BEARISH SENTIMENTS TO PREVAIL, PAK-AFGHAN POLICY MAY SPOILSPORTS
The incumbent government led by PML (N) already under domestic pressure, faces the external threat after a shift in Pak‐Afghan policy of the United States. The benchmark Index of Pakistan Stock Exchange closed the week ending 25th August 2017 at 42,642 points, down by one percent as compared to a week ago. During the week, investors preferred to stay on the sidelines. The average daily turnover trading volume was down by 2.00%WoW to 179.73 million shares. The top volume leaders of the week were: TRG, ANL, KEL, BOP and ASL. Major news flows impacting the market included: 1) NAB filing an application before the Supreme Court of Pakistan seeking statements from JIT members in the implementation of the Panama leaks case verdict, 2) country’s current account deficit during July’17, the first month of current financial year widening to US$2.05 billion due to the exports and remittances proving paltry to finance rising of imports and falling imports, 3) the GoP reportedly revealing plans to raise US$ one billion Eurobond/Sukuk over the few months to mobilize additional funds, 4) PSX proposing certain amendments regarding less liquid stocks, fee structure and classification under defaulters’ segment and 5) total foreign exchange reserves reverting back to slightly more than US$20 billion after falling for five consecutive weeks. Scrips leading the bourse during the week were: ASTL, POL, NML, PPL and INDU, while EFOODS, DGKC, PIOC and GWLC topped the list of major losers.
Foreign interest remained lackluster in view of elevated concerns over currency depreciation and political instability, where net outflows during the week were US$9.77 million as net outflows of US$2.04 million a week ago.
Analysts expect the market to remain volatile in the coming week with thin volumes with bearish sentiments to prevail due to the political turmoil. Additionally, the Pak‐Afghan policy may also pressurize the external sector, hurting investor’s sentiments.
Pakistan’s economy is once seen plunging deeper into endemic issues on the external front including a high current account deficit that has ballooned three times to US$2.05 billion during July 2017 YoY. The widening deficit is fast eroding foreign exchange reserves and the time may not be far when economic managers of the country will be forced to negotiate a new bailout package with the International Monetary Fund (IMF) if the situation persists. This has badly shaken the Pakistan Stock Exchange, enjoying substantial holding by the foreign fund managers. Many seasoned economists and analysts strongly believe that Pak rupee is overvalued against the dollar and other major world currencies and its devaluation offers a workable solution for containing the deficit. On different occasions during 2016, the IMF said Pakistan’s currency is overvalued by as much as 20%. However, some analysts also believe that any significant depreciation in rupee value could plunge the country deeper into the problems due to imports growing at a faster pace as compared to exports.
Pakistan’s foreign exchange reserves are likely to remain under pressure during the ongoing financial year due to massive repayments worth US$ 7.4 billion on the previous loans and increasing current account deficit. Pakistan’s reserves are depleting sharply and have come down by more than US$4 billion in a period of less than one year. The country’s total foreign liquid reserves have been reported at US$20.05 billion. Out of this State Bank of Pakistan holds foreign exchange reserves worth US$14.38 billion and reserves held by commercial banks amounted US$5.67 billion. The reserves are decreasing due to loan repayment and rising current account deficit.
Following the seasonal uptick in June’17, Pakistan’s total exports during July’17 declined. Group wise both textile and food exports fell 12.3%/17.3%MoM to US$1.006 billion and US$0.25 billion respectively. Sequentially, all key segments of the textile export witnessed downward trend, where value added exports declined 21%MoM to US$735.3 million, while low value added exports shrank 5.40% MoM to US$271 million. However, on a YoY basis, the value added segment registered a growth of 5.3%YoY on the back of growing garment exports (up 20.5%YoY) offsetting the falling knitwear exports (down 5.8%YoY). Looking ahead, analysts expect textile exports to grow by 5‐6%YoY in FY18 on account of expected currency depreciation along‐with a likely support from payment of pending refunds alleviating sector liquidity crisis. However, challenges to export sector remains in the form of stagnant demand scenario, end of unconditional export subsidy and EU GSP‐PLUS status review.
ENGRO held its analyst briefing on 18th Aug’17) to discuss its 1HCY17 earnings performance. To recall, ENGRO announced consolidated/unconsolidated net profit after tax of Rs3.78 billion/Rs4.10 billion (EPS: Rs7.21/Rs7.84) for 1HCY17, down 32%YoY/79%YoY. The key highlights of 1HCY17 consolidated result included: 1) weakening topline (down 22%YoY) due to classification of EFOODS as associates (post its partial divestment) despite 23%YoY/17% jump in EFERT/EPCL topline and 2) significantly higher effective tax rate of 64% in 2QCY17 as compared to 40% for 2QCY16 on account of retrospective provisioning of Rs2.1 billion super tax in this period in lieu of CY16. Along with the result, the company announced a second interim cash dividend of Rs7/share, taking total payout to PkR12/share. During the briefing, management hailed improved performance during 1HCY17 by its subsidiary EFERT and EPCL that diluted the impact of lower shareholding (strategic partial divestment) in EFOODS given its disappointing 1HCY17 performance, on ENGRO’s bottom‐line. Besides, taking a long term view, ENGRO’s management highlighted smooth progress at its flagship Thar coal mining and power project, which is currently 4 months ahead of its schedule and is expected to reach COD by June’19.