Macro, political uncertainty may keep activity sluggish
Pakistan Stock Exchange (PSX) witnessed a turbulent week ended on July 22, 2022, on account of political uncertainties mainly on the back of Punjab elections and massive currency depreciation on the back of oil payments. The index dropped by 1,968 points or 4.75%WoW to close at 40,077 points, while activity remained subdued as compared to last week. On the macro front, PKR/US$ depreciation was a shocker, as the domestic currency fell by 8.3% to PKR228 for a US$.
Furthermore, PTI’s victory in the by-election of Punjab caused further uncertainty, prompting international credit raters (Moody’s and Fitch) to downgrade the country’s rating to ‘negative’. Foreign exchange reserves held by State Bank of Pakistan (SBP) also dipped US$9.3 billion. The market participation remained very dull as the average daily turnover decreased 8%WoW to 177.6 million shares.
On the commodities front, MS and HSD prices were reduced by PKR18.5 and PKR40 during the week, on the back of falling global crude prices (ranging between US$91/bbl to US$102/bbl during the period).
Other major news flows during the week were: 1) Saudi Arabia said no to increasing oil production beyond 13 million bpd, 2) Over US$31 billion record remittances received during last financial year, 3) Pakistan international bond yields surged to 50.6%, 4) IMF wanted assurance on Saudi funding to Pakistan before it disburses loan, 5) FY22 FDI surged 2.6% to US$1.87 billion, 6) Power generation fell in peak demand season, and 7) non-textile exports rose to US$12.5 billion.
Sector-wise, amongst mainboard items, Vanaspati & Allied Industries, close-ended Mutual Funds and Leasing companies were amongst the top performers.
As against this, Textile Weaving was amongst the worst performers with a decline of 10%WoW for the week. Flow wise, major net selling was recorded by Mutual Funds (US$7.76 million) along with Insurance (US$2.2 million). Individuals absorbed most of the selling with net buy of US$5 million.
Stock wise, top performers include: HGFA, SML, HINOON, MUREB and DCR, while top laggards were: SNGP, EPCL, MLCF, CHCC and UNITY.
Market activity is expected to remain slow as investors seek an end to uncertainty on the macro and political front, after staff level agreement has been reached with the IMF. There still seems to be a funding gap for FY23 expenditures.
Until future funding from lenders/partners is ensured, domestic currency is expected to remain volatile, subsequently keeping investor confidence muted.
However, recent slump in commodity prices may be a positive development for country’s external account. Aside from lower inflation, lower oil prices may give the GoP space to begin collecting PDL and sales taxes once more without putting more burden on consumers. Analysts advise market participants to stay cautious.
Export proceeds for Pakistan recorded at an all-time high of US$31.8 billion in FY22 on the back of textile exports reaching their highest level in the country’s history to US$19.3 billion, up 25.5%YoY. The value-added segment registered an uptick of 25.6%YoY to US$15.6 billion.
Moreover, readymade garments/ bedwear/knitwear posted growth of 28.7%, 18.8% and 34.2%YoY respectively. For Jun’22, textile exports were reported at US$1.7 billion, up 3.9%MoM and 2.9%YoY. Segment-wise, value-added exports posted a growth of 8.3% MoM and 5.8%YoY while non-value-added exports posted a decline of 12.7%MOM and 9%YoY. Global cotton prices have plummeted 22%MoM to a seven-month low, and currently hovering around USc127/lb as compared to the last two weeks’ average of USc163/lb.
Furthermore, Cotlook A index futures have also plunged 32%MoM to USc110/lb for August 2022. Moreover, in Asian markets, cotton prices are following suit and have registered a decline of up to 20%MoM in India. Similarly in Pakistan, local cotton prices have receded 7%WoW in June 2022 to around PKR16,611/40kg and witnessing a decrease of 24.8%MoM in June 2022. In light of sharp decline in local and global cotton prices, textile players are likely to benefit from improved spinning margins in the short term while expected reduction in global demand (textile exports likely to decline by 15%YoY in FY23) is likely to counterbalance an expected increase in value added segment’s margins. Currency depreciation is an added positive.
Analysts expect Pakistan State Oil (PSO) to post profit after tax of PKR44 billion (EPS: PKR94) for 4QFY22, likely an increase by 290%YoY and 30%QoQ on the back of astronomical inventory gains, subsequently keeping gross margins skywards. On the topline front, company’s revenue is expected to clock in at PKR893 billion, up 154%YoY and 57%QoQ as retail prices increases coupled with risen dispatches (up 36% QoQ) allowed the Company to post its highest ever quarterly topline. PSO has remained in limelight recently due to positive result expectations, rallying 11% since beginning June and outperforming KSE-100 index by 13% during the period, as oil prices alongside refinery margins continued to power through resulting in inventory gains for the sector.
Another factor which contributed to the cause was IMF putting down stringent conditions to the government to take steps to curtail circular debt of power and gas sectors. A bill rationalizing the gas tariffs has been proposed which is waiting the final nod from federal cabinet. Once implemented, PSO’s working capital position will likely improve due to increased collections on LNG sales front. Furthermore, recent crude/finished product sell off may also provide respite on the cash flows due to falling costs of supply (risk of inventory losses in the near term). Therefore, analysts expect the scrip to remain in the limelight in short term due to the said developments.
The total industry sales of vehicles for June 2022 were reported at 36,557 units (up 91%YoY and 29%MoM), consisting of 28,378 passenger cars (up 106%YoY and 24%MoM), 4,832 LCVs (up122%YoY and 38%MoM), and 465 trucks (up 32%YoY and 9%MoM). Total industry sales for FY22 were reported at 344,430 units (up 46%YoY), consisting of 279,243 passenger vehicles (up 55%YoY), 45,068 LCVs (up 49%YoY) and 5,571 trucks (up 51%YoY). The volumes have shown a strong growth in the fiscal year, especially passenger vehicles whose numbers have exceeded the previous high of 217,000 units in FY18. The effect of stimulus provided in FY22 budget has been a key factor, with demand piled up for the local OEMs.
Segment-wise, the 800cc and below segment emerged as the top performer, posting growth of 82%YoY followed by 1000cc segment, growing 53%YoY and 1300cc+ premium segment witnessing growth of 39%YoY. On the flipside, volumes remained flat on MoM basis for the 1,300cc+ segment, growing by 6%MoM, while the 1,000cc/800cc segments posted growths of 30% and 41%MoM respectively. In FY22, the sales data is clearly showing that low price vehicles have grown at a better rate than higher priced ones. Amongst major OEMs, PSMC posted sales of 150,288 units, growing by 71%YoY.
Furthermore, INDU/HCAR posted sales of 74,533 and 39,452 units respectively, up 30% and 35%YoY. On MoM basis, INDU (7%), PSMC (31%) and HCAR (34%) have posted growth during June 2022. On the macro perspective, analysts believe that the surge in volumes depicted in FY22 indicate that the post FY22 budget euphoria has shown great impact on the demand in the industry. Going forward, demand is likely to take a hit in FY23, due to monetary tightening by the SBP and the additional taxes imposed in FY23 Federal Budget.