Elixir Securities Limited – Pakistan Equity Market: Weekly Review

Karachi, December 15, 2017 (PPI-OT): Political Deadlock Pulls the Index Down

KSE100 Index declined by 434pts WoW (~1.1%) to 38,646pts owing to 3.6%WoW slide in PKR/USD and deadlock on Delimitation Act which could delay general elections.

PKR depreciation caused Cements (-6.0%WoW), Engineering (-9.0%WoW), OMCs (-2.8%WoW), Autos (-2.7%WoW), and Refineries (-8.8%WoW) valuations to decline contributing -214/-83/-53/-52/-40pts to index whereas E and Ps (+1.9%WoW) drove index up by 117pts.

Trading activity picked up during the week where average daily traded value rose by 14% to USD61mn in spite of 4%WoW dip in average daily traded volumes to 135mn shares.

Trade deficit jumped 29%YoY to USD15.0bn in 5MFY17 owing to 21%YoY surge in imports to 19.9bn in 5MFY17 compared to 10%YoY growth in exports to USD8.2bn in 5MFY17. On monthly basis, trade deficit was 19%YoY higher while declining by 4%MoM to USD2.9bn in Nov-17.

Workers’ remittances rose by 1.3%YoY to USD8.0bn in 5MFY18. While the remittances from GCC region declined by 4.1%YoY to USD3.2bn (60% of total), remittances from non-GCC countries posted strong growth of 10.5%YoY. On monthly basis, remittances declined by 2.6%YoY/4.7%MoM to USD1.58bn.

Automobile Sales for the month of Nov-17 fell 9% sequentially but increased 4% YoY as the year-end effect kicked in. However the overall 5MFY18 performance remained strong, up 22% YoY.

Individuals/Foreigners remained major net sellers as they offloaded shares worth USD17.8mn/USD8.9mn during the week. Banks/Companies/Mutual Funds absorbed the major selling with net buying of USD11.3mn/USD10.7mn/USD6.5mn.

Equity Market Outlook and Perspective

The index posted a strong recovery on the final day of the week as the market welcomed Supreme Court decision of not opening Hudaibiya Paper Mill case (against Sharif family) which could have alleviated the political uncertainty. However for next week we flag risks related to potential development on Pakistan Awami Tehreek’s (PAT) protests against ruling party PML-N’s Model Town Case Incident. On the flip side, possible resolution of deadlock regarding Delimitation Act in upcoming days may provide boost to investors’ sentiment.

Key news this week

Power plants to start lifting of furnace oil (Power): Informed sources said the two divisions – petroleum and power – of the PM-led ministry of energy would submit a formal summary to Mr Abbasi under which the power plants would be directed to lift a combination of furnace oil produced by local refineries and imports arranged by Pakistan State Oil (PSO).

This is expected to facilitate optimal utilisation of local refining capacity so that shortages of petroleum products particularly those required by aviation and air force are overcome and increasing demurrage costs to PSO are checked.

Last minute somersault by PPP compels government to put off delimitations bill (National): A last-minute somersault by the top leadership of the Pakistan Peoples’ Party (PPP) over its pledged support to the most significant delimitation bill has put a serious question mark over the possibility of timely legislation for new delimitations, failing which could jeopardise the holding of next general elections on time.

Trump signs bill that includes $700m reimbursement for Pakistan (Economy): US President Donald Trump has signed into law a $700 billion defence bill that includes up to $700 million to reimburse Pakistan for supporting US military operations in Afghanistan. But half of this amount has been withheld and can only be released if the US secretary of defence certifies that Pakistan is taking demonstrable steps for curbing the Haqqani network.

Govt says no IMF bailout needed, mulls another bond launch (Economy): Pakistan plans launching another international bond in about 45 days to manage external vulnerabilities and said it would do everything possible not to go for another IMF programme in any circumstances.

He declined to commit exact size or type of the bond saying instruments could be different and financing needs would vary depending on discussions with other multilateral lenders like the World Bank and the Asian Development Bank but said the new bond in the international market would be of 5, 7, 10 or 30 year tenure depending on the market situation.

Cotton output maydrop to 12.6 million bales on Punjab lows (Textile): Cotton production is feared to plunge to 11 million bales during the current season against the revised target of 12.6 million bales as the country’s key crop producing province Punjab is likely to deliver an output setback, officials said on Thursday.

This week’s top stories

Automobile Assemblers – November Sales Down 9% Sequentially

Automobile Sales for the month of Nov-17 fell 9% sequentially but increased 4% YoY as the year-end effect kicked in. However the overall 5MFY18 performance remained strong, up 22% YoY.

During the outgoing month, passenger car sales rose 8% YoY but fell 11% MoM buoyed by weakness in the 1000cc and below segment. Meanwhile Jeeps continued strong performance owing to relatively new models rising 7%/63x MoM/YoY.

HCAR outperformed its competitors with sales up 44% YoY due to strong performance of the Honda BRV. For comparison INDU and PSMC sales rose 4/-1% and -18/20% MoM/YoY.

Despite potential upside to Target Prices, we maintain a Market weight stance on the Automobile sector because of the ongoing themes of PKR depreciation and reversal in interest rate cycle which can negatively impact margins and auto demand. However we recognize that the waiting time of 2-6 months will likely act as a lag in the translation of these variables onto the automobile companies.

Pakistan OMC and Refinery Sectors – Potential Exchange Losses in the Offing

During the ongoing month, the PKR has depreciated by ~5% which will likely lead to exchange losses for the OMC and Refinery sectors. The magnitude of losses will however depend on the dependence on import for each company.

Amongst OMCs, HASCOL and PSO will see the most impact owing to their high dependence on imports to meet domestic demand. On the other hand, APL will face minimal impact as it sources its products locally.

Within Refineries, ATRL remains relatively unaffected by the decline in PKR as it sources its crude oil domestically while PRL may be the most impacted due to its higher crude oil imports.

Moving ahead, the depreciation episode will likely play out well for OMCs as higher PRK based POL prices increase absolute margins on FO and trickle down inflation may lead to high margin increase in MS in the next year. However higher FO prices may expose the sector to faster buildup of circular debt.

For refineries, profitability may improve despite stable USD based GRMs as they will translate into higher PKR value subsequent to the devaluation.

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