Political instability may keep market down
The benchmark index of Pakistan Stock Exchange KSE-100 Index shed 623 points during the week ended on March 18, 2022, mainly during the last 2 sessions. This led to 1.43%WoW decline in total market capitalization of the Index. The daily trading volumes also dried up to 174 million shares as compared to 214 million shares a week ago, posting 18.6%WoW decline. The market’s downward drift has been due to further escalation in country’s political uncertainty as we approach close to 28th March, the day when no-confidence vote is due. Similarly, the uncertainty in global commodity markets persisted. Although, oil prices fell below US$100/barrel during the week, the price rebounded back.
Other news flow during the week included: 1) Beginning of IMF’s 7th review, 2) GoP keeping the petrol prices unchanged till the next fortnight at a cost of PKR28 billion, 3) PKR hitting another low of PKR180/US$, 4) the US FED moving up the interest rate needle by 25bps, 5) cut off yields on PIBs soaring 115bps, 6) ECC approving PKR24.26 subsidy on DAP fertilizer for upcoming Kharif season, 7) banking sector deposits increasing 15%YoY to PkR20trn, and 8) Forex reserves declining 1.7%WoW to US$22.3 billion.
Sector-wise, the gains remained small, with the top performing sectors being: Leather, Woollen, Sugar, Real Estate, and Foods.
The least favorite sectors were: E&P, Leasing, Closed end Mutual Funds, Refinery and Banks.
Stock-wise, top performers were: JSCL, SML, KTML, BNWM and NESTLE, while laggards were: PPL, TRG, BAFL, SCBPL and AVN.
Flow-wise, Foreigners remained as the net sellers, offloading US$4.9 million followed by Individuals (US$3.2 million) and Brokers (US$1.7 million). As against this, Banks (US$4.4 million), Companies (US$2.9 million), Insurance Companies (US$2.0 million) and Other organizations (US$1.0 million) were on the buying side.
The political uncertainty amidst the no-confidence vote will continue to drive the market, while the start of rollover week will further add to the volatility. Similarly, the market will watch the movement of global commodities very closely and will react accordingly.
Additionally, news flows related to ongoing IMF review would also dictate market sentiments in the coming weeks, warranting a closer look. Analysts advocate for gradual accumulation in fundamental scrips with a longer term focus. They prefer Banks (on possible further monetary tightening by the Central Bank), select-Techs (SYS, AVN) and other select-value stocks (LUCK etc.). They also like Fertilizers (FFC and EFERT) on the back of recent hikes in urea prices.
Textiles and clothing exports for February 2022 were recorded at US$1.7 billion, up 35.7%YoY, taking 8MFY22 textile exports to US$12.6 billion, up 26.1%YoY. More encouraging was the performance of value added segment which continued to outpace the growth in non-value added segment, a feature vastly visible since post-pandemic recovery. During 8MFY22, value added segment registered a growth of 24.8%YoY to US$10.2 billion, largely maintaining its share at 80.6% in the textile mix on yearly basis. Local cotton prices continue their strong momentum, trading at PKR21,000/40kg translating into an increase of 56.5%FYTD or 11.1%CYTD. This could be attributed to higher demand from local players, particularly yarn manufacturers where margins remained attractive due to lower cotton production than the target. Analysts expect tighter sales prospects for textile manufacturers in the near term given turmoil in European Union and inflationary pressures in key export markets. However, medium term prospects look bright following ease-off in commodity prices.
The rally in scrap prices has been upended by geopolitical tensions, with LME scrap trading around US$629/ton, increasing by 24% in last one month. Rebar prices have also joined the rally recently, up by 8% in last one week, as mills in Europe suspended operation due to high energy costs. Even though scrap prices have lost a bit of steam (declined by 10% in last one week), analysts expect rebar prices to maintain their ground in short run, resulting in increased rebar-scrap spread after it increased by 80% in last one week. Locally, rebar prices have increased by PKR15,000/ton during the past month as manufacturers passed on the increasing cost of scrap. Analysts expect the price to further increase by PKR5,000 to PKR10,000 per ton after scrap prices crossed US$600/ton benchmark.
AKD Research team revisited the investment case for Fauji Fertilizer Company (FFC), upgrading its target price, implying an upside of 29%. Additionally, the team expects a cumulative payout of PKR16/share based on an assumption of 80% payout ratio. They expect the Company to post earnings of PKR 19.8/share, up 15%YoY driven by: 1) A PKR80/bag hike in price, 2) a 38%YoY growth in other income. Likewise, the Company has net cash and short term investments of PKR28/share which makes the investment considerably less risky. The recent hike of PKR80/bag inflates FFC’s profitability by PKR1.78/share, thereby taking the gross margin to 32% in CY22 as against an earlier estimate of 30%. The brokerage house believe FFC is currently well placed than its peers as current macro outlook, directly impacting EFERT’s profitability due to its costly gas in old plant where pricing is derived under PP-12 policy formula. With international landed cost of urea at PKR6,200/bag, which leads to the conclusion that the recent hike is one of the many to come in near future. The burden of gas tariff and GST rationalization is being passed on to the consumers successfully.