The stock market depicted a mixed trend in the outgoing month, closing at 41,331 level during May’23, down by 250pts / -0.6% MoM. While a robust result season and announcement of shares buyback (LUCK and HBL) kept interest in the index alive early in the month, political instability following the arrest of ex PM eroded gains made at the equity bourse. As the situation pacified with his release, concerns emerged regarding substantial debt repayments in the remaining fiscal year with more news flow indicating the FY24 Budget a new focus point of the IMF, prior to the conclusion of the ninth review. Thereafter, the market began to speculate imposition of additional taxes, which dictated activity at the index. Whereas persistent delay in the resumption of the IMF program coupled with depleting FX reserves further depreciated the Pak Rupee to PKR 285.47/USD (-0.57% MoM).
Major News
Diesel smuggling from Iran reaches 8,000T/day, Auto financing drops to PKR 317bn in March, Govt raises LPG rates by PKR 4.89/kg, Qin, COAS discuss CPEC, other matters, Circular debt spikes to PKR 2.536trn, Jul-Dec: Govt inks USD 3.9bn new loan agreements, Car sales plummet by 85% to 2,844 units in April, Jul-Apr foreign borrowings down 37.7% to USD 8.123bn YoY, ECC approves PKR 5.57bn TSG for urea subsidy, RDA inflows cross USD 6bn mark in April, Jul-Apr ITeS export remittances down 3% to USD 2.133bn YoY, Expand tax base urgently, PM asks economic team, FY24 Budget: PKR 9.2trn tax collection target expected, Price of petrol cut by PKR 8, diesel’s by PKR 5, Russian oil: first shipment likely to reach by first week of June, IMF continues its engagement with govt: Porter, and Pakistan to share budget details with IMF to unlock funds: Finance Minister.
Outlook and Recommendation
In a recent statement, the Finance Minister stated that the details of the upcoming Budget will be shared with the IMF team to unlock stalled funds. Therefore, it remains pertinent for the incumbent government to persistently target fiscal consolidation, which complements the current tight monetary policy.
We believe a massive surge in tax revenue targets would necessitate imposing additional taxes and duties, with implications for the stock market. Recent news flow has indicated tax on corporates that have avoided announcing payouts recently, which is likely to propel companies to revive payouts.
Additionally, we view headline CPI to start tapering off from Jun’23 onwards due to high base effect of the prior year. However, the future inflation outlook relies heavily on the successful revival of the IMF program and effective management of debt repayments, which will potentially curb any major downside in the Pak Rupee. If this plays out in time, a bet can be placed on interest rate cuts one year down the line, attributable to lower inflation levels.
The KSE-100 is currently trading at a PER of 3.8x (2023) compared to Asia Pac regional average of 11.2x while offering a dividend yield of ~12.0% versus ~3.0% offered by the region. Our preferred stocks are OGDC, PPL, MARI, MCB, FABL, MEBL, BAFL, LUCK, MLCF, FCCL, ENGRO, FFC, HUMNL, HUBC, PSO, and SNGP.
Courtesy – AHL Research