News Column


January 26, 2014


The benchmark KSE-100 Index continued its march to new highs this week edging closer to 27,000, up by 1.61%WoW at 26,914 points. Volumes continued to be on the higher side at 283 million shares despite a decline of 11.5%WoW. Trading activity was dominated mostly by small cap stocks. Major news flows affecting market sentiment this week were 1) reduction in retail prices of urea as EFERT reached an agreement with the GoP, 2) extension in the concessionary rate of feedstock gas at US$0.7 /mmbtu for Engro Fertilizer equivalent to the period of non availability of gas at the concessionary rate from SNGPL, 3) improvement in foreign exchange reserves held by the central bank and 4) no change in discount rate for January’14. Top gainers of the week included DAWH, ICI and INDU . Decliners were led by SHEL, AGTL and LUCK. Volumes during the outgoing week were led by JSCL, KESC, ANL, TRG and LPCL. In the wake of an unchanged discount rate, analysts expect the market to continue its bull run in the near term, with focus on second and third tier scrips. Textile sector is likely to remain in the limelight over the coming week on expectations of MandA activity within the sector. Moreover, EFERT is likely to continue with its bull run across the week following positive development on concessionary gas pricing, with a spillover positive impact on ENGRO and DAWH scrips. The KSE-100 Index has witnessed 5.9% improvement bringing FYTD gains to a stellar 27%. At this run rate, the Pakistan market is headed for its best start to the calendar year since CY07. Interestingly, this latest extension in bull-run witnessed despite selling by foreigners, albeit at a small US$1.7 million CYTD. In contrast, the main buyers on the domestic front have been Banks ( +US$16.4 million CYTD) and Individuals ( US$1.3 million CYTD). Another dimension to this rally has been increased interest in small cap stocks, which analysts expect to catch up with the rerating witnessed in mainstream stocks in FY14TD amid triggers such as likely increased exports under the GSP Plus scheme. This is illustrated by a falling value/volume ratio of the KSE-100, which has come off to 33 CYTD as compared to its 10-year average of 63 (albeit bonus issues impact). From an investment perspective, rallying penny stocks should further aid in achieving June’14 KSE-100 Index target of 27,800 points, especially as foreign investors are expected to remain engaged ahead of key regulatory developments such as privatizations. Broad money supply (M2) growth remained on its upward trajectory and reached a level of Rs484 billion as on December 27 , last year reflecting an increase of 99bps on fortnightly basis and 5.47%FYTD. On weekly basis, supply grew by a significant 80bps. However, a significant observation was that net assets go on to move in opposite direction. Net Domestic Asset (NDA) of banking system grew by a mammoth 18% to Rs701 billion from Rs594 billion on fortnightly basis (11%, WoW) mainly on account of higher government borrowing from schedule banks and growth in credit to private sector. Borrowing from schedule banks reached at Rs19 billion as on December 27, 2013 from 15 days earlier level of Rs52 billion , while credit to private sector remained at Rs259 billion as compared to Rs175 billion 15 days ago (48% growth). Net Foreign Assets (NFA) head came down by 10% to Rs264 billion on fortnightly bases. Analysts attribute this fall to dwindling forex inflows in the country. Government borrowing for budgetary support declined by 2% on fortnightly basis to Rs594 billion during the period under review. Government retired its borrowing from SBP during period under review by 3% to Rs612 billion , while the same has fortified its borrowings from commercial banks by 64% adding Rs33 billion . Borrowing for commodity operations under government sector borrowing reflected a retirement of Rs13 billion on fortnightly bases. Credit to non-government sector witnessed a healthy growth of 38% on a fortnightly basis to Rs299 billion . The head is continuously reflecting a credit uptick since September'13 adding positivity to the overall economy. Credit to private sector, the main component of the head, increased by a huge 48% while credit to PSE's decreased by 4% on fortnightly basis. Rising trend of credit to private sector and muted government borrowing on fortnightly basis are key positives of the analysis. Going forward, analysts expect credit to private sector will increase further backing by textile sector developments after getting GSP Plus status and worsening liquidity situation in energy chain. They also expect government borrowing for budgetary support to increase in near term on widening gap between revenues and expenditures. As per news reports, the GoP has finally dealt with the long standing issue pertaining to feedstock price for Engross Enven plant. In this regard, the Economic Coordination Committee (ECC) has approved gas at the rate of US$0.7 /mmbtu for Engro Fertilizers on the gas it obtains from the SNGP system. Recall that currently both Engro plants are running on the Mari network. On an annualized basis, assuming 80% capacity utilization of Enven plant and holding all other things constant, this will translate into an incremental earnings benefit of PkR3.9 billion (EPS impact: PkR3.04 ) for Engro Fertilizer (EFERT). Supply of gas remains a key issue where ratification of the Kunnar Pasakhi Deep (KPD) pipeline still remains a question mark. Currently, full year EPS estimate for EFERT for CY14 stands at PkR3.66 , where running the Enven plant on subsidized gas rate increases profit after tax estimate to PkR6.7 billion (EPS: PkR5.65 ). Assuming Enven utilization at 80% in CY15F increases our earnings estimate to PkR12.4 billion (EPS: PkR9.5 ) from previous PkR6.3bn (EPS: PkR4.8 ). That said, as a consequence of the feedstock rate reduction, we believe the management will likely have to pass on benefit in the form of reduced urea prices when the discounted gas rate becomes effective which will trim the incremental benefit. Pakistan Automotive Manufacturers Association (PAMA) has released auto numbers for the month of December’13. According to the data, overall industry volumes grew by 6.5%YoY during 1HFY14 to 61,252 units where on MoM basis a decline of 7.5% was recorded with volumes of 8,868 units in December’13. The decline in December follows a recurring pattern wherein buyers tend to wait out the year end, opting instead for New Year registrations, with January sales having historically risen by an average of 60% MoM over the past 5 years. On the tractors front, sales volumes increased by 34%MoM during the month under review to 5,770 units. At the same time, tractor sales during 1HFY14 declined by 33%YoY to 18,376 units.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Pakistan & Gulf Economist

Story Tools