- Rallies 4% despite geopolitical tensions, easing concerns; Support from budget, foreign selling persists in consumer staples
According to Intermarket Securities, Pakistan Stock Exchange (PSX) weathered another volatile month, this time due to the Iran-Israel conflict, before rallying hard to post 4%MoM returns. Daily trading activity was buoyant at US$142 million (ready + futures). Foreign corporates remained sellers, primarily in the consumer staples sector, while local individuals once again showed resilience and added to positions on dips. Other than easing geopolitical concerns, the market was supported by the passage of a market-friendly budget. This should lay grounds for improved price performance in the second half of the year. Equities are trading at a 15% discount to their long-term mean – and the top-down environment is supportive.
The market had to contend with the Iran-Israel war in June, just a few weeks after the Pakistan-India conflict. Equities were rattled at spiking oil prices, given crude and petroleum products comprise 30% of Pakistan’s import bill (4% of GDP). The market was also concerned at the possible blockade of the Hormuz strait, with Pakistan filling nearly all its oil imports through this route.
Ultimately, Pakistan appeared to have navigated recent geopolitical crises fairly well, culminating in a meeting between the army chief and President Trump in the White House. Details are scant but it is possible that there is follow-up collaboration on mining and minerals, together with a favorable trade deal. The feel-good factor has been confirmed by Pakistan nominating President Trump for the Nobel peace prize.
With the Monetary Policy Committee meeting scheduled at the height of tensions, the State Bank of Pakistan (SBP) kept the policy rate on hold at 11.0%. The SBP may also have been influenced by the current account slipping back into a deficit despite strong remittances, and some delays in new commercial borrowing (SBP forex reserves have temporarily slipped to a 12-month low of US$9.1 billion). Now that the base effect is fading and inflation is on the way up (3.5% in May vs. 0.3% in April), it is possible that the SBP maintains interest rates over the next few MPC meetings as well.
The FY26 Budget spared the overtaxed formal economy by marginally reducing tax rates for the salaried class and the corporate sector. It also kept the taxation structure unchanged for equities while raising tax rates for debt securities e.g. on dividends from mutual funds earning from debt, and WHT on interest on debt. The equity market cheered this. However, while efforts have been made to further place restrictions on non-filers, the Budget seems to have fallen short of a meaningful push to broaden the tax net. The privatization of the national airline PIAHCLA will be a key litmus test in this respect, and the recent interest shown by several credible bidders such as LUCK, HUBC and FFC is encouraging.
Earnings for the E&P sector are expected to drop by 23%YoY and 25%QoQ to PKR69 billion in 4QFY25, largely due to a notable decline in hydrocarbon production amid pipeline bottlenecks and weaker international oil prices (Brent down 21%YoY and 12%QoQ). Within its coverage universe, oil and gas output is estimated to fall to 45,000bpd and 1,970mmcfd, respectively.
Banking sector earnings may flatten out as margin compression continues. That said, dividends should remain intact owing to a strong capital base. Pakistan Banks have rallied 15% month-to-date driven in part by broad based rerating and high dividend yields. The sector trades at a CY25f P/B of 1.5x and P/E of 6.4x.
Earnings for Cement universe are expected to rise 18%QoQ, driven by a 4% increase in both retention prices and volumes, while costs have remained stable amid weak coal prices. Additionally, interest rate cuts during the quarter are expected to lower finance costs, and one-offs such as PIOC’s elevated raw material costs last quarter are expected to normalize.
A recovery is expected in Fertilizer sector earnings, underpinned by a notable rebound in fertilizer offtakes (Urea up 14QoQ and 3%YoY; DAP up 99%QoQ, 16%YoY). FFC is expected to benefit from elevated international DAP primary margins during the quarter. Meanwhile, EFERT’s earnings should exhibit strong growth, driven by gains in Urea market share from a low base.
OMC sector profitability is projected to improve in 4QFY25, supported by a recovery in volumetric sales – up 22%QoQ and 4%YoY to 2.3 million tons – and estimated inventory gains of PKR3.8 billion. The inventory gains stem from sharp fluctuations in international oil prices during the quarter, driven largely by heightened geopolitical tensions following the Israel-Iran conflict.
HUBC earnings are expected to rise 9%QoQ to PKR9.24/share, supported by lower finance costs on the back of reduced borrowings and easing interest rates, along with a 1% depreciation in the USD-PKR exchange rate. The brokerage house anticipates a dividend payout of PKR5/share.
Cumulative earnings for steel sector are expected to remain negative on a sequential basis, primarily due to ASTL. However, lower finance costs during the quarter should help reduce the quantum of losses. Demand for flat steel is expected to remain stable, though weakness in CRC-HRC spreads is likely to weigh on margins.
Volumes in Autos universe rose 60%YoY and 10% QoQ, led by INDU and HCAR with YoY growth of 67% and 68%, respectively, while SAZEW recorded a 27% increase.
MTL earnings are expected to remain flat this quarter. While prices have stayed stable, volumes have declined slightly by 8%QoQ. However, lower finance costs during the quarter are expected to offset the impact of weaker volumes.
Pharma companies are expected to report another quarter of strong profits driven by double digit revenue growth and record gross margins up to 60%. This is led by a largely stable PKR and consistent price hikes. API costs are also coming off in line with global commodity prices and should begin to translate gradually.
IT exports remained flat during the quarter. However, SYS is expected to post a solid result, supported by higher other income driven by a 1.3%QoQ depreciation of the PKR against the US$. Meanwhile, smartphone volumes rose 7%QoQ but remained below the levels seen in the same period last year.