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Stock Review

Stock review December 2022
Bulls control likely to linger

Bulls finally returned to Pakistan Stock Exchange as the looming threat of a potential default on foreign debt eased off with a couple of friendly countries stepping forward to bail out Pakistan from the crisis situation.

The monthly external trade numbers were also announced this past week ended on August 05, 2022. The trade deficit pleasantly surprised consensus estimates owing to larger than anticipated squeeze on imports.

Consequently, the KSE-100 gained 4.85% to close at 42,096 points, amid significantly better volumes with average volume for the index recorded around 268.61 million shares up 78.9%WoW, as better investment outlook lured the investors back.

On the downside, the monthly CPI inflation numbers for July 2022 were announced where the headline inflation was reported at 24.9% as opposed to consensus estimates of 23.7%.

Major news flows during the week were: 1) GoP mulling to impose more taxes on industries, 2) Proposal being evaluated to revise petroleum prices weekly, 3) GoP rejecting speculations about gas tariff hike, 4) China agreeing to roll over US$2 billion loan, 5) GoP planning to auction 2100MHz spectrum, 6) Cement sales plunging by 48% on construction slowdown, and 7) Ministry agreeing to increase OMC margins.

The top performing sectors were: Refineries, Auto Assembles, Engineering, Cable and Electrical Goods and Chemicals, while the least favorite sectors were: Leasing, Close Ended Funds, Leathers and Tanneries, Tobacco, and Sugar.

Stock-wise, top performers in the KSE-100 were: CHCC, THALL, MLCF, COLG and HCAR, while laggards were: PGLC, NCL, HGFA, FABL and FHAM.

Brokers and Mutual Funds were the largest buyers, accumulating US$3.6 million, while Banks and Individuals were the biggest sellers with a net sell of US$1.9 million.

There will be only three trading sessions in the upcoming week owing to public holidays. The market momentum is likely to remain positive as Pakistan moves closer to IMF disbursing its next tranche of US$1.2 billion.

The currency market is also likely to remain buoyant and PKR may gain further ground against the Greenback as the treat of immediate default has subsided to a great extent after friendly countries came forward to bailout Pakistan from a crisis situation.

Import oriented sectors will remain in the limelight and may end up outperforming the market. Investors are advised to closely track the result announcements and can build positions accordingly.

Local cement dispatches posted negative growth during July 2022, declining 62%MoM and 48YoY. Region-wise North and South witnessed a huge decline in local dispatches. Northern region sales declined by 61%MoM and 44%YoY to 1.61 million tons while dispatches in the South decreased by 52%MoM and 69%YoY to 0.27 million tons. Exports also witnessed a similar fate, declining by 45%MoM and 66%YoY to 0.15 million tons. Low prices of exports coupled with increasing coal prices have made exports unattractive. Richards Bay coal prices contracted slightly by 5.1%MoM and hovered around US$323/ton as compared to FYTD/CYTD average of US$341/US285/ton.

Moreover, China’s approval of new coal-fired power plants to hedge against soaring alternative energy costs and the UK speeding up its permitting process for coal-fired power plants could keep coal prices high in the 2HCY22. Local manufacturers have increased prices by PKR40 to PKR60/bag in July 2022 as they look to pass on the increase in input costs however, we believe, that a further price hike will be difficult.

As cement demand is likely to go down by 6% to 8% in FY23 and capacity expansion by north-based players could result in price wars, hence, limiting the pass-on ability of local players. High coal prices coupled with PKR depreciation and rising fuel costs have kept the cement sector under pressure. Moreover, declining construction demand, monetary tightening, and a fragile macroeconomic condition are likely to keep the sector’s outlook gloomy.

OMC sales slipped to 1.44 million ton for July 2022, down 26% as compared to 1.96 million/1.93 million tons during June 2022 and July 2021. Other than organic demand destruction, majority of the said fall may also be on the back of lesser working days due to Eid and harsh monsoon season during the month. This took total industry volumes to 12.9 million tons in CYTD, up 11% as compared to the same period last year. PSO (760,000 tons), APL (142,000 tons), SHEL (100,000 tons) and GOPL (91,000 tons) delivered throughput levels during the month. This took their total market shares to end the month at 53%/10%/7%/6%, respectively. Company wise, APL emerged the most resilient as off takes remained slightly down, 13% YoY as compared to industry’s 26%YoY fall. GOPL/SHEL took the most hammering as volumes remained lower 40%/30% YoY respectively.

Overall, industry retail volumes (MS & HSD) shrunk noticeably by 32%/27% YoY/MoM respectively. With a second straight monthly fall in the offing, this may induce lower energy imports in the near term, in line with the Government’s plan to keep pressure off the foreign exchange reserves. Moving forward, with overall competitive landscape improving and phasing out of furnace oil, retail fuels are expected to be the mainstay of the sector.

FY23 started off on a weak note with index shedding 3.3% of its value in July 2022. This took the cumulative index return during CY22 to 10.6%. July 2022 was also a difficult year for PKR as the local currency shed 17% of its value against US$, the worst monthly performance since 1972. As a result, the US$ adjusted return clocked in 20%MoM. The average daily trading volume decreased to 223 million shares during the month as opposed to 298 million during the last month, down 25%MoM. The participation was seen to have remained concentrated in the side scrips with average volumes in KSE-100 index averaging 73.5 million throughout the month. The major underperforming sectors during the month were Refineries (14.4%MoM), Auto Assemblers (11.0%MoM) and Auto Parts Manufacturers (9.8%MoM) while the sectors that were able to outperform the benchmark index were Vanaspati (9.0%MoM), Leasing companies (4.1%MoM) and Technology (3.8%MoM). Market is expected to remain jittery in the short term with GoP looking to increase taxes on manufacturing concerns further on top of what had been approved in Federal Budget 2022-23. The market is unlikely to receive this news favorably as the corporate profitability will erode further which will squeeze the valuations. Investors are advised to stay cash rich.

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