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Stock Review

Stock review December 2022
Robust recovery as political noise eases

As the political noise in the country eased off considerably, the benchmark index of Pakistan Stock Exchange (PSX) posted a robust uptick. The index moved up by 1,237 points during the week ended on November 11, 2022 to close at 43,093 points, up 2.95%WoW.

The uptick in index was witnessed amid healthy participation with the weekly average daily traded
volumes also jumping by 8.8%WoW to settle around 306.4 million shares, as opposed to 281.5 million shares witnessed last week. Stability also returned in the foreign exchange market during the week with PKR holding its ground against US$ at 221.6, appreciating by 20bpsWoW.

The newfound stability in PKR came amid a hefty depletion in country’s official foreign exchange reserves which declined by US$956 million as the country made repayments on its international debt.

Major news flows during the week were: 1) SBP taking various steps to contain foreign exchange outflow, 2) Cabinet approving US$900 million escrow account for Reko Diq in March next year, 3) Bank Alfalah expressing plan to buy back 200 million shares, 4) DFML to start assembling LCVs, 5) first quarter fiscal deficit soaring to one percent of GDP from 0.7% of GDP, 6) Cement, CNG, Fertilizer sectors to face gas shortage in winter and 7) FBR Chairman ruling out any new tax amnesty.

The top performing sectors were: Leasing, Vanaspati and Allied, E&Ps, Refineries and Technology, while the least favorite sectors were: Miscellaneous, Sugar, Textiles, Leather and Tanneries (-0.8%WoW) and Woollen.

Stock-wise, top performers in the KSE-100 Index were PGLC, TRG, FABL, PPL and BAFL, while laggards were: PSEL, SHFA, SCBPL, ILP and FFBL. To five volume leaders for the week were WTL, HASCOL, CNERGY, DFML and FFL.

Flow-wise, Mutual Funds and Banks were the largest buyers in the market during the week, with net buys of US$3.6 million and US$3.0 million respectively. While Foreigners and Insurance Companies were major sellers, with the cumulative net sells of US$4.7 million and US$6.0 million respectively. The foreign outflow was largely concentrated in sectors namely Banks (US$5.31 million) and Technology (US$1.05 million).

After a relatively stable week for the currency, PKR may yet again come under pressure as foreign currency reserves posted a spectacular decline during the week, while the inward remittances also slowed down significantly, falling by 9%YoY during October 2022. On the political front, the things may start heating up once again as country’s largest political party starts its long march once again. Both these factors may yet again prove to be market dampeners and the resurgence that the market showed during this past week may fizzle out once again and the index may see a renewed selling pressure. Investors are advised to maintain trading positions only and refrain from building and holding long positions in the market.

According to a report by Pakistan’s leading brokerage house, AKD Securities, the Exploration & Production (E&P) sector has reported phenomenal earnings for 1QFY23. The sector’s profit after tax was reported at PKR100.8 billion—the highest in its history. The sector’s earnings grew 55%YoY, with favorable macros driving earnings growth this quarter. Net sales were reported at PKR226.6 billion for the quarter, higher by 13%QoQ and 54%YoY. This despite a drop in Oil/Gas production, but a weak PKR fueled topline growth. Exploration expenses in the final quarter of last year were at PKR26.6 billion, with the giant’s share dropping in PPL’s lap, with the Company reporting PKR11 billion in dry well costs. In 1QFY23, the exploration expenses of the sector were stated at PKR9.2 billion, lower by 65%QoQ, due to the absence of any substantial dry wells. On a company wise basis, the greatest sequential growth in profitability was posted by PPL, with net profit growing rising to PKR26.3 billion for the quarter. Trade Debts of OGDC and PPL were reported at PKR491 billion and PKR401 billion at the end of the quarter, respectively, increasing by PKR34 billion and PKR35 billion from the earlier quarter. The E&P sector provides investors with an exchange rate hedge, with the prospects of the sector having been muddied by mounting trade debts for the larger companies. Hence, within the sector, analysts like MARI and POL due to the relatively low exposure to the circular debt menace.

State Bank of Pakistan (SBP) has set a quota on imports for car assemblers, assigning 50%/60%/70% of the average import during the March-June period for July/August/September, respectively. The 70% quota has continued for the time being, although OEMs are pushing for the government to increase the quota. Consequently, PSMC has had to pay PKR2.2 billion in port charges as imported kits could not be cleared. The local auto part manufacturers have recently stated their fears of going bankrupt given the lackluster pricing from OEMs. Unless the margins incorporated in the pricings are unfrozen, production lines for these part manufacturers may come to a halt, adversely affecting the localized supply for Assemblers. On the flipside, in case the pricings are revised, already depressed margins for OEMs may be further pressured due to increasing Cost of Sales. On a QoQ basis, sales of passenger cars and LCVs have dropped by 53% in 1QFY23 as compared to the previous quarter. INDU had run its production plant for 9 days in July, with two weeks off in August and September each. The same negative impact of delayed deliveries is experienced by other OEMs, with PSMC shutting down its plant for 25 days between August and October along with closure of bookings. HCAR showed better inventory management, not having to shut down plants in Q1, although the company has closed down its plant for 12 days in October. In August, auto assemblers have hiked prices by 15% at an average from previous revision. This is on top of the 15% hikes experienced in the last quarter. The reduction in demand for auto-financing can be expected to impact INDU lesser, as it remained protected compared to HCAR and PSMC, with merely 20% of sales through auto-financing previously, lesser compared to 35-45% of the other two. As disposable incomes remain stagnant and auto-financing getting out of reach, coupled with exuberant hikes in prices in the past 5 months, analysts expect demand for automobiles to decline substantially in FY23.

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