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Stocks ends above 40,000 mark amid political, economic woes

The benchmark Index of Pakistan Stock Exchange (PSX) managed to close the week on higher note as it ended at 40,271 level on July 13, 2018. Despite starting the week with an approximately 1,000 points decline on first day of the week, the market closed positive in last 4 days of the week, with Index closing above 40,000 level. Although, attractive valuation kept the market participants interested, yet the political noise and economic woes, dampened sentiments, evident from average daily trading volume declining to 131 million shares and average daily traded value at US$ 49.3 million for the week.

Foreigners remained net sellers for the 10th consecutive week. As a result, net selling was recorded at US$26.6 million. On top of this, mutual funds also emerged as net sellers with US$9.5 million, whereas insurance companies were buyers to the tune of US$13.8 million. Top volume leaders included: BOP, FCCL, KEL, EPCL and DGKC.

Towards the end of the week, there was rally in banking stocks in anticipation of hike in interest rate in the upcoming monetary policy announcement scheduled for 14th July, 2018. The movers and shakers of the market included: 1) Pakistan’s liquid foreign exchange reserves declined by more than US$ 301 million due to the external debt servicing, according the weekly report of State Bank of Pakistan issued on Thursday. The total liquid foreign reserves held by the country declined to US$16.084 billion on 6th July as compared to US$ 16.385 billion on 29th June this year; 2) Federal Board of Revenue (FBR) announced to start the process of identifying the large number of new taxpayers from its existing data after July 31, 2018, the last date of the amnesty scheme; 3) Rising global oil supply, driven by hike in production by crude giants Saudi Arabia and Russia may come under pressure as the key producers face disruptions; 4) United Bank (UBL) entered into a fresh written agreement with Federal Reserve Bank of New York, effective July 2, 2018 upon termination of the earlier written agreement. The new agreement requires UBL to take steps to strengthen its Bank Secrecy and Anti Money Laundering (AML) Compliance, Customer Due Diligence and Suspicious Activity Monitoring and Reporting programs. The Fed has not imposed any penalty as yet on UBL. As per new agreement, UBL has to submit reports on Corporate Governance, Management Oversight, Bank Secrecy and Anti-money Laundering Compliance review, Customer due diligence and other compliance reports within the next 30-60 days; 5) Gadoon Textile Mills Limited (GADT) has approved to evaluate setting up hydro power projects having an aggregate capacity of around 150MW. However, future investment will be subject to the outcome of the evaluation and necessary approvals from the concerned authorities; 6) Sindh Engro Coal Mining Company (SECMC) expressed intention to sign a coal supply agreement with Shanghai Electric Corporation to undertake expeditious expansion of Thar Block-II, a move likely to further trim the coal tariff.

Initial Public Offering of Mughal Manufacturing Modaraba was deferred at the11th hour. Keeping in view the prevailing turbulent stock market condition and rising political uncertainty, the management of Mughal Manufacturing Modaraba decided to defer its Initial Public Offering (IPO) scheduled for subscription on 11th and 12th July 2018.

Analysts of political economy and financial system have received this decision with great exception as it has conveyed highly negative perception about Pakistan market, which is already witnessing massive selling by the foreigners. Mughal Manufacturing Modaraba is a multi-purpose and perpetual Modaraba had a plan to issue of 10 million Modaraba Certificates at par value of Rs10 each through (IPO). The total fund size of Modaraba is Rs250 million, out of this the sponsors have already subscribed Rs150 million and remaining Rs100 million was to be offered to general public through IPO.


The Modaraba plans to acquire re-rolling mill on Ijarah (operating lease) for a minimum period of ten years for manufacturing and sale of T-Iron. The proceeds from the IPO will be utilized primarily for meeting raw material and other operational requirements. The Modaraba is backed by one of the largest players in the steel industry, Mughal Iron and Steel Industries Limited. Following are the key considerations for the potential investors:

Strong demand dynamics

According to the Pakistan Social and Living Standards Measurement Survey (FY15), Girder and T Iron was the most used material for construction of roofs across Pakistan with a 39% share. The percentage is higher in rural areas at 45% as compared to that of 28% in urban areas. As per estimate of World Bank, shortfall of housing units in Pakistan stands at 10 million units which are likely to keep the demand strong for the input material for the foreseeable future.

Sponsor profile

The sponsors of the Modaraba and Mughal Group have been engaged in the steel industry for over a decade with a tremendous track record and repute. The group commands strong management prowess with a track record of successful business operations.

Favorable business demographics

Pakistan has posted robust economic growth over the last 5 years and the trend is expected to continue. Growth in FY17 was reported at 5.7%, which was the highest percentage growth in a decade. The World Bank estimates have put the GDP growth numbers at 5.5% and 5.8% for FY18 and FY19 respectively, which bodes well for the construction industry.

Strong distribution network

The Mughal group already has a very strong footprint in the local market through its well-connected dealer network. The Modaraba will have easy access to an established market presence.

Tax benefit

Under the Income Tax Ordinance manufacturing Modaraba’s are subject to a reduced tax rate of 25% compared to current effective corporate tax rate of 29%.

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