during the same period last year. We expect during by the end of
Pakistan Research

FY10 company export sales would show recovery.

(PRs m) 9M/FY09 9M/FY10 Chg 3Q/FY09 3Q/FY10 Chg

Net Sales 19,107 18,027 -6% 6,700 5,911 -12%
Cost of Sales 11,996 11,739 -2% 4,473 4,148 -7%
Gross Profit 7,111 6,287 -12% 2,227 1,763 -21%
Operating Expenses 1,868 2,776 49% 684 891 30%
Operating Profit 5,242 3,512 -33% 1,543 872 -44%
Financial Charges 998 418 -58% 173 120 -30%
Profit Befor Tax 3,489 2,878 -18% 1,276 699 -45%
Taxation 416 317 -24% 142 46 -68%
Profit After Tax 3,072 2,561 -17% 1,134 653 -42%
EPS (PRs) 9.50 7.92 -17% 3.51 2.02 -42%
Source: Company Accounts, Atlas Research

Valuation….

We have valued the Lucky Cement by using Discounted Cash Flow Method (DCF) with
risk free rate of 12.50%, market risk premium of 6.00% and beta of 1.21. We have
discounted free cash flows at the weighted average cost of capital (WACC) of 16.00%.
With 20.00% cost of equity and 4.00% terminal growth assumptions, our fair value for the
scrip is PRs90.00 with an upside potential of 31.89% from its current trading levels.
DISCOUNTED CASH FLOW
Year ended June (PRs.mn) FY11 FY12 FY13 FY14 FY15

Net Income 4,765 5,815 6,724 7,716 8,404

Add: Depriciation 1,396 1,497 1,736 1,872 2,018
Add: Finance cost net of tax 942 1,045 1,250 1,508 1,867
Less: Fixed Investment 3,628 4,464 7,061 7,526 7,024 Terminal
Less: Working Capital 460 443 759 770 756 Value
FCFF 3,015 3,450 1,889 2,801 4,509 30,187
Present Values 2,603 2,572 1,216 1,556 2,163 19,019
Sum of Present Values 29,126

Risk Free Rate of Return 12.5% WACC 16%

Market Premium 6% Terminal Growth 4%
Beta 1.21 Enterprise Value 29,129
Cost of Equity 20% Fair Value 90

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 ATLAS CAPITAL MARKETS (PVT.) LIMITED MORNING PULSE

Key Financial Highlights…

Balance Sheet
(Rs in million) FY07A FY08A FY09A FY10F FY11F FY12F FY13F FY14F
ASSETS
Non-Current Assets 20,321 25,884 30,534 32,263 35,876 40,335 47,391 54,912
Current Assets 5,403 8,356 7,858 8,096 11,056 13,175 14,633 16,861
TOTAL ASSETS 25,724 34,239 38,392 40,358 46,931 53,510 62,024 71,773
EQUITY AND LIABILITIES
Share capital 2,634 3,234 3,234 3,234 3,234 3,234 3,234 3,234
Reserves 6,720 15,422 20,018 21,763 24,146 27,053 30,415 34,274
Pakistan Research

9,354 18,655 23,252 24,997 27,379 30,287 33,649 37,507

LIABILITIES
Non-current liabilities 10,018 7,897 6,042 4,026 4,444 4,870 5,376 5,944
Current liabilities 6,353 7,687 9,099 11,335 15,108 18,352 22,999 28,321
CONTINGENCIES AND COMMITMENTS - - - - - - - -
TOTAL EQUITIES AND LIABILITIES 25,724 34,239 38,392 40,358 46,931 53,510 62,024 71,773

Income Statement
(PRs m) FY07A FY08A FY09A FY10F FY11F FY12F FY13F FY14F
Turnover 12,522 16,958 26,330 24,119 26,526 28,631 33,118 37,241
Cost of sales 8,847 12,601 16,520 16,596 16,549 17,185 19,617 21,873
Gross Profit 3,675 4,357 9,811 7,523 9,977 11,446 13,501 15,368
Distribution cost 498 1,155 2,428 1,226 2,120 1,866 2,370 2,516
Administrative expenses 111 126 166 178 192 208 241 272
Operating Profit 3,066 3,076 7,217 6,119 7,665 9,372 10,889 12,581
Finance cost 863 127 1,237 1,185 1,449 1,608 1,922 2,320
Other Income 629 1 23 12 13 13 15 13
Other charges 142 644 827 840 935 935 1,072 1,196
Profit Before Tax 2,690 2,306 5,177 4,106 5,294 6,842 7,911 9,078
Taxation: net 143 -371 580 616 529 1,026 1,187 1,362
Profit after taxation 2,547 2,677 4,596 3,490 4,765 5,815 6,724 7,716
Outstanding Shares 263 272 323 323 323 323 323 323
EPS (PRs.) 9.67 9.84 14.21 10.79 14.73 17.98 20.79 23.86

Key Ratios
Year Ended June FY07A FY08A FY09A FY10F FY11F FY12F FY13F FY14F
Liqudity (x)
Current Ratio 0.85 1.09 0.86 0.71 0.73 0.72 0.64 0.60
Quick Ratios 0.74 0.99 0.73 0.60 0.64 0.63 0.56 0.53
Activity Ratio (x)
Sales to Total Assets - Times 0.49 0.50 0.69 0.60 0.57 0.54 0.53 0.52
Sales to Fixed Assets - Times 0.62 0.66 0.86 0.75 0.74 0.71 0.70 0.68
Efficiency Ratio (x)
Total Assets Turnover 0.51 0.57 0.73 0.61 0.61 0.57 0.57 0.56
Fixed Assets Turnover 0.63 0.73 0.93 0.77 0.78 0.75 0.76 0.73
Profitability Ratio (%)
Gross Margins (%) 29% 26% 37% 31% 38% 40% 41% 41%
Operating Margins (%) 24% 18% 27% 25% 29% 33% 33% 34%
Net Margins (%) 20% 16% 17% 14% 18% 20% 20% 21%
Return on Assets 10% 9% 13% 9% 11% 12% 12% 12%
Return on Equity 31% 19% 22% 14% 18% 20% 21% 22%