Indian artillery shelling across LoC keeps Pakistan stock market under pressure

During the week ended 18th October, Pakistan Stock Exchange remained under pressure due to external and internal pressures. While India continued medium and heavy artillery shelling across the line of control (LoC), Panama case hearing added more confusion rather than providing clarity. As a result the benchmark Index closed 1.2%WoW lower at 42,325 points. Daily average trading volumes also declined 7.1%WoW to 458.6 million shares. Top gainers for the week included: HASCOL, EPCL, PIOC, CHCC and NCL; while losers were: INDU, ICI, ASTL, SSGC and DAWH.

Major news flow for the week included: 1) GoP rejected bids worth Rs113 billion (against a target of Rs50 billion) for this month’s auction of Pakistan Investment Bonds (PIB) as banks sought higher interest rates, 2) SBP reduced SLR for Islamic banks and banking branches by to 14% to induce liquidity near Rs225 billion Bai‐Muajjal maturity, 3) Vitol announced plans to acquire another 10% stake in HASCOL exercising its call option that would take cumulative holding to 25 percent, 4) Oman Telecommunications’ Chief reiterated plans to sell the company’s controlling stake in WorldCall Telecom, 5) Lucky Electric Power Company revised proposal for its planned 660MW power plant following a shift in fuel source to local coal with the EPC arrangement expected to be finalized by before 2016 and 6) SECMC expects to begin commercial operations for its 660MW Thar coal‐fired power project by June 2019.

With room for escalation in political tensions on developments on Panama case, delayed till 29th November, market is likely to remain lackluster. Moreover, futures rollover next week along with possible continuation of foreign outflows is likely to keep market under pressure. Anticipations regarding this month’s monetary policy statement are expected to remain in favor of a status quo, giving support to banking scrips. Continued weakness in coal prices (a decline by almost 18%WoW) can propel price performance in the cement sector while volatility in crude prices ahead of OPEC meeting scheduled on 30th November may prompt higher activity in energy stocks.

According to AKD Securities, 9MCY16 earnings performance of Bank Alfalah (BAFL) was laudable on a number of counts, especially in terms of improvement in asset quality and effective Current Account mobilization. Flagging NPL ratio of 5.4% ‐ the lowest among ‘Big-Six), the bank’s provisioning charges have come down by a sizable 79%YoY to Rs267 million, while coverage has increased to 83.1% in 9MCY16. Gaining confidence from the same, the brokerage house is now more comfortable on the bank’s asset quality metrics and has lowered its provision charges. In turn, the bank’s CASA hiked to 79% as compared the same period last year, lowering cost of funds. The brokerage house believes there are chances for further trimming, where apart from the aforementioned factors, CAR enhancement to 14.1% and ADR in excess of 50% depicting bank’s push for loan growth are additional positives.

Lack of encouraging news flows, following a shift in policy for coal fired power plant (refusal to allow imported coal projects), lack of headway on circular debt clearance and privatizations have weighted on the energy sector companies, with HUBC and KAPCO posting a decline of about 12 and 13 percent FYTD. The impact on future growth projects (limiting of size and scale of planned expansions) from an adverse policy environment may be sizeable, holding down valuations and profitability in the long run.

According to the monthly automobile sales and production data, total vehicles sold reached 16,330 units (down 1.5%MoM and 17.2%YoY) during October this year. The sale comprised of 14,796 passenger cars (increasing 1.2%MoM but down 5.8%YoY) and 1,534 LCVs (falling 22.2%MoM and 61.8%YoY). The halving of GST on tractors allowed sales to climb by 46.3%MoM/93.2%YoY to 4,642 units. Monthly numbers point to a systemic consolidation in unit sales as consumers adjust buying behavior to accommodate for new models, while OEMs phase out models (Hilux by INDU and possibly Cultus by PSMC). Buying behavior is expected to ramp‐up in the beginning of CY17 with newly registered automobiles experiencing an increase in demand, additionally, auto sales growth is expected to normalize in 2QFY17, where the high base of the Rozgar scheme sales normalizes.

 

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