KAPCO profit declines by 13 percent

Pakistan’s biggest independent power producer, Kot Addu Power Company (KAPCO) has released its third quarter financial results for the current financial year (FY16). The company has posted profit after tax of Rs6.204 billion (EPS: Rs7.05) for 9Mfy16 as compared to net profit of Rs7.122 billion (EPS: Rs8.09) for 9MFY15, down by 13%YoY.

They keyways are: 1) sales declined by 36 percent, 2) cost of sales declined by 39 percent and 3) gross profit declined by 17 percent. In declining cost scenario 34 percent increase in administrative cost a bit odd but in the absence of detailed accounts it may not be possible to give any rationale for this hike.

There are two other interesting observations: 1) a 43 percent decline in other income and 2) a 54 percent reduction in financial cost. In the declining interest rate scenario this can be termed an indication that other income was drawn from higher remunerative assets.

Reduction in cost of sales can be attributed to greater use of gas as compared to furnace oil during the period under review. However, a point arises that despite cost being a passed on factor there has not be corresponding reduction in electricity by NEPRA.

Despite many odds the scrip still looks worth considering as KAPCO has already paid Rs4.25 dividend for the first half and a similar payout can be expected for the second half of the FY16.  

Rupees in million				9MFY16		9MFY15		YoY%
Sales				47,937.15		74,736		-36%
Cost of Sales				(39,032.74)		(64,046)		-39%
Gross Profit				8,904.41		10,690		-17%
Administrative Expenses				(369.09)		(276)		34%
Other Income				2,958.65		5,221		-43%
Profit From Operations				11,494		15,635		-26%
Finance Cost				(2,446.33)		(5,266)		-54%
Profit Before Tax				9,048		10,369		-13%
Taxation				(2,843.87)		(3,246)		-12%
Profit For the Period				6,204		7,122		-13%
EPS		-		7.05		8.09		-

Engro Fertilizer earnings to nose dive

Engro Fertilizer limited (EFERT), one of Pakistan’s largest urea manufacturing companies,

is scheduled to announce its financial results for January-March quarter (1QCY16) on 25^th April. According to a forecast by AKD Securities the company is expected to post profit after tax of Rs1.65 billion (EPS: Rs1.24) for 1QCY16 as compared to net profit of Rs3.06 billion (EPS: Rs2.3) for 1QCY15, a decline of 46%YoY/68%QoQ.

This significant fall in earnings will be at the back of: 1) a decline of 28%YoY/64%QoQ in topline to Rs12.79 billion caused by likely 34%YoY decrease in Urea offtake to 302,000 tons from 481,000 tons during the corresponding period, 2) Gross margins (GMs) coming off by 200bps to 36.3% on account of increase in feedstock and fuel gas prices in September 2015 and low product prices (6%YoY decrease in urea prices) on the back of depressed international price trend ‑ down by 25%YoY to an average of US$238/tons during 1QCY16 and 3) a 70%YoY lower other income as a result of 54% YoY reduction in T‐Bills and other fixed income placements to Rs10.1 billion. A dividend payout of Rs0.75/share is expected to accompany the result announcement.

CY16 is expected to be a very tough year for the fertilizer manufacturers with no major volumetric growth, depressed farmer income, weak pricing power and high cost of raw material (gas prices slated to go up in July'16). EFERT remains top pick of analysts among the fertilizer companies primarily on account of concessionary gas pricing for Enven Plant and swift deleveraging resulting in significant saving in financial cost and integration of DAP business (2MCY16 offtake of 51,000 tons) that constitutes a 25% market share in the industry). Analysts advocate building positions in EFERT due to potential upside.

Pakistani entrepreneurs seeking joint venture partners

For more than quarter of a century I have been working as economic analysts. Later on, I ventured into political economy and the new focus is geopolitical affairs. Ever since Pakistan and China have agreed to build China Pakistan Economic Corridor (CPEC) both the local and global investors are trying to understand the importance and economic implication of this project. Without going into too many details it may be said that CPEC is a game changer and those who get associated with the main and even peripheral projects now will enjoy the ‘early bird’ advantage.

By this time it has become evident that China is developing two routes to minimize the distance covered by its imports and exports. These two routes have been termed ‘Silk Routes’, one on land and the other in waters. Let one point be kept in mind that various roads/railway tracks already exist, which are now being interconnected. Similarly, ports are already operating in almost all the countries, though enjoying different levels of technology. Effectively China is creating interconnectivity and upgrading technologies under CPEC.

One of the most recent examples is the commencement of a rail service that passes through various countries and offers the ultimate connectivity between China and Turkey. On the sea front two new ports are being developed; Chabahar and Gwadar. Chabahar is located in Iran and Gwadar is situated in Pakistan. The key objective behind the construction of both the ports is to get access to land locked Central Asian countries, Russia and China. Other countries will also benefit from these ports and the biggest beneficiary is Afghanistan as it will get cost efficient connectivity for its transit trade.

If one looks at the map of the region, Pakistan can be rightly termed ‘natural corridor for trade and energy’ because two of the proposed mega gas pipelines; Iran-Pakistan-India (IPI) and Turkmenistan-Afghanistan-Pakistan-India (TAPI) will also pass through Pakistan. It is no secret that even today Pakistan offers the shortest and most cost efficient route to Afghanistan.

For ensuring the most efficient service, Pakistani entrepreneurs will have to focus on three key areas: 1) logistic, 2) warehousing and 3) collateral management services. I will admit it point blank that Pakistan is weak in all the three areas, mainly because of shortage of funds as well as lack of expertise. Therefore, the entrepreneurs are seeking joint venture partners, who have the capital as well as the expertise.

Pakistan’s central bank, with the help of multilateral donors, is also ready to offer loans on concessional interest rate. However, little success has been achieved as local entrepreneurs have not been able to get in touch with overseas investors. One of the reasons for the poor response from the overseas investors is that those are shy in investing in Pakistan, due to geopolitical condition of the region.

However, regional landscape is changing fast. China, Russia and United States seem to be arriving at the consensus that ‘enough is enough’ and for boosting the global economy policy must shift to cooperation from confrontation. Global downturn must be reversed and this will not be possible without establishing peace and tranquility in the region.

P.S. The foreign investors keen in locating joint venture partners in Pakistan are invited to contact us in locating a trustworthy business partner. They may send their queries at shkazmipk@gmail.com

Selling by foreigners keeps Pakistan stock market under pressure

During the week ended 15^th April benchmark of Pakistan Stock Exchange PSX-100 Index lost its winning streak in the last two sessions. The market closed at 33,767 levels, losing 201 points or down by 0.59%WoW. Strong earnings of refineries and Oil & Gas failed to counter negativity arising from political noise. Turnover once again plunged, with average daily traded volume declining to 190 million shares from 275 million, down by almost 31%WoW.

Key news flows during the week included: 1) Vitol Dubai completed acquisition of around 18 million or 15% of voting shares of HASCOL, 2) joint session of parliament passed "The Pakistan International Airlines Corporation (Conversion) Bill" to convert the national flag carrier into a public limited company, 3) Prime Minister Nawaz Sharif laid foundation stone of two power plants of 660MW in Thar as Sindh provincial government reached financial close of 660MW Thar Coal Power Project, 4) companies from China' western region of Xinjiang signed deals worth US$2 billion, 5) Ministry of Water & Power recommended the GoP to withdraw 3% increase in GST on HSFO being consumed by IPPs, 6) Fauji Foundation expressed interest in purchasing 10% shares of MARI and, 7) Fitch Ratings affirmed Pakistan at 'B' with stable outlook.

Performance leaders during the week were: POL, SNGP, UBL, NCL and AGTL; while laggards included: DAWH, EPCL, PTC, FATIMA and LOTCHEM. Volume leaders were: TRG, BYCO, JSCL, DCL and DCH. Foreign participation failed to sustain last week’s trend where net outflows during the week amounted to US$1.46 million as compared to net inflows of US$27.7 million a week ago.

Led by healthy gains in energy and agricultural crop prices, the global commodity index exhibited strong recovery during March'16, up 7%MoM. Fastest to recover, oil prices led the pack with WTI/Brent gaining 13.6%/7.7%MoM in anticipation of Doha meeting of oil producers for capping the output to contain prevailing glut. Recovery in urea and coal was a function of pick‐up in demand and tighter supply respectively. Barring dairy (FAO dairy index down 8.2%MoM), food‐commodities fared well too with sugar and vegetable oil indices gaining 17.1%MoM and 6.3%MoM respectively. While recovery has been steady in March'16, sustainability of the trend depends on 1) improvement in demand and 2) containment of commodity oversupply. Until then, analysts expect commodity prices to continue to remain weak.

Automotive sales/production was recorded at 17,587/17,424 units in March’16, growing 11%/27%MoM, but down 17%/17%YoY, largely in line with expectation of post‐Rozgar scheme tapered growth scenario. Cumulative, 9MFY16 sales/production remained robust, resting at 166,898/167,217 units increasing 35%/35%YoY, driven by hogher offtake from PSMC (100,663 units sold, rising 51%YoY) and INDU (47,504 units sold, rising 18%YoY). The 800cc and below 1000cc segment exhibited 49%YoY growth during 9MFY16 (53,715 units sold, led by Mehran and Bolan), followed by the 1000cc segment rising 34%YoY (18,609 units sold, mainly due to the increase in Cultus sales and the 1300cc and above segment increased by 17%YoY (64,882 units sold with 20%YoY growth in Corolla sales). LCV sales outpaced the passenger car segment, where 9MFY16 sales were recorded at 29,692 units, an increase of 62%YoY, accentuated by Rozgar scheme driven offtake. Analysts remain bullish on local OEMs as new entrants remain few and far.

FCCL is scheduled to announce its 3QFY16 results on 18^th April’16. Analysts forecast the company to post net profit of Rs1.41 billion (EPS: Rs1.02) during 3QFY16, up 44%YoY. They expect this improvement in earnings to emanate from: 1) stellar growth in topline (+13%YoY to Rs5.01 billion) backed by 17%YoY increase in dispatches and 2) flatter cost of sales. In this regard, the low cost is likely to result from lower energy costs (average coal price down by 23%YoY), employment of 10MW WHR that came online towards the end of FY15 and cheaper in‐house power generation. As a result, Gross Margins are expected to go up by an impressive quantum to 44.35% in 3QFY16 from 36.74% in 3QFY15. Bottomline is expected to be further bolstered by decline in finance cost by 44%YoY owing to long‐term debt repayments. On a cumulative basis, analysts expect 9MFY16 earnings to grow to Rs4.19 billion (EPS: Rs3.04) compared to Rs2.65 billion (EPS: Rs1.92) for 9MFY15, up 58%YoY. Despite robust returns, analysts believe FCCL is still an interesting investment proposition due to its combination of growth and value characteristics.

Contrary to the expectations, State bank of Pakistan chose to keep policy rate unchanged at 6.0%, prompted by concerns on: 1) reversal in inflationary trends and 2) declining exports and increasing non‐oil imports making the current account more vulnerable to oil price shocks. That said, positive macro trends following earlier monetary easing were also highlighted with uptick in private sector credit and LSM growth at 4.1%YoY during 7MFY16 being notable improvements. Going forward, inflation is expected to accelerate as food prices pick up near Ramadan/Eid season. FY16 CPI inflation average is projected at 3.0%YoY while NFNE Core inflation is expected to average 4.2%YoY. Under the prevailing conditions analysts do not see room for further easing where probability for a modest hike before CY16 end due to external side risks, primarily: 1) chronic exports decline, 2) exchange rate volatility and 3) possible decline in foreign exchange reserves of the country.

Is pre Doha meeting oil rally sustainable?

On Tuesday oil breached US$43 a barrel. Brent was up 50 cents at $43.33 a barrel at 0842 GMT and earlier in the session reached a 2016 high of $43.53. WTI gained 39 cents to $40.75 a barrel.

The price movement is being attributed to the hopes being attached to an upcoming meeting of oil producers. The overwhelming perception is that the producers will agree on the measures to tackle the prevailing glut. The perception is also supported by a weak U.S. dollar and further signs of improving oil demand in China.

Many members of OPEC plus outside producers such as Russia are meeting in Doha, Qatar, on Sunday to discuss freezing output. However, two of the largest oil producing countries i.e. the US and Iran will not be taking any part in the deliberations.

As I have in my previous blogs the three largest oil producers/exporters Saudi Arabia, United States and Russia are not willing to contain output. They are insisting that Iran must also freeze output at January 2016 level. The logic is totally illogical.

In fact all the oil producing countries have succeeded in increasing their output after the imposition of economic sanctions on Iran. Therefore, Iran’s point carries weight that let it first regain its lost share and only then it would be willing to talk about containing its output.

There are growing fears that the upcoming meeting will prove a non-event as the three largest oil producers/exporters will not be ready to relinquish their market share to Iran.

  

State Bank of Pakistan keeps interest rate unchanged

State Bank of Pakistan (SBP) chose to keep policy rate unchanged and the announcement came through a Press Release. The announcement was disappointing because the business community was expecting a reduction of 50 basis points, at least. This perception emerged after the recent decision of Reserve Bank of India (RBI) to cut the policy rate.

RBI decision was in line with the policy of many central banks around the world and also the US Fed which deferred increase in policy rate due to faltering domestic as well as global economy. All the central banks are curtailing policy rates to boost their economies. One completely fails to understand the logic behind not reducing the rate, especially after the constitution of a new Monetary Policy Board at the central bank.

According to the central bank all the key indicators hints towards improving state of the economy of the country. However, it also warns about the future challenges that include stagnant growth of exports, looming energy crisis and subdued GDP growth rate.

Earlier, many of economic analysts were shocked to read a statement of Finance Minster that the country no longer needs the help of International Monetary Fund (IMF). They could recall a report on Bloomberg that Pakistan was inching towards default due to non-sustainability of its debt servicing obligations.

It may be true that he was upset due to inclusion of the names of sons of Prime Minister Nawaz Sharif in the list of Panama Leaks. But no one expected that he could go insane and say that Pakistan does not need the IMF.

Next General Elections are due in 2018 and it was expected that the incumbent would prefer to maintain even more cordial relationship with the IMF but spending more money on developmental programs for boosting confidence of its vote bank.

Pakistan needs to boost its GDP growth rate and the IMF has rightly suggested focusing on improving supply side. This demands spending more on creation of productive facilities and improving capacity utilization of existing manufacturing facilities. Curtailing developmental expenditures is likely to further widening of ‘confidence deficit’ being faced by the PML government.