The outgoing week witnessed lackluster activity in the KSE-100 index primarily due to prolonged uncertainty on the resumption of IMF program, high twin deficits, runaway inflation and rising political noise. Despite tough measures being taken by the govt. in the form of reversal of energy subsidies and major taxation changes in the budget, several steps were still needed to be taken to convince the IMF and get the program back on track. As a result, the govt. presented some key amendments to the Finance Bill in the National Assembly where changes included i) reversal in income tax exemptions, ii) imposition of 6% super tax on 15 sectors (one-time), iii) revision in PDL collection from PKR 30 to PKR 50/ltr and iv) reduction in corporate tax rate for banks from 45% to 39%.
Despite being negative from a corporate earnings standpoint, the market did not take much of an impact as the slide last week had largely incorporated the negatives. What came as a welcome move was the IMF’s approval of the MEFP for the combined 7th & 8th tranche that could result in inflows of ~USD 2.0Bn to the national reserves. As per FM, the country has also been approved funding of USD 17Bn from ADB and WB that could help steer the economy out of crisis, however, they are dependent upon resumption of IMF program. Despite highest ever tax collection of PKR 6.1Trn (↑29% YoY) in FY22, the sentiment did not improve primarily due to widening CAD which was reported at USD 15.2Bn for 11MFY22. With the inflow of USD 2.3Bn from Chinese debt rollover, forex reserves strengthened by ~14% (USD 2.0Bn) during the week. This provided much needed strength to the PKR against the greenback, which recorded gains of 1.5% during the week to close at PKR 204.9/USD. As for performance of the local bourse, the index moved between highs and lows of 42,149 pts and 41,052 pts to conclude at 41,630pts (↑579 pts or 1.4% WoW). Trading volumes, on the other hand averaged 100Mn shares (↓30% WoW) while daily traded value was reported at ~USD 23Mn (↓29% WoW).
KSE-100 profitability to take a hit as Super tax and poverty alleviation taxes are imposed: With the smooth sailing of the amended Finance Bill from the National Assembly, the resumption of IMF program looks increasingly likely in the next few weeks. However, these measures are poised to further impact the local population, as inflation is expected to remain in high teens throughout the next fiscal year. Moreover, with imposition of one-time super tax of 6%, corporate earnings are poised to take a major dent. As a result, payouts will likely be impacted too. Moreover, with the revision of petrol prices from PKR 234/ltr to PKR 249/ltr, the govt. has once again introduced PDL of PKR 10/ltr as per IMF demands. As per news flows, the govt. has also stopped the supply of gas to export and non-export industries till Eid-ul-Azha and directed the supply to the power sector in order to reduce load shedding. Moreover, with the June-22 CPI clocking-in at 21.3%, it is expected that the trend will continue for the next few months until high base effect kicks in. However, once the IMF is on board, further sources of lending will result in strengthening of reserves and appreciation of PKR. We opine that this will lead to some ease in inflation numbers going forward, however, with the revenue collection targets in place, a downward revision in prices is highly unlikely until we see a major correction in international oil prices.
Major data releases during the week included: 1) FBR tax collection crosses PKR 6.1Trn in FY22 (↑29% YoY), 2) CAD clocked-in at USD 15.2Bn in 11MFY22 (↑12x YoY), 3) Forex reserves improve 14% WoW to USD 16.2Bn, 4) REER drops 2.4% in May-22, 5) NEPRA approves PKR 7.9/unit hike in electricity prices, 6) Petrol prices increased by PKR 14.85/ltr as PDL is re-introduced and 7) CPI inflation for Jun-22 clocks-in at 21.3% (FY22 avg: 12.1%).
Outlook:
With increased direct taxation and reversal of energy subsidies, the resumption of IMF program now looks increasingly likely. However, recent imposition of super tax and poverty alleviation tax on corporate earnings will weigh heavily on investors as earnings outlook and dividend yields are set to take a hit. That said, we advise adopting a ‘play it safe’ strategy by maintaining exposures in low beta, high yielding and mature industries. Our top sectoral picks are Banks, E&P’s and Fertilizers.
Courtesy – BMA Research