Little recovery seen after a positive development with IMF
Following a 1,049 points decline a week ago, the market recovered 520 points on the first trading session of the week ended on April 28, 2022 on the back positive development with International Monetary Fund (IMF).
According to their spoke person, the IMF delegation is expected to visit Pakistan in May. In addition to this, the length of the program is also expected to increase till June 2023 with additional US$2 billion financing arrangement, taking the total program size to US$8 billion. The upward movement, however, was short lived as the returns got trimmed in upcoming sessions as KIBOR reached 14-year high to 14.1% and T-Bill yields spiked 15%, hitting a 22-year high. As a result, the benchmark index of Pakistan Stock Exchange 100 posted a net decline of 304 points to close at 45,249 points, down 0.67%WoW.
Other news flow during the week included: 1) Current Account Deficit (CAD) swelling to US$13 billion for the first nine months of current financial year, 2) IT exports increasing 29.3%YoY to US$1.9 billion, 3) Finance Minister, Miftah Ismail holding talks with key global investors, 4) portfolio allocations to six cabinet members, and 5) 9MFY22 fiscal deficit widening to PKR2.6 trillion (4% of GDP). In addition to this, the technical level talks with IMF have also started under which the stress will be placed on the curtailment of CAD and other prior actions based on the latest data available.
Sector wise, the highest gainers were Cable & Electrical Goods (up 22.4%WoW) and Vanaspati & Allied Industries (up 1.2%WoW). Close-end Mutual Funds declined the most (down 14.0%WoW), followed by Synthetic & Rayon, (down 5.3%WoW).
Stock wise, top performers were: LOTCHEM, NESTLE, BAFL, ABOT and BAHL, while laggards were: DCL, KTML, MUGHAL, PTC and FFBL. Volume leaders during the week were: HUMNL, WTL, TELE, PRL and PAEL.
Flow wise, Insurance companies emerged as the net sellers offloading US$6.71 million, followed by Mutual Funds (US$4.87 million) and Banks & DFIs (US$2.93 million). On the flipside, Foreigners accumulated shares worth US$3.17 million during the week. Similarly, Individuals and Companies remained on the buying side, with a net buy of US$5.78 million and US$2.98 million, respectively.
After the downward correction faced by the market during the week under review, analysts expect it to remain jittery in the near term. As the country settles into the new regime, economic policies are set to change, hence causing uncertainty in the market until things become clearer.
News from IMF is bound to dictate market sentiments in the near term, with tough conditions being laid out for the country in the ongoing review. Analysts continue to advise investors to accumulate on fundamental scrips with a long-term focus, and prefer the Refineries, Fertilizers and Chemicals sectors.
According to the data released by NFDC for the month of March 2022 urea offtake for the industry was reported at 509,000 tons, up 48.3%YoY but down 3.4%MoM on account of maintaining additional buffer for upcoming months in case of unforeseen circumstances. Company wise, FATIMA recorded sales of 63,000 tons (up 130%YoY, but down 4.3%MoM), followed by EFERT at 171,000 tons up 81%YoY and up 0.5%MoM) and FFC at 168,000, up 16%YoY but down 8.6%MoM). Sales of FFBL declined 15.2%YoY but increased 12%MoM.
DAP offtake in March 2022 was reported at 80,000, down 45%YoY due to substitution effect by urea and NP combined. On MoM basis, offtake registered a growth of 44% in preparation of Kharif sowing season. The current ending inventory was reported at 276,000 tons, while the requirement for current Kharif season was estimated around 750,000 tons MT. Hence, the additional requirement is 480,000 tons among which 220,000 tons can be met by local production while rest will have to be met through imports.
AKD Cement Universe is expected to post profit after tax of PKR7.6 billion for 3QFY22 as against net profit of PKR8.9 billion for 3QFY21 and PKR 16.4 billion for 2QFY22. On YoY basis, profitability is expected to decline mainly due to high base as MLCF, DGKC and LUCK recorded high other income during 3QFY21, while on QoQ basis, net profit is expected to decline on the back of increasing power and fuel costs. Trend of gross margins for 3QFY22 will vary for every player in the universe where players with high inventory of coal from 2QFY22 are going to outshine, while additional comfort will be provided by increased use of Afghan coal. The brokerage house expects DGKC to witness highest pressure on margins with the Company having low inventory of coal while in South, it couldn’t utilize Afghan coal either due to high freight cost. LUCK is expected to be the only player to post a QoQ increase courtesy higher other income from ICI. The continued volatility in coal prices can provide good opportunity to accumulate where the brokerage house maintains its overweight stance on the sector for CY22. In this backdrop, LUCK, MLCF and FCCL emerge as top picks from sector.
Inflation for the month of April 2022 is likely to rise to 13.0%YoY — highest level since January 2020 — as compared to 12.7%YoY in March 2022. On a monthly basis, inflation is expected to be recorded at 1.3%MoM, highest monthly accretion since November 2021, potentially due to Ramadan effect. Pakistan is set to restart IMF program which would provide much needed clarity on Pakistan’s macros particularly the external side which should bring stability to exchange rate—potentially shaving off inflationary pressures but with a lag. Analysts expect inflation for 2QCY22 to rise to 13.2%, whereas for CY22 they expect inflation at 12.9% with inflationary reading remaining in double digits for most of CY22, only to fall in single digit during 4QCY22. That said, the risks are skewed to upside from roll back of subsidy on fuel prices (not incorporated in the estimate). End of political uncertainty and laser-focused steps by the new setup to address Pakistan’s external side is appreciated by the market where KSE-100 index has returned 4.6% in the past one month. The same is likely to continue at least in the near term where analysts advocate concentrating positions in Banks and Techs.