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Pakistan Stock Exchange Index likely to reach 87k by Dec 2024, 106k by Jun 2025

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We have revisited our target PE for Dec 2024 after incorporating Pakistan’s successful completion of US$3bn stand-by agreement with IMF and initiation of talks for a new IMF program, Extended Funding Facility (EFF).

We believe the current PE of 3.7x will linearly revert to its historical average of 6.93x over the next three years of the IMF program (Jul 2024 – Jul 2027), subject to the successful implementation of the program and its conditionalities with respect to fiscal/monetary discipline and structural reforms.

That said, we believe forward PE by June 2025 will rise to 4.6x, taking our index target for June 2025 to 106k. In line with this, our Index target for December 2024 is now revised to 87k (earlier: 75k), providing a further return of 20%.

For FY25, we estimate real GDP to grow 3.5-4.0% from our earlier numbers of 3.5%. The upward revision is after incorporating the crop target numbers for next season and the slight positive adjustment in service numbers, considering negligible growth in the last two years.

We expect inflation to come down to an average of 13.0-13.5% during FY25 (vs. FY24E inflation of 24.4%). Our inflation estimates for FY25 include a 15% hike in power tariff, an 8% hike in rent, 14.5% hike in wheat prices (taking market price back to support price of Rs4,000/40kg), 14.3% hike in fuel price (assumed Rs20/liter change in PDL), and 40% hike gas tariff (20% in Jul 2024 and 20% in Jan 2025).

Going with our inflation assumption of 13-13.5% during FY25, we expect interest rates to witness cumulative cuts of 500-600bps till Jun 2025 with real interest rate assumption of 300-400 bps. We expect the interest rate to fall to 16-17% by Jun 2025.

Top Sectors: Due to expected monetary easing, deregulation of non-essential pharmaceutical prices, lower inflation and gradual address of recurring circular debt, we believe high leverage, pharma, consumer and circular debt-affected companies/sectors will garner investors’ attention in the next 12 months.

Top picks: Our Top picks are MEBL, HBL, ENGRO, OGDC, PPL, ILP, LUCK, FCCL, DGKC, and ISL. We prefer PABC, MUGHAL, AIRLINK, SAZEW, and SEARL in alpha stocks.

Courtesy – Topline Research

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