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Stock review December 2022

Political, economic fronts may keep market in check – stock update

The week ended on February 03, 2023 remained volatile due to the ongoing talks with IMF to ensure its prerequisite conditions are implemented which includes high circular debt which is hovering around PKR2.5 trillion for power sector and PKR1.6 trillion for Gas sector while restricting subsidies only to vulnerable domestic consumers.

Furthermore the lender has also demanded political consensus given that opposition might create hurdles in the way of implementing tough economic decisions.

The local currency has dropped significantly after it was left to market forces, depreciating to PKR276/USD.

Participation in the market declined, with daily volumes averaging at 130.78 million shares during the week, as compared to 217.20 million shares in the prior week depicting a loss of 39.8%WoW.

Other major news flows during the week included: 1) US Fed raising rates a quarter point, 2) SBP reserves plunging to US$3.07 billion, 3) trade deficit for first seven months of FY23 shrinking 31.97% to US$19.632YoY, 4) IMF identifying PKR2 trillion hole in budget estimates, 5) CPI Inflation for January 2023 rising to 27.6% and 6) LPG prices hitting historic high of PKR300/kg.

The top performing sectors were: Glass and Ceramics, Pharmaceuticals, and Woolen, while the least favorite sectors were: Miscellaneous, Textile Weaving, and Tobacco.

Stock-wise, top performers were: GATM, ABOT, GHGL, COLG, and KTML, while laggards were: PSEL, GADT, SRVI, PPL, and PSMC.

Flow wise, individuals were the major buyers with net buy of US$0.32 million, followed by Banks/DFI with net buy of US$0.13 million), while foreign investors were major sellers, with a net sell of US$0.75 million.

The market is expected to remain under pressure in the near future mainly due to the concerns stemming on political and economic fronts, expected to keep the market movements in check.

Any news flow regarding foreign inflows, whether from the IMF or other bilateral and multilateral sources, would support the market trajectory. However, the government would have to take difficult decisions to get the IMF on board, which includes additional revenue collection of PKR600 billion and hikes in gas and electricity tariffs. Analysts continue to advise a cautious approach while building positions in the market.

The benchmark index, closed the month up by a meager 252.61 points or 0.62%MoM, it had dipped to as low as 38,342.21 level earlier in the month. Pressure was largely driven by worries on the country’s external front and the Monetary Policy action, which was announced on January 23, 2022. IMF remained in the limelight during the month, with the lender’s nod expected to unlock flows from other sources. Pakistan is in dire need of foreign exchange as reserves held by State Bank of Pakistan dropped to US$3.7 billion as of January 20, 2023. Out of the major sectors, the E&P sector was at the forefront during the month, with returning 7.4%. The sector’s gains were driven by OGDC and PPL, which returned 10% and 14%, respectively over the course of the month. Analysts advise clients to take positions in those stocks that offer healthy dividend yields or have dollarized revenues, such as the Technology and E&P sectors.

The Board of Directors of Pakistan Oilfields Limited (POL) is scheduled to meet in mid-Feb to approve 1HFY23 results where. AKD Securities, anticipates the company to post earnings of PKR15.12 billion (EPS: PKR53.3) for the period, depicting a growth of 38%YoY. The growth in earnings is largely price driven, mainly due to increasing crude prices, up by 28%YoY along with 1HFY22 average of 31%YoY depreciation in PKR value. Oil production on the other hand has fallen by 11%YoY during 1HFY23 amid significant declines in blocks including Tal (↓9%YoY), Adhi (↓16%YoY) and Pindori (↓32%YoY). For 2QFY23 alone, the profitability is expected to settle at PKR6.78 billion (EPS: PKR24.0), down by 19%QoQ as compared to PKR8.3 billion (EPS: PKR29.4) in the previous quarter. The decline in profitability is production driven, as production in the Tal Block remained hampered (Makori East) due to maintenance works at SNGPL pipeline during the quarter. Furthermore, the brokerage house expects the company to incur exploration expenses of PKR384 million for the quarter. To recall, the company posted PKR4.35 billion in dry well costs during the 1QFY23, on account of DGK-1 (DG Khan Block), taking total exploration expenses to PKR4.53 billion for the period. Finally, given its immunity from circular debt, the company is expected to announce half year cash dividend of PKR45/share.

Power generation was reported at 8,417GWh for the month of December 2022, remaining flat MoM while decreasing by 4.5%YoY as compared to 8,815GWh generated last year. Circular debt for the power sector has crossed PKR2.5 trillion from PKR2.25 trillion in June 2022. The significant increases in power generation have been seen from Coal fired power plants, with generation up 56%MoM. Furthermore, Nuclear plants have sustained their levels of generation, while the natural course of hydrology in winters has led to a 31% MoM decrease in generation from the Hydel sources. The average cost of generation for the month has risen by 18% to PKR7.0/kWh owing to the decrease in generation from Hydel plants. In terms of the generation mix for 1HFY23, the largest contributors were Hydel (32%), Nuclear (19%), RLNG (14%), Coal (14%) and Gas (11%). HUBC has seen significant decline in operations, cumulating to 94% less power purchased compared to December 2021 while down 29%MoM. The CPHGC remains barely used with its low position in the Merit Order as the plant relies solely on the expensive imported coal. Meanwhile, the base plant remains non-operational for the last 3 months, although that is bound to increase profitability for the inefficient plant.

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