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Stock Review

Stock review December 2022
Smidgen Recovery Witnessed, Investors Cling To Hope Of FATF Outcome

With the commencement of its plenary meeting, Financial Action Task Force (FATF) episode once again came into play with news flow setting market direction. The benchmark Index of Pakistan Stock Exchange (PSX) lost 659 points on Monday (first day of the week) ahead of the meeting but staged some recovery on emerging clarity over Pakistan’s status. For the week ended 29th June 2018, the Index closed at 41,911pts, up 0.66% WoW. Trading activity at the bourse improved marginally during the week, with average daily turnover increasing close to 182 million shares, up 6%WoW.

Key news inflows impacting the market during the week included: 1) GoP notifying increase in profit margins of Oil Marketing Companies (OMCs) and dealers’ margin on HSD and MoGAS, 2) GoP reportedly raising Rs36billion revenue under the amnesty scheme for declaring undisclosed local and foreign assets, 3) gas utilities demanding an increase in their average prescribed tariffs for FY19 based on their revenue requirements and 4) Pakistan’s foreign exchange reserves falling by another 3.30%WoW to US$16.243billion during the week ended 22nd June 2018.

Gainers of the week included: HASCOL, KEL, ASTL and ABL, while laggards were: CHCC, KAPCO, APL and PSMC. Foreigners continued to offload their equity stakes during the week, posting net outflow of US$15.52million as compared to a net outflow of US$24.53million a week ago. Post FATF’s official announcement, expected by Saturday 30th June, analysts expect investors to once again shift focus towards more pressing economic issues i.e. interest rate hike, rupee depreciation and political uncertainties. Moreover, with start of new fiscal year, portfolio rebalancing by local funds could swing momentum accordingly.

After a promising start of CY18, overall fertilizer sales came under little pressure for the first time during the calendar year owing to delayed start of the Kharif season. According to the latest data released by NFDC, aggregate fertilizer sales in May 2018 reported at 669,000 tons, down 7%YoY. In tandem, urea sales decreased by 5%YoY to 494,000 tons and DAP off take also declined by 15% YoY/15%MoM owing to seasonal slowdown and inflated product prices. Despite this monthly slowdown, total fertilizer sales posted an encouraging growth of 19%YoY during 5MCY18, with urea sales posting a robust growth of 29%YoY during the period underreview. The fertilizer sector has posted a strong recovery on improving fundamentals.

Going forward, analysts anticipate the sector to remain in limelight on the back of: 1) lower inventory levels, 2) expected urea import at current elevated cost of imported fertilizers and 3) continuous upward trend in local product prices.



Pakistan’s total exports continue to exhibit remarkable performance, with May 2018 exports rising to US$2.14billion, up 32.3%YoY. Once again, both food and textile groups were the key outperforming sectors, with respective group exports growing by 44.5%YoY and 28.4%YoY. In textile group, both high and low value added exports took a quantum leap of 28% and 29.7%YoY to reach US$878million and US$327million. On a cumulative basis, 11MFY18 textile exports have grown by 9.8%YoY to US$12.36billion as compared to US$11.23billion during 11MFY17. While export of high value added productswere up by 11.3%YoY to US$8.98billion, outlook for low value added products emerged promising during the second half. The segment wise exports increased to US$3.35billion, up 6%YoY during 11MFY18. Going forward analysts expect textile exports to remain on upward trajectory, as sector would continue to benefit from strengthening economic activity in key importing markets, flexible exchange rate regime and continued government support, through export incentives. However, prolonged delay in payment of exporters’ refunds could undermine benefits of export package, thus posing downside risk to export outlook.

Oil & Gas Regulatory Authority (OGRA) has issued Estimated Revenue Requirements (ERR) for Sui Northern Gas Pipeline (SNGPL) and Sui Southern Gas Company (SSGC) for FY19 notifying 30% increase in gas prices for Fertilizer, General Industries, Independent Power Plants and Captive Power Plants. The regulator has also increased prices for domestic consumers by 300%.

The overall perception is that OGRA has only recommended price increase but final authority rests with the Government of Pakistan (GoP), which may or may not approve increase in gas tariff. Last time gas price for consumer was increased in December 2016 and since then there has been no increase. Assuming that the GoP approves the increase the likely impact of different classes of gas consumers needs to be understood. A report by Topline Securities offers an elaborate analysis:

Gas Marketing: Gas price hike will be positive for both the gas marketing companies, SSGC and SNGPL, resulting in improvement in their cash flows.

Fertilizer: The hike will be neutral for the sector as the overwhelming perception is that these companies will be able to pass it on the increase to farmers. The brokerage house estimates that manufacturers will have to increase urea prices up to Rs100/bag. Engro Fertilizer (EFERT) and Fatima Fertilizer (FATIMA) seem immune due to their long-term concessionary gas supply agreements.

Cement: One of the largest companies having presence in Southern and northern regions, Lucky Cement (LUCK), is likely to face negative impact due to gas price hike. Rest of the players will not be affected by the gas price hike as they either are on Re-gasified Liquefied Natural Gas (RLNG) or does not use gas in significant quantity.

Textiles: Textile players that are using natural gas for their captive power plants can be negatively affected, estimated up to 20%, if gas price hike is not passed on.

Chemicals: Engro Polymer (EPCL) and Lotte Chemical (LOTCHEM) will have a minimum 15% negative impact on earnings. Moreover, prices of their products are internationally linked and local companies have very low ability to pass-on hike in cost to consumers.

Steel: Any hike in gas price is negative for the sector as they will not be able to fully pass on the cost increase to consumers, resulting in decline in the EPS and dividend payout.

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