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Bulls rule persist and to carry on with

The week ended on 24th December 2020, the rollover week started on a negative note on declining crude oil prices and concerns regarding a potentially more dangerous strain of Covid-19 coupled with increased border tensions. However, towards mid of the week, market went into a positive on the back of another current account surplus for November 2020 as well as slight improvement in oil prices.

The benchmark index closed the week at 43,417 points, down 0.74%WoW. Oil and gas exploration and refineries were among the major laggards due to declining oil prices. As against this, cement sector was among the leaders as investors cheered healthy local cement demand despite winter season. Top performers during the week included GHGL, CHCC, HMM, PIOC and INIL, whereas laggards were: ANL, AGIL, ATRL, MEBL and PPL.

Average daily trading volumes declined to 507 million shares, from 550 million shares in the earlier week. Foreign outflow were recorded at US$23.3 million, but was absorbed by Companies and Mutual Funds with US$24.8 million and US$1.5 million inflows during the week.

Major news flow affecting the market during the week included, 1) Pakistan’s textile exports registering an increase of 9.27%YoY to US$1.3 billion in November 2020 as compared to US$1.18 billion in corresponding month of last year, 2) Government successfully concluding negotiations with 21 creditor countries for debt suspension amounting to US$1.7 billion, 3) Government considering a proposal to increase the margins of the Oil Marketing Companies (OMCs) and dealers on high-speed diesel (HSD) and petrol, 4) Pakistan and the IMF inching towards formal revival of the stalled Fund program, as the government decided to hike power tariff by 25-30%, and 5) The Federal Cabinet granting massive tax exemptions to facilitate promotion of four-wheeler electric vehicles (EVs) in the country.

Developments on the IMF program (timing and scale of measures would be of utmost importance), Covid-19 situation in the country and global crude oil price movements are likely to sway the market sentiments, going forward. Resurgence in energy prices remain double edged sword, where interest in energy chain and banking sector likely to continue.

As per the NFDC data released, urea offtake in November 2020 increased 29%MoM and 40% YoY to 533,000 tons. This takes 11MCY19 offtake to 5.1 million tons, up 6% YoY. The uptrend is visible across indigenous gas based player, where we attribute YoY increase in company-wise offtake to closure of LNG based fertilizer plants (monthly capacity: 75,000 tons, 15% of total capacity). On a cumulative basis, FATIMA and FFBL posted an increase of 72% and 35%, respectively, leading the pack. Despite an uptick in urea offtake sequentially, the ending inventory remained flattish at 667,000 tons. Based on released data, analysts expect urea offtake to remain flattish for 4QCY20 on YoY basis as well as sequentially, due to high base effect in the same period last year.

There was an upsurge in DAP offtake, posting an increase of 60%MoM, but remained down 9%YoY, led by FFC’s offtake of more than 50,000 tons in November 2020, as opposed to remaining on the sidelines in the previous month. Meanwhile, FFBL also posted an increase of 22%MoM during the month, with EFERT lagging behind. On a cumulative basis, DAP offtake declined by 10%YoY, with FFBL being the only player posting an increase of 32%YoY. The ending inventory is also near depletion at 99,000 tons, down 60%MoM, reportedly due to DAP import issues. International DAP prices remain on an uptrend, where volumetric growth for FFBL may land the player in a sweet spot for 4QCY20.

As per S.R.O. 1337 (I)/2020 notified on 16th December 2020, GoP has provided relief to fertilizer players on input sales tax adjustment, which was disallowed in case of fertilizer sale to unregistered buyers. To recall, sales tax on urea is at 2%, lower than that on inputs (5/17/17/10% on feed gas/fuel gas/other inputs/rock phosphate) and fertilizer players used to claim tax credit adjustment to keep fertilizer prices affordable to end consumers. EFERT (Rs1.300 billion) and FFBL (Rs600 million) have provisioned in lieu of the aforementioned measure and may likely record reversal in 4QCY20. A resolution with regards to income tax may also be on the cards (10% expense disallowance for taxation purpose on sale to unregistered dealers) could be a potential headwind.

Number of risk are looming on the horizon for local cement manufacturers that include: 1) Competition Commission of Pakistan (CCP) initiating inquiry over cement price hike, and 2) sharp spike in coal prices (up 50% since October 2020), with implications for pricing moving forward. CCP has recently issued an enquiry report regarding alleged cartelization by cement manufacturers and increasing prices by Rs50/bag. The enquiry committee has recommended initiating proceedings against the APCMA and its member. With the sector on strict watch of CCP, analysts believe the spot light may force players to self regulate, possibly staggered price hikes at best, with complete absorption of cost by the sector at worst (unlikely) and in case of the latter, margin suppression in 3QFY21 cannot be ruled out. Analysts continue to prefer LUCK and MLCF with LUCK’s low cost based shielding against potential headwinds and suggest diversifying portfolio further to reduce the risk. MLCF enjoys the option having the option to switch its fuel to petcoke, in case coal prices continue upward move.

Consistent government efforts to boost the construction activity and supportive macro policies have markedly increased the demand for construction and allied industries. Long steel being the key moving part of the chain turns out to be a major beneficiary. Long steel manufacturers are posting record monthly volumes. Take ASTL first, the company sold record-high monthly sales of 36,500 tons in a seasonally slow month of November 2020. The situation is more or less similar for other manufacturers. Besides increased utilization levels, upbeat demand has considerably enhanced pricing power of the industry, with leading manufacturers swiftly raising their rebar prices in response to rising scrap steel prices. ASTL has increased its rebar prices by Rs5,000 per ton in response to increase in scrap prices in the last 15 days. In this backdrop, analysts raise near term earnings estimates for ASTL, incorporating a swifter than expected recovery in demand and consequent better pricing dynamics leading to swifter margin recovery as well.

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