Market range-bound in hope of economic events; blue-chips in spotlight
The benchmark index of Pakistan Stock Exchange (PSX) closed almost flat during the week ended 14th September 2018. Market remained range-bound in anticipation of the key economic measures to be taken by the incumbent government. At the start of the week, market came under pressure on the news of likely increase in gas price. Oil & Gas Exploration Companies and Fertilizer manufacturers remained in limelight due to increase in international oil prices and the government deciding not to increase price of gas being supplied to fertilizer sector. Commercial banks came under pressure on account of selling by foreigners, exceeding US$12 million. Aggregate selling by foreigners exceeded US$26 million during the week under review as compared to net selling of about US$10 million a week ago.
On the local front, Insurance Companies and Mutual Funds emerged net buyers to the tune of US$11.8million and US$10.6million respectively. The other key news impacting the market were: 1) Cotton Crop Assessment Committee bringing down 2018 crop estimate to 10.8 million bales for 2018 as against an earlier estimate of 14.4 million due to the reductionin sowing area amid shortage of water, 2) incumbent government looking adamant at reversing the tax concessions granted by the previous government, 3) Pakistan’s economic managers briefing the IMF team in Washington, DC, on video conference about the proposed mini-budget and partial withdrawal of tax incentives, imposition of regulatory duties on luxury items and slashing down development outlay and 4) government announcing to accelerate pace of implementation of US$62billion China-Pakistan Economic Corridor (CPEC), open it to other countries and hire international consultants for financial modeling of future projects.
Average daily trading volume during the week remained flat at a little less than 139million shares. The average traded value rose to US$46.6million as compared to that of US$39.2million a week ago. Volume leaders for the week were: Unity Foods, MLCF, DOL and FFL. While major gainers were: FATIMA, CHCC, NML and NCL, the laggards were, BAFL, MLCF, ABL and HBL.
During the coming week, investors are expected to continue to take exposures in blue-chips on attractive valuations. Analysts believe major market drivers will be measures announced in the mini budget on Tuesday and Prime Minister’s visit to Saudi Arabia and any clarity on the plan on the government to address the most contentious issue of current account deficit. Market is likely to remain lackluster in the absence of some major triggers.
Recent crisis in Argentina and Turkey has fuelled speculation of a contagion in Emerging Markets. Economies most vulnerable in this regard are the ones with high current account deficit and greater reliance on foreign lending. Dollar adjusted return for the KSE-100 is directly in line with regional markets, where primary reason for increased correlations with regional emerging markets (REMs) appears to be currency depreciation. However, analysts believe the correlation number only partially explains the market’s dismal performance. In this regard, they believe indigenous factors contributed more towards weaker returns rather than contagion risks. Currency volatility in EMS could possibly keep Pak Rupee under pressure.
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According to the data released by APCMA, total cement dispatches during August 2018 declined by 2.9%MoM/8.3%YoY to 3.45million tons, primarily due to a 4.6%MoM/13.7%YoY decline in domestic dispatches to 2.89million tons, the highest yearly decline since June 2017. A quantum jump of 7.1%MoM/35.8%YoY to 0.557million tons in exports capped the overall decline. On a cumulative basis, dispatches during 2MFY19 posted a decline of 2.0%YoY as against a 20.8%YoY robust growth witnessed during 2MFY18, led by 5.3%YoY drop in domestic demand.
The end of monsoon season and Eid holidays, along with an up-tick in private sector investment is likely to boost domestic demand. The recent news flows suggesting fiscal tightening by way of reduced PSDP allocation could dampen public sector offtake. Due to subdued demand for cement against higher supply,investors are advised to follow a cautious stance. Cumulative installed capacity of the industry has exceeded 52 million tons, which may trigger another pricing indiscipline. Analysts recommend cautious stance towards the sector in the medium term, where soft cement prices in the prevailing high cost environment can further deteriorate primary margins.
Recently released August 2018 data by PAMA reporting total industry sales of 18,384 units, indicated decline of 17%MoM/20%YoY. The decline in offtake can be attributed to hike in price resulting from hike in input costs, delay in the introduction of new models and a ban on sale of cars to the non-filer of income tax returns proving to be the straw that breaks the camel’s back. The cumulative 8MCY18 industry sales were reported at 180,300 units, up 10%YoY that appears to be a better barometer for judging industry health. Cumulative sales of the key players namely, PSMC, HCAR and INDU were up during 8MCY18 due to therise in 1000cc segment sales of passenger cars, benefiting mostly PSMC. A paltry 5%YoY rise in 1,300CC and above engine capacity sales offtake impacted Corolla sales negatively. While news reports point to additional levies on imported vehicles and reduction in maximum allowed years of depreciation for used vehicles, analysts believe reversal of policies surrounding the non-filer ban will be a key measure to monitor.
Other corporate announcements include: Orix Leasing Pakistan (OLPL) releasing its financial result for FY18, reporting EPS of Rs10.05, up by 9% YoY. The increase in earnings was primarily driven by 66% increase in income from other activities. Simultaneously, a 3% decline in expenses also supported the bottom-line. The company announced cash dividend of Rs3/share for 4QFY18, as well as a bonus of 20%. Kohinoor Mills (KML) reported its earnings for FY18, with EPS rising by 79% YoY to Rs4.70. Despite a fall in gross margins, rise in profitability is attributable to 13.6% decline in expenses and increases in other income. The company also announced dividend of Rs1.2 per share for 4QFY18. MARI Petroleum (MARI) and Pakistan Petroleum (PPL) in a Ziarat joint venture (60% stake MARI, 40% stake PPL) have made a new oil discovery at exploratory well Bolan East-1 in Ziarat Block, Baluchistan province. The cumulative oil production is 1500bpd (Chiltan Formation at 810 bpd, Moro/Mughal Kot Formation at 690bpd).