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Stock Review

Bullish mood persist; upcoming budget, bonds auction and talks with imf in focus

The benchmark Index of Pakistan Stock exchange (PSX) closed in the green for the week ended 18th January 2019. It was the third consecutive week the Index posted gain of 258 points and closed at 39,307 level. Positive sentiments were driven by the possibility of third budget of FY19, which is expected to reduce/eliminate advance tax of 0.2% on brokers, rationalize group taxation system, ensure ease of doing business and reduce input cost for export oriented sectors.

With the possibility of GIDC Resolution (50% waiver) on the cards, the fertilizer sector is expected to benefit the most. Resultantly, fertilizer was the best performing sector of the week followed by E&P and tobacco sectors. Selling by foreigners for the week spiked to US$9.42 million as compared to net buying of US$0.6 million a week ago. Uncertainties kept investors’ sentiments subdued, plunging average daily turnover to less than 118 million shares, down 15%WoW.

Additional news flows driving the market included: 1) Fitch Solutions stated that the Government of Pakistan continues to have little appetite for austerity and painful and necessary economic reforms, which would prolong the current up cycle for Bank advances, 2) SBP reserves fell to US$6.9 billion — their lowest level since April 11, 2014 when they hit a trough of $4.984 billion, 3) current account deficit (CAD) slipped by 4.4%YoY to US$7.98 billion and 4) Exxon Mobil representatives apprised Petroleum Minister on the pace of ongoing exploration activity in ultra-deep waters at the offshore Indus G-Block, about 230 kilometers off Karachi coast.

Gainers of the week included: FFBL, PSMC, NCL and EFOODS, whereas laggard were: CHCC, POL, PIOC and DGKC. Volume leaders were: KEL, PAEL, BOP and TRG. Developments on negotiations with the IMF are expected to keep market under pressure next week. The government’s much-awaited mini-budget (second since coming to power), and Prime Minister Khan’s visit to Qatar to secure concessions along the lines of those secured from UAE and Saudi Arabia could push sentiment either way.

Upcoming Pakistan Investment Bonds (PIBs) auction on 23rd January 2018 will have strong implications for the local equity and bond markets. In the last PIB auction held on 26th December 2018 a small amount of Rs22.5 billion was accepted with cut off for 3, 5 and 10 years at 12.2%, 12.7% and 13.1%, respectively. Moreover, these cut offs were up 472bps, 345bps and 442bps as compared to the last auctions.

The PIB cutoffs in December 2018 were higher than secondary market rates, which was a surprise for the market and a signal of further monetary tightening. Analysts believe that upcoming PIB auction will likely see strong participation specifically from non-banking financial companies like Mutual Funds and insurance companies. Some banks may also now participate given these high interest rates while most banks’ participation will come after agreement with International Monetary Fund (IMF). Steepening of yield curve indicates that market is expecting further monetary tightening. A significant amount pick up will result in ratification of government’s debt profile and movement of debt from SBP to banks. The government has increasingly resorted to the State Bank of Pakistan (SBP) since the end of last IMF, borrowing from SBP now hovers around Rs7 trillion, up Rs5.5 trillion since FY16. It is worth noting that borrowing from central bank and printing of currency is inflationary.


Borrowing from banks (through PIBs) will result in lengthening of government debt profile. A shorter debt maturity profile has higher re-pricing risk. It is on record that the Government of Pakistan issued a huge Rs2.5 trillion worth of PIBs in 2014. During this time, the banking sector took significant participation in the auctions where the listed banks cumulatively added Rs1.8 trillion PIBs to their investment portfolios taking their PIB to Deposit ratio to 28% by December 2014 from 9% in December 2013.

Analysts expect the listed banks to accumulate PIBs in the coming auctions where PIB to Deposit ratio is likely to increase to 30% in December 2019 from 15% in September 2018, which translates into addition of Rs2.2 trillion PIBs. Moreover, approximately Rs720 billion worth of PIBs are also maturing in 2019, which would take the total PIB participation of Pakistan listed banks to Rs2.9 trillion.

After the introduction of government policy to shift to other sources from furnace oil (FO) based power plants, it is the retail fuels which have become the center of attraction for oil marketing companies (OMCs). However, overall economic uncertainty is hampering performance of the sector as motor gasoline (MS) and high speed diesel (HSD) volumes changed by 2% and -11%YoY for CY18. Railways and Roads ate up 60% of the total volumes of 11.3 million tons during 5MFY19, while transport formed 99.6% and 91.2% of the total volumes of MS and HSD for the period under review.

During 4QCY18 we earmark HSD (for transport demand using applicable sector source shares), MS and HOBC, revealing an average retail throughput of 521,000 ltrs/outlet, where HASCOL maintained (793,000), APL (714,000), SHEL (562,000) and PSO (453,000) ltrs/outlet of throughput through their networks across the country. On a YoY basis, HASCOL, APL, SHEL and PSO throughputs moved in different directions. On a YoY basis for 3QCY18 HASCOL added 80 outlets, APL 30, PSO 61 and SHEL just one, signifying continued push on outlet additions. By and large, the continued addition of retail outlets matched with tapering throughput levels highlight mean reversion in the retail space.

The downturn in the industry volumes is taking a toll on the throughput levels which is leading analysts to a mean reversion level where a significant reduction is being witnessed in throughput of HASCOL as the company aggressively expands its footprint (increase of 80 outlets in CY18 at a time of 6% decline in retail fuel sales). Moving forward, HASCOL is expected to continue its aggressive strategy implying that every additional outlet would have lower throughput, partly offsetting marginal increase in sales per outlet. Moreover, analysts witness a persistent slowdown in HASCOL’s sales growth, where planned additions to storage could suffer from lower capacity utilization, slowing profitability.

Analysts believe this phenomenon is exacerbated by the OMC’s reliance on the southern market, where sale of smuggled and adulterated fuel (particularly HSD) is widespread. Analysts also highlight that the difference between SHEL’s HSD and MS throughput has increased to 198,000 ltrs/outlet in CY18 from 153,000 ltrs/outlet in CY17, signifying the company’s continued reliance on extensive urban presence.

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