KARACHI, March 8: In nine weeks since January 1, this year, the Karachi stock exchange has risen by an incredible 45 per cent with the index crossing over the 9,000 levels.

Due to its composition, heavyweights (OGDC and PTCL) have played a pivotal role in taking the index as high as that. But even so, it is clear to see that the bulls have charged all across the board.

Cement sector stocks have been in the forefront of the rally. On average, cement shares are now trading on price-to-earnings (p/e) ratio of 16.1 times, which is higher than the market multiple of 15.9 times.

Ask any ordinary shareholder, who may be staring up at the trading terminal at the KSE, why he thinks cement stocks, such as DG Khan has jumped 34 per cent or by Rs19 to Rs74 from Rs55 at the start of the year, or Lucky gained 29 per cent or Rs12 to Rs53, from Rs41 in a less than two months and a half. The answer would most likely be the "dams".

Just as little understood (by most shareholders) the discovery of new oil and gas fields (besides the privatization stories) is driving energy stock crazy, the "dams" are the buzz words for the cement sector.

Will this house fall to pieces? Most stock brokers shiver under their shirt to see the market going up and up every morning, when they are expecting major corrections. Appropriately qualified and well-paid analysts have discontinued calculations of fair price of stocks and shun recommendations on whether to "buy", "sell" or "hold". But that is beside the point. Here it is meant to focus on the current status of the cement sector. Faisal Jiwani, analyst at InvestCap observed in a recent report that the run of statements by the President, Prime Minister and the Planning Commission seem to indicate an imminent announcement with regards to the construction of large reservoirs.

"Based on initial estimates, a large water reservoir can generate cement demand of up to 1.25-1.50m tons per annum (t.p.a)", says Jiwani, adding that while the demand quantum was certainly not insignificant, market expectations of the impact of dams on overall demand-supply equation appeared to be slightly over-optimistic.

The analyst pondered over the cement sector's performance during first half of the year 2005. His sample included 17 companies out of the 21 listed cement companies. The four left-outs were Chakwal and Mustehkam, that were not operational and comparable results of Dadabhoy Cement were not available. Dewan Hattar (Saadi Cement) was also not included in the sample as it was under trial production in 1HFY04.

In 1HFY05, the sample companies' posted aggregate profit after tax (PAT) in the sum of Rs3.2bn which showed a growth of 17pc (Rs361mn) when compared to 1HFY04 PAT of Rs2.7bn. The growth was both due to higher demand coupled with higher gross and net margins.

Manufacturers were able to maintain and increase prices as the understanding within the cartel which had developed earlier was maintained during the period. Average retention price increased by 9.7pc during 1HFY05 to Rs2,906/ton compared to Rs2,648/ton during 1HFY04. Average cost of manufacturing also went up due to higher coal and furnace oil prices from Rs1,890/ton in 1HFY04 to Rs1,985/ton in 1HFY05.

Cement sector earned Rs1.47bn in 2QFY05 compared to Rs1.74bn in 1QFY05, showing a decline of 16pc. That was because of coal and furnace oil prices increased mainly in 2QFY05 and gross margins of cement companies witnessed a decline from 34pc to 30pc.

Similarly operating margins declined from 30pc to 26pc. Overall, net retention prices increased in 2QFY05 by 4pc from 2,847/ton to Rs2,972/ton in 2QFY05. Cost of manufacturing also increased by 10pc from Rs1,892/ton to Rs2,088/ton. Gross margins reduced as increase in cost of manufacturing was greater than the increase in retention prices.

Cement sector analyst at Elixir Securities noted that sales in February declined by 13pc MoM, following heavy rains and snowfalls in most parts of the country. Off take slow down was expected (witnessed last year also) and the analyst did not think that was a matter of grave concern.

More importantly, the month once again saw a 'temporary break-down' of the cement cartel as a significantly large cement company sold in excess of its allocated quota. The players soon managed to patch up. But the on-going agreement of the cartel is due to expire in June this year, when the capacity allocations of each player would be reviewed.

Some units that have gone into huge expansion are sure to ask for more. It has to be seen if the companies are able to work out agreeable quotas so as to preserve profitability of the sector as a whole.