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Stock review December 2022

Market likely to stay range-bound

Foreign Exchange Reserves and Cement Sales: A Glimpse into Pakistan’s Economic Landscape

Economic uncertainty regarding Pakistan’s ability to make good on its debt payments kept the market under pressure during the week ended December 09, 2022. The benchmark index closed at 41,698 points, posting a decline of 1.07%WoW.

State Bank of Pakistan (SBP) confirmed the payment of US$1.08 billion of International Sukuk. This brought down foreign exchange reserves held by the SBP to US$6.7 billion on December 02, 2022.

Saudi Arabia provided a much-needed breathing space to Pakistan by announcing the rollover of US$3 billion which would help meet external sector challenges and achieve economic growth.

Participation in the market improved, though negligibly, with average traded volumes increasing to 179.7 million shares from 161.8 million shares in the earlier week.

Other major news flows during the week included: 1) ECNEC okayed RKR333.6 billion for flood-hit projects, 2) GoP announced to borrow RKR5.52 trillion domestic debt over the next three months, 3) GoP debt rose to RKR50.152 trillion, 4) revised flood damages estimates estimated at US$46 billion, 5) tractor sales anticipated to decline 67 percent, 6) auto financing dropped for the fourth consecutive month, 7) Cement dispatches Declined by 17%YoY in November 20222 and 8) Cotton arrivals plunged 40%.

Top performing sectors were: Miscellaneous, Closed end mutual funds, and Vanaspati and Allied Industries, while the least favorite sectors were: Pharmaceuticals, Jute and Leasing.

Stock-wise, top performers were: PSEL, PGLC, MUREB, ILP, and BAHL, while laggards included: GLAXO, PIOC, CHCC, PSMC, and SEARL.

Individuals were major buyers with net buy of US$8.82 million, followed by Insurance companies with net buy of US$1.26 million. As against this, foreign investors were major sellers, with a net sell of US$6.26 million. Mutual funds continued to be a seller, with a net sell of US$3.71 million.

The market is expected to remain range-bound in the near future, clouded by liquidity concerns of the country, with foreign exchange reserves held by SBP plunging to US$6.7 billion — a less than one month import cover.

Some respite may come in the form of Saudi Arabia’s expected US$4.2 billion (US$3 billion in deposits and US$1.2 billion in deferred oil facilities), alleviating the pressures off the country’s FX reserves to some extent.

Political uncertainty and any developments regarding the 9th review by the IMF would remain in the limelight.

Circular debt of the power sector hovered around PKR2.5 trillion according to recent news flow. This shows an increase of PKR200 billion after the first 4 months of the current fiscal year as compared to PKR2.25 trillion recorded at end June 2022. Recovery rate on billed amount for the CPPA-G system dropped to 90.5% in FY22, considerably lower as compared to the 97.3% recorded in FY21. As tariffs have been drastically increased in FY23, recovery rates are expected to drop even lower as the DISCOs scramble to make end-consumers pay up the hiked bills. The recently announced Kissan package has further reduced the rate charged to agricultural tube-wells, which will lead to an increase in circular debt. Moreover, the increment in tariffs after the reversal of FCA deferral will cause losses in recovery for DISCOs; hence the expected reduction in Circular Debt after the reversal will be less than forecasts. HUBC by far has the largest trade receivables and payables in IPPs, with PKR82.7 billion and PKR45.8 billion respectively. As against this, KAPCO has PKR44.4 billion in receivables and PkR12.3 billion in payables. Going forward, analysts expect dividend payout capacity of IPPs to remain compromised as the quality of earnings is severely affected, unless the GoP comes up with another debt payout program, which seems a far cry given the various other crises the country is facing currently.

Lately, Oil prices came under pressure, Brent prices having slipped from a recent high of US$98.57/bbl reached at the start of November 2022—indicating a 15.7% retracement since then. Going forward into 2023, analysts expect coal prices to recover back to levels preceding the Russia-Ukraine war in the medium term, as the winter season recedes and power generation based on renewable energy takes the forefront, which along with the expected global economic slowdown will reduce the demand for coal. International scrap prices have shown major weakness since peaks in mid-April’22, declining by 40% since then, to currently hovering around US$350/ton as compared to FYTD/CYTD average of US$373/US$447/ton. Cotton prices have continued to remain elevated in the global market with cotton trading in a narrow band of USc99/lb to Usc101.3/lb over the last few months. However, there are questions whether there will be enough demand to sustain prices at higher levels. A slowdown in the Chinese economy has led to fears of lower demand for oil in the near term, which has recently led to weakness in crude oil prices.

Cement sales in the Northern region to the domestic market were reported at 3.16 million tons in the month, posting a decline of 8.8%YoY while remaining flat on a MoM basis. On the flipside, local cement sales in the South posted a gain of 6.6%YoY to 0.70 million tons in November 2022. On a sequential basis, South sales were down by 6.7%MoM. Exports from the North posted an increase of 1.5%YoY in 5MFY23 to 0.5 million tons, while Southern region exports declined by 56.5% in 5MFY23 to 1.0 million tons as compared to 2.3 million tons for the same period last year. Local construction sector was expected to remain under pressure even before the floods hit parts of the country. With that in mind, the cement dispatches have recovered from the impact of the floods as major rehabilitation drives uplifted cement dispatches in September and October 2022 at an average of 4.3 million tons, as compared to 2.7 million tons averaged in July-August 2022). Prices of Richards Bay coal have contracted significantly in the mid of October 2022 with increase in the last of the month, currently hovering at around US$248/ton as compared to FYTD/CYTD average of US$292/US$280/ton. High coal prices coupled with PKR depreciation and rising fuel costs have kept the cement sector under pressure. The surprise hike of 100bps from the SBP has put further burden on the sector, as several companies increased leveraging in order to fund
capacity expansions.

Dive deep into Pakistan’s economic scenarios with a spotlight on the declining foreign exchange reserves and the dynamics of the cement sales market. Uncover how global trends and local factors influence the country’s financial panorama as of December 2022

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