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Market likely to find foothold in the coming sessions on budget perceptive

The week ended on 14th June 2019 commenced on a negative note, with the benchmark Index of Pakistan Stock Exchange (PSX) falling by about 1,000 points on broad expectations of a negative budget. However, the market pared losses in the remaining sessions on the expectations of formation of market support fund. Resultantly, the Index closed at 35,573 points, almost flat WoW. Average daily volume remained on the lower side at 136.4 million shares, down 13.0%WoW. Contrary to broader expectations Budget’19 was headline equities positive despite GoP’s efforts remaining focused on increasing tax base.

Key highlights of Budget’19 from market’s standpoint included 1) continuing CGT at 15 percent, 2) freezing corporate tax rate at the current level of 29 percent, 3) abolishing tax credit for BMR investment, 4) increasing tax rates on profit on debt and 5) bringing of capital gains on property sale under normal tax regime. The latter two hold particular value for equities and may result in potential switchover from fixed come securities to equities, while tax incentives may shift preference for new investment from real estate to equities as a preferred investment vehicle.

Gainers for the week included: FFBL, PIOC, FFC and CHCC, whereas laggards were: PSMC, PSO, NBP and HASCOL. Volume leaders included: KEL, MLCF, BOP and TRG. With clarity and understanding emerging over budgetary proposals, analysts expect the market to find its foothold in the upcoming sessions. That said, volatility in exchange rate would likely act as a warning to their thesis with the PkR already depreciating by 4.9% in the outgoing week. From this context, currency sensitive sectors i.e. Power, E&Ps and Textiles (despite negative budgetary developments) may remain in the limelight.

Total automotive industry sales of 28,342 units in May’19, plunged 11MFY19 aggregate sale to 229,436 units, down 8%YoY. Major constituents of total industry sales i.e. Passenger Cars/LCV & Pick-ups/Trucks were reported at 192,800 units, levels last seen during March’18, indicating an early stage down cycle. Cumulative 11MFY19 total industry sales dip was a factor of LCV & Pickups/Trucks/Passenger car segments weakening. In the passenger car segment, 11MFY19 numbers for 1000cc and 1300cc plus segments posted 13% and 2%YoY growth respectively, meanwhile the 800cc and below segment experienced the brunt of slowing demand, falling 25%YoY.

Performance of assemblers was largely muted with for PSMC and INDU recording decline of 7% and 17% respectively and HCAR posting a gain of 4%MoM. Their cumulative 11MFY19 offtakes of 3 out of 11 industry variants (counting Civic + City as one) experiencing growth (Cultus/WagonR/Corolla sales grew by 14%, 13 and 9%YoY). Re-iterating the weaknesses imposed on demand from a weak macro backdrop, analysts flag the persistence of depreciative GoP policy actions (starting with non-filer ban from June’18), the recently extended progressive FED levy (extending levies on new vehicle sales already in place), as continuing to dampen sales outlook for the sector over the medium term.

 

Seasonality weighed heavily on local OMC sales as downtrend persists with sales going down by 31%YoY for May’19. HSD, having a share of 42% in total volumes, was a laggard declining by 21%YoY on the back of smuggled product in Southern region being sold at a discount, significantly affecting the sales. Another dampener emerges in the form of RLNG and Coal based generation trumping legacy FO generation base, consequently resulting in FO facing a decrease of 66%YoY. MS also followed the overall trend of volumes, decreasing by 5%YoY. Overall, for 11MFY19, volumes posted a decline of 25%YoY where FO and HSD sales declined 58%YoY and 20%YoY, respectively.

HASCOL’s misery continued in May’19 with company witnessing the largest decline among listed players of 59%YoY as compared to 31%YoY decline in industry volumes. Even on MoM basis, where industry registered a growth of 1%MoM, company’s volumes are expected to post a decline of 1%MoM. Consequently, HASCOL’s market share in overall volumes declined to 7% in May’19 as compared to 12% in May’18, a similar story was witnessed in retail fuels, where market share halved to 7% in May’19 from 15% in May’18. PSO stands on the other end of the spectrum as it successfully defends, and is working towards gaining back lost market share, May’19 share rose to 51% from 44% for April’19. That said, the main highlight are small players encroaching upon shares of big players where market share of four listed players (namely SHEL, HASCOL, PSO, APL) now stands at 70% against 80% in May’19 while the situation for 11MFY19 tells the same story with the combined market share standing at 70% as compared to 76% in 11MFY18.

Moving forward, analysts expect June’19 to be representative of near-term sectoral dynamics where MS will be the only respite. However, with prices increasing constantly, further slowdown in growth cannot be ruled out as consumers shift to CNG and marginal propensity is tightened further. Elevated prices will also keep encouraging sales of smuggled product being offered at a significant discount to HSD in local market.

On the flip side, increasing temperature means higher electricity demand which will uplift the sales of FO as power production increases. Player-wise, analysts expect HASCOL to tread the same path as company also stated in the latest analyst briefing of shifting focus from acquiring market share to increase in margins with an emphasis on cost-cutting. Smaller players are going to continue encroaching upon the market share of listed players where the biggest casualty has been HASCOL lately. However other players witnessing the same fate in medium term seems imminent in our view.

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