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Stock Review

Stock review December 2022
Index falls, short term range bound likely

Market remained lackluster during the week ended on June 16, 2023, with KSE-100 index losing 603 points during the week to close at 41,301 points, posting a decline of 1.4%WoW. Market participation also registered a decline of 25%WoW, averaging at 161.7 million shares as compared to an average of 215.7 million shares a week ago. Despite the negative impact of the budget, including the imposition of a 10% super tax, windfall tax, and tax on bonus share, the market showed some resilience.

Meanwhile, in the last Monetary Policy Committee (MPC) meeting last week, State Bank of Pakistan maintained the policy rate at 21%.

As per news flow, GoP has paid US$1.0 billion as debt repayment during the week. The SBP in its post MPS briefing apprised that only US$800 million of repayment was due for the remaining month. The decline in reserves resulting from this repayment is expected to be visible in the foreign exchange numbers to be released. As of June 9th, foreign exchange reserves held by SBP were reported at US$4.02 billion, which are anticipated to drop below the US$3 billion mark due to the rumored debt repayment.

On the currency front, PKR lost 0.09%WoW to close at PKR287.2/US$.

Other major news flows during the week included: 1) LSM took a nosedive of 21.07% in April, 2) US$7 billion Chinese and Saudi deposits and PKR402 billion paid as cost of rollovers, 3) July-May remittances plunged 13% to US$24.83 billion, 4) Car sales took a nosedive of 80% in May, 5) Tax expenditures constitute 36.43% of FBR tax collection, 6) IMF came down hard on Pakistan’s budget proposals.

Sector-wise, Leasing Companies, Chemical, and Textile Weaving were amongst the top performers, while Transport, Modarabas, and Textile Spinning were amongst the worst performers.

Flow wise, major net selling was recorded by Mutual funds with a net sell of US$1.97 million. Individuals absorbed most of the selling with a net buy of US$4.40 million.

Top performing scrips during the week were: PGLC, SHEL, COLG, MTL, and BNWM, while top laggards included SML, KEL, HINOON, PSMC, and FABL.

Market is expected to remain range bound in the short term, primarily due to the lack of clarity on the IMF front as the current IMF program is nearing expiration with less than half a month remaining.

Additionally, political instability will also contribute to investors’ uneasiness and impact the market confidence. It is advisable for investors to remain cautious while building positions until stability improves.

Analysts continue to advocate stocks with dollar denominated revenue streams i.e. E&P and Technology sector. Additionally, considering companies with healthy forward dividend yields can be a strategy to explore.

Impact of budget on listed companies

In general, the FY24 Budget carries negatives for corporate profitability, and by extension the KSE-100. While the continuation of the super tax does not come as a surprise, the introduction of a windfall tax on inventory/exchange gains can lead to earnings estimates being missed. This is balanced to some extent by ultra-cheap valuations. However, it is difficult to see meaningful rerating, if at all, without the comfort of an IMF program.

From an overall perspective, Budget for FY24 has largely negative connotations for the broader market as well as the different sectors (super tax, tax on bonus). That said, budget is positive for Cements where for incentivizing construction activity, tax liability reduction has been provided by 10% or PKR5 million/ PKR1 million (whichever is lower) for builders/ individuals engaged in construction of houses, applicable for three years.

Instead of incentivizing domestic capital market as a medium through which future capital raising can be done, successive governments have moved in the opposite direction with the incumbent government introducing a 10% tax on bonus shares for filers and 20% for non-filers.

Tax on cash withdrawals (albeit for non-filers) has been re-introduced which is clearly regressive from a documentation stand point – not the way to go about if one is concerned about documenting black economy.

Budget is also positive for Glass & Ceramics (Increased Regulatory Duty to 30% from 15% on imported glass and related products) and Autos in theory at least (withdrawal of cap of fixed duties/ taxes on old Asian make vehicles above 1300cc).

Budget is mixed for OMCs (introduction of bonded storage bulk facility is theoretically positive; windfall tax is negative).

Budget is Neutral for Fertilizers, Power and Tech (continuation of concessionary fixed rate of 0.25%).

Budget has negative connotations for Banks (windfall tax) and Textiles (sales tax on POS retailers enhanced to 15% from previous 12%).

Windfall tax on extraordinary income will hurt Banks and Commodity trading businesses: The government has introduced additional tax (up to 50%) on income arising from extraordinary gains resulting from exogenous factors i.e. international price fluctuations, commodity market changes or currency fluctuation.

The scope of this tax will be the previous 5 years in any tax year as the Finance Bill uses the words ‘preceding 5 years tax from tax year 2023 and onwards’ for this section.

As such, extraordinary FX income generated by Banks in CY22 is likely to become a part of this where analysts expect heavy taxation within the banking sector as a consequence.

Also, FX and inventory gains particularly for Commodity trading businesses (OMCs, Foods and Steel etc.) will be taxed heavily as a consequence of this provision.

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