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Stock Review

Stock review December 2022
Index recovers and likely to come round

With the political tumult settling, market bounced back and regained the points lost in the previous week. Benchmark index closed the week ended on Friday (February 23) at 62,816 points, up 4.9%WoW. The market had lost 3,000 points a week ago amidst political uncertainty.

Overall, week started with the positivity, however exacerbated after Bilawal Bhutto’s announcement of new prime minister and president joint candidates. Similarly, provincial assemblies also began taking shape, with Punjab MPAs taking oaths and the announcement of the Sindh chief minister name.

Additionally, healthy corporate earnings and developments on the economic front supported the market’s bullish momentum, with current account deficit (CAD) for January 2024 at US$269 million.

Furthermore, FBR’s tax collection rose by 30%YoY from July 2023 to mid-February 2024, with total collection reaching PKR5.15 trillion during the period.

Notification of deregulation of non-essential medications led to a rally in the pharmaceutical sector, posting the highest gains during the week.

However, in the latest T-Bills auction, yields for 3-month papers rose by 126bps as participants foresee a status quo in the next monetary policy announcement scheduled in March 2024.

Market participation remained subdued, with the daily traded volume averaging at 298 million shares as compared to 350 million shares in the earlier week, down 15%WoW.

Other major news flows during the week included: 1) July-January 2024 power sector circular debt soars to PRR2.635 trillion, 2) Tax proposals for next federal budget sought, 3) IT exports soar by 39% in January amid currency calm and regulatory support and 4) July-January FDI inflow down 21%YoY to US$689.5 million.

Pharmaceutical, Woollen, and Technology were amongst the top performers, while Property, Synthetic & Rayon, and Vanaspati were amongst the worst performers.

Flow wise, major net selling was recorded by individuals with a net sell of US$6.2 million, while Mutual Funds absorbed most of the selling with a net buy of US$3.3 million.

Top performing scrips of the week were: YOUW, SEARL, OGDC, PSO, and ABOT, while top laggards included: PSEL, GADT, JVDC, NESTLE, FATIMA.

Going forward, market is expected to remain heavily influenced by political developments in the short term, with progress towards proper government formation likely to push the index movement upward.

However, in the medium term, market performance will likely hinge on signals from the new government’s dealings with IMF for second SBA review and the next EFF programme.

Given the market’s sensitivity to politics, investors are advised to remain cautious and maintain their investments in financially strong companies, with exposure skewed towards high dividend yielding stocks.

Reportedly, Urea sales during January 2024 was reported at 613,000 tonnes, a decline of 2.4%MoM as the Rabi sowing season draws to close. Annually, urea offtakes decreased by 2.9%, attributed to a high base in the same period last year, when the government-led imports flooded the market, ultimately accounting for 22% market share.

FFC, the largest manufacturer, witnessed a 2.2%MoM/ 8.5%YoY increase in offtakes to 234,000 tonnes, whereas EFERT’s monthly offtakes remained flat at 210.4,000 tonnes.

DAP sales continued their downward drift, with total offtakes amounting to 66,800 tonnes, down 30%YoY, due to overall deterred demand amid prevalent higher prices.

FFBL has responded the gas price hike by increasing Urea prices to PKR5,489/bag from PKR4,072 in December 2023. In contrast, EFERT and FFC currently maintain urea prices at PKR3,767/bag.

Although EFERT and FFC have not yet raised Urea prices, analysts expect both companies will adjust prices within the range of PKR1,250 to PKR1,300/bag. With only EFERT’s production cost only impacted by 60%, increase to the said levels would be incrementally beneficial to the company.

Engro Fertilizers (EFERT) conducted its 2023 corporate briefing session where management discussed financial performance and future outlook.

As per the management, removing gas subsidies by increasing gas tariffs is a step in the right direction. However, gas tariffs should be uniform across the industry, as tariffs for companies on Mari still remain unchanged. Failure to maintain uniform gas prices will result in market distortions.

After this recent hike, 60% of the fertilizer industry will be operating at a higher gas rate of PKR1,597/mmbtu, while the remaining 40% will continue to operate at the lower rate of PKR580/mmtbu. This disparity in pricing would potentially make ENGRO Urea more expensive than FFC and FATIMA.

The recent hike in gas prices for EFERT is effective from March 2024. Therefore, the company still has days left to announce its new Urea price.

According to the management, EFERT expects a turnaround of its Enven plant in April 2024, which would result in the plant being shut down for approximately two months. Capex for the turnaround is estimated to be up to US$45 million. However, a significant portion of the Capex has already been incurred.

EFERT is engaged in a joint project with Mari and other fertiliser companies to ensure gas reserves are preserved. 60% work on phase one has been done and expected to be complete by the end of this year. Work on second phase has also started with the ordering of compressors and likely to be complete by the end of 2025.

The 4Q2023 earnings were higher than expectations due to better margins on specialty products.

Going forward, as per the management, the payout ratio is expected to remain close to 100%.

EFERT Urea production clocked in at 2.3 million tons in 2023 as compared to 1.9 million tons in 2022, up by 21%YoY.

EFERT’s market share in Urea improved to 35% in 2023, from 29% in 2022 due to increased production capacity by 170,000 tons.

Industry DAP sales remained at 1.5 million tons in 2023, with EFERT reporting a market share of 18%.

Power generation for January 2024 was reported at 8,314GWh, up 9.1%MoM, while down 2.3%YoY compared to 8,515GWh during the same period last year.

Hydel generation remained down during the month, with output clocking in at 924GwH (down 50%MoM), with share in total generation reported at 11.1% as compared to 36.5% and 24.4% in November 2023 and December 2023, respectively.

Average cost of generation experienced a sharp increase during January 2024, rising by 33%MoM, to PKR15.50/KWh from PKR11.70/KWh in December 2023.

The significant rise is primarily due to the hefty increases in generation from higher costing thermal plants (RLNG, Coal and RFO) and the concurrent decrease from cheaper fuel sources.

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