Pakistan Stock Market Review

K-electric logoThe market witnessed high volatility during the week during this past week ended 4th December. There was escalation in political activities due to the local bodies’ election. This caused the benchmark KSE-100 Index to lose 1250 points during the first two consecutive sessions of the week. However, the index recovered some of its loss to settle at 32,708 levels, down 0.77%WoW. Key news flows during the week included: 1) November’15 CPI-based inflation reported at 2.73%YoY as against 1.61%YoY in the previous month, 2) GoP increasing import duties by 5-10% on luxury items and FED on cigarettes and customs tariffs by one percent, 3) SECP accepting major broker demands regarding the proposed Securities Brokers Regulations, 4) Nishat Chunian, Nishat Power, Hub Power (Narowal), Saif Power and 5 other IPPs approaching international arbitration against NTDC for unpaid capacity payments of Rs11 billion and 5) PkR/US$ parity coming under pressure in the open market to trade at Rs107.70 as US$ continued to gain strength. Average trading volumes during the week improved by 7.9%WoW to 154.6 million shares per day. Leaders at the bourse were ENGRO, MLCF, DGKC and MCB while laggards included PSMC, ICI, POL and PPL. Foreign selling also increased to US$16.95 million compared to US$13.10 million a week ago.
Major reasons for the country’s largest utility K-Electric (KEL) underperforming the market (FY16TD return of -13.9% vs. -5.8% for KSE-100) were: 1) overbearing offtake risk by sponsors effectively capping price at Rs8.5/share (price of last divestment of 65 million shares early this year and 2) news reports suggesting regulatory apathy, where negotiations for an expired PPA and renewal of Multi-Year Tariff (MYT) due June’16 are of material importance. That said, analysts retain their bullish stance on the scrip due to: 1) confluence of reduced cost of generation (own and purchased) and persistent reduction in T&D buoying profits, 2) presence of value additive investments in the pipeline (transmission and distribution projects amounting to US$700 million for two 350MW coal fired power plant and 3) cash flows for 1QFY16 reflecting improved operational dynamics affecting liquidity, raising the expectations for payouts.
Some recent important developments in the power sector include, 1) sustained increase in generation levels (4MFY16 generation at 39.1GwH rising 5%YoY) as cost of generation decreased to its lowest for past six years and, 2) MYT being negotiated by FESCO, PESCO and SEPCO, with other DISCOs including KEL in the spotlight for renewals of their consumer end tariffs. Additionally, news items of particular significance are: 1) IPPs approaching international arbitration (final step before invoking sovereign guarantees) for Rs11 billion due to them arising from overdue receivables from the power purchaser leading to non-availability of the plants, 2) signing of master power purchase agreements for CASA-100 to import 1000MW of power during summer and, 3) release of US$1.4 billion in funding by Asian Development Bank and US$500 million from the World Bank for power sector reforms. Analysts hint towards some of the issues in the framing of MYT and process involved as positive for KEL, as the utility is slated to negotiate a revised MYT in June’16. The impact on HUBC of a favorable outcome in the overdue receivables case amounts to a reversal of liquidated damages amounting to Rs802 million (Rs0.5/share) supplementing cash flows at a time of significant outlays.
KSE remains under pressure, selling by foreigners, power sector remains a thorn

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