KARACHI, June 5: For all the right reasons, hopefully, cement stocks have been the investors' delight at the stock market. DG Khan, Maple Leaf and Lucky, among others, have been at the forefront of the ongoing rally.

Majority of the cement sector analysts are positive in regard to budget expectations. "Cement sector is expected to be the main beneficiary of the FY04-05 budgetary announcements in the form of further uplift to cement demand resulting from higher development expenditures, infrastructure and water reservoir construction and greater incentives for housing finance," says Tanvir Abid, Head of Research at Jahangir Siddiqui Capital Markets (Pvt) Ltd.

The analyst does not rule out possibility of further reduction in the Central Excise Duty on cement, which could lead to a corresponding reduction in prices.

The government plans to assign over Rs200bn for the Public Sector Development Programme (PSDP) as against Rs160bn in the previous budget. That would be the highest ever allocation for the programme in the history of the country.

Several agreements have been signed by the government for construction of dams including Munda dam, expansion of Mangla dam and others, along with increase in government expenditures for infrastructure development (roads, Gwadar Port etc). The analyst observed that further announcements are also expected for the enhancement of housing finance, which may include enhanced loaning facilities. Recently, cement production quotas have been enhanced in the range of 90pc with an extremely upbeat outlook on cement demand. Almost all leading cement manufacturers have initiated capacity additions in anticipation of robust demand growth prospects.

Shagufta Irshad, sector analyst at KASB Securities, observes that the upcoming budget could have a direct positive impact on the sector. A Rs202 billion PSDP allocation and government's focus on building physical infrastructure was likely to boost the construction industry.

"The government had announced a 25 per cent reduction in Central Excise Duty on the cement leading to its gradual removal over the five years period in the last budget," says the analyst, adding: "we expect a further 25 per cent reduction in CED in the upcoming budget." Meanwhile the coal-based plants, though still more efficient compared to RFO based plants, were facing exceptional cost increase owing to a 100 per cent increase in coal prices. Delay by the Federal Government in releasing funds for Thal Coal fields and PSDP for Sindh province were said to be the causative factors.

While everyone is looking good on the cement sector, some analysts caution investors to be wary of rising prices in stock values of small companies. "Recently it has been observed that few second and third tier stocks are surging sharply despite a rangebound market", says Mohammed Sohail, Head of Research at InvestCap.

He says that small companies stock prices in the cement sector are rising in spite of concerns on the law and order situation, coupled with increasing yield on PIBs. "This may prove to be an alarming sign for such stocks and for the market as well," says the analyst.

InvestCap has calculated that cement sector small shares have shot up by 24 per cent in the last two weeks. For analysis, the analyst defines small cement stocks as those that have production capacity of less than one million tons. While large cement companies stocks (above 1 million tons capacity), which include DG Khan, Maple Leaf, Lucky and Bestways, have seen their stocks gain 4 per cent in value, compared to 24 per cent in prices of smaller companies shares in the past two weeks. Some selected small cement companies that have seen surprising rallies in the past two weeks include: Zeal Pak up by 100 per cent; Gharibwal, 84 per cent; Javedan 52 per cent; Saadi 26 per cent; Pakland 61 per cent; Fauji 15 per cent and Pioneer 37 per cent.

Sohail at InvestCap explains possible reasons for what looks like unjustified rallies in small cement companies stock prices: "First of all investors are attracted by low absolute price of these companies' shares," says he, adding that after the takeover of Saadi and Pakland by Dewan Group, speculators were taking stakes on the possibility of takeover of other small companies too. Thirdly, the analyst says that since investors have made great fortunes from investing in large cap cement stocks, they are hoping for more of the same from the same sector.