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Smidgen gain witnessed; new SECP rules may short-term hit to the sentiments

The benchmark Index of Pakistan Stock Exchange (PSX) closed at 34,190 points, up 0.9%WoW the first week of FY20 ended 5th July 2019. The nose dive in daily trading volume by almost 41%WoW to average 86.6 million shares was particularly indicative of lack of investors’ interest. With approval from the IMF executive board for the proposed US$6 billion under EFF for the next three years (accompanied by release of US$ one billion), investor sentiment see-sawed as regulatory action to curb un-registered transactions, including SECP’s recently approved Search And Seizure Rules raised apprehensions.

Key news flows during the week included: 1) IMF Executive Board approved the US$6 billion three-year Extended Funding Facility allowing for the release of the initial US$ one billion and monitoring of macro indicators for further release of funds, 2) planned roll-out of the new petroleum policy with concession for high risk fields and 35 additional blocks to be put up for bidding, 3) Federal Cabinet approved the Search and Seizure rules for the SECP, the apex securities regulator, granting its officers the authority to conduct raids, seize evidence and secure search warrants and 4) ADB and WB approved US$2.2 billion in financing for projects in Karachi, including mobility enhancements.

Key performers included: NBP, FFC, FFBL and HBL, whereas laggard during the week were: EFOODS, HASCOL, ASTL and KEL. Volume leaders at the main board included: UNITY, LOTCHEM, TRG, and KEL. As investors deal with the erratic nature of regulatory actions, where an announced ‘crackdown’ holds the potential for drastic, knee-jerk negativity, the long term externalities are still positive, the lack of cohesion between regulatory agencies may deplete sentiment over the short term.

Analysts expected another 150 bps hike in interest rate by the end of July 2019, which may bode well for Banks but certainly prove detrimental to highly leveraged companies.

Total liquid foreign reserves held by the country were reported at US$14,443 million on 28th June 2019.The break-up of the foreign reserves was: reserves held by State Bank of Pakistan at US$7,272.8 million and reserves held by commercial banks at US$7,170.2 million. During the week under review SBP received US$500 million from Qatar as placement of funds, taking into account outflows relating to external debt and other official payments, SBP reserves declined by US$9 million.

The economic slowdown and significant increase in petroleum prices due to rupee depreciation crumbled overall FY19 petroleum sales; plunging by 27%YoY. Excluding Furnace Oil (FO) sales, volume posted a declined of 13%YoY, the largest fall in more than a decade. Furnace oil sales continued its declining trend; down by 59%YoY owing to change in the country’s generation mix to RLNG and Coal. Product wise, HSD volumes contracted by 20%YoY to 7.2 million tons due to its smuggling from Iran and a slowdown in economic activities, mainly transport. MS oil sales during remained flattish at 7.4 million tons. Muted sales in the MS segment could be attributed to the declining purchasing power of consumers amidst inflation and increase in petrol prices by 30% in the last year. Company wise, Hascol remained top underperformer during FY19 as the company lost its market share in MS and HSD respectively. Pakistan State Oil also witnessed erosion in its market share of MS and HSD. GO outperformed peers by gaining market share in HSD and MS. Key risks to the sector include: 1) further slowdown in the economy, 2) increase in turnover tax and 3) currency depreciation.


K-Electric (KEL) posted 67%YoY decline in its FY17 earnings to Rs0.38 per share as the company’s Multi Year Tariff (MYT) was revised down to Rs12.81/kwh from Rs15.5/kwh. The new MYT is applicable for the period of 7-year commencing from Jul 01, 2016. To recall, KEL requested NEPRA to increase tariff to Rs16.1/Kwh, but the apex regulators turned down KEL’s request twice and announced MYT of Rs12.81/Kwh. KEL is still contesting its MYT matter in NEPRA’s appellate tribunal. However the company has withdrawn its case from Sindh High Court (SHC) in order to finalize its accounts for FY17, as stated in KEL’s 28th May, 2019 notice to Exchange. Other income of the company went up by 41%YoY as Finance cost declined by 24%YoY. The company availed tax credit of Rs1.7 billion during FY17 as compared to Rs6.9 billion in FY16 as the company is availing benefits of its previous year losses. Key risks to company include: 1) unfavorable decision related to MYT and 2) increase in T&D losses from allowed threshold.

Urea offtake during June 2019 is expected to depict 3%YoY growth to 625,000 tons. The nominal increase in sales is due to the excessive purchasing by dealers/farmers in earlier months amid an expected hike in prices due to an upward revision in gas tariff effective 1st July 2019. Similarly, urea production during June 2019 is expected to post growth of 25%YoY due to the resumption of production by FatimaFert (FATIMA) and Agritech (AGL). Fauji Fertilizer (FFC) and Engro Fertilizer (EFERT) production is expected around 214,000 tons and 177,000 tons respectively, up 1% and 27% respectively. Aggregate closing inventory of the industry for June 2019 is estimated around 200,000 tons. Amongst the players, FFBL is likely to record the highest growth of 47%YoY in its urea offtake to 83,000 tons, followed by FFC at 263,000 tons, as against this EFERT is expected to post a decline of 29%YoY to 173,000 tons.

Aggregate DAP offtake for June 2019 is likely to decline by 21%YoY to 150,000 tons. The largest decline of 65%YoY is expected for FFC to 23,000 tons, followed by EFERT by 53%YoY to 30,000 tons. However, FFBL is expected to witness an increase in DAP offtake, up by 58%YoY to 61,000 tons. The key risks to fertilizer sector include: 1) an un-favorable settlement of GIDC, 2) poor crop season and 3) increase in gas prices.

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