Stock Review

Market witnessed positive trend, euphoria of mini budget to continue

Stock market opened the week positive in anticipation of a successful visit of Prime Minister Imran Khan to Qatar while the unveiling of much-awaited ‘mini budget’ during the week kept the momentum positive. Investors’ sentiments were reflected in the stock market’s performance as the bourse closed the week ended 25th January 2019 at 40,265 points, up 2.44%WoW. Average daily volume increased by 44%WoW to 168 million shares, while net foreign buying of US$17 million during the week also supported the index.

Additional news flows moving the market included: 1) State Bank of Pakistan (SBP) receiving US$ one billion from the UAE following an agreement with the Abu Dhabi Fund for Development (ADFD) in Abu Dhabi, 2) cabinet approving Gas Infrastructure Development Cess settlement mechanism, 3) IMF revising GDP growth projections downwards to three percent for the current fiscal and in the subsequent years and 4) the foreign currency reserves held by the SBP earlier falling by USD$265 million to US$6.6 billion.

Gainers at the bourse included: PSMC, HBL, UBL, MCB and PPL, whereas laggards were: APL, GWLC, EFERT, PIOC and FATIMA. Volume leaders during the week were: BOP, KEL, PIBTL and TRG. With the rollover week ending, analysts expect market to continue its journey north-driven by the euphoria over mini budget. Also, clarity on GIDC issue is expected to emerge next week which can significantly affect sectors like fertilizer and textiles. However, analysts still attach longer term direction to clarity regarding IMF bailout package. Moreover, the result season is upon us where bigwigs like LUCK are expected to announce their result along with other companies like EPCL and BAHL.

Amidst a divisive macro outlook and heady budgetary imbalances, the PTI-led government introduced its second finance bill to a revengeful opposition, while alluding to approaching the IMF for the ‘final time’, something Finance Minister, Asad Umar and Prime Minister Imran Khan have vowed to uphold market dynamics are expected to get a lift from 1) abolishment of 0.02% WHT on share transactions, 2) capital loss carryover to be available for three years, 3) abolishment of tax on undistributed profits and 4) abolishment of super tax in FY20 on non-banking companies.

From a sector wise perspective, proposals in the budget can be seen to favor SMEs (concessionary tax on loans), Automobile OEMs (FED on 1800CC+ CBU, removal of non-filer sales ban on 1,300CC below models), parts vendors, small scale manufacturers, construction concerns (incentives for low-income housing), agri-reliant (fertilizers, tractors, lenders), renewable energy equipment manufacturers (5YR tax holiday), group holding companies (group-relief partially reinstated) and fertilizers (GIDC reduction).

Market euphoria may, however, be tempered by Banking sector developments where despite specific tax concessions on finance income from advances to SMEs, agriculture and low income housing (20% tax rate as compared to 35% currently), incidence of super tax at 4% on FY18 profits (previous: 0%) and increase to 4% in FY20 (previous: 3%) and FY21 (previous: 2%) may disrupt overall sentiment. The incidence of super tax will adversely impact our Banking during CY19.

 

Fertilizer sector witnessed low Rabi season offtake. Cumulative CY18 fertilizer offtake across all nutrients stood at 9.38 million tons (down 5%YoY). This constituted by 5.81 million tons of urea (down on 1%YoY), 1.76 million tons of DAP (down 6%YoY), 0.60 million tons of CAN (down 17%YoY) and 0.45 million tons of NP (down 34%YoY). Domestic urea production for December 2018 was reported at 511,900 tons (down 3%MoM/but up 6%YoY). Market share for sales clocked in at for FFC (37%), EFERT (30%), FATIMA (15%) and FFBL (9%). Increase in nutrient prices accompanied by slower harvesting and availability issues have pulled down nutrient offtake during Rabi by 7%YoY, while production slowed to keep inventory levels manageable. Growth in sales is likely going to be a factor of extended late seasons buying, catalyzed by pricing concessions delivered through GIDC rationalization, where any GIDC rationalization for fertilizer manufacturers will be passed on to end-consumers, with FFBL stands to benefit the most, as DAP pricing depends on international factors.

Cements sector witnessed persistent downtrend trend persist and manufacturers are likely to post a 37%YoY decline in profitability for 1HFY19 as higher energy/fuel cost weigh on margins despite an increase in retail cement prices of 10%YoY. On QoQ basis, profitability is going to increase on the back of better margins. Finance cost is going to be a drag on the earnings for 1HFY19 as increasing debt to finance capacity additions will take the interest cover down.

DGKC, after posting a dismal 1QFY19 is expected to rebound as higher utilization at South is expected to result in better absorption of fixed costs. While on YoY basis, company’s profitability is expected to decline by 36%. FCCL is expected to outperform peers on YoY basis for 1HFY19, while CHCC may disappoint on QoQ basis in 1QFY19.

International Steels (ISL) posted its 12 quarter low margins at 10.7% due to 1) discounts on local sales, 2) lower margins on exports business and 3) hike in gas prices. Further, decline in margins were offset to some extent by tax reversal of around Rs300 million. As a result, the company recorded earnings of Rs2.09/share, down 23% YoY. Net sales of the company rose by 18% YoY to Rs13.5 billion due to hike in CRC prices. Financial cost increased by 157% YoY due to its treatment as expense, while in corresponding period of last year, this amount was being capitalized. Distribution expenses were up 30% YoY to Rs134 million amidst increase in transportation cost. Effective tax rate of the company was up 4% in 2QFY19 (recorded reversal of around Rs300 million) as compared to 28% in 2QFY18. This reversal can be attributed to utilization of remaining rebate on commencement of new line. Analysts hint 1) downward revision in duty structure, 2) volatility in commodity prices, 3) dumping from countries not protected by anti-dumping duties and 4) devaluation as key risks.