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Sentiments remain lackluster over weak gdp outlook, political uncertainty

Despite announcement of populist budgetary measures and persistent increase in international oil prices, sentiments at Pakistan Stock Exchange (PSX) remained lackluster during the week ended 4th May 2018. The benchmark index shed 1,006 points and closed at 44,537points, down 2.21%WoW. Political uncertainty and weak outlook for Pakistan’s GDP growth along with highlighting of macroeconomic vulnerabilities by IMF kept the market under pressure during the week. Keep

Average daily traded volume at bourse declined by 1.56%WoW to a little less than 166 million shares with volume leaders being BOP, LOTCHEM, UNITY, STCL and EPCL. Major news highlights during the week included: 1) total foreign exchange reserves of the country rising to US$17.71billion, reversing its 19-week long declining trend, 2) average consumer price inflation rising to 3.7%YoY in April 2018 due to the increase in international prices of crude oil and utility tariffs, 3) ECP finalizing the new delimitations of national and provincial constituencies after conclusion of objections, 4) OGRA announcing increase inthe prices of diesel and petrol and 5) Moody’s Investor Service in its latest credit outlook highlighting the continuation of super tax on banks a credit negative event and estimating their ROEs to decline by one percent.

Gainers of the week were: ASTL, FCCL, DGKC, EFERT and KAPCO; while laggards included: FATIMA, HBL, UBL, PIOC and INDU. Foreigners remained net buyer during the week, with US$0.57 million inflowas compared to US$2.80 million outflow in the preceding week. During the upcoming week the market is expected to remain range-bound, with investors likely to stay on sidelines. Oil & Gas sector is expected to remain in limelight as the US President is likely to takes a decision next week regarding Iran’s nuclear deal, where re-imposition of sanctions could spark hike in international oil prices.

During April 2018 PSX witnessed erosion of 1,077 points. The benchmark index was unable to sustain the rally despite rising international oil prices, anticipation of a populist budget particularly with regards to taxation and amnesty scheme announcement. Additionally, the result season also failed to boost market performance with no major positive surprises (barring OMCs and certain banking names). Performance at the mainboard remained dismal with majority of the key sectors ending in red.

Cements (down 5.3%MoM on price reduction, anticipated increase in FED in budget FY19), Banks (down 3.2%MoM on weak 1QCY18 results) and Textiles (on news pertaining to possible conclusion of export incentives before budget FY19) losing out the most. Post budget, investor started focusing on politics. Additionally, developments on the macro front should also be keenly tracked where materialization of likely foreign exchange inflows projected around US$3billion can be somewhat relieving for the market. Daily trading Volumes improved by 9%MoM to average 210 million shares as compared 192 million shares in March 2018. Domestic participants particularly Mutual Funds emerged net buyer with nearly US$ 73 million) and Individuals with net purchase of US$16.4million were a. While foreigners were net sellers during the month primarily on account of OGDC deal (35million shares offloaded at Rs164/share), adjusting for the same leaves us with a net inflow of US$19.6million in April 2018.


According to a report by Topline Securities, Pakistan cement sector profit was down 24% YoY for 3QFY18, to near 6-Year low margins on quarterly basis. Decline in profits was mainly on the back of lower margins, falling to nearly 6-Year low of 28%. Margins have been on a declining trajectory since 3QFY17, ever since CHCC’s new capacity of 1.3million tons per annum came online and prices came down in the North region.Volumetric growth remained robust during the quarter under review, up 19% YoY due to higher local dispatches, fueled by boost in private sector construction activities and demand from CPEC related projects.Despite robust dispatches, sector revenues grew by mere 4% YoY during 3QFY18, primarily owing to decline in high margin local net retention prices. Analysts estimate that the industry’s average net retention prices declined by around 12% YoY to Rs323/bag during 3QFY18. On sequential basis, average net retention price were down by Rs12/bag (4%).Sector’s gross margins fell to near 6-year low of 28% in 3QFY18. Analysts attribute this decline to: 1) higher Federal Excise Duty (FED); the Govt. in last Budget increased FED by 25% to Rs1.25/kg which North producers were unable to pass on due to weak pricing power, 2) lower local net retention prices and 3) higher input costs. FOB coal prices increased to US$93.3/ton, up 13% YoY in 3QFY18. On sequential basis, gross margins were down 4.2 basis points. Sector’s financial charges grew by 41% YoY during the quarter on the back of increase in producers’ debt level to fund upcoming expansions.While pretax profits were down 28% YoY for 3QFY18, lower effective tax rate contained profit decline to 24%. Effective tax rate was lower as some players like LUCK and CHCC availed tax benefit for setting up manufacturing units, while Shariah compliance also provided tax relief to LUCK.During 9MFY18, revenues grew by 4% while profits were down 18% as margins contracted to 31%. On company basis, FCCL was the only company that reported profitability growth of 28% YoY in 3QFY18, primarily on the back of improved margins as a result of re-commissioning of its damaged line. Though, prices have recently consolidated in North, manufacturers will have to pass on the increase in FED to alleviate further pressure on margins. The Government in FY19 Budget raised FED on cement by 20%, creating a need for producers to increase price.

Sui Northern Gas Pipelines (SNGPL) earnings per share for 3QFY18 declined due to higher operating expenses, up 32% YoY.Net sales of the company surged to Rs133billion for 3QFY18 from Rs72billion for the corresponding period last year. Gross profit of the company was also up 31% YoY to Rs4.1billion. This improvement was primarily on account of higher capex carried out during the quarter and in 9MFY18.Other operating income was also up 10% due to higher interest income on late payment surcharge.Other operating expenses increased by 32% denting profitability of the company. This is due to exchange losses as Pak rupee depreciated by 5% during the quarter. However, the exchange rate adjustment is a pass through item and it could be passed on to consumers. For 9MFY18, earnings of the company reported at Rs9.4/share, was down 2% YoY primarily due to higher operating expenses. The key risks for the company includes 1) higher UFG losses, 2) delay in capex and 3) regulatory changes.

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