Pakistan stock market closes week flat

The PSX‐100 index snapped its ten‐day winning streak during middle of the week ended 11^th March 2016 and closed at 32,669 levels, up 0.70%WoW. Overall, activity at the market showed sharp recovery, where average traded volumes for the week ascended to 175 million shares as compared to 135 million shares a week ago.

Key news flows guiding the market included: 1) ECC of the Cabinet approved increase in withholding tax on banking transactions for non‐filers to 0.4% from 0.3% and deferred the approval of Auto Policy for more consultation, 2) NTC rejected petition of PSM for imposition of antidumping duty on import of iron ore and steel products from China, 3) National Assembly Standing Committee on National Food Security and Research recommended 60% excise duty on the import of dry milk to promote local dairy sector compared to the current rate of 30 percent, 4) MoF and the MoPNR gave the go‐ahead the Ministry of National Food Security and Research to frame policy allowing urea import by the private sector, while the NA Standing Committee on Industries and Production also directed NFML to import urea in order to curb domestic prices, 5) ISL inaugurated its capacity expansion of over 500,000MT of which 400,000MT can be galvanized at its state‐of‐the‐art steel complex in Karachi and 6) DPC approved around 12 applications envisaging an increase of up to 8% in the prices of the drugs concerned and deferred the issue of reduction in prices of innovator drugs.

Scrips that led the bourse included PTC, EFOODS, FFBL, PPL and AICL, while laggards were PSMC, HBL, UBL, APL and AKBL. Foreign participation witnessed marked improvement this week, where net foreign inflows for the week amounted to US$4.1 million as compared to net selling of US$1.6 million in the week before.

The market is expected to see consolidation around current levels where volatility can emerge from uncertainty in global oil price movements and regional flow trends. Upcoming key events include monetary policy review later this month, where State Bank of Pakistan is likely to maintain status quo due to expectations of higher inflation. This would bode well for banking sector which can gain traction as a 50bps hike in rate in September ’16 is being talked about. Data pertaining to US oil inventories and the possibility of an OPEC meeting may keep oil prices on upward trajectory, flowing through to the domestic Oil & Gas sector. However, many analysts remain skeptical about any consensus due to Iran’s likely agreement to freeze production at January’16 levels.

Despite a number of challenges faced during CY15, UBL was able to post decent earnings growth of 11%, with profit growth being a function of strong NII growth (+23%YoY) and capital gains utilization (+57%YoY). Going forward, analysts expect earnings growth to slow down to 4%YoY during CY16 where: 1) upcoming PIB maturities and lower banking spreads are making way for tighter NIMs and 2) continued risk of further deterioration in international book in the light of the global commodity slump will be key factors to be kept in mind. That said, UBL's sheer strength in terms of diversification of income streams (non‐core income makes 31% of total income), ability to grow loan book (already mandated for infrastructure projects) and sizable capital gains backlog are likely to provide support to earnings. UBL remains the most attractively priced scrips within the banking sector considering its size and superior ROE profile. Price performance however remains hinged upon the reversal of interest rate cycle that is likely to rejuvenate interest in the sector.

According to the latest dispatches data, cement demand has started to pick up where dispatches grew to record levels during February'16 as compared to a month ago. Pick up in domestic construction activity and respite in exports slump were the key highlights. As a result, cumulative growth rate of dispatches improved to 7.7%YoY during 8MFY16 from 6.4%YoY growth during 7MFY16. Companies outperforming the industry during the month included FECTC, FCCL, KOHC, PIOC, DGKC, and MLCF, while LUCK and ACPL remained underperformers due to continued fall in exports. On cumulative basis, KOHC, PIOC and FCCL continued to outpace the industry while LUCK and ACPL continued to face problems on account of failure to divert lost exports (South Africa/Iraq) to other markets. Domestic demand is expected to continue to grow at a fast pace at least during the remainder of current fiscal year on account of record level growth in PDSP spending and construction related private sector credit. Expected normalization of exports from FY17 and initiation of construction work on CPEC projects may further surprise with double digit growth rate in the medium term. Due to strong fundamentals, analysts continue to maintain an Overweight stance on the sector where their top picks include LUCK and DGKC on account of expansion to catch up with anticipated rising domestic demand.

Automotive sales during February ’16 declined to 15,873 units, whereas production figures mimicked this trend. Cumulative 8MFY16 sales/offtake moved by 121,934/121,735units, while 2MCY16 figures showed signs of exhaustion when compared to last year's exorbitant rise in sales/production for 2MCY15 as compared to 2MCY14). All OEMs witnessed monthly sales growth stalling, which may be due to the fading out of 'new registration' effect, while only INDU showcased growth. The 1000cc segment fared better than others in declining offtake, while all other segments posted declines, following the phasing out of the Punjab Rozgar Scheme (news reports indicate final deliveries were due in February’16). At current levels analysts express preference for INDU, citing resilience of Corolla sales (now in its 18th production month) and ability to pass on costs.