Pakistan market closes week on bearish note

During the week ended 15th April benchmark of Pakistan Stock Exchange, PSX-100 Index lost its winning streak in the last two sessions. The market closed at 33,767 levels, losing 201 points or down by 0.59%WoW. Strong earnings of refineries and Oil & Gas failed to counter negativity arising from political noise. Turnover once again plunged, with average daily traded volume declining to 190 million shares from 275 million, down by almost 31%WoW.

Key news flows during the week included: 1) Vitol Dubai completed acquisition of around 18 million or 15% of voting shares of HASCOL, 2) joint session of parliament passed “The Pakistan International Airlines Corporation (Conversion) Bill” to convert the national flag carrier into a public limited company, 3) Prime Minister Nawaz Sharif laid foundation stone of two power plants of 660MW in Thar as Sindh provincial government reached financial close of 660MW Thar Coal Power Project, 4) companies from China’ western region of Xinjiang signed deals worth US$2 billion, 5) Ministry of Water & Power recommended the GoP to withdraw 3% increase in GST on HSFO being consumed by IPPs, 6) Fauji Foundation expressed interest in purchasing 10% shares of MARI and, 7) Fitch Ratings affirmed Pakistan at ‘B’ with stable outlook.

Performance leaders during the week were: POL, SNGP, UBL, NCL and AGTL; while laggards included: DAWH, EPCL, PTC, FATIMA and LOTCHEM. Volume leaders were: TRG, BYCO, JSCL, DCL and DCH. Foreign participation failed to sustain last week’s trend where net outflows during the week amounted to US$1.46 million as compared to net inflows of US$27.7 million a week ago.

Led by healthy gains in energy and agricultural crop prices, the global commodity index exhibited strong recovery during March’16, up 7%MoM. Fastest to recover, oil prices led the pack with WTI/Brent gaining 13.6%/7.7%MoM in anticipation of Doha meeting of oil producers for capping the output to contain prevailing glut. Recovery in urea and coal was a function of pick‐up in demand and tighter supply respectively. Barring dairy (FAO dairy index down 8.2%MoM), food‐commodities fared well too with sugar and vegetable oil indices gaining 17.1%MoM and 6.3%MoM respectively. While recovery has been steady in March’16, sustainability of the trend depends on 1) improvement in demand and 2) containment of commodity oversupply. Until then, analysts expect commodity prices to continue to remain weak.

Automotive sales/production was recorded at 17,587/17,424 units in March’16, growing 11%/27%MoM, but down 17%/17%YoY, largely in line with expectation of post‐Rozgar scheme tapered growth scenario. Cumulative, 9MFY16 sales/production remained robust, resting at 166,898/167,217 units increasing 35%/35%YoY, driven by hogher offtake from PSMC (100,663 units sold, rising 51%YoY) and INDU (47,504 units sold, rising 18%YoY). The 800cc and below 1000cc segment exhibited 49%YoY growth during 9MFY16 (53,715 units sold, led by Mehran and Bolan), followed by the 1000cc segment rising 34%YoY (18,609 units sold, mainly due to the increase in Cultus sales and the 1300cc and above segment increased by 17%YoY (64,882 units sold with 20%YoY growth in Corolla sales). LCV sales outpaced the passenger car segment, where 9MFY16 sales were recorded at 29,692 units, an increase of 62%YoY, accentuated by Rozgar scheme driven offtake. Analysts remain bullish on local OEMs as new entrants remain few and far.

FCCL is scheduled to announce its 3QFY16 results on 18th April’16. Analysts forecast the company to post net profit of Rs1.41 billion (EPS: Rs1.02) during 3QFY16, up 44%YoY. They expect this improvement in earnings to emanate from: 1) stellar growth in topline (+13%YoY to Rs5.01 billion) backed by 17%YoY increase in dispatches and 2) flatter cost of sales. In this regard, the low cost is likely to result from lower energy costs (average coal price down by 23%YoY), employment of 10MW WHR that came online towards the end of FY15 and cheaper in‐house power generation. As a result, Gross Margins are expected to go up by an impressive quantum to 44.35% in 3QFY16 from 36.74% in 3QFY15. Bottomline is expected to be further bolstered by decline in finance cost by 44%YoY owing to long‐term debt repayments. On a cumulative basis, analysts expect 9MFY16 earnings to grow to Rs4.19 billion (EPS: Rs3.04) compared to Rs2.65 billion (EPS: Rs1.92) for 9MFY15, up 58%YoY. Despite robust returns, analysts believe FCCL is still an interesting investment proposition due to its combination of growth and value characteristics.

Contrary to the expectations, State bank of Pakistan chose to keep policy rate unchanged at 6.0%, prompted by concerns on: 1) reversal in inflationary trends and 2) declining exports and increasing non‐oil imports making the current account more vulnerable to oil price shocks. That said, positive macro trends following earlier monetary easing were also highlighted with uptick in private sector credit and LSM growth at 4.1%YoY during 7MFY16 being notable improvements. Going forward, inflation is expected to accelerate as food prices pick up near Ramadan/Eid season. FY16 CPI inflation average is projected at 3.0%YoY while NFNE Core inflation is expected to average 4.2%YoY. Under the prevailing conditions analysts do not see room for further easing where probability for a modest hike before CY16 end due to external side risks, primarily: 1) chronic exports decline, 2) exchange rate volatility and 3) possible decline in foreign exchange reserves of the country.


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