Pakistan Stock Exchange benchmark index declines 9% in CY22

Economic and political issues badly affected Pakistan Stock Exchange (PSX) in 2022. The benchmark index, KSE-100 index, declined 9% during the year. With PKR depreciating 22% against greenback, Index was down 29% in US$ terms.

According to Pakistan’s leading brokerage house, Topline Securities, 2022 was also a turbulent year for global stock markets as US$18 trillion were wiped out in 2022 with drop of approx 20% in MSCI World Index which is worst performance since the 2008 crisis. MSCI EM fell 22%, while MSCI FM was down 29% in 2022.

According to Bloomberg data, Pakistan’s KSE-100 Index was amongst worst performing market in US$ term in 2022.

Due to macroeconomic issues, activity at PSX also remained dull. Average traded volume (ready/cash) per day at PSX was down 52% to 230 million shares/day.

Similarly, average traded value per day was down 59% to PKR7 billion/day which was lowest since 2019.

In futures market, total traded volume and value per day were also down by 33% and 56% to 94 million shares and PKR3.6 billion, respectively.

KSE-100 Index also underperformed as compared to other asset classes in 2022 including Gold (+45%), one-year US$ denominated Naya Pakistan Certificate (+36%) and greenback (+28%).

T-Bills, Money Market Fund and Property indices posted return in the range of 12% to 14% in 2022.

Initial public offering (IPO) market was also impacted due to eroding equity values as only 3 IPOs raised funds in 2022 as against 8 IPOs in 2021. The number of IPOs was also the lowest in 2019 when Pakistan saw just one IPO at PSX.

Selling by foreigners continued in 2022 with net selling of US$127 million. In last 7-years, foreign corporates have sold shares worth of US$2.5 billion at PSX.

Local Mutual Funds and Insurance Companies also trimmed their position in 2022, with Mutual Funds selling US$166 million, while Insurance Companies sold US$128 million.

Selling was absorbed by Local Individuals, Banks and Companies with net buying of US$138 million, US$117 million, and US$78 million respectively.

 

Oil set to end turbulent 2022 directionless

On the last trading day of year 2022, oil prices are inching higher and are on track to post their second straight annual gains, albeit modest, in a stormy year marked by tight supplies due to the Ukraine war, a strong dollar and weak demand from the world's top crude importer China.

Next year is set to be another year of uncertainty, with plenty of volatility.

Brent crude futures rose 20 cents to US$83.66 a barrel by 0445 GMT, after settling 1.2% down in the previous session. Brent looked set to end the year with a 7.6% gain, after jumping 50.2% in 2021. Prices surged in March to a peak of US$139.13 a barrel, a level not seen since 2008, after Russia invaded Ukraine, sparking supply and energy security concerns.

US West Intermediate crude (WTI) was traded at US$78.63, after closing 0.7% lower on Thursday. It is on track to rise 4.5% in 2022, following a 55% gain last year.

While an increase in year-end holiday travel and Russia's ban on crude and oil product sales are supportive of oil prices, declining consumption due to a deteriorating economic environment next year will offset supply tightness, said CMC Markets analyst Leon Li.

The global unemployment rate is expected to rise rapidly in 2023, restraining energy demand. So I think oil prices may fall to US$60 next year," he said.

Oil prices cooled quickly in the second half this year as central banks across the world hiked interest rates to fight inflation, boosting the US dollar. That made dollar-denominated commodities costlier investment for holders of other currencies.

Also, China's zero-COVID restrictions, which were only eased in December, squashed oil demand recovery hopes for the world's No. 2 consumer. While China is expected to slowly recover in 2023, a surge in COVID cases in the country and global recession concerns are clouding the commodities demand outlook.

"The recent easing of travel restrictions was expected to boost oil demand; however, the sharp increase in COVID cases in China has raised serious concerns over a potential global outbreak," John Driscoll, director at consultancy JTD Energy Services, said.

In response to China's surge in COVID cases, several countries including the United States, South Korea and Japan have imposed mandatory COVID tests on travellers from China.

A health data firm estimated that around 9,000 people in China are probably dying from COVID each day, as infections spread in the world's most populous nation.

Looking ahead on supplies, western sanctions will push Russia to divert more crude and refined products exports from Europe to Asia.

In the United States, output growth in top oil-producing states has slowed despite higher prices. Inflation, supply chain snags and economic uncertainty have led executives to lower their expectations, the latest survey by the Federal Reserve Bank of Dallas found.

"This year has been an extraordinary year for commodity markets with supply risks leading to increased volatility and elevated prices," ING analyst Ewa Manthey said.

 

 

 

Uzbekistan links child deaths to Indian syrup

According to Saudi Gazette, Uzbekistan's health ministry has said that 18 children have died after drinking a cough syrup manufactured by Indian drug maker Marion Biotech.

The ministry said that preliminary tests showed a batch of the medicine contained ethylene glycol, a toxic substance.

The children were given the Dok-1 Max syrup without a doctor's prescription, it said. The amount they consumed also exceeded the standard dose for children.

The allegation from Uzbekistan comes weeks after The Gambia also linked child deaths to cough syrups made by another Indian firm.

India's health ministry said in a statement that its officials have been in regular contact with the national drug regulator of Uzbekistan regarding the matter since December 27, 2022.

It added that health officials have conducted an inspection of Marion Biotech's facility in Noida in Uttar Pradesh state.

"The samples of the cough syrup have been taken from the manufacturing premises and sent to Regional Drugs Testing Laboratory, Chandigarh for testing," the statement added.

News agency ANI has quoted a Marion Biotech executive as saying that the company has halted production of the syrup temporarily. He added that the government was conducting an enquiry and that the firm would take action accordingly.

Marion Biotech is based in Noida, near India's national capital Delhi. Its website is currently down, but the company's LinkedIn page says it was founded in 1999 and that its products are household names in Central Asian countries, Central and Latin America, South East Asia and Africa".

India produces a third of the world's medicines, mostly in the form of generic drugs.

The country, home to some of the fastest-growing pharmaceutical companies, is known as the world's pharmacy and meets much of the medical needs of developing countries.

The Uzbek ministry statement, dated December 27, says that Dok-1 Max tablets and syrup have been sold in the country since 2012.

"It was found that the deceased children, before admission to hospital treatment, took this drug at home for 2-7 days, 3-4 times a day, 2.5-5ml, which exceeds the standard dose of the drug for children," the ministry said.

The statement did not specify over what time period the deaths occurred. BBC Monitoring had reported on December 23, citing news website Gazeta.uz, that Uzbek authorities were investigating claims that 15 children died in central Samarkand region over the past two months after taking a cough syrup made in India".

On December 26, Podrobno.uz news website reported that 21 children - 15 of them under the age of three - were treated for acute kidney failure allegedly caused by the India-made cough syrup Dok-1 Max between September and December". Three of the patients recovered.

The ministry also said that preliminary laboratory studies have shown that this series of Dok-1 Max syrup contains ethylene glycol.

In October 2022, the World Health Organization (WHO) had sounded a global alert and linked four India-made cough syrups to the deaths of 66 children from kidney injuries in The Gambia. It said tests on samples of the syrup showed that they contained unacceptable amounts of toxic substances diethylene glycol and ethylene glycol.

Both the Indian government and the company, Maiden Pharmaceuticals, have denied the allegations.

India said earlier in December that tests on the four syrups showed that they complied with specifications, and a government official told the BBC that the WHO had been presumptuous in blaming the syrups. But the WHO said it stood by the action taken.

Last week, a parliamentary committee in The Gambia recommended the prosecution of Maiden Pharmaceuticals after weeks of investigation. The committee also recommended banning all products by the firm in the country. 

Pakistan Refinery: Corporate Briefing

To recall during FY22, sales of Pakistan refinery (PRL) grew to its highest ever level of PKR 191 billion. Gross profit increased to PKR20 billion due to high cracking margins globally. Despite a provision of PKR1.6 billion related to super tax, profit after tax and EPS increased to PKR 12.6 billion and PKR 19.96, respectively.

During 1QFY23, sales grew to PKR73 billion. Moreover, gross profit increased to PKR1.6 billion as cracking margins are on a decline globally. This led to an increase in net profit to PKR1.00 billion and EPS of PKR 1.63. 

PRL is a subsidiary of PSO with 63.6% holding. Plant’s annual capacity is 50,000bpd which is run on hydro skimming technology with Crude distillation, Hydrotreating, Platformer and Isomerisation units.

PRL product mix and margins: mainly comprises of HSD and MS, constitute 70% of the refined products and have higher margins than the rest. However, negative margins in FO has made it unviable for exports.

Wood plc was awarded to conduct a FEED study for the upgrade of the plant. Further, JS Global and UBL are hired as financial advisors for the arrangement of financing for the project. This deep conversion refinery upgrade project will allow the Company to produce Euro-V compliant fuel at the same time enhancing capacity to 100,000 bpd. 

The Company has altered its sources to lighter crudes which has resulted in higher profitability. It was mainly due to less reliance on ADNOC due to its lower grade and increasing the share of ARAMCO and KPC. In turn FO proportion in the production mix has declined to 22% which was more than 30% in FY19.

Higher of ACT (based in higher of accounting income and taxable income), normal corporate tax or the minimum turnover tax (0.5% on local and 1% on exports) is applicable on the Company.

During 1QFY23, taxation was provided on turnover tax which included PKR100 million deferred tax.

After the Sindh High Court decision on super tax, the Company is hopeful that its reversal would augment profitability going forward.

 Future outlook

Despite delays in the issuance of the new refinery policy, the Company remains committed to upgrade project as the country is reducing its reliance on FO for power generation and better margins are offered by HSD and MS.

The Company also changed its logo to reflect its contribution for the sustainable development of the country.

Key challenges include subdued refinery margin which is currently declining from its peak. Also, high interest rate and PKR depreciation will continue to dampen profitability. Lastly, low FO upliftment may hamper cash flows in the coming months.

UN halts some programs in Afghanistan after ban on women aid workers

Taliban seized power in August in 2021. They largely banned education of girls when last in power two decades ago but had said their policies had changed. Taliban-led administration has not been recognized internationally.

The United Nations said on Wednesday that some time-critical programs in Afghanistan have temporarily stopped and warned many other activities will also likely need to be paused because of a ban by the Taliban-led administration on women aid workers.

UN aid chief Martin Griffiths, the heads of UN agencies and several aid groups said in a joint statement that women's participation in aid delivery is not negotiable and must continue, calling on the authorities to reverse the decision.

“Banning women from humanitarian work has immediate life-threatening consequences for all Afghans. Already, some time-critical programs have had to stop temporarily due to lack of female staff," read the statement.

"We cannot ignore the operational constraints now facing us as a humanitarian community," it said. "We will endeavour to continue lifesaving, time-critical activities ... But we foresee that many activities will need to be paused as we cannot deliver principled humanitarian assistance without female aid workers."

The ban on female aid workers was announced by Taliban-led administration on Saturday. It follows a ban imposed earlier on women attending universities. Girls were stopped from attending high school in March this year.

"No country can afford to exclude half of its population from contributing to society," said the statement, which was also signed by the heads of UNICEF, the World Food Program, the World Health Organization, the U.N. Development Program, and the UN high commissioners for refugees and human rights.

Separately, 12 countries and the EU jointly called on the Taliban to reverse the ban on female aid workers and allow women and girls to return to school.

The statement was issued by the foreign ministers of Australia, Canada, Denmark, France, Germany, Italy, Japan, Norway, Switzerland, the Netherlands, Britain, the United States and the EU.

The ban on female aid workers "puts at risk millions of Afghans who depend on humanitarian assistance for their survival," the statement said.

Four major global groups, whose humanitarian aid has reached millions of Afghans, said on Sunday that they were suspending operations because they were unable to run their programs without female staff.

The UN statement said the ban on female aid workers "comes at a time when more than 28 million people in Afghanistan ... require assistance to survive as the country grapples with the risk of famine conditions, economic decline, entrenched poverty and a brutal winter."

The UN agencies and aid groups - which included World Vision International, CARE International, Save the Children US, Mercy Corps and InterAction - pledged to remain resolute in our commitment to deliver independent, principled, lifesaving assistance to all the women, men and children who need it.

Taliban seized power in August last year. They largely banned education of girls when last in power two decades ago but had said their policies had changed. Taliban-led administration has not been recognized internationally.

 

 

 

 

Moscow considering gas export to Pakistan through Iran

Russian Deputy Prime Minister Alexander Novak has said his country is considering export of natural gas to Pakistan and Afghanistan through Iran.

Novak said that in the long run, Russia can send its natural gas to the markets of Afghanistan and Pakistan, either using the infrastructure of Central Asia or by swapping from the territory of Iran.

Back in November, Iranian Oil Minister Javad Oji had announced a plan for cooperation with Russia and Pakistan on gas export to Islamabad.

Under the mentioned plan, Iran can tap Russian gas for a revival of its long-installed pipeline project to neighboring Pakistan.

As reported by Iranian media, Russia has agreed to supply gas to Iran for the purpose of delivery to Pakistan via the Iranian pipelines.

Russia has also agreed to build pipelines in Pakistan that were supposed to be built by the Pakistani side of a 1995 gas supply contract with Iran.

Russia’s contribution to the scheme comes as the country is trying to find new markets for natural gas supplies that were removed from the European markets because of Western sanctions on Moscow over the war in Ukraine.

Iran is also keen to partner with Russia in supplying gas to Pakistan as the country could benefit financially from the project while increased gas supplies from Russia will help the country address potential gas shortages in its northern regions.

Under a proposed swap scheme, Iran will import gas from Russia either through Turkmenistan or Azerbaijan to consume the supplies in its northern regions while committing to deliver the same amount of gas on the border with Pakistan.

Iran has another option to buy Russian gas for domestic consumption in its north without committing to any swap delivery of the same amount to other countries.

That will enable Iran to meet the growing domestic demand for natural gas and increase its gas supplies for the purpose of exports to other countries.

Experts believe both scenarios could benefit Iran although some prefer the swap model because it will lead to more Russian contribution to the Iran-Pakistan gas pipeline project.

 

Decoding Pakistan’s Circular Debt

Recent government estimates point towards the gas sector circular debt to have increased to PKR900 billion by end November 2022, compared to PKR719 billion as of March 2022. The companies affected by the debt include OGDC, PPL, SNGP, SSGC, and PSO.

The increasing quantum of circular debt in the gas sector has been detrimental to the energy security of the country in the recent past. Not only has it constricted the liquidity positions of the companies in the energy chain, but has also become a point of contention with the IMF.

The circular debt can be traced to: 1) diversion of costlier RLNG to Natural Gas consumers, 2) hike in UFG Losses, primarily theft, and 3) delayed gas tariff revisions.

Rising circular debt has put Pakistan in a vicious cycle. It has been widely documented that the increasing quantum has resulted in liquidity constraints, especially for the Exploration & Production companies, OGDC and PPL.

The stock of receivables on the companies’ books has increased from a collective PKR306 billion at the end of FY18 to PKR892 billion at the end of the September 2022 quarter.

With the mounting receivable burden on the companies, exploration activity has been subdued, leading to an inability to arrest the fall in production due to natural decline in reserves.

Gas production in the country has fallen from 3,997 MMCFD in FY18 to 3,390 MMCFD in FY22. This comes at a time when the demand for gas and energy is increasing.

This gap is being filled by imported RLNG, which is diverted to natural gas consumers and billed at lower rates, adding further to the stock of gas circular debt—putting the country in a vicious cycle.

Trade debt leads to lower exploration activity, ultimately leading to lower production levels, increasing the diversion of RLNG to natural gas consumers, which leads to lower cash collection, adding to the receivables, and the cycle continues.

Government is succumbing to the peculiar situation. Thanks to IMF’s impending ninth review, the government has finally taken notice of the situation in the gas sector and constituted a team to address the circular debt situation.

However, the agenda for the committee is short-term as it only aims to address the circular debt that has built up over the years, while not addressing the greater issue of policy measures required to arrest the buildup of the circular debt going forward.

The government would have to hike gas tariffs if it hopes to reduce the buildup going forward—a measure that has also been stressed by the IMF. Prime Minister Shehbaz Sharif has hinted towards the same in his recent address, paving the way for euphoria in the market.

From the vantage of E&P companies, specifically OGDC and PPL, any resolution of the receivables on the companies’ balance sheets would result in valuations being unlocked for the juggernauts.

If the government is able to overhaul the balance sheets of OGDC and PPL, it may lead to a re-rating in the multiples, unlocking upside potential.