Index falls as political uncertainty persists
The week ended on May 12, 2023 was mired with political uncertainty, at a time Pakistan needs additional financing for the successful completion of long standing 9th IMF review. The benchmark index closed the week at 41,488 points, posting 1.79%WoW decline. Participation also declined to average daily volumes of 133.52 million shares during the week, from 244.47 million shares a week ago, depicting 45.4%WoW fall.
Pakistan has assured the IMF, it will not implement cross fuel subsidy program. Foreign exchange reserves held by State Bank of Pakistan (SBP) eroded by US$74 million to US$4.38 billion as May 05, 2023, with the import cover still remaining below one month.
Other major news flows during the week included: 1) Fiscal deficit for Jul-Mar reaches 3.7% of GDP, 2) GoP raises PKR62.9 billion PIBs auction, 3) Jul-Apr remittances decline 13% to US$22.74 billion, 4) PKR plunges 5.38 against dollar to fresh low and 5) Discos seek PKR1.5 per unit QTA for 3QFY23.
The top performing sectors were: Close- End Mutual fund, Textile composite, and Textile Weaving, while the least favorite sectors were: Vanaspati & Allied Industries, Oil & Gas exploration companies, and Modarabas.
Top performing scrips were: GLAXO, SCBPL, MUREB, PIOC, and ATLH, while laggards included: PSEL, OGDC, PPL, SRVI, and HCAR.
Flow wise, individuals were the major buyers with net buy of US$1.07 million, followed by Broker Propriety trading (net buy of US$0.85 million), while foreign investors were major sellers during the week, with a net sell of US$1.14 million.
Pakistan is in very a precarious situation and further delays can’t be tolerated. World Bank along with AIIB has linked approval of US$700 million loan with the completion of pending IMF review. Political stability will dictate the market performance in the near term.
Ministry has clarified that arrangements have been made for the rollover/ repayment of US$3.7 billion debt which are due by June 30, 2023 FY23.
Analysts continue to advocate companies that have dollar-denominated revenue streams, while minimal dollar-denominated cost structures, which hedges them against any currency risk, top of the list includes Technology and E&P sectors.
According to a report by Taurus Securities, Pakistan Automobile sector recorded a 52%MoM decrease in sales during April 2023 with Passenger Car sales reported at 4,443 units, sales were down 80%YoY in April 2023.
The brokerage houses believes, the decrease in YoY sales volume is attributable to: 1) fewer production days; 2) halt in booking by the assemblers due to volatile exchange rate and insufficient inventory levels of CKD kits; 3) inflationary environment in the country which has spiked car prices; and 4) overall economic slowdown.
Auto financing as of March 2022 stands at PKR 367 billion, down 2.2%MoM mainly on account of high interest rates discouraging new financing while the share of old financing also diluted. The brokerage house expects more dilution given that both car prices and interest rates remain at a higher level and are expected to increase further.
MoM volumes for listed players, INDU increased by 6%, while, volumes for HCAR and PSMC decreased by 74% and 75% MoM, respectively. During April 2023, Hyundai sales decreased by 13%.
Current macro-economic head-winds, monetary tightening, Rupee devaluation, inflationary environment, falling disposable incomes and spillover effect from the floods are the main drivers which are expected to adversely affect demand and industry profitability, going forward.
Decrease in regulatory duties on imported vehicles above 1,800cc, is expected to further taper down the demand for local high-end automobiles along with import restriction on CKD kits which is posing a major supply chain risk for the assemblers with recurring non-production days.
Sector outlook remains under-pressure with possible drop in volumes specially for new players operating in the high-end segment alongside a decline in auto financing on account of high interest rates.
Topline Securities hosted Pakistan Cement Conference 2023 from May 8-10 where major cement players Maple Leaf Cement (MLCF), Lucky Cement (LUCK), DG Khan Cement (DGKC), Cherat Cement (CHCC), Kohat Cement (KOHC) and Pioneer Cement (PIOC) participated in the conference. Managements unanimously downplayed fears of a price war, stating that due to economic conditions and slow demand, it would be unwise to start a price war.
The brokerage house believes that major price wars have only commenced when capacity has increased by around 50% in a span of one to two years. Major price wars in the past started in 1995-1996, 2006 and 2017 when large capacities came online. The sector has been able to manage smaller increases in capacity in the past without any major pricing indiscipline.
Management of Cement companies expect demand in FY24 to remain stable after a large decline in FY23 and expect margins to remain strong.
Maple Leaf Cement Management stated that the sector is trading at 20% of replacement value and that has led them to buy a stake in Pioneer Cement. The sector is currently trading at an average EV/ton of US$22/ton and is trading significantly below replacement value and remains cheap.
The sector has managed the increase in international coal prices by moving towards Afghan and local coal. Some companies pointed out that they have opened L/Cs for coal from South Africa and this would reduce the average cost of coal.
Price of Coal from Richards bay has declined to the lowest level since June 2021 and as L/C opening restrictions reduce and the supply of South African coal improved, the cost of Afghan Coal is expected to decline.