During the week ended 20th April 2018, sentiments at Pakistan Stock Exchange (PSX) remained subdued and the benchmark index closed at 45,259.34 points, down 1.76%WoW. The prime concern was seesawing budgetary expectations as the tenure of incumbent government ends in May 2018. Average daily traded volume shrunk by more than 37%WoW to around 155 million shares. The volume leaders were: EPCL, LOTCHEM, UNITY, KEL and FCCL. Key news flows impacting the market during the week included: 1) current account deficit exceeding US$12 billion, up 51%YoY for 9MFY18 reflecting mounting pressure on trade deficit, 2) expected announcement of an agriculture package in the upcoming budget with relief in taxes (on imported machinery) and a hefty subsidy to support the farmers including removal of sales taxes on tractors and Punjab government increasing subsidy on DAP to Rs300/bag, from Rs150/bag, 3) Ghandhara Nissan signing an agreement with Renault for the import of heavy commercial vehicles primarily for test and trial purposes, 4) federal government borrowing Rs34 billion through PIBs auction as many institutions remained reluctant in locking rates at the prevailing historic low levels and 5) country’s foreign exchange reserves falling to US$17.55 billion, with SBP reserves decreasing by US$58.7 million ending to US$11.38 billion. Major gainers of the week were: BAFL, APL, EFERT, INDU and KAPCO; while laggards included: FFBL, DGKC, OGDC, HBL and FCCL. Foreigners continued to off-load their holding with majority of the selling coming from OGDC’s share placement deal (54 million shares) at Rs164/share. Cumulative outflow was recorded at US$41.79 million during the week as against an inflow of US$17.45 million a week ago. Anticipation of budgetary measures will likely drive the market in the upcoming week. The PML-N government is scheduled to present the Federal Budget on 27th of this month. Additionally, E&Ps could garner investors’ attention as international oil prices are hovering at 4-year high. Moreover, investors are expected to keep a close eye on result announcements by large cap companies that include PSO, ENGRO, PPL, OGDC, KAPCO, HUBC, MCB, FFC, FATIMA, INDU and PSMC during the next week.
Based on provisional data for 8MFY18, the Government of Pakistan (GoP) expects GDP growth for the full year at 5.8%YoY as compared to the ongoing year. Key catalysts for the growth remain ongoing implementation of infrastructure projects under CPEC that include improved energy supply and sustained credit growth. Ancillary support factors including improved law and order situation aided by heightened confidence allowed broad based economic growth momentum with all three constituents the economy on an upward trajectory, services (6.4%) /industrial (5.8%) and agriculture (3.8%). Nominal GDP is projected at Rs34.4 trillion, up by 7.6%YoY as compared to Rs32.0 trillion for FY17, translating into per capita income of Rs180,000. Industrial sector growth remains encouraging likely touching a 10-year high of 5.8%YoY supported by improved energy situation and increased consumer spending. In this regard, the LSM growth is up 6.2%YoY, where all sectors posted positive growth except for chemicals and fertilizer due to lower availability of gas. Imposition of a temporary ban on furnace oil consumption by power plants had a deterring impact on production figures. However, with the fast track approach to complete infrastructure projects before the national elections, construction boom would remain in the lime light, posting growth of over 9%YoY. Agriculture sector all major crops namely rice, sugarcane and cotton posted an increase in production on account of higher yields and GoP support programs. However, Wheat and Maize posted a slowdown due to the decline in area under cultivation (shortage of water in both rain-fed and irrigated areas). Additionally, livestock recorded a growth of 3.8%YoY. Any curtailment in PSDP can have negative impact, while economy remains vulnerable to event-based risk accompanied by large current account deficit. That said, in the medium term Pakistan economy is likely to maintain a strong momentum as infrastructure and energy projects unfolds and sustained agriculture output.
High POL consumption by transport sector continues to be the firm driver for OMC volumes, as power sector demand plunges due to gradual decline in furnace oil sales. Throughput calculations suggest an uptrend in retail volumes, with average quarterly volume sales per outlet recorded at 828,600 litre, up 18%QoQ/+10%YoY. Daily average throughput per retail outlet recorded at 9,207 litre, up 10.3%YoY due to expansion in supply chain and storage to resulting in higher retail POL volumes. All the OMCs added outlets with PSO seeming to have completed the consolidation phase initiated in CY16 and enacting a retail-led penetration. Prominence of OMCs based on outlet additions, average sales throughput strategy, supporting CAPEX plans, fuel availability, and market share movements appears encouraging. HASCOL continues to outpace the industry, where discounts continue to play a role in attracting demand, Addition of retail outlets and storage facilities continue to enhance volumetric sale. PSO’s quarterly throughput remains below twelve-month average indicating room for further consolidation. Cash based retail sales are a boon for the stressed balance sheet of the Company.
According to an AKD Securities report, two crucial data sets regarding the OMCs are difficult to tabulate and verify: 1) lubricant sales and market share, which are excluded from monthly OCAC volumes and 2) mid-stream storage infrastructure. Annual OCAC Pakistan Oil Report 2016-17 indicates: 1) about 48%YoY increase in lubricant sales volumes during FY17, mainly driven by 73%YoY increase in passenger motor car lubricant sales, 2) SHEL maintaining leadership in the segment, controlling 44% market share and 3) total storage infrastructure for POL products growing by 131,000 tons, up 4%YoY. A point of concern is if government re-imposes ban on use of furnace oil by power plants how would it affect the refineries and alternate use of furnace oil storage tanks. The key industry data regarding storage additions and lubricant volumes indicate paradigm shift, emphasizing need for enhanced capital expenditures. The brokerage house believes that the numbers reported are in no way comprehensive (company wise storage data excludes leased facilities, lubes data has other companies including HTL missing). The details submitted by OMCs show the continuation of an aggressive CAPEX program for making inroads into transport-led demand and an industry yet to initiate any large scale price-based competition. Plans for an additional white oil pipeline are vital for rationalizing storage costs, counter transporter lobbies and resolve safety concerns over OMC fleets, giving room to further competition based on price in the long run.