Bullish trend persists, market braces for consolidation
The week ended on 24th July 2020 was the 5th consecutive week, where the benchmark index of Pakistan Stock Exchange (PSX) closed in green. The market maintained its bullish momentum in the first three trading sessions and witnessed consolidation in the latter part of the week, closing the week at 37,608 points, up 0.74%WoW. Rumors about fines on cement companies as well as profit-taking brought the cement sector under pressure in last two trading sessions. Average daily traded volume during the week declined 4.5%WoW to 407 million shares. The scrips generating bulk of the volume included: HASCOL, UNITY, TRG, KEL and MLCF. Major gainers were: SHEL, SERT, ANL and KAPCO, whereas laggards included: ARPL, PAEL, DGKC and PMPK.
Major news driving the market during the week included: 1) Current account deficit for June 20 reported at US$96 million, down 90%YoY, taking the full year deficit to US$2.9 billion, down 78%YoY as compared to for the corresponding period last year, 2) US$750 million agreements signed with WB, AIIB under RISE program, 3) GoP reviewed withdrawing generalized subsidies and increasing electricity tariff to pass-on the impact and 4) GoP also announced promulgation of Oil Refining and Marketing Policy 2020. The incentives in draft package would be applicable to all new ‘state-of-the-art’ deep conversion (not second hand/relocated) oil refinery projects of minimum 100,000 bpd refining capacities to be set up anywhere in the country.
Accordingly, the ban imposed by OGRA on retail development by Oil Marketing Companies (OMCs) in relation to lack of storage capacity in the regional context shall be lifted. Major board meetings in the upcoming week include FFC and EFERT. The PSX may continue to witness consolidation on the onset of Eid holidays and roll over week, given a 10% rally over the past one month.
In an acknowledgement of deep rooted inefficiencies in the regulatory system governing mid and downstream oil investments in the country, a stream of news reports over the week have raised the likelihood of a major investment package of tax reliefs, relaxation of regulations and margin autonomy for the sector. For OMCs key initiatives of a material nature include relaxation of limits on provincial retail expansion (previously tied to provincial storage CAPEX) and the removal of ECC/Cabinet approval as a pre-condition for annual OMC margin hikes minimizing the negative burden of delayed hikes. Refinery sector packages are demarcated between Greenfield expansions and Brownfield expansions of at least 100,000 bpd providing exemption on taxes incurred on CAPEX (inclusive of import duties), 20-year income tax holiday amongst other incentives (provision for easing single point mooring for offloading crude. Analysts believe the long cycle CAPEX investment in the mid-stream infrastructure face hurdles to materialization, unless pricing reforms. That said, national oil companies, in a bid to guarantee end market demand, may consider investment regardless as accompanying crude supply contracts confirm offtake in a market of increasing prominence. Policies specifying pathway to deregulation will be a step in the right direction. Deregulation will ensure competitiveness as well as decrease the uncertainties regarding inventory/exchange losses, increasing the earnings quality of the companies.
Topline Securities has projected its Autos Universe earnings to decline sharply in Mar-Jun 2020 quarter owing to decline in unit sales and reduction in Gross Margins. mCar assemblers are likely to be the most hit as the government had imposed lockdown across the country from March 2020, which continued on till the end of May 2020.
The volumetric sales of its Auto universe (INDU, HCAR, PSMC and MTL) were reported at 19,014 units, down by 70%YoY and 47% QoQ. It is pertinent to mention that in April 2020 no car sales were recorded by companies, while in May 2020 only 4,473 units were sold.
The manufacturing operations of Indus Motors (INDU) and Honda Car (HCAR) remained non-operational for 55-60 days, while Pak Suzuki Motor (PSMC) manufacturing was only operational for the last 15 days of the quarter, total 75 non-production days. The brokerage house expects further depletion in Gross Margins of the assemblers as fixed costs/unit is likely to substantially increase due to lower sales.
Indus Motors (INDU) is expected to record an EPS of Rs7.6 for 4QFY20, down 78% QoQ and 83% YoY. The fall in earnings is mainly due to the drop in unit sales by 81%YoY and decline in Gross Margins to 7% from 9.3% in 4QFY19). During the outgoing quarter, INDU has started delivery of its newly launched Yaris. The highly anticipated model recorded sales of 1,327 units in 4QFY20. INDU maintained short term investments of Rs31 billion in 4QFY20. Other income will be a major contributor. The Company is expected to announce a cash payout of Rs2/share, which will take the full year payout to Rs25/share for FY20.
HCAR is expected to breakeven for 1QMY21. In the preceding quarter HCAR recorded a loss of Rs0.2/share due to application of turnover tax (effective tax rate of 105%) and high finance costs. It is also anticipated to post sequential improvement due to normal effective tax rate and lower finance costs owing to substitution of local currency loan with short term loan of US$14 million at a markup rate of 3.2% from Asian Honda Motor Company. Earnings will be down due to lower sales and depletion in Gross Margins.
PSMC is expected to post a loss of Rs13.2/share for 2Q2020. The losses are likely to accentuate due to plant shutdown amidst COVID-19 related lockdowns. The company’s sales are down by 75%YoY during the quarter. The Finance Cost is likely to be a continuous drag on the company’s profitability as PSMC is highly leveraged.