§  In a major development today, Punjab-based manufacturers have obtained a stay order from the court against the imposition of 6% of the ex-factory cement/clinker price as royalty on Limestone and argillaceous clay. However, this stay is subject to Bank Guarantees to be furnished by manufacturers.

§  Based on our channel checks, companies will expense out/provide for this increase in royalty cost despite the stay order, following prudent accounting treatments. This will be a non-cash expense until the matter is resolved.

§ To avoid any unfavourable decision going forward, the Punjab manufacturers are increasing cement prices by up to Rs75/bag.

§ At the same time, it is important to highlight that the majority of the KPK-based manufacturers sell a portion of their cement in Punjab, and this may provide them either an opportunity to sell higher volumes at a lower price or they may consider increasing their cement price (with no royalty increase). We believe the latter would be the case as they will opt to increase the prices. We believe this will be positive for companies/plants situated near Punjab borders or in KPK, i.e. Bestway Cement, Lucky Cement, Kohat Cement, Fauji Cement, and Cherat Cement, in our view.

§  Furthermore, it is too early to say how long this high royalty cost disparity will persist. Any move by other provincial bodies to bridge this gap (by increasing royalty) or reversal of the increase in royalty tax in Punjab may again bring some equilibrium in the costing structure of the manufacturers.

Courtesy – Topline Research