JS Securities Limited - JS Research.

Karachi -- January 31, 2023 (PPI-OT)

LUCK: Some tough months; strong in the long run

Lucky Cement Company Limited's (LUCK) is one of the first companies to go for an expansion in the ongoing cycle and has recently commenced its 3.1mn tons expansion taking total capacity to ~15.3mn tons, providing opportunity to avail higher market share compared to most peers.

The company's core business has however been facing dull demand in recent months. Management, in its briefing held yesterday, acknowledged that due to the difficult economic climate, demand pressure would persist during the remainder of FY23. To recall, 1HFY23 volumes reported a 21% YoY decline.

Briefed by the management in its Corporate Briefing session held yesterday, the company is continuously working to lower production costs, such as by diversifying coal sourcing avenues, adding renewable-based power sources, and ensuring uninterrupted production in the case of unavailability of gas supply through cheaper furnace oil stock.

Given earnings growth stored in with stable margins, we maintain an Overweight stance on LUCK with attractive upside of 68% from current levels to our SoTP based Target Price of Rs665.

Construction sector demand to remain dull during 2HFY23

Lucky Cement (LUCK) held its post result Corporate Briefing session yesterday, in which the key area of concern discussed was prospective demand pressure during the remainder of FY23 due to the challenging economic situation. Management shared that it expects total volumes to decline by ~18% YoY for FY23, which effectively translates to 15% YoY decline in 2HFY23.

Some respite can come from the reconstruction demand from flood affected areas in light of the recent international pledges. Management believes that exports may become viable if international coal prices continue on the downward trajectory and prices go below US$130/ton. To recall, 1HFY23 total cement volumes reported a decline of 21% YoY.

Company explores alternative fuel sources

The company's core business reported a QoQ decline during 2QFY23 at the gross level mainly due to normalization of inventory cost of coal. To recall, the company had used low cost South African coal during previous quarters resulting in higher gross level performance.

Current weighted average cost of coal as per management is around Rs50k/ton, whereas inventory is available for 30 days at both plants. The coal mix of the company comprises of 30-40% international coal, while the...