LAHORE - After notching up a 1.5% or 347 points gain in the first three trading sessions of the week, the KSE index witnessed correction towards the end of the week, closing up by a nominal 0.3% WoW or 68 points. Correction was sparked by both rollover of future contracts and elevated KSE-100 levels, where the market is treading all-time high levels following a 39% YTD 2013 surge.
Meanwhile with the onset of the generally higher payout June 2013 result season, trading volumes at the bourse rose by 40% WoW to 302m shares. Positive news early in the week centered on foreign inflows, where (1) the upcoming IMF loan has been upped to US$6.5bn from $5.3b and the US onboard to plead Pakistan’s case for a further increase to $7.5bn; (2) ADB and World Bank are also expected to chip in with up to $500m budgetary support apiece and (3) China continues to make positive noises on investment in Pakistan, citing a $6b investment in the power sector over the next 5-years. Farrah Marwat, a stock market expert from JS Capital, observed that in terms of company/sector specific activity this week, Cements put in a strong showing (+6.9% WoW) in anticipation of strong year-end results while investors shrugged off concerns on Banks’ slow core performance in light of an anticipated U-turn in spreads. Following strong 2Q2013 results last week, the spotlight shone on PTC again this week (+10.1% WoW) as news of Etisalat’s interest in acquiring Warid Telecom picked up pace. PPL (+3.2% WoW) was the E&P poster boy, announcing its 4th discovery in 3-months while KAPCO took a beating (-6.4% WoW) after International Power Plc offloaded its 36% stake in the company to local investors at Rs46/sh (28% discount to market price). Key results this week included 2Q2013 announcements by (1) Askari Bank (AKBL) which posted an unexpected loss and (2) Fauji Fertilizer Bin Qasim (FFBL) with below-expected EPS partly compensated for by a decent cash DPS:
Experts said that after a period of relative stability in last six months, PKR (Pakistan Rupee) is likely to come under pressure due to inability of SBP (State Bank of Pakistan) to support local currency and declining regional currencies against the USD. In Jan-Jun 2013, PKR has eroded by meager 2.7% compared to average 5% devaluation in regional currencies. We attribute the stability to frequent USD injection in the market by SBP, investor’s revitalized confidence on changing political setup and expectations of IMF fresh loan deal.
The loan deal of $5.3b with IMF has eliminated most of the risks of sharp reduction in foreign reserves but experts still foresee some risks of forex reserves erosion, even if expected foreign inflows materializes. Going on, critical reserves level and strengthening USD (weak regional currencies) is likely to keep exerting pressures on the currency. In addition, SBP inability to support PKR, due to likely restrictions by IMF, may result into 3-4% PKR depreciation by Dec 2013 and 6-7% in FY14.
Although slightly inflationary, PKR depreciation could be positive for the Pakistan listed E&P, IPPs, Textile and Chemicals sector. However, the impact is slight negative for OMCs, Autos and Cement.
With USD dominated revenue stream, experts expect Oil & Gas E&P sector to benefit from the prevailing phenomenon. Within the sector, Pakistan oilfields (POL) stands out to be the chief beneficiary on account of higher portion of oil in its revenue mix, while positive impact on PPL remains on the lower side. Similarly, IPPs’ ROE component is indexed to PKR/USD parity and would yield positively for listed IPP sector.
Being export oriented, Pakistan’s textile sector will also welcome the depreciation, as it will make production more competitive in the international market. LOTCHEM, Pakistan’s only manufacturer of PTA, will also benefit from PKR depreciation as its selling prices are indexed to international PTA prices in contrast to a portion of US dollar based cost (Px).
OMCs would enjoy higher absolute margins while refineries will earn higher deemed duty in absolute terms. However, for both the sectors, exchange losses, due to higher reliance on imports, will offset the incremental benefit. Hence, we gauge neutral to negative impact of PKR devaluation for OMCs and refineries.