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Growing momentum persists; investors to book profits expected

The benchmark index of Pakistan Stock Exchange (PSX) continued the upward momentum attained in the earlier and started the week on a strong footing, recouping 900 points in first trading session, supported by declining yields in the latest PIB auction. Additional stimulus was provided by easing noise on the political front. Encouraging numbers of external account also provided support. The positive impact of all the positive factors put together helped the index to close all 5 trading days of the week in green. The week ended on 8th November 2019 closed the index at 35,978 points, up 4.66%Wow. As a result of active participation of investors, average daily traded volume rose to 243 million, up 46%WoW. Foreigners emerged net buyers with US$4.6 million worth of shares during the week. Top performers of the week included: HASCOL, INDU, PSMC, FFBL and NCL, while ASTL, FCCL, ABL, and MEBL were the major losers.

Key macro and sectoral headlines impacting the market included: 1) local cement dispatches during 4MFY20 rising by 2.3%YoY to 13.312 million tons while exports grew by 16.48%YoY to 2.8 million tons, 2) Prime Minister Imran Khan stating that Government of Pakistan (GoP), with the help of Turkish President Tayyip Erdogan, has amicably resolved the Karkey dispute, saving US$1.2 billion penalty, 3) sales of petroleum, oil and lubricant (POL) products decreasing by 7%YoY to 5.97 million tons during first four months of current financial year, 4) GoP slashing profit rates on Defense Saving Certificates by 2.33% to 10.68% per annum and 5) Economic Coordination Committee (ECC) increasing sale margins of oil marketing companies (OMCs) by Rs0.17/ liter.

After a jubilant week, analysts expect investors to book profits. The upcoming monetary policy is also expected to determine the market momentum. While some analysts expect status quo to prevail over, others don’t rule out reduction in policy rate up to 100 basis points.

After a relatively soft October 2019 reading, analysts project the headline national inflation to once again crawl higher during November 2029. From March 2020 onwards, inflation is expected to taper off, aided by favorable base effects and moderation in food prices. Upcoming issuance of Eurobond, expected in December this year and IMF Mission review (currently underway) are two important checkpoints. Although, the reported concession on revenue target will provide some breathing space, the full year target still remains tough, given the authorities still need to show a massive 38%YoY growth as against actual growth of 16%YoY recorded in 4MFY20. While better than expected improvement in macro-imbalances is encouraging, reserves buffer still remains critically weak (import cover of mere 2.3 months) particularly considering new exchange rate regime. The Monetary Policy Committee meeting scheduled later this month is expected to follow a wait and see approach until it gets comfortable with respect to reserve and fiscal position.

During the week ended 1st November 2019, foreign exchange reserves held by Pakistan increased to US$15,517.9 million. Foreign reserves held by the State Bank of Pakistan (SBP) amounted US$8,357.6 million, posting an increase of US$443 million. Net foreign reserves held by commercial banks were reported at US$7,160.3 million.

Profit of fertilizer manufacturers of Pakistan has declined by 31%YoY to Rs8.6 billion for 3Q2019, primarily due to 1) decrease in gross profit margins, 2) increase in administrative expense up by 33%YoY, and 3) spike in finance cost by 110%YoY. The analysis is based on sample of 4 largest listed companies, namely Fauji Fertilizer (FFC), Engro Fertilizer (EFERT), Fatima Fertilizer (FATIMA) and Fauji Fertilizer Bin Qasim (FFBL). The analysis is based on unconsolidated statements of FFBL and FFC and consolidated statements of EFERT and FATIMA for true depiction of their fertilizer business. During the period, Urea sales of these companies witnessed a growth of 6%YoY to 1.5 million tons due to pre buying by farmers/dealers amid hike in urea prices along with resumption in operation by Agritech and FatimaFert, contributing 179,000 additional tons. DAP offtake of three companies (EFERT, FFBL and FFC) posted a decline of 10%YoY, in-line with sector’s volumetric decline of 11%YoY to 517,000 tons. Net sales of the sector witnessed a growth of 8%YoY to Rs93 billion during 3Q2019, despite decline in volumetric sales due to increase in Urea and DAP prices. Gross margin of the manufacturers declined to 25% during 3Q2019, from 33% last year due to higher input cost. Government of Pakistan (GoP) has increased feed and fuel prices by 62% and 31% respectively which translate into increase in cost by Rs210 per bag.

Fertilizer manufactures tried to pass on the full cost to end consumer, but the GoP only allowed companies to increase urea price by Rs10 per bag, while the rest of amount would be offset by 50% waiver in GIDC.

Due to media criticism and political reasons Prime Minister, Imran Khan withdrew the ordinance and directed the Attorney General to move the Supreme Court for an early decision on the matter in accordance with relevant laws. As the ordinance was withdrawn, manufactures increased urea prices by Rs200 per bag effective 8th September 2019. Finance cost increased by 110%YoY due to the hike in policy rate and increase in borrowings of the sector. Effective tax rate during 3Q2019 rose to 44% as compared to 33% last year, effective tax rate for FFBL increased by 141% amid implementation of minimum tax.

The government has called an urgent meeting of the ECC of the Cabinet on a single-point agenda to remove the condition of 66% compulsory utilization of LNG by two mega power projects to facilitate their privatization as required under the International Monetary Fund program.

Mari Petroleum Company in its 35th annual general meeting has approved issue of 10% bonus shares.

Mughal Iron & Steel Industries notified investors that the Company has entered into a contract for supply and installation of solar power system having 1MW capacity.

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