Pakistan Stock Market Review

KSEThe benchmark of Karachi Stock Exchange, KSE-100 index closed the week ended on 4th September closed at 33,891 level, losing 1.62%WoW amid continuation of political noise and global oil price volatility weighing on Oil & Gas sector performance. Further, gas tariff hike in the range of 10%-63% for the industrial sector acted as a major dampener during the week particularly for the fertilizer sector, though some support came through subsequent urea price increase. Other key news flows during the week included: 1) Ministry of Power & Natural Resources reducing fuel prices by Rs3.0/liter, 2) CPI for August’15 declining to 1.72%YoY as compared to 1.8%YoY last month, 3) GoP borrowing Rs187.9 billion through MTB auction where cut-off yields remained unchanged and 4) expectations of GoP and K-Electric to finalize a revised Power Purchase Agreement (PPA) and Gas Supply Agreement (GSA) during the second round of talks to be held on 7th September. Gainers at the bourse were: SNGP, EPCL, OGDC, and SHEL, while laggards included: MLCF, DGKC, PSO, and LOTCHEM. Average traded volumes for the week declined by 3.71%WoW to 289.3 million shares. On the other hand, foreign flows improved with net inflows of US$12.78 million compared to an outflow of US$42.21 million in the previous week. In the absence of major triggers, the bourse is expected to remain range bound and lackluster in the coming week. Volatility in global oil prices, heightened political noise and muted LSM/industrial production numbers are likely to be key dampeners. However, strong performance in the Cement sector may be augmented further by better than estimated earnings (LUCK and MLCF scheduled to release their results in the coming week). Impact of the recent rise in gas tariffs is expected to remain moderate, as fertilizer producers pass on the hike in costs to end consumers. Going forward, triggers may come from upcoming Monetary Policy Statement due on 12th September with expectation of a further 50bps cut in discount rate likely to benefit highly leveraged listed companies.

Oil & Gas Regulatory Authority (OGRA) has notified an increase in natural gas prices in the range of 10 to 63 percent, which has compelled the AKD analysts to revisit earnings projections for their universe companies. Amongst the major industrial gas consumers, Fertilizer sector is expected to bear the worst brunt as this move will further test its pricing power. On the flip side, the gas tariff hike would remain a non-issue for Cements (lower gas utilization), Power (pass through nature of input prices) and Textiles (already limited gas supply especially during winter season). For fertilizer companies, an increase of 62% on feedstock and 23% increase in fuel gas prices should materially dent earnings of manufacturers which do not have fixed gas price contracts (FFC and FFBL). While AKD analyst expects fertilizers to come under pressure being the biggest industrial gas consumers (EFERT and FATIMA remain the top picks). He also remains positive on Cements and Power (immune to the gas price hike.

Operational improvements to reduce T&D losses are expected to continue driving earnings growth for K-Electric (KEL) during FY16. Following on from the FY15 results, where the company reported profit before tax (PBT) of Rs15.08 billion (EPS: Rs0.55), rising 57%YoY, against a PBT of Rs9.58 billion (EPS: Rs0.35) posted for FY14. Looking ahead to FY16, analysts identify two major factors hindering earnings growth namely: 1) increased cost of generation on gas, whereby the recent 23% hike in the tariff raises the cost of generation and 2) regulatory hurdles cannot be ruled out regarding rolling blackouts experienced during summer along with renegotiation of a PPA with NTDC and FSA with SSGC. Higher tariff structure, accompanied by general backlash in consumer sentiment experienced by KEL, may hinder the task of improving recoveries (currently at 92%). However, recent price under performance (down 16% CY15TD) provides an opportunity to investors to revisit the Company and keep a close eye on unfolding events.


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