Pakistan Stock Marker Review

KSEDuring this past week ended 12th June, Karachi Stock Exchange continued its pre-budget rally. The benchmark KSE-100 index closed at 34,651 level posting1.9%WoW increase. The key market drivers included: 1) MSCI deciding to include Pakistan in the review list for upgrading Pakistan to MSCI EM status from MSCI FM, 2) Moody’s upgrading Pakistan’s sovereign bond credit rating to B3 and 3) Pakistan receiving US$16.6 billion remittances during 11 months of current financial year, posting an increase of 16% YoY. However, negative response on many of the Federal Budget proposals kept the market pegged. Gainers for the week included FFBL, EPC, FFC and LOTCHEM, while commercial banks particularly MCB, HMB, AKBL and BAFL remained laggards. Additional news flows included 1) yields for 3, 6 and 12 months on Treasury Bills increased to 6.79%, 6.8% and 6.82% respectively, 2) SBP injected Rs623.35 billion through OMO on 12th Jun for 7 day tenor at cut off rate of 6.5 percent, 3) successful book-building for Dolmen REIT and Al-Shaheer exhibited confidence of investors as well as availability of ample liquidity in the market. Volumes remained buoyant with average daily turnover of 313.5 million shares. Foreign inflows for the week were lower at US$13.8 million as compared to US$23.5 million a week ago. Improving fundamentals and recognition of Pakistan’s stable economic growth prospects by international agencies is a strong signal for continued performance re‐invigorating further. That said, with forthcoming Ramadan accompanied by shorter trading hours and historically lower volumes during the holy month, analysts expect resilient price performance from stocks with June year‐end.

The thrust of PML‐N government’s third budget displayed continued emphasis on infrastructure spending. Fiscal consolidation efforts during the last two years have provided some space to the government to focus on economic growth. In this regard, it is encouraging to note that the government’s strategy tilt towards growth‐oriented policies. That said, corporate/market taxation regimes have been materially tweaked (stock market and the banking sector are penalized) and along with sector related developments, market turbulence can be expected as investors realign portfolios. However, analysts remain confident on the overall macroeconomic led rerating theme for the KSE and continue to prefer Cements & Allied sector due to higher PSDP allocation and incentives for the construction sector and Power sector.

Moody’s Investor Service upgraded Pakistan’s sovereign credit rating from Caa1 with ‘positive’ outlook one notch higher at B3 with a ‘stable outlook’, in line with earlier prediction. This upgrade in rating can be attributed to: 1) enhanced foreign exchange reserves, 2) sustained traction on the IMF EFF agreement leading to implementation of reforms and better fiscal management, 3) higher ranking for multiple macro indictors than comparable peer countries and 4) ongoing monetary easing cycle aiding higher policy effectiveness. A stable outlook indicates expectations of the current macro recovery cycle to sustain supporting the new higher rating. Projects agreed under the China Pakistan Economic Corridor (CPEC) and HBL privatization brought in foreign flows up to US$764 million (reflective of better investors’ perception) have also contributed to the upgrade. Analysts view the upgrade beneficial for: 1) increasing foreign flows into the country, 2) reducing costs of the planned US$ one billion Eurobond issue during FY16, and 3) driving higher valuations for the market, where overall P/E rerating theme is likely to accelerate.

Overseas Pakistani workers remitted US$16.6 billion during the eleven months of FY15, showing a significant growth of 16% compared with US$14.3 billion received during the same period in the preceding year. During May 2015, the inflow of worker’s remittances amounted to US$1.6 billion, which was 1.37% higher than April 2015 and 15.46% higher than May 2014. The country wise details for the month of May 2015 show that major contribution of inflows was from Saudi Arabia, UAE, USA, UK, GCC countries (including Bahrain, Kuwait, Qatar and Oman) and EU. Remittances received from Norway, Switzerland, Australia, Canada, Japan and other countries during May 2015 also increased. The total liquid foreign exchange reserves held by the country amounted to US$17.4 billion as on 5th June2015. The break-up was: reserves held by the State Bank of Pakistan (SBP) amounted US$12.3 billion and reserves held by commercial banks were reported at US$5.1 billion. During the week under review reserves held by SBP increased by US$400 million that was due to receipt of official inflows.

In line with our expectations, PML-N government’s major focus during the FY16 budget tilted towards infrastructure and construction activities. As a result cement sector is likely to be a major beneficiary due to increased PSDP allocation (Federal PSDP allocation up by 29%) along with specific incentives for the sector (exemption of taxes on construction‐related materials, imposition of customs duty on imported cement etc.) continued to bring positive news for the industry. In the backdrop of these budgetary developments, continuous monetary easing by the central bank (cumulative 300bps cut in discount rate since November’14) and strengthening fundamentals (cement dispatches up 7.9% YoY in 11MFY15).

Oil Companies Advisory Committee (OCAC) recently released oil volume numbers for the month of May’15, posting sales volume increase by 3%MoM. Sale of high speed diesel (HSD) increased by 18%MoM to 848,000 tons in May’15 as compared to 716,000 tons in April’15. Furnace oil sales plummet by 13%MoM to 766,000 tons due to lesser electricity produced owing to higher circular debt. Motor gasoline (Mogas) sales rose to 490,000 tons in May’15 as compared to 455,000 tons a month ago, posting 8%MoM increase. Highest growth of 54%MoM was observed in PSO’s HSD volume capturing competitors share. Contrary to PSO results, Shell and APL’s HSD volumes declined by 10%MoM and 33%MoM. Mogas sales of PSO and Shell were up by 16%MoM and 8%MoM respectively, as against this APL volume dropped by 26%MoM. Furnace oil volumes declined during the month with PSO and Shell experiencing reduction in their volumes by 17%MoM and 20%MoM respectively, as against this APL sale increased by 3% as compared to last month.

During 11MFY15 POL sales volume jumped by 5% with furnace oil sale at 8.34 million tons, shrinking by 3%YoY. While Mogas sales increased by 21%YoY to 4.26 million tons, HSD volume increased by 7%YoY. During 11MFY15, PSO recorded declines in the shares of HSD by 400bps coming to the level of 54%, MOGAS by 200bps at 49% and furnace oil by 700bps settling at 66%.

Recent hike by in POL products prices may lead to reduction in volumes in the coming months. Furthermore rebound in international oil prices and expectation of further increase may also put pressure on volumes. In addition to this increase in the petroleum levy in the FY16 budget proposal and government’s rejection of the finance committee suggestion to reduce the petroleum levy will keep the prices at the current level. OMC volumes may remain under pressure. However expectation of reduction in circular debt owing to condition by IMF may console the volumes.























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