SMIDGEN gains witness; stocks may likely go up
Announcement of Federal Budget FY23 by the Government of Pakistan (GoP) brought some stability to the local stock market. There is overwhelming perception that the Budget has been prepared keeping in view the conditionalities of the International Monetary Fund (IMF).
The benchmark index of Pakistan Stock Exchange posted a nominal increase of 0.3%WoW for the week ended on Friday, June 17, 2022. It recovered sharply after shedding 1,135 points on the first trading session of the week.
The market participation picked up slightly where the average daily turnover increased 2.6%WoW to 174.2 million shares.
The rupee continued to slide down against dollar to close 208.7/US$, depreciating 3.2%WoW. Consequently the dollar adjusted return for the week declined by 2.9%.
SBP also conducted T-Bills auction during the week mopping up RKR800 billion against a target of PKR750 billion. The participation remained concentrated in 3-month papers while the yields surprisingly declined by 30bps and 55bps for 6-month and 12-month papers, but remained flat for 3-month papers.
Other major news flows during the week included: 1) GoP increased prices of POL products by PKR29/ltr (for petrol and PkKR55/ltr for diesel, 2) Exports up 27.9% during Jul-May and imports soar 44.5% , 3) Cement prices increased by PKR50/bag in the North region, 4) PKR5/unit relief on electricity consumption was withdrawn and 5) SBP’s foreign exchange reserves dipped below US$9 billion.
Sector-wise, the top performing sectors were Engineering (up 6%WoW) and OMCs (up 5%WoW), while the least favorite sectors were: Vanaspati & Allied industries down 14%WoW and Tobacco down 5%WoW.
Stock-wise, top performers included: MUGHAL, INIL, MLCF, ISL and SNGP (+7.6%WoW), while laggards were: SCBPL, POML, IGIHL, MEBL and UBL.
Flow-wise, Insurance companies remained the net sellers, offloading US$5.9 million followed by Brokers (US$-4.4 million). While Individuals and Companies were net the buyers, with a net buy of US$16.1 million. Foreigners recorded a net outflow of US$1.9 million.
The rumor mill was in full swing throughout June 17 that Pakistan will finally exit FATF’s grey list. However, nothing concrete has come off that till the time of writing this report. However, the chances were bright that the country will finally exit the grey list having achieved compliance on all the major checkpoints. However, before the country exits the grey list, an FATF team will likely visit the country to confirm the implementation. The market will likely take this news favorably and we may see market participation picking up. Also, the yields on the government papers look to have plateaued at current levels which will also help bring confidence in the market. The country still needs to close an agreement with IMF for the disbursement of US$ one billion tranche which will help bring stability to PKR and the index.
Urea offtake in May 2022 decreased by 9%MoM and 17%YoY to 417,521 tons. The YoY decrease in offtake is likely due to higher Urea prices and higher base effect in same period last year. On a cumulative basis, in 5MCY22, Urea offtake increased by 14%YoY to 2.51 million tons. The sales volumes of FFC decreased by a mere 2%YoY, while that of EFERT and FFBL decreased by 24%YoY and 35%YoY, respectively.
Urea ex-factory prices had reached PKR1,980/bag in May 2022. The premium in the local market remained unchanged as well, hovering up to PKR350 per bag due to anticipation of further increase in Urea prices amid proposed increase in GST on fertilizer products in FY23 Budget. However, recently the government has fixed prices at PKR1,950/bag (retail) and dealer transfer price at PKR1,810/bag.
Industry Urea inventory levels increased to 465,000 tons at the end of May 2022, compared to 320,0000 tons at the end of April. This is attributed to lower monthly offtake and imports earlier in the year.
DAP offtake declined by a sharp 46%YoY to 95,000 tons. The YoY decrease is majorly led by massive surge in local DAP prices (in-line with international price and PKR depreciation). DAP inventory during the month was reported at 370,000 tons.
During 9MFY22, Power Cement sold a total of 1.76 million tons of cement and clinker, down 6% from 1.87 million tons during the same period last year. While local sale of cement and clinker posted a growth of 2%, there a major decline was witnessed in export dispatches mainly on account of high freight cost resulting in cancelled orders from export destinations.
According to the management, average net selling price during 9MFY22 hovered at PKR 8,617 as compared to PKR 6,293 during the same period last year. The Company has been able to pass on the impact of increasing fuel and power costs. However, it comes with a delay which has shrunk the Gross Margin to 17%, down from 24%. Fuel and Power costs account for 75% of the total cost of production.
Furthermore, the Company completely shifted from using imported coal to a mix of local and Afghan coal which is significantly contributing towards cost savings for the Company.
The Company is investing significantly in renewable and alternate energy projects to reduce costs as well as reducing carbon footprint. A 7MW Solar Power Plant project is expected to commence operations in July. The Company has entered into a 20-Year rental agreement with Burj Solar Energy for the implementation of this project which means the Company won’t be adding any assets related to this power plant in its financials.
The Company claims highest retentions in sales to Karachi. The current sales mix is distributed between Karachi (retail) 28%, (Institutions) 36% and Sindh 36% (excluding Karachi), which was previously 23%, 36% and 41%, respectively.
The Capacity utilization of the new line-III was reported at 83% as compared to 105% during the same period last year. Low utilization of the plant was mainly because of the damage caused in January this year which was repaired under warranty. The Company claims that they faced no material financial impact as they had availability of sufficient stock to cover over two-month sale.