Index smidgen low; renew IMF plan likely to support
The benchmark index of Pakistan Stock Exchange closed the week ended on April 13, 2023 with a dip of 0.47%WoW. Despite Pakistan’s completion of all prior actions, the resumption of the IMF program is still awaited. According to news sources, the pain point between Pakistan and the IMF of late is commitments from friendly countries.
Furthermore, the circular debt of power sector increased by PKR419 billion during 8MFY23, taking the total circular debt to PKR2.67 trillion despite increasing electricity tariffs.
With the interest rates at 21% and uncertainties regarding the country’s economic position, participation remained lackluster during the week, with daily volumes averaging at 83 million shares during the week, as compared to 110.18 million shares in the prior week depicting a decline of 24.1%WoW.
Other major news flows during the week included; 1) IMF drastically cuts Pakistan’s FY23 growth forecast to 0.5%, 2) IMF projects fall in GoP gross debt to 73.6% of GDP, 3), March workers’ remittances hit 7-month high of US$2.5 billion, 4) RDA inflows cross US$6 billion mark, 5) SBP raises via auction for PIBs, and 6) Banks’ deposits increase by 15% YoY to PKR23.56 trillion.
The top performing sectors were: Commercial banks, technology and communication, and closed-end mutual funds, while the least favorite sectors were: Vanaspati & allied industries, textile weaving, and tobacco.
Top performing scrips were: FABL, LOTCHEM, KOHC, SCBPL, and MUGHAL, while laggards included PSEL, EPCL, GLAXO, AIRLINK, and PAKT.
Flow wise, individuals were the major buyers with net buy of US$0.21 million, while companies were major sellers, with a net sell of US$0.35 million.
Any news flow regarding materialization of the commitments from friendly countries will put the IMF program back on track and will support the market sentiment.
According to recent news flow, Pakistan is likely to receive $ one billion financing commitment from UAE. NEPRA has approved positive tariff adjustment of 47 paisas to recover PKR15.45 billion from customers during 2QFY23 under QTA—likely to keep the circular debt in check.
With this backdrop, the market is expected to remain range bound, with any news regarding the IMF program, including an Staff Level Agreement, would lead to a euphoric move in the market.
Most of the manufacturing sectors witnessed significant slowdowns in the first half of FY23 mainly on the back of sharp currency depreciation, supply chain disruptions, and overall inflated commodity prices in the international market. Overall, the long-steel industrial volumes are expected to close FY23 around 5.2 million tons (FY22 6.4 million tons), down 18%YoY, with Mughal expecting to enhance market share to 5.25% (4.9% in FY22). The contribution of the non-ferrous sales to the total revenues has grown exponentially in the previous two years, with export revenues accounting for as much as 20% during FY22 (1.5% back in FY20). Since the company has indicated that it is targeting to diversify its non-ferrous portfolio (aluminum) and add other base metals (zinc) in it, analysts expect the contribution from nonferrous division to increase significantly in the years to come. Overall, MUGHAL remains top pick in the long steel sector.
Analysts expect Engro Fertilizers (EFERT) to post profit after tax of PKR3.9 billion (EPS: PKR2.9) in 1QCY23, a decline of 29%YoY and 39%QoQ. Revenue for the quarter is likely to clock at PKR41.3 billion, an increase of 12%YoY on the back of higher prices for product offerings. On the flipside, Revenue will be recording a decline of 10%QoQ due to DAP sales reducing by more than half when compared to 4QCY22, although slightly offset by higher urea offtakes.
Margins for the quarter are expected to increase to 25.8%, an increase of 290bps compared to the previous quarter, as higher urea prices along with relatively improved fixed-cost absorption supported profitability for the quarter. EFERT is likely to record an operating profit of PKR7.3 billion, up by 14%QoQ when compared to PKR6.3 billion posted in the last quarter as Selling & Distribution expenses are likely to normalize back down.
Profit before Taxation for the quarter is expected to clock in at PKR5.9 billion, up by a mere 6%QoQ as higher Finance costs (PKR1.1 billion) owing to higher ST borrowings along with lower Other Income (PKR732 million) are likely to partially offset the benefits of better gross margins in 1QCY23 as compared to the same period last year. After a tax reversal of PKR888 million in the last quarter, taxation is expected to normalize and clock in at PKR1.9 billion with an ETR of 33%.
Analysts expect the Company to announce a dividend of PKR3.0/share for the first quarter of the year, although the possibility of a payout ratio higher than 100% cannot be ruled out given the company’s recent history.
Maple Leaf Cement Factory (MLCF) is scheduled to announce its 3QFY23 result on April 17, 2023. Analysts expect the Company to record profit after tax of PKR2.1 billion (EPS: PKR2.0) as compared to net profit of PKR2.3 billion (EPS: PKR2.2), a decline of 10%QoQ while an increase of 78%YoY. MLCF’s topline attrition on a sequential basis can be attributed to the lower offtakes during the period, wherein the Company experienced 7%QoQ drop in offtakes. In comparison, industry sales in the Northern Region posted a negative growth of 8.6%QoQ, with MLCF’s relative outperformance driven by the commissioning of the Line IV expansion.
Furthermore, analysts expect the Company’s gross margins to clock in at 29.9% as against 29.4% in 2QFY23, slight improvement in the margins is expected due to price increase during the quarter, where retention price rose by 2% despite the imposition of additional 1% GST and FED increase PKR100/bag in mid-February 2023. Moreover, finance cost of the company is expected to clock in at PKR761 million (up by 25%QoQ and 54%YoY) due to increased borrowing and higher interest rates. Overall, this takes 9MFY23 net profit to PKR5.7 billion (EPS: PKR5.3) against net profit of PKR3.6 billion (EPS: PKR3.3) in the same period last year.