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Under mood of pessimism index weakens further; cautiousness advised

Continuing the trend witnessed in the earlier week, the benchmark Index of Pakistan Stock Exchange (PSX) lost another 3.5%WoW to close at 33,902 points for the week ended 28th June 2019. Apart from the regulatory tightening that has been the dominant factor impacting market performance negatively other factors included: 1) fiscal year-end phenomena, where historically market remains under pressure in June, 2) exchange rate volatility taking exchange rate to new high of Rs163.5 before closing at Rs159.5 and 3) government increasing in gas tariffs up to 191%. Concerns over tail risks have overshadowed the positives including the US$3 billion commitment from Qatar in the form of deposits and FDI.

Average daily trading volume improved to 146.4 million shares from 124.8 million shares, driven by year-end repositioning particularly by mutual funds emerging as net seller to the tune of US$14.7 million. Top performers during the week included: FATIMA, EFOODS, KEL, KAPCO and INDU, while PSMC, GWLC, NBP, PAEL and PIOC remained the worst performers. Amongst the major sectors, resurgence of oil price due to the tension in Middle-East and currency depreciation failed to invigorate interest in E&Ps (posting a decline of 4.97%WoW). Along with this, weak demand of cements and OMCs impacted respective sector performance (down 5.35%WoW and 5.42%WoW respectively). This was despite recovery in cement prices up to R20/bag a week ago. Commercial banks posted 2.6%WoW decline, possibly on concerns over rising NPLs, whereas fertilizers were down 2.6%WoW on gas price hike. Market performance is likely to remain volatile in the upcoming week, taking cue from: 1) IMF Board approving US$6.6 billion EFF facility for Pakistan, 2) June 2019 inflation announcement which would indicate future course of interest rates and 3) OPEC meeting which can impact global oil price movement.

Analysts advise investors to take at least two years investment horizon and follow macro themes (interest rate, exchange rate, and circular debt resolution) in picking investments.

Total liquid foreign reserves held by the country were reported at US$14,351.3 million on 21st June, 2019. The break-up was: reserves held by the State Bank of Pakistan were US$7,282.1 million and reserves held by commercial banks amounted US$7,069.2 million. During the week under review reserves held by SBP decreased by US$322 million to US$7,282.1 million, due to external debt servicing and other official payments.


During 9MFY19, Thatta Cement Company (THCCL) recorded 33%YoY increase in sales to Rs2.9 billion, primarily due to healthy growth in clinker exports. However, profit after tax of the Company declined by 47% owing to: 1) lower margin on clinker sales, 2) higher production cost due to a massive depreciation of Pak rupee and 3) enhanced competition in the domestic market. The Company believes that it will continue to reap benefit from clinker export to Bangladesh. The average selling price touches US$32/ton. The Company does not wish to export cement due to negative margin. Its 5MW waste heat recovery plant (WHRPP) is expected to come online by July this year. The said project would substitute approximately 40-45% reliance from captive energy. Manufacturers are expected to increase retail cement prices by Rs35/bag to pass on additional cost pressure of recent hike in FED rates, effective 1st July, 2019. On the domestic demand side, the company expects the south region local sales to remain flat during FY20 as compared to healthy growth of 15%YoY in 9MFY19. Furthermore, THCCL expects domestic retail prices in the region to remain under pressure primarily due to upcoming capacity addition by power cement along with sluggish local demand growth.

Urea offtake for May 2019 was reported at 592,000 tons, up 103MoM and 20%YoY. This takes 5MCY19 urea sale to 2.2 million tons, exhibiting an increase of marginal 2% YoY. The YoY increase for May’19 is mostly led by higher urea availability due to production from Agritech and FatimaFert plants, which operated at 94% and 118% utilization levels, respectively. FFBL remained relatively better performer, with offtake registering an increase of 31%YoY. While urea offtakes of FFC and EFERT increased by 5%YoY and 3%YoY respectively, FATIMA posted a decline of 8% YoY.

With increase in offtake, urea inventory declined to 263,000 tons, down 21MoM and 20%YoY. To ensure ample availability, the government has approved 100,000 tons urea imports and also decided to keep FatimaFert and Agritech fertilizer plants operational till October this year by providing LNG at subsidized rate, the gap between local and international urea prices is 47% and demand supply dynamics forecast indicate that urea inventory build-up may still not lead to pressure on prices. In this regard, Fertilizer players may likely pass the recently proposed 62/31% higher feed/fuel gas price to end-consumer. It is worth noting that urea price was preemptively increased by Rs80/bag in March this year. To completely pass-on the impact of cost inflation, the fertilizer players will have to increase urea price by another Rs103/bag. Concessionary gas based players (EFERT and FATIMA) will pocket in higher profits in that case, while FFBL (55% of offtakes are dominated by DAP) may still face pressure on core operations.

DAP offtake during the month grew to 213,000 tons, led by seasonality and potential price hikes during upcoming Rabi season. For May 2019, FFBL led with DAP offtake of 77,000 tons. For 5MCY19, the cumulative DAP offtake remained disappointing at 355,000 tons, down 28%YoY. EFERT’s DAP offtake posted highest increase of 37% in 5MCY19, while offtake of FFC and FFBL witnessed a decline of 49%YoY and 17%YoY respectively. DAP inventory closed at 503,000 tons, FFC and FFBL account for 43 and 30% of the total inventory.

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