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Stock Review

Stock review December 2022
Index falls despite IMF staff level agreement news

Despite the positive news-flow regarding the IMF staff level agreement, the benchmark index of Pakistan Stock Exchange (PSX) trimmed the last week’s gains on account of unexpected hike of 150bps in policy rate by SBP. In addition to this, the Current Account Deficit (CAD) widened by US$1.66 billion in October 2021 and rose to 4.7% of the GDP from 4.1%, beyond the target of 2-3% for the entire financial year.

With negative news-flows engulfing the investors, the confidence remained jittery. At the same time, PKR remained on downward trajectory against US$, hitting a low of PKR176.5/US$. As a result, the benchmark index lost its value during the week by 5.1%WoW to close at 44,114 points as against 46,489 points last week. The average traded volume rose by 8.2%WoW to 264.38 million shares.

Other major events during the week included: 1) weekly inflation hitting 7-month high of 18.34%YoY, 2) petrol pump dealers calling nationwide strikes, 3) one-year KIBOR rising to 11%, 4) Ayub Afridi resigning from senate, a clear indication that PM’s Finance Advisor Shaukat Tarin is to be elevated in the upper house of Parliament, 5) cabinet approving PKR134 billion payment to IPPs as second installment, 6) SBP keeping the inflation outlook unchanged at 7-9% in medium term, 7) Bank deposits rising 13% CYTD to PKR19.34 trillion, 8) Fertilizer offtakes surging 45%YoY and 9) SBP reserves taking the biggest drop of US$691 million in FY22 so far owing to dual pressure of debt repayments and rising CAD. Stock wise, major performers were: GATI, HMM, ATLH, EFUG and HGFA, while laggards included ANL, SEARL, TRG, DGKC and PIOC.

As expected, the market remained under pressure after SBP increased the benchmark interest rates by 150bps against the general consensus of 100bps. Also, CAD rising to US$1.66 billion created further volatility in the market. For upcoming week, analysts expect the market to change the momentum to positive side owing to the meltdown in Crude Oil where Brent Crude (ICE) declined 5.73%, thereby giving a sigh of relief on the commodities front. On the flipside, the birth of a new Covid—19 variant has risen the panic across the globe.

In a move that surprised the market, SBP raised the benchmark interest rates by 150bps. The move marks a structural shift in central bank’s policy from stimulating growth to now targeting stabilization amid rising risks emanating on the external account. The rate hike brings real interest rates closer to ZERO, having stayed well below minus 2% mark during the pandemic as SBP strived to protect economy from the negative impact of the COVID-19. With rate hike, Pakistan has broadly met all the requirements of the IMF paving way for the revival of assistance program. To this end, the news of country reaching staff level agreement finally broke this morning, notwithstanding any last minute hiccups; country is expected to receive US$1.1 billion and unlocking further funding from other bilateral partners. A hike of 150bps was higher than market expectation of 100bps and may set ground for further rate hikes in the coming months as focus shifts back to stabilization amid mounting risks to external account and as SBP may look to target mildly positive real interest rates. Money market yields had already peaked at 9% before the hike in interest rate and ordinarily the equity markets may witnessed a heavy correction as the news of higher than anticipated rate hike was further compounded by soaring CAD. However, the staff level agreement with IMF is likely to be positively received by the market and may keep downside in check.

International scrap/copper prices have increased by more than 11% since October 2021 and currently hover around US$488/9,932/ton compared to FYTD average of US$473/9,485/ton amid power shortages and supply concerns which caused smelters to go offline from Chile to China. Impressive Chinese export growth in October 2021(up 27%YoY) to US$300.2 billion has counterbalanced some of the pressure mounting on Chinese local manufacturers from emergence of enormous power shortage, supply-side disruptions and reappearance of covid-19 cases in China. Local rebar prices have increased by 9.7%MoM to PKR197,000/ton in Oct-Nov this year amid strong retail demand in construction sector (both north and south). A sign of considerable pricing power local manufacturers exhibit which was fairly reflected in 1QFY22 results of long steel manufacturers (GMs to 17.5% in 1QFY22 as compared to 13.4% in 1QFY21). In light of robust earnings in 1QFY22 on the back of higher rebar prices, MUGHAL and ASTL have performed well, an out performance of 4.2%.

Total urea offtake rose to 514,000 ton (up 24%YoY and 5%MoM). The cumulative 10MCY21 numbers depict a growth of 12%YoY to stand at 5.16 million tons in contrast to 4.6 million in same period last year. DAP offtake increased 55%MoM and 49%YoY to 342,000 tons taking 10MCY21 DAP offtake to 1.4 million tons as compared to 1.6 million tons during the same period last year, down by 11%YoY. The local retail prices of urea currently hover at PKR1,800/bag, while in the international markets, the price of urea is hovering around US$932/ton which translates into landed cost of PKR10,000/bag, thereby providing ample room for the local manufacturers to pass on the costs in the local market in case of gas price hikes. The current international DAP prices stand at US$740/ton translating into landed cost of PKR8,200/bag, prices in local market currently quoted at PKR8,100/bag, at par with the international markets.

AKD Securities has revisit its investment case on Auto Assemblers, assigning overweight stance to the sector where the recent wave of sell-offs has provided attractive entry points to take exposure in OEMs. Its investment proposition is premised on enticing long term growth in volume offtakes on the back of 1) budgetary measures, 2) fading competition from imported CBUs, 3) mounting farmers’ income, and 4) major upgrades in existing product offerings. On the flipside 1) the commodity bull cycle, 2) revised regulations on auto financing arrangements, 3) monetary tightening and 4) threat from new entrants remain key downside risks for the sector in terms of volumes as well as margins.

Our top pick for the sector is INDU due to 1) first mover advantage in hybrid segment, 2) resilient demand outlook and 3) superior margins, solid balance sheet, brand value and widespread dealership network. PSMC liking is based on 1) robust sales outlook on the back of budgetary measures, 2) fading competition in 1,000cc segment, 3) stabilizing margins, and 4) launch of new Swift in the pipeline.

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