Performance may range-bound; mini budget in focus
Stock Market remained flat throughout the week ended on December 24, 2021 posting a nominal increase of 0.5%WoW to close in at 44,118 points level. This took the cumulative performance throughout CY21 to 0.8% whereas USD adjusted return currently stands at negative 9%. Volumes dried up significantly on WoW bases and average daily traded volume was recorded at 215 million shares as opposed to 265 million shares, down 18.7%WoW. Top performers of the market included: BNWM, HCAR, TRG, PSX and ABOT. The laggards were: ARPL, SFL, GATI, COLG, and JDWS.
The performance during the week was driven by the news flow related to possible resumption of the IMF program, the pre-conditions related to the program and the law making the country needs to do in order to unlock the flows.
Major news released during the week included: 1) CAD numbers for November 2021 settled around US$1.9 billion as opposed to expectations of US$2.5 billion, 2) GoP approved textiles and auto policies, 3) GoP missed petroleum levy target by 41 percent, 4) ADB approved US$1.5 billion loan for the power sector reforms and 5) GoP increased the base tariff by 95paisas. Other key market related news during the week were: 1) Wilmar increased its stake in Unity to 15.1 percent, 2) cellular subscribers increased to 106.68 million as per PTA’s latest report, 3) fertilizer shortage in Sindh and Punjab to hit wheat production in the country, 4) GVGL looking to enter auto assembling business and 5) Auto financing touched PKR350 billion mark.
In terms of the top performing sectors, Power generation (news of payment of outstanding dues) was the top performer, returning 4%WoW, followed by Pharmaceutical sector (news of revision in drug prices) returning 3.7%WoW and Textile spinners (soaring yarn margins) returning 3%WoW.
Flow wise, Foreigners emerged net buyers with an inflow of US$3.7 million, absorbing sell-off by Mutual funds (US$3.6 million) and Individuals (US$2.6 million).
The market performance is likely to remain range-bound next week given the year end phenomena where the volumes appear to ease-off slightly before New Year. The market is also likely to closely watch the developments related to announcement of mini-budget. The market will keep close eye on the secondary market yield movements where the central bank through its recent open market operations flushed banking industry liquidity which helped bring down the yields on GoP papers by up to 80bps.
Banking sector spread for November 2021 slipped to 4.2%, marking the sixth consecutive month of diminishing spread. Although, fresh spreads — being reflective of recent monetary settings – have begun to inch up the spread to 4.83%, up 88bps MoM. Fresh lending yields incurred negative credit spread during the month of negative 16bps as against 33bps in October 2021 where one plausible explanation was proponing of loan requirements eyeing further rate hikes in the future amid global prices spiraling upwards increasing cash flow needs, and banks capitalizing on the opportunity in order to meet regulatory threshold of 50% of ADR. In the previous interest rate up cycle, spreads averaged at 5.6% as compared to November 2021 spread of 4.2%. In the current cycle, while there is a significant room for spreads to mean revert, the presence of subsidized loans (20.0% of total outstanding private sector loans as against 9.2% in October 2018) with further disbursements under TERF in the near term might result in realized spread falling short of mean. With GoP likely capping growth, a shift to value from growth sectors is imminent with Banks in a perfect spot through historically attractive valuations and improving dividend yield prospects not found in any other sector.
As CY21 approaches close, AKD Securities reviewed performance of its Cement universe performance during the year. Despite a strong performance for 1HCY21 (up 18% against 8% of KSE 100), sector came out among the underperformers, posting a CYTD return of negative 10% as against KSE-100 increasing by 1%. The underperformance was largely on the back of increasing coal prices which have increased 64%. However, the same did not have significant impact on margins of local players. After absorbing some pressure, they were able to increase prices and also altering their fuel mix to reduce reliance on imported coal. Though, some impact will be witnessed on margins for 2QFY22. Additional factors impacting the performance of the sector were muted growth in dispatches, increased freight rates due to global supply chain issues and higher domestic interest rates. Moving forward, post-winter decline in coal demand in the developed economies is likely to trigger the decline in coal prices and resultantly improve margins of local payers given cement prices have proved to be downward sticky historically.
The issue of non-availability of urea has started to reach mainstream media reporting that farmers being charged up to PKR2,400/bag as opposed to official price of PKR1,800/bag. The disparity in domestic and international prices of urea of PKR7,700/bag has being the primary reason affecting retail supplies of the commodity. The supply side concerns come at a time when the wheat sowing is in full swing posing risks to overall acreage of the crop which has been stagnant around 1.15 ton/acre over the last many years, and to production target set for current season of 30 million ton. That said, analysts see limited risks materializing owing to better farm economics (as a result of bumper crops last season and favorable pricing trends) and increase in support prices. The support prices of the commodity has been revised up to PKR2,200/bag in Sindh and PkR1,950/bag by center. Country reported a bumper wheat crop last year of 27.3 million ton and also imported another 3.6 million ton to build buffers to manage end-user prices. Hence, they do not see price pressures in the immediate run. However realization of risks to wheat production target may hit the prices in the medium run.
While much of the policies have already been incorporated and made effective through FY22 budget, the cabinet this past week approved fresh incentives for the local auto industry. The fresh incentives include reduction in the duty structure for the new model launches (concessional CD of 15% and 30% on non-localized and localized parts respectively). The said incentives will be applicable for the period of 3-years after the new model launch. Similar incentives have been approved for the newer models of tractors (15% CD as against existing 35%) and motorcycles & rickshaws (30% CD as against existing 46%). The overall capex of auto sector has swelled 117%YoY in 9MCY21, among which the highest increase has been witnessed by PSMC (+470%YoY) suggesting the launch of 4th generation Swift in CY22 which may trigger a rally in stock in near future. On the other hand, INDU is investing US$100 million to launch local HEVs in the country, thereby putting themselves ahead of their peers.