Pakistan Stock Market Review

KSEFollowing on from 11.5% rise in the KSE-100 index during May and corporate profitability for 1QCY15 growing 8%YoY the market closed at 33,530 point during the week ended May 09, 2015. News flows influencing the market included 1) global oil prices rising to CY15 highs as Brent crossed US$67/barrel closing near US$65/barrel, 2) CPI based inflation for April was reported at 2.11%YoY as against 2.49%YoY for March, 3) MoF’s approval of SBP’s proposed forced merger of KASB Bank with BankIslami and 4) accumulated debt in the power sector surpassing Rs600 billion, as the supply shortfall climbs to 4,500MW. Leaders at the bourse were LOTCHEM, AGTL, SHEL and POL while laggards were ENGRO, DGKC, MLCF and ICI. Volumes sharply tapered as average daily turnover fell by 26%WoW to slightly more than 187 million shares. Foreigners remained net buyers with purchases amounting to US$12.1 million from US$21.6 million in the last week.

With the conclusion of talks with the IMF in the seventh review imminent, news flows suggest commitments to curb energy subsidies, raise GST and shore up foreign reserves will offer insights to budgetary measures for the upcoming Finance Bill. Low inflation levels have cemented anticipations of continued monetary easing with a further 50 bps reduction is discount rate in the upcoming Monetary Policy to be announced this month. With volumes thinning out as pre‐budget jitters play out, the market may experience broad base selling.

The total liquid foreign exchange reserves held by Pakistan were reported at US$17,690 million as of 1st May 2015.The break-up is as under: foreign reserves held by the State Bank of Pakistan were reported at US$ 12,517 million and reserves held by banks were reported at US$ 5,173 million During the week under review reserves held by SBP decreased by US$48 million to US$12,517 million, from US$12,565 million reported a week ago.

The quarterly result season seems to be over. Cumulative profitability of AKD Universe (comprising of 42 companies that represents 70% of the KSE 100 Index’s market cap) posted growth of 8%YoY to reach Rs113.7billion (US$1,118.1million). The prime factor responsible for this robust growth is corporate profitability, posting 57%YoY earnings growth by the manufacturing sector, led by autos). This was followed by services sector with 23%YoY uptick in earnings on the back of stellar performance by the banking sector. Conversely, energy sector continued to drag on the overall positivity posting decline in earnings of 24%YoY. As against this profitability of AKD sample group excluding Oil and Gas posted stellar growth of 37%YoY to Rs75.6billion (US$742.5million), which was the highest ever. Going forward, analysts estimate full-year FY15 earnings to post marginal decline of 1%YoY (29%YoY growth ex-Oil & Gas).

In a contest between manufacturing and services sectors, the former continued to remain on top, recording earnings growth of 57%YoY in 1QCY15/3QFY15. In addition to this, manufacturing sector also reigned supreme when paired against services sector in terms of absolute profit growth as manufacturing sector’s bottomline grew by Rs13.25billion YoY (US$130.2million YoY) as compared to Rs7.19billion YoY (US$70.7million YoY) of services sector. Within the manufacturing sector’s sub-groups, on the back of impressive 6.37%YoY gross margin augmentation, autos remained the star performer, where INDU earnings growth of emerged outstanding. This was followed by Consumer sector, which saw its bottomline improving by 87%YoY, owing to superior performance recorded by EFOODS. Led by EFERT Chemical Sector was among the top three sectors with its profitability improving by 45%YoY.

Services sector posted bottomline growth of 23%YoY to Rs39.1 billion (US$384.7 million) for 1QCY15. This healthy growth was backed by dream run experienced by banking sector in 1QCY15 where its earnings were bolstered by 39%YoY to Rs38.4 billion (US$377.6 million). Key factor behind the abovementioned growth was impressive uptick banking sector’s non-funded income due to higher capital gains. That said, had Telecom (predominantly PTC) with massive 84%YoY negative earnings growth not taken the shine off the banks’ performance, the velocity of services sector’s earnings growth could have been even more potent. Similar to YoY basis, the services sector posted sequential earnings growth of 23%QoQ.

With already sunk in crude oil prices (down 44% FY15TD), severe negative performance from OMCs and E&Ps didn’t come as a surprise. These two sectors continue to be a drag on not only on the energy sector profitability, but on overall corporate profitability. Better performance from refineries and Power did their best to dilute the negativity impact of the international oil price decline. That said, as a rebound was seen in international oil prices in 3QFY15, sequentially energy sector posted bottomline growth of 10%QoQ where main support came from refineries and E&Ps.

With 1QCY15/3QFY15 corporate profitability growth reported at 13%QoQ/8%YoY (ex-Oil & Gas 15%QoQ/37%YoY) analysts predict profitability for 2QCY15/4QFY15 would actually come off by 1%QoQ/1%YoY (ex-Oil & Gas -ve 3%QoQ/+ve 31%YoY). This is mainly because corporate performance in 1QCY15/3QFY15 from the banking sector would be a tough act to repeat. That said, ex-banks, corporate profitability of the AKD sample is to improve by 6%QoQ in 2QCY15/4QFY15 where prime impetus to growth would be driven from: 1) seasonal impact lifting Cement sector’s profitability and 2) crude oil prices being on their CY15TD high to provide much needed impetus to Oil & Gas Sector profitability. Even though the fundamentals remain intact analysts argue for adoption of cautious stance going forward, as budget related jitters are likely to pull the index down. Analysts estimate full-year FY15 earnings to post marginal growth.

In keeping up with the low CPI trend, headline inflation reported at 2.11%YoY for April’15 as compared to 9.18%YoY for April’14. That said, on monthly basis CPI depicted an increase of 1.32%YoY mainly on the back of: 1) increase in heavyweight food basket, 2) higher education costs and 3) rental inflation. While inflationary pressures may start to mount next month onwards, analysts reiterate their FY15 average forecast of 4.6%YoY owing to high base effect. As yields on government securities continue to taper off remaining indicative of further monetary easing, we see a 50bps cut in the upcoming May’15 MPS on the back of 1) soft inflation levels, 2) foreign reserve accretion with HBL’s privatization bringing in greater than expected foreign flows, and 3) need for private sector credit off‐take. With our expectation of a 50bps rate cut already factored in by the market we expect budget concerns and political noise related to decision on re‐election to create a drag on the market. That said, we continue to prefer leverage plays in cement and textile sector.



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