Topline Pakistan Research has released a report regarding royalty issues in Punjab. In a significant development today, the larger bench of the Lahore High Court announced its decision against cement manufacturers based in Punjab regarding the royalty case. These companies will now be required to pay the royalty amount based on a formula that dictates 6% of the retention price.

– Companies may choose to appeal to the Supreme Court; however, a final decision on whether to seek a review from the cement manufacturers has not yet been made.

– It’s important to note that manufacturers in Punjab were already accounting for their raw material costs using the 6% formula based on retention price.

– Previously, Punjab manufacturers had secured a stay order against this raw material pricing formula by providing Bank Guarantees. As a result of the recent ruling, these manufacturers may face negative cash flow impacts, as the Bank Guarantees will now be enforced.

– In the medium to long term, this court verdict is expected to have a neutral effect on Punjab-based manufacturers, such as Maple Leaf Cement (MLCF), Pioneer Cement (PIOC), Fauji Cement (FCCL), and Bestway Cement (BWCL), as they have already been factoring in this expense in their financial accounts. DG Khan Cement (DGKC) also operates a plant in Punjab.

– Conversely, their neighbouring province of Khyber Pakhtunkhwa (KPK) will impose a lower royalty rate of Rs350 per ton, which gives a cost advantage to KPK-based manufacturers like Kohat Cement (KOHC), Cherat Cement (CHCC), Lucky Cement (LUCK), FCCL, and BWCL. Notably, the KPK government recently proposed increasing the royalty on raw materials from Rs250 per ton to Rs350 per ton, significantly lower than Punjab’s previous understanding of 6% of net sales prices. This discrepancy of approximately Rs1,000 per ton in royalty is substantial.

Additionally, it’s worth mentioning that many KPK-based manufacturers sell a portion of their cement in Punjab, which may enable them to sell higher volumes at lower prices in a market characterised by pricing indiscipline.

We maintain our overweight stance on the Topline Cement sector, as the industry is currently trading at fiscal year 2026 and 2027 price-to-earnings ratios of 6.5 and 5.8 times, respectively.