Pakistan Stock Market Review

KSE logoIn continuation with its bearish trend in the first four days of the week ended 21st August, benchmark of Karachi Stock Exchange, KSE-100 index shed another 700pts (plunging up to 944 points intraday) on Friday to close at 34,520 level (down 2.0%WoW). The decline was primarily driven by foreign selling on the back of overall downturn in the Chinese economy exerting pressures on international commodity prices, region-wide currencies decline and domestic political noise. Foreigners sold US$43.6 million during the week under review taking total selling so far during August to US$37.7 million. Key news flows included: 1) oil prices falling to their six years low over the weekend due to global glut, 2) Pakistan and Thailand to start negotiations on Free Trade Agreement, 3) country’s total liquid foreign reserves slipping to US$18.65 billion, 4) increase of 18%YoY in power sector’s payables taking total debt to Rs313.11 billion at the end of last financial year, 5) receipt of FDI amounting to US$75 million during July, the first month of FY16 and 6) signing of a MoU between the Punjab government and a Chinese cement company over establishing a modern cement plant in the Salt Range. Leaders at the bourse were HUBC, KAPCO, and DAWH, whereas laggards were EPCL, LOTCHEM, and SSGC. During the week decreased activity was witnessed at the bourse where avg. traded volumes declined by 14%WoW to 286.5 million shares. In the face of heightened regional unpredictability, currency risk and declining commodity prices, near term stock market volatility cannot be ruled out. Analysts expect that upcoming earnings announcements by oil & gas exploration companies (PPL, OGDC) and culmination of rollover effect can sustain the pressure. In the absence of triggers, muted price performance can’t be ruled out.

News flow regarding gas price increase is once again making the rounds post a recent statement by Ministry of Petroleum and Natural Resources hinting towards a potential gas price increase up to 6% from 1st September this year. Earnings of Cement, Fertilizer and Textiles and clothing sectors are likely to come under pressure. An increase of 10% on both feedstock and fuel gas prices will hurt the earnings of players that do not have fixed gas price contracts (FFC and FFBL). In this regard, FFC stands to lose out the most with an annualized earnings impact of Rs0.63/share (4% of CY16 earnings). Both FATIMA and EFERT will be partially shielded against the price hike, while any increase in urea/DAP selling price will allow these companies to enjoy a piggy back effect. As far as cement sector is concerned, analysts see minimal impact due to lower utilization of gas by the sector (LUCK, DGKC & MLCF have gas fired CPPs). That said the analysis indicates LUCK as the most affected (annualized impact of Rs0.61/share or 2% of FY16 earnings). Among the textile companies NML is expected to suffer an annualized earnings decline of Rs0.15/share or one percent of FY16 earnings. While the news regarding gas tariff hike can dampen market sentiments analysts believe any dip in price should be considered a buying opportunity.

Undergoing unprecedented reforms to the power chain, developments at the fore include 1) approval of sale and resale supply tariff for DISCOs by NEPRA, 2) approval of pass-through including additional levies of debt equalization surcharge, line losses and in the monthly fuel variation calculation, 3) initiation of establishing a whole sale clearing house with amendments to NTDC’s transmission license. In light of these policy reforms, three major parameters for performance in the power sector remain under par, namely 1) tentative generation levels for FY14 point to a dependable generation capacity of 10,815MW (against a nameplate capacity nearing 23,000MW), being flat over FY13, 2) line losses and shortfall in revenues for the PEPCO system remain and 3) circular debt remains a major sticking point.

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