Stock Review

PSX remains under pressure as of weak market sentiments

Pakistan Stock Exchange (PSX) remained under pressure during the week ended 27th August 2021, apart from Monday, where the benchmark index crossed the much anticipated barrier of 48,000 points to close at 48,112. The weak market sentiments, coupled with Rupee depreciation, geopolitical tensions in the region and uncertainty over talks with IMF continued to dampen investors’ confidence during the rest of the week. The index could not sustain the massive selling during week and cumulatively lost 463 points, down 0.97%WoW, to close at 47,137 points. Despite receiving US$2.7 billion inflow under IMF’s SDR allocation (to be directed to COVID vaccine procurement), the surging import bill payments due to constant currency deprecation kept the market sentiment negative. Participation during the week remained strong with average daily traded volume rising to 384.1 million shares as against 265.7 million shares posted a week earlier.

Other major news flow during the week included: 1) the country posted a current account deficit of US$773 million in the 1MFY22 as against a surplus of US$583 million in corresponding period last year, 2) Pakistan’s energy sector circular debt amounted to Rs2.28 trillion in FY21 as against Rs2.15 trillion in FY20, posting 6.04%YoY growth, 3) IMF chief thanked Pakistan for helping in evacuation of the Fund staff and their families from Afghanistan after its takeover by Taliban, 4) CCoE approved power generation capacity expansion plan, 5) Pakistan’s textile and clothing exports posted double-digit growth in 1MFY22 increasing by 15.61%YoY to US$1.41 billion as compared to US$1.27 billion in 1MFY21 and 6) Pakistan’s overall budget deficit has rising to a staggering PkR3.4 trillion, equivalent to 7.1% of GDP, in FY21.

Top performers of the market included SEL, GSKCH, SYS, MEBL and ARPL. Meanwhile laggards included: JLICL, SRVI, GADT, ANL and HGFA. Top volume leaders included WTL, GGL, HUMNL, ANL and BOP.

Flow wise, other organization remained the major buyers with (net buy of US$3.49 million) followed by Mutual Funds (net buy of US$2.27 million), while Insurance Companies stood on the other side with (net sell of US$2.38 million) followed by Banks and DFI (net sell of US$1.52 million).

The market performance is likely to remain range-bound amid the political turmoil in Afghanistan and uncertainty surrounding IMF review, likely to commence next month. However, from sectoral perspective, currency devaluation bodes well for Textiles and E&Ps, while for import driven sectors like cement and steel, their ability to pass on cost further will be tested. Moreover, flow based movement on account of MSCI Review in September 20221 will also impact market sentiment. For the upcoming week major result announcements include, KOHC, HUBC and PSMC.

Pak Rupee has depreciated 5.1% against US$ since the beginning of FY22 due to the deferral of IMF June 2021 review, timing difference between FX flows (mostly trade-related) and Dollar Index movement accounting for Rupee depreciation. Analysts expect volatility to persist in the short term with risks skewed to downside. However, in the medium run, possible resumption of the IMF program could restore confidence in the market. That said, exogenous factors present risks to the expectation where early tapering by FED and increase in interest rates could consequently strengthen the US$. From a sectoral perspective, currency devaluation bodes well for Textiles, Tech and E&Ps. Exports occupy 72% share in total sales of our Textile of AKD universe where Rupee depreciation increases price competitiveness of these players resulting in stronger volumes. With undemanding valuations, market appears primed for lift-off. However, near term movement will likely be dictated by the upcoming September 2021 IMF review. Flow based movement on account of MSCI Review in September 2021 will also impact sentiment.

Air Link Communication Limited has filed intention for a listing on the PSX, with book building scheduled to take place on 30 and 31st August 2021. The offering includes new shares issuance raising Rs3.9 billion while OFS component is worth Rs1.9 billion, at a base price of Rs65/share with the cumulative amount at Rs5.8 billion, the largest IPO in Pakistan’s history. The company is one of the leading and largest distributors of mobile phones in Pakistan with a nationwide distribution network linked with more than 1,000 wholesalers and 4,000 retailers. The Company has set up state of the art mobile assembling facility having production capacity of more than 400,000 units per month and has already commenced operations in April, 2021. Management expects 100% utilization to be achieved till December 2021. The Company has non-exclusive distribution agreements with leading mobile phone brands like Samsung, Techno, Huawei, TCL and Xiaomi. The Company also has entered into an agreement with MP (Apple Authorized Distributor for Pakistan) for distribution of products procured from MP in Pakistan. That said, non-exclusive distribution agreements, requiring annual renewals, exposes the company to unilateral termination risks. Additionally, aggressive penetration in the market could result in built-up of receivables causing cash flow issues to re-emerge. The Company expects 3-year CAGR in earnings of 25% (from FY22) with average 3-year EPS at Rs14.6. However, given the risks highlighted above to the earnings outlook, analysts apply a 20% discount to earnings. As such, at a base price, the stock trades at a P/E of 5.5x. However, another 20% discount is applied given possible conversion of TFCs into shares in the near term.

As per the numbers released by NFDC, urea offtake increased 9%YoY, but exhibited a decline of 10%MoM to 621,000 tons. This takes 7MCY21 urea offtake to 3.5 million tons, up 8%YoY. The overall urea inventory closed at 321,000, down 26%MoM, at par with the levels witnessed during the same period last year. Urea price, already up by Rs125/bag FYTD to Rs1,725/bag may sustain over 2HCY21 at least, given supply side hiccups. DAP offtake increased 184%MoM but posted a decline of 23%YoY to 193,000 ton, taking 7MCY21 DAP offtakes to 794,000 tons, down 6% YoY. FFC led the pack with cumulative offtake in CY21TD up 65%YoY as opposed to 31/9% decline in EFERT/FFBL DAP offtakes. DAP inventory in July 2021 closed at 400,000 tons up 5% YoY, on the onset of seasonally.

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