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Index springs back; result season, tax measures for budget will likely define sentiments

The week ended on 9th April 2021 remained volatile due to the concerns on rising COVID cases in the country. Market was down more than 750 points on the first day of the week. However, a sharp recovery in the remaining days helped the market to close at 45,186 points, up 2.0%WoW. Stronger growth forecasts by IMF, and lower than expected inflation reading in March 2021 acted as catalysts to change investors’ sentiments followed by US$2.5 billion inflows from Eurobond.

Other news flows during the week included: 1) easing of political noise due to split in the opposition alliance, 2) rising cement sales by 44.4% in March, 3) successful diplomatic concurrence during the visit of Russian foreign minister and the US pushing Pakistan and India for dialogue putting concerns over depleting relationship between Pakistan and US at rest, 4) NEPRA approving Rs0.64/unit fuel adjustment and 5) IMF report casting light on timeline for potential release of payments under MoU signed by the GoP and IPPs.

Engineering and Cements sectors, gained 6.0%WoW and 5.5%WoW, respectively on expectation of stronger results whereas E&Ps and Autos witnessed flattish performance. Overall, sector chart were topped by Cable and Electricals and Technology sector, while sugar stood as most laggard.

Foreigners accelerated their selling spree, squaring-off positions worth US$9.5 million, but it was absorbed by participants across the board primarily by Banks and companies with net inflow of US$3.1 million and US$2.5 million, respectively. Top performers include: TRG, INIL, PIOC, PAEL and KTML, whereas laggards were: INDU, PSMC, IGIHL, OGDC and PKGS.

Result season is likely to define market sentiments in the near term where major companies due to announce their financial results are FFBL and EPCL. Overall, analysts expect Cements, Chemicals, Steel, and Autos to outperform in the current season. In the medium run, potential tax measures in the upcoming budget remains a key headwind and any correction in this regard should be taken as an opportunity for accumulation.

IMF in its latest detailed assessment on Pakistan, leading to disbursement of US$499 million emphasized on fiscal and power sector reforms (release of circular debt payment under the agreed MoUs, notification of FY20 Q4 quarterly adjustment and FY21 annual rebasing). At the same time, the report underlined the need for calibrated approach in undertaking reforms to keep economic recovery unperturbed. Analysts believe this could potentially result in revision in FBR revenue estimates. Full implementation of TSA-1 by May this year is also made a part of fiscal reforms, work on which has already been initiated. Moreover, the staff has concurred current monetary stance, indicating interest rates may remain stable until economic recovery becomes more entrenched, while any increase would be gradual as to achieve mildly positive real rates. The report also acknowledged GoP’s progress for meeting compliance with FATF’s remaining 3 items (24 already complied) stating it to be in advanced stages with completion deadline before next review in June 2021. The IMF authorities have also altered disbursement schedule, which dependent upon success of the sixth review, would unlock US$1 billion flows in June this year and should support recent appreciation in PkR. To highlight, IMF staff projects US$3.4 billion funding surplus in FY22. From market’s vantage, IMF’s keen interest on autonomy of regulatory bodies (SBP, NEPRA, OGRA etc.) should resolve structural issues particularly in energy chain keeping power related stocks and OMCs (PSO) in limelight whereas continued US$ flows (SBP recently received US$2.5 billion Eurobond payment) and consequent PkR appreciation could gather interest in Cements, Steel (already reeling from stronger demand) and Autos. That said, potential tax measures in the upcoming budget remain a key headwind in the near term.

Local cement dispatches extended their outstanding run with an increase of 42%YoY to 4.6 million tons for March 2021 where South fared better among the two regions, witnessing an increase of 62%YoY while North posted an increase of 39%YoY. Exports also registered an impressive growth of 26/4% YoY/MoM where resolution of supply chain issues also contributed to the cause. Overall, dispatches for 9MFY21 rose to 42.9 million tons, up 16%YoY led by 18%YoY increase in local dispatches while exports increased by 4%YoY. Number of cost headwinds stand ahead of local cement manufacturers where in near term. As per news reports, GoP is expected to increase power tariff, while increase in FED might also be on the cards. However, analysts expect local cement manufactures to exercise their strong pricing power to pass-on any increase in costs.

Volumes of OMC remained on upward trajectory with a massive increase of 45%YoY mainly on the back of low base due to stringent COVID-19 related restrictions in March 2020, rising to 1.5 million tons for March 2021 while sequentially, volumes grew by 6%. Overall, local OMC sales continued on a strong footing, up 16%YoY for 9MFY21 (up 12%YoY excluding FO). The seasonal uptick in FO demand for power generation over the period drove growth of 44%YoY while MS/HSD followed with growth of 10/18% YoY. Market shares remain fluid with PSO/APL/HASCOL/SHEL accounting for market shares of 47/9/3/9% during March 2021 where a comparison with March 2020 reveals decreasing share of HASCOL/APL and market share of PSO increasing. PSO remains top pick where medium term developments include clearance of circular debt and shift in profile of cash flows due to increased share of retail fuels while focus on improving storage infrastructure will result in Company sustaining the recently gained market share, moving forward.

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