Pakistan Stock Exchange witnesses 39.8%WoW decline in average daily trading volume

The week ended on February 03, 2023 remained volatile  due to the ongoing talks with IMF to ensure its prerequisite conditions are implemented which includes high circular debt which is hovering around PKR2.5 trillion for power sector and PKR1.6 trillion for Gas sector while restricting subsidies only to vulnerable domestic consumers. Furthermore the lender has also demanded political consensus given that opposition might create hurdles in the way of implementing tough economic decisions.

The local currency has dropped significantly after it was left to market forces, depreciating to PKR276/USD.

Participation in the market declined, with daily volumes averaging at 130.78 million shares during the week, as compared to 217.20 million shares in the prior week depicting a loss of 39.8%WoW.

Other major news flows during the week included: 1) US Fed raising rates a quarter point, 2) SBP reserves plunging to US$3.07 billion, 3) trade deficit for first seven months of FY23 shrinking 31.97% to US$19.632YoY, 4) IMF identifying PKR2 trillion hole in budget estimates, 5) CPI Inflation for January 2023 rising to 27.6% and 6) LPG prices hitting historic high of PKR300/kg.

The top performing sectors were; i) Glass and Ceramics (+4.4%WoW), ii) Pharmaceuticals (+3.9%WoW), and iii) Woolen (+3.6%WoW), while the least favorite sectors were: Miscellaneous, Textile Weaving, and Tobacco.

Stock-wise, top performers were: GATM, ABOT, GHGL, COLG, and KTML, while laggards were: PSEL, GADT, SRVI, PPL, and PSMC.

Flow wise, individuals were the major buyers with net buy of US$0.32 million, followed by Banks/DFI with net buy of US$0.13 million), while foreign investors were major sellers, with a net sell of US$0.75 million.

The market is expected to remain under pressure in the near future mainly due to the concerns stemming on political and economic fronts, expected to keep the market movements in check. 

Any news flow regarding foreign inflows, whether from the IMF or other bilateral and multilateral sources, would support the market trajectory. However, the government would have to take difficult decisions to get the IMF on board, which includes additional revenue collection of PKR600 billion and hikes in gas and electricity tariffs.

 Analysts continue to advise a cautious approach while building positions in the market.

Pakistan Stock Exchange benchmark index witnesses 2.5%WoW decline

Pakistan Stock Exchange (PSX) remained under pressure during the week ended on September 23, 2022, driven by renewed weakness in the PKR against the USD and concerns regarding the country’s fiscal health.

Participation in the market remained lackluster, with average daily traded volumes averaging 166.1 million shares during the week under review as compared to 183.2 million shares a week ago.

The benchmark index, KSE-100 Index lost 1,059.28 points during the week, depicting a 2.5%WoW decline. The PKR continued to lose value against the US$, depreciating 1.2% during the week.

Furthermore, the SBP conducted the T-Bill auction this week, where the central bank raised PKR1.3 trillion against a target of PKR1.5 trillion. The cut-off yields for the 3-month and 12-month tenors remained largely flat, whereas the yield for 6-month increased by 15bps to 16%.

Other major news inflows during the week were: Saudi Fund for Development confirmed a one-year extension of US$3 billion deposit, 2) Initial estimates pointed towards flood losses to be US$30 billion, 3) IMF announced that it would support Pakistan’s flood relief, reconstruction efforts under the current program, 4) Russia agreed to provide petrol to Pakistan on deferred payments, 5) In July 2022, LSMI output was down by 16.5%MoM, 6) SPI was down by 8.11%WoW, and 7) CAD dropped 42%MoM to US$703 million in August 2022.

The top performing sectors were: Tobacco, and Synthetic & Rayon, while the least favorite were: Close-End Mutual Fund and Oil & Gas Exploration Companies.

Top performing stocks were: PAKT, IBFL, UNITY, TRG and NESTLE, while laggards were: TGL, HGFA, CEPB, KEL and PPL.

Foreign investors emerged the major buyers with net buy of US$5.1 million, followed by Individuals (US$1.5 million). As against this, Insurance Companies were the biggest sellers with US$3.3 million, followed by Mutual Funds (US$2.4 million).

Going forward, the easing off in international commodity prices, particularly oil is expected to be a welcomed development as the pressures on the external account start to recede.

On the flip side, the strength in the US$ following the 75bps policy rate increase in the US is expected to put pressure on the exchange rate, which could murk sentiment.

Investors will be looking towards any policy action in the upcoming Monetary Policy, scheduled for October 10, 2022.

However, the economic slowdown—an intended outcome of the SBP’s contractionary policies—and effects of floods across the country could adversely affect sentiment going forward. Investors are to stay cautious, while building new positions in the market.

Pakistan textile exports rise to US$11 billion

According to the data released by Pakistan Bureau of Statistics, Pakistan textile exports has witnessed a record exports of US$11 billion in first seven months of the current financial year (FY22), up by 25%YoY. In PKR terms, the exports yielded Rs1.861 trillion, up 30%YoY due to 4% depreciation of the local currency.

For 7MFY22, the key export driver was increase in value-added exports where knitwear segment contributed the most as it increased by 33%YoY to US$2.9 billion, followed by Readymade garments, up 22%YoY to US$2.2 billion and Bedwear up 19%YoY to US$1.9 billion exports.

However, on MoM basis, Pakistan textile exports were down 4% to US$1.5 billion in January 2022, due to lower value-added exports segments mainly in Knitwear, down 12%MoM and Ready-made garments, down 4% MoM.

As compared to last year, Pakistan’s textile exports were up by 17%YoY in January 2022 led by significant recovery witnessed in value-added segments, largely in knitwear, up 19%YoY, Ready-made up 17%YoY and Bedwear, up 21%YoY.

The volumetric growth and improved pricing were the key drivers resulting in higher exports.   

Going forward, analysts expect textile exports to remain robust in the remaining months of FY22 fiscal and may touch US$19 billion.

Ease of lockdown in European economies is likely to drive increased orders and help overall textile exports.

The Federal Cabinet on February 15 approved the Textile and Apparel Policy 2020-25, after Ministry of Commerce (MoC) submitted the revised draft of textile policy to Economic Coordination Committee (ECC) incorporating few amendments.

The key reason behind the late approval was the dispute between MoC and Energy Ministry on the issue of Energy Tariffs, specifically RLNG and Electricity.

As to the sources, the updated draft stated that Energy Tariffs (RLNG and Electricity) will be provided to textiles and apparel industry at regionally competitive rates during the policy years. For this, tariff will be reviewed and announced in federal budget by Finance Division.

§  As per Pakistan Institute of Development Economics (PIDE), the average regional electricity tariff rate stood at 7.4 cents/kWh in Mar-21, which we believe has likely increased since than. Pakistan’s current electricity tariff is around 9 cents/Kwh. 

§  In case of RLNG, the average regional RLNG rate stood at ~US$4/MMBTU as per PIDE vs. Pakistan’s tariff rate at US$6.5/MMBTU. We believe the above stated textile policy will have a neutral impact on the sector. Given, Pakistan is already offering subsidized energy & RLNG tariffs to textile players and Pakistan being part of an IMF program, a further reduction from the current levels is highly unlikely. 

§  RLNG tariff is expected to remain intact at US$6.5/MMBTU level although regional average is comparatively low. To note, RLNG is currently being provided at US$9/MMBTU to textile sector till March-22 due to supply issues.

§  Subsidized energy rates, increasing export numbers, and currency weakness bodes well for the sector. We have an ‘Overweight’ stance on Textile Sector with Interloop Limited (ILP) and Nishat Mills Limited (NML) as our top picks.