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Bulls remain in control as FATF liking, uae package boost investor sentiments

The benchmark index of Pakistan Stock Exchange (PSX) gained 1,502 points to close at 39,049 points for the week ended 11th January 2019. A US$3.0 billion support package was signed between Pakistan and United Arab Emirates that is likely to help the country overcome its balance of payments crisis. Furthermore, the Financial Action Task Force (FATF) expressed some degree of satisfaction over Pakistan’s efforts and action plan to combat money laundering and terror financing under international obligations and indicated areas where more has to be done before May this year to get out of the grey list. This news further improved investor sentiments.

With WTI crude oil rising 10% this week, E&P scrips were the best performers during the week. These were followed by Commercial Banks and Fertilizers. The average daily traded volumes for the week rose to 140 million shares, up 18%WoW and average daily traded value for the week was up US$46 million, up 12%WoW. Other news flow impacting the market during the week included: 1) the PTI-led government deciding to slap additional taxes for the purpose of achieving import compression and broaden revenue base and 2) the Government of Pakistan (GoP) notifying ban on import of furnace oil asking refineries to enter into contracts with IPPs for furnace oil sales.

Trading volumes for the week increased by 29.7%WoW as market activity was led by Mutual Funds, whereas insurance companies continued to offload their equity portfolio. Top gainers included PPL, POL, FFBL, GWLC, and OGDC, while KAPCO turned out to be the negative performer.

Moving forward, a keen eye should be kept on the indications of an IMF program where an early arrival at a consensus will provide a serious boost to the market but mini budget will not bode well. The GoP is planning to introduce a mini-budget in a bid to meet the revenue requirement. However, adverse developments over the on-going cases involving political bigwigs of the country can keep the market under pressure.

As per a report of APCMA, cement dispatches for December 2018 rose to 3.9million tons as compared to 3.7million in December 2017, up by 4%YoY. On a sequential basis, total dispatches declined marginally by 2%MoM, whereas exports increased by 6%MoM. During the period under review, local dispatches witnessed a decline by 4%YoY to 3.3million. This fall can be attributed to slow down in construction activity in winter season along with slower disbursement of PSDP funds (Rs187billion released out of Rs675billion) on the back of fiscal austerity measures. Region wise analysis reveals that local offtakes for south increased by 15%YoY, primarily due to DGKC’s south plant that is catering to the demand in central and southern Punjab. On the flip side, exports managed to offset the decline in domestic dispatches, exhibiting an increase of 81%YoY to 0.6million tons. In this regard, major support came from a substantial growth in southern exports that increased by 3.8xYoY after the successful commissioning of new lines of Attock Cement (ACPL), Lucky Cement (LUCK) and DG Khan Cement (DGKC).

On a cumulative basis, total dispatches were reported at 23.1million tons for 1HFY19, up by 4%YoY. As against this exports witnessed a double digit growth of 48%YoY and local dispatches shrunk. The capacity utilization for the cement sector declined to 89% as compared to 95% for the same period last year, attributed to the addition of new capacities and limited growth in 1HFY19.

Company wise provisional data suggest that ACPL has recorded the highest volumetric growth (50%YoY) with the major support coming from exports. Other players exhibiting notable growth include DGKC and KOHC. However, CHCC and FCCL have remained laggards for this month. Coal price per ton decreased and settled at US$92.7 as opposed to a peak of US$96.3.

Prices are expected to further ease in CY19 as China plans to increase its coal supplies by replacing the older and inefficient mines. Should this trend persist, it would provide some respite to the gross margins. Additionally, cement retail price has increased by an average of 4.5%QoQ settling around Rs603/bag which would provide some relief to the manufacturers.

Reportedly the GoP is in negotiation with fertilizer manufacturers for the resolution of Gas Infrastructure Development Cess (GIDC) issue. Last year GoP waived 50% of outstanding amount of CNG stations and same development could come across for fertilizer sector. Currently fertilizer players are accruing Rs300/mmbtu on feed gas and R150/mmbtu on fuel component. This translates into per bag cost of up to Rs400/bag. All fertilizer manufacturers are accruing GIDC amount on fuel. On Feed, FFC and FFBL are accruing GIDC on full production, while EFERT is accruing it on only base plant (35% of its total production).

If this development (50% reduction in outstanding amount and recurring GIDC rates) materializes than FFC would be the biggest beneficiary with one time gain of Rs10.2/share followed by FFBL (Rs5.6), EFERT (Rs3.1 /share) and FATIMA (Rs0.6/share). However, recurring benefit depends on price of urea. It would be too early to comment who will retain benefit of this development, as GoP’s motto is to reduce input costs of farmers, in which case we cannot rule out reduction in urea prices. If industry retains benefit of this development (up to Rs200/bag), then FFC’s recurring earnings will rise by Rs4.4/share, while EFERT and FFBL will get benefit by Rs1.4/share and Rs2.4/share respectively in their bottom line.

Further, to release outstanding amount to GoP fertilizer players have to reduce their short term investments (on which they are earning other income) or borrow from banks. In either case, there will be some opportunity cost on settlement of GIDC in terms of lower other income or higher finance cost.

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