The KSE-100 index closed flat this month at 40,510 points, down by 163pts / 0.4% MoM. With the SBP reserves continuing to show weakness, the Pak Rupee touched its all-time low level of 276.58/USD on 3rd Feb’23. Albeit, the commencement of talks between the incumbent government and the IMF staff for the 9th review, as well as the potential clearance of gas circular debt, propelled the market in the early months, particularly energy stocks. However, the staff returned without an agreement while the virtual discussion was ongoing.
In addition, fresh taxes were imposed through a Finance Bill to generate an additional PKR 170mn, a hike in gas tariff already notified while power tariff has been proposed, and an emergent monetary policy meeting has been called to potentially further hike the interest rates (reflective in primary and secondary market yields of T-Bills). This built a cumulative pressure on the index, as investors feared tougher inflationary environment for both, businesses and households. However, a silver lining appeared as a USD 700mn loan was approved by China, while probably SLA with the IMF, also translated to some improvement in the PKR-USD parity (closing of 261.50). In USD terms, the KSE-100 index posted a return of 2.03% in Feb’23.
Major News
USD USD 700mn Chinese loan lands in SBP account, Petrol price reduced by PKR 5; diesel’s remains unchanged, Jul-Jan FDI dips 44%, Bestway Cement commences production at brownfield Hattar plant, Fuel cost for power generation rises 59%, Government likely to increase SLR by 500 bps, Oct-Dec’22 QTA for Discos; Nepra agrees to approve PKR 0.5/unit hike in tariff, Debt, liabilities surge 23.5% to PKR 63.9tr in July-Dec, Car sales drop to a 31-month low in Pakistan, Govt plans to quadruple coal-fired power, LSM output drops 3.5% in Dec’22, marking sixth monthly fall, Two RLNG-based power plants: Govt considers selling own 30% equity, Italian, Chinese show interest for JVs in footwear industry, Thar coal-based power plant: COD achieved, Islamic NPC rates revised upward, PSO directed to charter PNSC fleet for POL import, Govt offers its SOE stakes to 2 UAE firms, Govt plans to convert PKR 800bn PHL debt into public debt, Indus Motor halts production for two weeks on inventory shortages, and Textile exports drop 12%.
Outlook and Recommendation
Another month has expired with investors pining all their hopes to an SLA (staff level agreement) with the IMF. Albeit, some pre-requisites are still due; an emergent monetary policy meeting scheduled for tomorrow indicates potential rate hike, while an increase in power tariff has been demanded for a prolonged period as opposed to just four remaining months of FY23. The fund also needs confirmation from bilateral partners to help meet the external financing needs. While all administrative measures in place to control the parity should be removed, so the Pak Rupee can find its market determined value.
In addition, Moody’s has further downgraded Pakistan’s sovereign credit rating by two notches to Caa3, driven by the country’s fragile liquidity and external position, with stable outlook as opposed to negative earlier.
Therefore, the risks are becoming increasingly complicated to manage, and swift policy action by the incumbent government remains the need of the hour. However, these policies come at a substantial cost; latest data for CPI for the month of Feb’23 at 31.55% indicates the highest ever YoY jump since availability of data (Jul’65).
Yet, upside to inflationary levels will continue to mount as augmented energy tariffs becomes effective and pre-Ramzan price euphoria is witnessed in edible commodities. In this backdrop, and with interest rates at near all-time high levels, business environment appears extremely feeble.
Albeit, these decisions have been long pending, and materialization will enable the country to resume the IMF program and secure the funds necessary to meet financing needs, and stabilize its FX reserves position.
The KSE-100 is currently trading at a PER of 3.9x (2023) compared to Asia Pac regional average of 11.8x while offering a dividend yield of ~10.5% versus ~2.9% offered by the region.
Our preferred stocks are MCB, FABL, MEBL, BAFL, LUCK, MLCF, FCCL, ENGRO, FFC, OGDC, PPL, MARI, HUMNL, HUBC, PSO, and SNGP.
Courtesy – HL Research