Index keeps surging on improved economic factors
During the week ended 17th April 2020, the benchmark index of Pakistan Stock Exchange (KSE-100 Index) exhibited initial signs of consolidation, managing to close the week at 32,831 points, up 2.5% WoW. This was the third consecutive week of positive returns, a trend last observed at the end of 2019. Macro and policy developments remained in a state of flux, with sentiments broadly coming to a head at the tail-end of the week as foreign debt relief accompanied by the surprise 200bps policy rate cut changed investors’ sentiment.
Key news flows during the week included: 1) The SBP launched a refinancing scheme providing cheaper loans to businesses at 4-5% for payment of wages and salaries, while on Thursday, in an emergency meeting of the Monetary Policy Committee of the SBP, the benchmark policy rate was cut by 200bps, 2) The GoP is planning to promulgate a Tax Laws (Amendment) Ordinance, 2020 to implement the tax incentives package for the construction industry including immunity from disclosing the source of investment made in future projects to be executed by developers and builders, a draft of which was passed by the Cabinet, 3) Power Division convened meetings of public sector Independent Power Producers (IPPs), Generation Companies and private sector IPPs on April 15-16th in Islamabad aimed at exploring different ways to reduce tariff, and 4) Pakistan was included in the group of countries eligible for debt relief on all principal and interest payments to bilateral creditors announced by the G20 countries, where reportedly, the suspension period for debt relief will start from 1st May and continue till 1st December, 2020 with all debt service falling due in this period will be packaged into a new loan on which the payments will not start until June 2022.
Sectors driving returns included: Pharma (+12.7%WoW), Edible oil (+11.4%WoW), Steel (+8.8%WoW), while Banks (-2.6% WoW) and Foods (-6.1%WoW) were in the red. Stocks driving the benchmark index higher were: 1) DAWH (18.5%WoW), 2) GSKCH (+17.2%WoW), 3) GHGL (+15.4%WoW), and 4) INIL (+15.0%WoW), whereas laggards during the week were: 1) NESTLE (-14.7%WoW), 2) IDYM (11.1%WoW) and 3) BAFL (-9.0%WoW).
Average daily traded shares during the week remained relatively stable at 178.3 million shares. Volume leaders being: 1) HASCOL (67.2mn shares), 2) MLCF (66.5mn shares), 3) KEL (48.3mn shares), and 4) UNITY (45.0mn shares). Insurance, Individuals and Mutual Funds remained net buyers during the week, while FIPI outflows continued, CYTD outflow has risen to as high as US$193.1 million.
Targeted relaxation of mandatory social distancing for large scale industry, cohesion in decision making between provincial and federal governments, accompanied by augmented testing capacity are headline developments to be tracked going forward. As the last week before the beginning of the holy month of Ramazan, some consolidation is likely.
After an emergency meeting State Bank of Pakistan (SBP) decided to cut the policy rate by another 200bps to 9%, taking cumulative easing to 425bps in just one month. The emergency rate cut came on the back of worsening global and domestic economic outlook due to COVID-19 and improved inflation outlook following a plunge in commodity prices.
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The central bank has revised its GDP growth projections, where it now sees the domestic economy to contract by 1.5% as against 3% growth previously. It also expects inflation to be close to the lower end of the previously announced 11-12% range and to fall to 7-9% range next fiscal year.
Going forward, analysts do not rule further monetary action from the central bank, given the sharp decline in economic activity, benign inflationary backdrop and improved external account position following G20 debt relief and funding commitments from multilaterals (the IMF board approved US$1.4 billion under RPI, WB earlier approved US$0.2 billion while additional US$1.6 billion (US$0.8 billion each from WB/ADB) is under consideration.
The confluence of positive events on both the domestic and international front has resulted in equities taking a quantum leap. Moving ahead, the market’s recovery, while likely sharp in light of recent developments, will remain contingent on news flow emanating from COVID-19 spread, particularly in lieu of phased opening of businesses/industrial units within the country.
Engro Fertilizers (EFERT) has announced 1QCY20F consolidated profit after tax of Rs571 million (EPS: Rs0.43) down 86/91% YoY/QoQ. The decline in earnings is mainly attributable to 1) a 54%YoY lower topline, led by anticipated 61/60% YoY dip in urea/DAP offtake and 2) a 74%YoY decline in other income due to absence of one-off gain recorded from the sale of land to EPCL in 1QCY19. The result was below expectation where major deviations resulted from: 1) gross margins declining to 34%, likely due to lower than anticipated ending inventory, 2) higher than expected finance cost and 3) effective tax rate of 49% as against an estimate of 25%. Offtakes are likely to normalize from 2QCY20 onwards as EFERT has reduced its urea price to bring at par with those of FFC. To recall, GIDC elimination in February 2020 followed by lower urea price cut by EFERT as compared to FFC, leading to a steep market share decline for the former. Nonetheless, investors are advised to remain cautious, as the urea price reduction is expected to eat into the company’s profitability.
Habib Metropolitan Bank (HMB) has released its 1QCY20 results, posting profit after tax of Rs1.64 billion (EPS: Rs1.48) as against net profit of Rs1.56 billion (EPS: Rs1.41) for the same period last year. On a sequential basis, earnings were down 5.0%QoQ as a result of lower net interest income (down 6.0%QoQ) and higher provisioning costs. However, the impact was neutralized to a large extent by 43.6%QoQ growth in NFI base. The growth in NFI was driven by FX income, earned due to volatility in exchange rate, offsetting the impact of decline in fee income possibly in the backdrop of global lockdown impacting trade income. Resultantly, gross yield declined to 21.5% in 1QCY20 as against 22.4% in 4QCY20 whereas contribution from NFI to total income improved to 33.8% from 25.1% in the previous quarter.