The benchmark index of Pakistan Stock Exchange (PSX) continued its upward journey towards 50,000 mark during the week ended 6th January 2017. It posted a gain of 2.58%WoW, and closed the week at 49,038. Exercising of pricing power by cements, expectations of turnaround in margins for steels, expectations of the textile policy and the Supreme Court's move to re‐examine beneficial owners of holding companies, helped boost a broad based rally where average volumes for the week were up 42.3%WoW, 408 million shares. Key new flows included: 1) cement dispatches grew by 8.65%YoY to 19.81 million tons in 1HFY17, led by growing demand in the domestic market, while local cement sales increasing by 11.07%YoY during the period, 2) the GoP decided to keep petroleum prices unchanged for two weeks during the ongoing month, 3) domestic petroleum products sales during the 1HFY16 increased by more than 18% to 13 million tons. POL sales during December'16 rose to 2 million tons, reflecting a growth of 23% YoY/1.8%MoM and 4) news reports stated that KEL has shelved plans for converting its BQPS‐1, with 420MW capacity to low‐priced coal after the utility failed to secure cost‐effective tariffs from the regulator. Stocks outperforming over the week were: ASTL, FFC, NCL and PTC, while laggards were: MEBL, AGTL, EPCL and KEL. Volume leaders were: DSL, ASL, KEL and, BOP. News flows and preliminary data on output figures from OPEC nations is expected to greatly sway global oil prices. While the index is at all‐time highs, profit taking cannot be ruled out. In the run‐up to results season, dividend paying stocks are expected to remain in the limelight.
Recent recovery in international urea price to US$240/ton (up 42% since July'16) presents a lucrative opportunity for local manufacturers to export excess urea inventory (November'16 urea inventory in the system stands reported at 1.45 million tons, down 15%MoM/ up 56%YoY). Weakening demand (poor farm dynamics) along with record level urea production has led to high inventory build‐up in the system which is likely to persist in the near‐term with urea inventory forecasted at 1.2 million to 1.8 million tons by the end of CY16/CY17 respectively. In this backdrop, the GoP is expected to allow export of 0.8 million tons of urea in line with a proposal of Ministry of Industries. In such a scenario, Engro fertilizer remains a key beneficiary on account of its low cost/bag and healthy market share, followed by FFC owing to market leadership in urea sales.
Robust growth in demand for POL products, underpins December'16 total volumetric offtake of over 2 million tons, climbing 1.4%MoM/21.6%YoY. Furnace oil sales rose by 35.5% MoM/30.4%YoY, followed by HSD sales up 23.7%YoY but dipped 20%MoM, whereas MOGAS demand continued to rise (growing 16.7%YoY), yet remaining tepid sequentially (0.3%YoY increase). 1HFY17 volumes point to 18%YoY growth in total volumes, led by 20%/16%/20%YoY growth in FO/HSD/MOGAS offtake. The picking up of volumes at this pace is likely to slow. That said, 2HFY17 is likely to be slightly better (5-year average 2HFY sales make up 53% of annual offtake), led by strong growth in retail fuels from May’17 onwards. Premium fuels sales continue to soar, where 1HFY17 sales of 29,547 tons marks a 37%YoY increase, making FY16 full year sales of 41,067 tons pale in comparison. Renewed force to regain market share remains prominent in PSO's numbers, where the OMC is slated to benefit from its vast retail network.
According to an AKD Research report, cement prices in the North Region have likely been increased in the range of Rs10‐20/bag whereas the cement prices in the South Region remain unchanged and are not expected to be raised anytime soon. The brokerage house believes that the hike in cement prices (not incorporated in base estimates yet) should allow cement manufacturers to maintain margins whereas gross margin of AKD Cement Universe is likely to improve by 54 bps/100 bps to 38.76%/43.77% in FY17/FY18.