Pakistan Stock Exchange closes January 2017 almost flat

While the benchmark index of Pakistan Stock Exchange mostly remained on upward trajectory during January 2017, various factors also plunged it down. However, the month posted a nominal increase of slightly less than 2 percent. Though, the index breached 50,000 barrier it failed in sustaining this level and the month closed at 48,758 points.

The factors keeping the market under pressure included: 1) political volatility due to Panama case, 2) deteriorating economic indicators, 3) apex regulator enforcing rules more stringently and 4) foreign investors offloading their holdings. While foreigners remained net seller, local investors bought at dips.

Barring Automobiles and Chemical, all other major sectors posted flat returns. On top of that Oil & Gas and Commercial Banks ended in the red. The performance of market was mainly led by second tier scrips. As stated earlier, local participation remained robust, with average daily trading rising to 443 million shares, a hike of 26 percent.

Foreigners continued to trim their holding as part of the global strategy, with a net outflow of almost US$111 million during the month under review, taking net outflow to a whopping US$409 million. Positions were offloaded in Power Generation, Banks and Chemicals.

Going forward, the market is likely to take direction from the ongoing results season where strong earnings growth by Banks, Cements and Autos is likely to provide impetus to the market performance.

Pakistan Stock Exchange fails to sustain 50,000 levels

During the week ended 27^th January 2017, benchmark index of Pakistan Stock Exchange managed to cross 50,000 levels. It failed to sustain the level due to due to profit taking and closed the week at 49,964 points, up 1.21%WoW. Earnings and corporate announcements remained at the center of investor interest with major highlights including: 1) CHCC announcing capacity expansion of 2.1 million tons per annum, 2) PSMC’s plan to enter in to a JV to manufacture automobile glass and 3) ISL disclosing plans to enhance capacity. Volumes improved considerably during the week with daily average rising to 523.4 million shares, up 34.7%WoW with foreign outflows also tapering to US$13.7 million as compared to US$46.6 million a week ago. Top gainers were: EPCL, KEL, HUBC and BAFL, while laggards were: ASTL, SSGC, NCL and MTL.

Major news flows for the week were: 1) SECP constituted a committee to review matters of in‐house financing, 2) the ECC extended cash subsidy on domestic fertilizer sales and approved 0.3 million tons of urea till 28^th April, 3) CCP imposed fines of Rs62.3 million on EFOODS, Rs2 million on FFL and Rs0.5 million on Shakarganj Foods for deceptive marketing of dairy products as milk with EFOODS denying these allegations later, 4) FBR exempted sales tax on machinery imports by textile units and customs duty on import of 13 items for textiles till 30^th June 2018, 5) SBP raised Rs39.39 billion through PIB auction and 6) GoP signed implementation and power‐purchase agreements with two Chinese companies and HUBCO for setting up 1320MW coal plant at Hub and 330MW coal plant in Thar. With no excitement expected in the monetary policy review over the weekend, the market is likely to retain its focus on results announcements with major names in Sugar, Fertilizer, Foods and Autos reporting earnings. January CPI data due next week can prove a key in setting expectations for future interest rate trajectory. On the global front, the US FOMC is also scheduled to announce its interest rate policy, with broader anticipations of no change in the Fed rate.

Fauji Fertilizer Bin Qasim (FFBL) is scheduled to announce its full year financial results for CY16 on Monday 30^th January. The companies is forecast to post profit after tax of Rs678 million (EPS: Rs0.73) in CY16F as compared to net profit of Rs4.06 billion (EPS: Rs4.35) in CY15, down 83%YoY). This decline in earnings is expected on the back of: 1) gross margin (GM) coming off by 15.7% (including subsidy) on account of significant reduction in DAP prices (down 14%YoY) due to depressed international price trends, 2) a 39%YoY lower other income (excluding subsidy) on account of lower dividend payout from associated companies and reduction in term deposit placements, and 3) 19%YoY higher finance cost owing to increased borrowing to manage working capital requirements. Sequentially, analysts expect earnings to post a turnaround recording profit of Rs1.73 billion (EPS: R1.15) in 4QCY16 against net loss of Rs159 million (LPS: Rs0.17) in 3QCY16 on the back of 1.3xQoQ growth in topline to PkR23.7bn on account of increase in DAP offtake to 483,000 tons, courtesy the Rabi season. Along with the result we also expect a cash dividend of Rs0.60/ share. While earnings turnaround in 4QCY16 is expected to be led by strong volumetric growth, we feel an improvement in international pricing dynamics would be necessary for sustainability of the earnings trend, going forward.

Lucky Cement (LUCK) announced its 2QFY17 result posting consolidated/unconsolidated earnings of R4.34 billion/ Rss3.80 billion (EPS: Rs13.43/Rs11.75) in 2QFY17, up 16%YoY/12%YoY. The consolidated earnings came in line with the expectation of Rs4.27 billion (EPS: Rs13.21) where unconsolidated earnings of AKD Securities higher than our expectation owing to better than expected GM during the period. This was in spite of 68%YoY/30%QoQ surge in average coal price to US$85/ton suggesting LUCK utilized cheaper coal inventory during the period. On a cumulative basis, consolidated/unconsolidated earnings grew by 13%YoY/13%YoY to in 1HFY17. Growth in earnings was led by 1) Topline grew by 12%YoY/22%QoQ led by 16%YoY/19%QoQ growth in dispatches to 2.03 million tons in 2QFY17 as compared to 1.753 million tons/1.703 million tons in 2QFY16/1QFY17, (2) Gross Profit increased by 16%YoY/18%QoQ led by improved topline and 1.61ppt YoY GM expansion to 49.05% in 2QFY17, and (3) Other income growth  by 64%YoY/10%QoQ to Rs498 million in 2QFY17 owing to relatively higher cash and STI of Rs32.1 billion (Rs99.28/share).

                                                                 

                

PSX-100 Index filtering at 40,000 level

Ignoring recent political flare up the benchmark of Pakistan Stock exchange, PSX-100 index resumed bullish momentum during the week ended 26^th August. After some recent profit-taking, the benchmark Index closed the week at 39,927 points. Average daily volumes for the week remained almost flat a little above 232 million shares with KEL, TRG, DFML, SNGP and AMTEX leading the board.

Key news flows during the week included: 1) GoP announced that claims for tax refunds for which payment orders were issued till 30^th April would be settled by 23^rd August this year, 2) SSGC in its plan submitted to the OGDC indicated spending Rs118.5 billion on its ongoing and new projects for improving and upgrading its transmission and distribution network, including RLNG transmission projects over the next 5 years, 3) meeting of the Drug Pricing Committee (DPC) summoned on 30^th of this month, where pharmaceutical companies have appealed to the government to increase the prices of various medicines, 4) ADB approved US$810 million in multi-tranche loans for Pakistan's transmission system, funding rehabilitation of NTDC's grid, 5) service deficit rose to US$290 billion, as against a surplus of US$51 million last year and 6) due diligence for MCB acquisition of NIB nearing completion.

Performance leaders during the week were: SNGP, ASTL, ICI and PSMC; while laggards included: HMB, SHEL, FATIMA and PPL. Foreign participation also eased out where net inflows during the week amounted to US$1.9 million as against considerably high net outflows of US$18.4 million a week ago.

Interest in the coming week is likely to be centered around the remainder of the corporate result for the season especially cement sector. Major companies scheduled to announce results include LUCK, DGKC, KOHC, KAPCO, GHNL, KML, ICI, AGIL and SMBL. At the tail‐end of earnings season, analysts expect the index to remain range-bound, in the absence of major triggers. Global developments surrounding oil prices and speculations over an output freeze by major oil producers may spur the index heavy Oil & Gas sector.

Reflecting lower remittances and delay in CSF installments, current account deficit for July 2016 widened to US$591 million. Remittances received during the month declined 20% YoY/36%MoM on account of 1) worsening labor dynamics in GCC region, 2) greater regulatory monitoring in US, and 3) seasonal impact from Ramadan. Trade deficit also continued to worsen; where monthly deficit widened 18%YoY with exports declining 6.6%YoY and imports rising 6.2%YoY in July 2016. Foreign investment flows remained a mixed bag; with portfolio investments staying in the positive zone (US$49.5 million inflows as compared to US$24.7 million outflows), FDI registered a decline of 14.6%YoY on reduced investments from China (decline of 75.8%YoY). Going forward, analysts expect current account to post a deficit of 1.7% of GDP during FY17 underpinned by weak trade outlook amid stagnant remittance inflows.

National Bank of Pakistan (NBP) has posted consolidated profit after tax of above Rs10 billion (EPS: Rs4.74) for 1HCY16 as compared to net profit of Rs7.8 billion (EPS: Rs3.70) for 1HCY15, up by hefty 28%YoY. This above expectations performance can be attributed to higher net interest income (NII) along with lower than expected provisioning expense. Sequentially, there was a substantial 51%QoQ uptick in earnings on the back of 31%QoQ higher NII and capital gains, despite higher tax incidence (tax rate of 45% in 2QCY16 as compared to 35.0% in 1QCY16). Key 1HCY16 result highlights included: 1) a 9%YoY/31%QoQ increase in NII, 2) provisions down 78% YoY/48%QoQ to Rs1.3 billion during the period under review, 3) non-interest income came down by 20%YoY due to 54%YoY lower capital gains. However, fee income posted a considerable rise of 20%YoY during 1HCY16 and 4) a 8%YoY increase in total expenses. Sequential uptick can be attributed to growth in NII that was up by a commendable 31%YoY. NBP’s 1HCY16 earnings performance is encouraging due to growth in NII along with improvement in asset quality.

Continuing with its disappointing trend, detailed data for external trade reflects a marked decline during July 2016, where exports were registered at US$1.48 billion, down 7.4%YoY/10.4%MoM. Exports registered a decline across all segments, with highest impact coming from the heavyweight Food and Textile sectors at US$185.5 million and US$982.6 million, posting decline of 15.4%YoY and 4.2% YoY respectively. Going forward, despite a buildup in pressures due to weakness in PkR/US$ parity. Analysts expect textile exports to remain under pressure on the basis of: 1) lower Chinese demand due to slow economic growth, 2) lack of currency competitiveness (as opposed to regional competitors) limiting GSP+ benefits, 3) concerns of an economic slowdown in the EU following Brexit and 4) shortage of cotton supply after tapering cotton production last year with arrivals down by 34%YoY.

Pakistan Stock Market closes above 36,000 level

The benchmark PSX‐100 index continued its winning streak of the last two weeks (gained 2,234pts) to close week ended on 13^th May at 36,122 points (up 0.41%WoW). As opposed to earlier week the index was able to close above the crucial 36,000 level as investors calibrated portfolios in anticipation of Pakistan's inclusion in the Emerging markets club.

Additionally, the Oil & Gas sector was drive by rising global oil prices. Activity at the market remained buoyed with average daily traded volumes rising to 294.5 million shares from 242.3 million shares last week, up by hefty 23%WoW).

Key news flows guiding the market included: 1) semi‐annual index review for MSCI Equity Indices resulting in the addition of 2 scrips (HCAR and PIBTL) and deletion of 4 (ABOT, BAHL, DAWH and HMB) Pakistani companies into the MSCI FM Small Cap Index, 2) Cabinet Committee on Privatization (CCOP) approving divestment of GoP's residual 40.25% Shareholdings in KAPCO, and sale of shares in Mari Petroleum Company, 3) GoP and Italy likely to sign a G2G deal for the supply of liquefied natural gas (LNG) through an Italian firm Eni, 4) Drug Regulatory Authority Pakistan (DRAP) expected to allow pharmaceutical companies to further increase drug prices (up to 15%) with the commencement of new financial year, 5) fertilizer companies slashing prices of urea by Rs60/bag after revision of gas prices and 6) KAPCO securing an upfront tariff of Rs8.1176/kWh for its coal‐fired project with an installed capacity of 660MW.

Gainers at the bourse were: LOTCHEM, ICI, SNGP, HUBC and EPCL, while scrips losing value were: HBL (‐3.8%WoW), NML (‐3.7%WoW), MLCF (‐2.7%WoW) ABL and FATIMA. Volumes leaders were: DCL, TRG, SNGP and KEL. Foreign participation remained under pressure, with foreigners selling US$12.7 million worth equities during the week against net buy of US$21.2 million last week.

Upcoming FY17 budgetary measures (tentative date of release being 3^rd June’16), politically cohesive conclusion of the recent Panama Papers deadlock, and the outcome of the MSCI’s Annual Classification review (announcement scheduled on 14^th June’16) remain major upcoming milestones for equity market. Anticipating MSCI classification review, investors are likely to shift interest to scrips that are likely to enter the EM index, namely LUCK, ENGRO, HBL, UBL, MCB and OGDC.

Pakistan successfully completed staff level discussions for the eleventh review under the IMF Extended Fund Facility (EFF) qualifying for disbursement of US$510 million, subject to approval by the Fund's Board. GoP managed to meet all quantitative criteria for the Jan-Mar 2016 quarter where progress on fiscal benchmarks (9MFY16 tax collection target of Rs2.1 trillion met and budget deficit contained to Rs1.0 trillion) is encouraging. With FY16 budget deficit target of 4.3% of GDP close to be achieved, the GoP will now be eyeing further consolidation to 4.0% in the coming budget. As the program draws to a close, the Fund has highlighted need for continued efforts in key reform areas particularly fiscal management, energy shortages and restructuring of loss‐making entities. The last review for the year ending June'16 is expected in August'16 where the analysts expect GoP to comfortably meet all quantitative criteria, likely to lead to disbursement of the final tranche of US$100 million under the program.

The PkR/US$ has depicted commendable stability in the ongoing financial year averaging Rs104.7 reflecting a marginal decline of 0.05%CYTD against the dollar. This has remained a function of: 1) weak dollar dynamics, down 4.65%CYTD, 2) strong foreign exchange reserves countering BoP weakness and 3) ramp up in the FE‐25 import financing facility (1QCY16 average utilization at US$1,438 million as compared to an average of US$749 million for CY15). Over the immediate term experts see the PkR/US$ parity to remain stable, with projection for interbank rate to average Rs106.2 during remaining months of CY16.

That said, pressure on the Rupee is expected to intensify with the start of next financial years (FY17) on account of: 1) higher inflation and potential reversal in monetary cycle and 2) greater Balance of Payment vulnerability to oil price shock where analysts foresee PkR to depreciate up to 4.0% (against earlier expectation of 2.4%) during FY17/CY17 averaging at Rs108.5/Rs110.1. Foreign exchange reserve stability (before repayments start in May'17) is likely to restrict pressures on the PkR in the coming fiscal year.