Decline in trade deficit a sigh of relief; monetary policy eyed
After taking a heavy beating during earlier week on the back of high trade deficit for November 2021, the market took a breather on the first trading session of the week. In the second session the news of assistance from Saudi Arabia provided some relief and the market rallied 1.3% during the session. However, towards later part of the week, market set its sight on the upcoming monetary policy meeting and remained under pressure on the expectations of an increase in interest rate and depreciating PKR. Overall, the benchmark index KSE-100, closed the week ended on December 10, 2021 at 43,396 points, up 0.4%WoW. Stock wise, major performers included: STJT, TRG, PPL, HASCOL, OGDC, while laggards were: ANL, PIOC, HMM, CHCC and SHFA.
Among sectors, Oil and Gas Exploration remained the top performer on the back of increasing oil prices after it was declared that COVID-19’s new variant, ‘Omicron,’ isn’t as contagious as it was initially assessed to be. Technology sector remained in limelight with the sector almost immune to rupee depreciation and increase in interest rates. Cement and Engineering remained among the worst performers with both the sectors being cyclical in nature and expected to be adversely affected from the increase in interest rates.
Other major news flow during the week included: 1) Cement sales increasing by 7%YoY to 4.82 million tons in November this year, 2) Government abandoning the proposal to ban the import of CBU vehicles and instead imposing a regulatory duty of up to 50% on import of CBUs for a certain time period, 3) NEPRA increasing KE’s tariff by PKR3.8/unit for September 2021 under monthly Fuel Cost Adjustment (FCA) mechanism, and 4) The Fitch Ratings agency anticipating further interest-rate hike for Pakistan. Flow-wise, foreigners emerged net sellers with US$1.0 million along with Mutual Funds (US$4.2 million) which was mainly absorbed by Others (US$3.9 million) and Companies (US$2.1 million).
Market is expected to remain focused on upcoming monetary policy meeting on December 14, 2021 (Tuesday). AKD Research anticipates an increase in interest rate of 125-150bps. Any decline in trade deficit/imports for December 2021 will be a sigh of relief for the market. Overall, analysts continue to advocate thematic plays that include Banks (on monetary tightening), Construction (Cements, and Steel), and Textiles (on depreciating PKR and strong export prospects).
Local cement dispatches rose to 4.82 million tons during November 2021, from 4.51 million tons in last year, depicting a growth of 7%YoY. This took the total dispatches during 5MFY22 to 23.0 million, down 3.4%YoY. Domestic dispatches from North increased to 3.47 million tons, while South based pants dispatched 0.65 million tons in November 2021, taking total dispatches from North to 17.43 million tons, 2%YoY during 5MFY22, while South volumes were up 16%YoY to 5.56 million. During November 2021, MRPs across the country increased by PKR28/bag (North) and PKR29/bag (South) to average PKR734/bag and PkR749/bag respectively as the sector started to pass on the impact of higher coal prices on to end customers. International coal prices eased off considerably, down 44% from their high in September 2021 to current level of US$132/ton. Analysts expect cement prices to stabilize somewhat around the current levels. With coal prices on the downtrend, further decline in prices will help shore up the margins going forward. Recent volatility is a good opportunity to accumulate as coal prices are expected to ease off post winter. Analysts advocate building positions in stocks having strong balance sheet and opting for an expansion in the next expansion cycle.
As a proxy, AKD Securities has broken down the quarterly capex for the big three OEMs to highlight the upcoming developments in Pakistan’s auto industry. PSMC has allocated a capex of PKR4.5 billion in 9MCY21, signaling the new Swift in pipeline which is expected to be launched in 2HCY22. Capex of INDU in 1QFY22 declined slightly to PKR437 million as against an average quarterly capex of PKR614 million in FY21 which signals that the new capacity is expected to come online soon. The capex for HCAR in the latest quarter has increased to PKR523 million in 2QMY22, from PKR234 million in 1QMY22 which signals the initial development of new Civic. Analysts are yet to gain clarity from the management. They expect the 4th generation of Swift to be launched locally in 2HCY22 which is expected to be a handsome upgrade for the Pakistani market as the company had been selling the 2nd generation of swift for over a decade. The car is expected to be propelled in 1.2L engine and expected to be priced in the range of PKR2.6-2.8 million. In the latest development, the GoP has increased the RD on imported CBUs to 50%, from 15% in order to contain the massive increase in import bill. This bodes well for the local OEMs, enabling them to capture the lost market share.
Refining margins have slipped during last fifteen days of November 2021 on the back of a new COVID-19 variant being detected in South Africa (Diesel/Gasoline cracks declined by 34/48% to USD5.9/6.2/bbl for last fifteen days of the month under review, from USD9.0/12.0/bbl for initial fifteen days). HSFO cracks, after improving have slipped again after oil prices declined in recent weeks and averaged at negative USD16.5/bbl for last fifteen days of November 2021. To note, HSFO cracks are at a low of almost two years. With the advent of a new COVID-19 variant, refinery margins can be in for a volatile ride once again and initial signs in this regard are already visible where oil prices tumbled on the news of a new variant being detected. However, when it emerged that booster shots of vaccine can work against the new variant, price recovered along with refinery margins internationally. For local refiners, oil prices slipping and decrease in refinery margins can prove to be a double whammy. A bigger injury can occur from worsening HSFO cracks with 25- 30% of the product slate belonging to the product.