Daily Times - Leading News Resource of Pakistan

Daily Times - Leading News Resource of Pakistan

The Karachi stock market closed in the negative zone on the last trading day of the week Friday amid news that capital gains tax (CGT) Ordinance has been challenged in the court, which forced investors to aggressively offload their holdings.
The Karachi Stock Exchange (KSE) 100-share index shed 158.60 points or 1.16 percent to close at 13,558.70 points as compared to 13,717.30 points of the previous session. The KSE 30-share index was down by 162.18 points to close at 11,708.96 points as compared with 11,871.14 points.
Analysts said that across-the-board selling was witnessed in the market with major pressure in cement stocks.
The market turnover surged 12.45 percent and traded 124.43 million shares after opening at 110.65 million shares. The overall market capitalisation declined by 1.11 percent and traded Rs 3.468 trillion as against Rs 3.507 trillion. Losers beat gainers 195 to 80, while 78 stocks were unchanged.
“News that CGT Ordinance has been challenged in the court forced investors to aggressively square their positions,” said Topline Sec analyst Samar Iqbal. “Across-the-board selling was witnessed with major pressure in cement stocks like Dera Ghazi Khan Cement (DGKC) that fell by 2.7 percent with a volume of 13 million shares. While oil stocks fell amid declining international oil prices.”
The KMI 30-share index was down by 282.36 points to close at 23,466.87 points from its opening at 23,749.23 points. The KSE all-share index closed with a loss of 106.65 points to 9,550.94 points as against 9,657.59 points.
“Stocks fell at KSE on institutional profit-taking as hopes dimmed over reduction in State Bank of Pakistan’s key policy rates on fears of double digit inflation for next fiscal year,” said Arif Habib Corporation Director Ahsan Mehanti. “Stocks fell across-the-board on limited foreign interest, fall in global stocks and commodities and concerns over falling rupee value.”
Jahangir Siddiqui and Co was the volume leader in the share market with 21.96 million shares as it closed at Rs 13.93 after opening at Rs 13.03, gaining 90 paisas. DGKC traded 13.08 million shares as it closed at Rs 39.82 from its opening at Rs 41.10, shedding Rs 1.28. Engro Corporation traded 7.40 million shares and closed at Rs 108.44 as compared to its opening at Rs 110.26, losing Rs 1.84. Azgard Nine traded 7.16 million shares as it closed at Rs 5.97 as against its opening at Rs 5.62, increasing 35 paisas.

Daily Times - Leading News Resource of Pakistan

KSE index falls by 1pc on uncertainty over CGT ordinance - thenews.com.pk

KSE index falls by 1pc on uncertainty over CGT ordinance - thenews.com.pk


The Karachi Stock Exchange’s (KSE) benchmark 100-share index on Friday fell by over one percent on across-the-board selling after the capital gains tax (CGT) ordinance – that allowed keeping the ‘source of investment’ undisclosed – was challenged in the court, dealers said.

“Reports that CGT ordinance has been challenged in the court forced investors to aggressively offload their shares,” said Samar Iqbal, an equity dealer at Topline Securities.

The benchmark KSE 100-share Index declined by 158.60 points, or 1.16 percent, to 13,558.70 points. The index moved both sides of the fence by 257.94 points, making an intra-day high of 13,768.27 points and a low of 13,510.33 points.

The KSE 30-share index dropped 162.18 points, or 1.37 percent, to 11,708.96 points.

Iqbal observed that across-the-board selling pressure was seen in the market but the cement sector took most of the brunt. DG Khan Cement fell by 2.7 percent with a turnover of 13 million shares. While oil stocks also fell in line with declining oil prices in world markets.

Stocks that played a major role in driving the benchmark index down were DG Khan Cement, Lucky Cement, Engro Foods Limited, National Bank of Pakistan, MCB Bank, Habib Bank Limited, Pakistan Telecommunication Company Limited (PTCL), Fauji Fertilizer Company, Pakistan Petroleum Limited, Oil and Gas Development Company Ltd. and Pakistan Oilfields Limited.

A total of 195 companies’ stocks closed under selling pressure out of total 353 companies’ stocks that were active on the board. However, stocks of 80 companies managed to close in positive territory while 78 companies’ stocks closed unchanged.

Moreover, about half a dozen stocks closed with over four percent decline in their share prices in the session.

These included Engro Foods Limited, PTCL and Byco Petroleum.

Hasnain Asghar Ali, head of equity sales at Invisor Securities, said that historically a low turnover price erosion on the eve of the monetary policy announcement led to the panic selling. Major sale was seen in frontline stocks, which resulted into a massive adjustment of more than 1.5 percent in the benchmark index during the session.

State Bank of Pakistan, however, announced to keep the discount rate unchanged at 12 percent for the next two-month period after the session at KSE concluded. Analysts, however, foresee a neutral impact of statue-quo in rate at the shares market.

Turnover improved by 12 percent to 124.43 million shares from 110.65 million shares traded in the previous session. Turnover in futures market surged to 13.14 million shares from 8.31 million shares traded a day earlier.

Market capitalisation declined by Rs39 billion to Rs3,468 billion.

Jahangir Siddiqui and Company was the turnover leader with 21.96 million shares and it closed at Rs13.93 with an increase of 90 paisas. It was followed by DG Khan Cement with turnover 13.08 million shares and it closed at Rs39.80 with a loss of Rs1.28. Engro Corporation was on the third position with 7.40 million shares turnover and it closed at Rs108.44 with a fall of Rs1.82.

Rafhan Maize Rs132.97

Closing Rs2,963.47

Mitehells Fruit Rs16.45

Closing Rs345.63

JDW Sugar Rs4.53

Closing Rs95.53

Unilever Pak Rs51.50

Closing Rs7,208.50

Sanofi Aventis Rs9.13

Closing Rs183.00

Shezan Int Rs8.65

Closing Rs199.90

KSE index falls by 1pc on uncertainty over CGT ordinance - thenews.com.pk

Weekly Review

 

KSE-100 index closed this week at 13,558.7 points, down by 2.29%WoW, absorbing after-shocks of FY13 budget. Although budget was positive for the broader market, investors remained cautious over i) exclusion of decrease in gross turnover tax rate from 1% to 0.5% in the Finance Bill 2012, ii) increase in GIDC on the fertilizer sector, iii) lower than earlier expected decrease in FED for cement sector, and iv) increase in tax rates for banks on dividend income earned through money market/income funds. Sharp fall in commodity prices, particularly oil coupled with the weak PkR added to the sell-off during the week. In this regard, the week ended witnessed a massive foreign outflow of US$16.8mn compared with an outflow of just US$92mn  the previous week. Furthermore, continued noise over the reopening of the NATO supply routes also amplified the negative sentiment. Lastly, statement by PML-N  MNA challenging CGT ordinance in Supreme Court today further soured the sentiment. Avg. daily volumes were also down by 32%WoW to 95mn shares. Top gainers for the week included ENGRO (+1.7%; resumption of gas supply to Enven from Jun 10’12) and MEBL (+1.3%). Decliners list was headed by AICL (-9.4%), LOTPTA (-8%, no respite in budget FY13 coupled with falling margins), EPCL (-7.9%), NBP (-6.6%) and DGKC (-6.5%WoW).

Weekly Review

Stock Market Overview

KSE: Post-budget blues engulf the market

• KSE exhibited a lackluster response to the FY13E budget and gradually fell victim to selling pressure, closing down 2.3% WoW, as investors stuck to the sidelines in anticipation of MPS announcement. A status quo transpired on Friday after market close.

 

• Volumes were sluggish, dropping to 95.3mn shares/day, down 32% WoW whereas FPI outflow was substantial with US$16.8mn exiting the bourses.

 

• Grays Of Cambridge, Rafhan Maize, Bata (Pakistan), Nestle Pakistan Limited and IGI Insurance were the major gainers while Media Times Limited, Agritech Limited, BYCO Petroleum, P.I.A.C. (A) and Pace (Pak) Ltd were major losers in the benchmark KSE-100 this week.

 

News This Week

• NRL cuts base oil prices by PRs7.15/litre                

 

• Govt raises PRs35.7bn through PIB auction

 

• FBR agrees to opposition proposals regarding listed companies

 

• Cement Sales up 9% in 11MFY12; APCMA unhappy with the budget

 

Stock Market Overview

Discount Rate Maintained at 12%

 

          State Bank of Pakistan (SBP) has stated that monetary policy is less effective in the current economic landscape and consequently has decided to maintain discount rate at 12% for the next two months

 

          The central bank has once again emphasized the need for fundamental restructuring of the economy.

 

          It was explicitly highlighted that total stock of government borrowing directly from SBP has swelled to PKR1,660bn – GoP has borrowed PKR414bn up till end May12. This is in negation to the SBP (Amendment) Act 2012 requiring government to maintain zero quarterly borrowing and retire the total stock in next seven years

 

          Although SBP is not expecting any sharp increase in inflation but is worried over its persistence at high levels; largely due to monetization

 

          The economic managers pointed towards fiscal authority and stated that reduction in reliance over banking system and retirement of borrowing from SBP without bringing structural reforms is not possible

 

Discount Rate Maintained at 12%

Bearish spell hits KSE, down 2.3%WoW

 

June 08, 2012 (JS Research)

 

 

Investors adopted a cautious approach through out the week despite a positive budget for the capital markets. Concerns related to continued diplomatic tension between the US and Pakistan , rupee depreciation, weakness in oil prices and monetary policy expectations weighed heavily on the minds of investors. Consequently, the oil heavy KSE-100 index was down 2.3%WoW to close at 13,559 level. Average volumes also reflected the limited interest in the market as they plunged by 32%WoW to 95mn shares. Foreigners too were downbeat as they sold shares worth US$16.8mn.

 

Tension between US-Pak remains unresolved

The US did agree to reimburse US$1.18bn to Pakistan on account of CSF but the issue of reopening of NATO supply routes remains unresolved. The stalemate was further fueled on the difference of opinion on drone strikes and the Salala tragedy. A senior US official is expected in the country next week to break the deadlock between the two countries on reopening of NATO supply routes.

 

SBP keeps discount rate (DR) unchanged

As per market expectations, the SBP adopted a wait and see approach by keeping DR unchanged at 12%. In its Monetary Policy Statement, SBP highlighted managing external and fiscal pressures as key concerns in the immediate term. Moreover, the SBP also emphasized the importance of reviving private investment in the economy and the need of fundamental reforms to turnaround the economy.

 

Individual stock performance

News of restoration of gas supply to Engro’s Enven plant kept the stock in the limelight throughout the week as it outperformed the market by 4%. On the other hand, POL underperformed the market by 1.6% on the recent slide in oil prices.

 

Bearish spell hits KSE, down 2.3%WoW

Pakistan Market Statistics (Jun 08, 2012)

June 08, 2012 (JS Research)

 

 

KSE-100 Index	13,558.70
Previous KSE-100 Index	13,717.30
Change from last closing - Negative	-158.60
Change from last closing (%)	-1.16%
KSE Market Capitalization (Rs. bn)	3,468.39
KSE Market Capitalization (US$ bn)	36.82
Total Volume (Shares mn)	124.44
Total Ready Market Value (Rs. bn)	4.02
Total Ready Market Value (US$ mn)	42.67
KSE-30 Index	11,708.96
Change from last closing - Negative	-162.18
Change from last closing (%)	-1.37%
KSE Future Volume (Shares mn)	13.14
KSE Future Value (Rs. mn)	979.30
KSE Future Spread	9.62%

Pakistan Market Statistics (Jun 08, 2012)

Banks: Deposits and offtake up 3% and 2%QoQ in 2Q

 

June 08, 2012 (JS Research)

 

 

Latest banking sector data (June 1, 2012) released by the SBP show a growth of 3%QoQ in aggregate deposit during 2Q2012 so far, while credit offtake, on an encouraging note also rose by 1%. While Kibor is up 9bps on an average in 2Q2012, spreads have seen a contraction to 7.13% (only April number yet released) from an average of 7.32% in 1Q mainly on account of an increase in minimum deposit rate on saving deposits to 6%. On the provisions front, cumulative provisions have grown by 2%QoQ (Rs9bn) so far to Rs401bn which is unlikely to pose a great risk to bigger banks mainly on account of their higher loan coverage ratio. We maintain our ‘Market-Weight’ stance on the sector and flag MCB and NBP as our preferred play.

 

Deposits and offtake up 3%QoQ & 2%QoQ

Banking sector aggregate deposits in 2Q2012 have grown by 3%QoQ to reach Rs6.1trn so far. Credit offtake, in 2012, has seen a reversal in its declining trend witnessed during 2011, growing by 2%QoQ to Rs3.7trn. Growth in investments, on the other hand, has slowed down – just growing by 1%QoQ to Rs3.1trn, as the government issued TFCs in 1Q to resolve the circular debt issue. ADR for the banking sector has come down by a single ppt to 60% in 2Q with IDR also contracting by 1ppt to 51%.

 

 

Spreads in April contract to 7.13%

After averaging at 7.32% in 1Q2012, spreads have further contracted to 7.13% in April, down 39bps YoY. As per the breakup, average lending rates are down 15bps MoM, with a 2bps increase witnessed in the deposit rate in April. However, with the 6-month Kibor averaging at 12.01% in 2Q (up 9bps) so far, we can see a slight improvement in net interest margins on QoQ basis which is likely to be offset by an increase in the minimum deposit rate on savings to 6%.

 

 

Cumulative provisions rise by Rs9bn

Total provisions have risen by Rs9bn in 2Q, compared to an average rise of Rs10bn in the previous five quarters. Bigger banks with high coverage ratio and relatively better asset quality are likely to be less affected by rising provisions, however, it remains a concern for the smaller banks.

 

Outlook: ‘Market-Weight’

We currently maintain our ‘Market-Weight’ stance on the banking sector in the absence of any major trigger. So far in 2012 the banking sector has outperformed the broader market by 8% while underperforming by ~6% in 2Q. Underperformance in 2Q can be linked to pre budget news of increase in tax rate on income from government securities for the banking sector, which did not materialize. However, tax on dividend income received by banks from money market and income funds was raised to 25% and 35% in 2013 and 2014 respectively. With banking sector down 5.3% in 2Q so far, we believe investors have an opportunity to take positions in NBP and MCB as both the stocks offer a potential upside of 30% and 22% to their respective target prices.

 

Also in focus

Forex reserves decline to US$15.53bn

Country’s foreign exchange reserves fell to US$15.53bn during the week ending May 31, 2012 from US$16.01bn. The decline was witnessed on account of scheduled debt repayments made by the SBP to various multilateral lending agencies. Reserves held by commercial banks dipped slightly by US$15mn to US$4.29bn while those held by the SBP witnessed a contraction of US$455mn to US$11.24bn.

Banks: Deposits and offtake up 3% and 2%QoQ in 2Q

Sector Update – E&P

Volatile crude & domestic E&Ps
Oil prices have changed directions after a ~ 2.5 month of bull run when prices had shot up from USD 108/bbl at the start of Jan12 to reach their CY12TD high of USD 127/bbl in Mar12, an increase of 17%. However, the trend has since than reversed as renewed concerns over the Euro zone coupled with lackluster US job data dampened sentiment in the commodity. Resultantly, prices dropped sharply by 26% to touch a low of USD 94/bbl, levels last seen in Jan11. AGAL has averaged at USD 113/bbl during the ongoing quarter against USD 119/bbl in the preceding quarter, down by 5%.

We continue our preference for
POL (Dec12 TP PKR 230/share) and
PPL (Dec12 TP PKR 450/share) as they offer balance of dividend yield and potential capital gains.
We reiterate our BUY recommendation for
POL and PPL while maintaining our
HOLD recommendation on OGDC (Dec12 TP PKR 172/share).

1H FY13 – reference price up by 7% YoY
Recall that gas prices are fixed on 6mo averaged prices and benchmark crude for the reference period for 1H FY13 (Dec11-May12) averaged at USD 116/bbl, up by 7% over the last reference period. Resultantly, regardless of the direction of oil prices post May12, realized price of gas for 1H FY13 is expected to clock in higher by 9% as PKR depreciation will further lead to topline accretion. PPL is the key beneficiary as Sui & Kandkhot are free from caps in their policies.

OGDC – the least affected
Downside risk to OGDC's earnings is arrested because of caps placed in oil pricing policies – at USD 118/bbl, OGDC's realized price of oil was estimated at USD 93/bbl against PPL's and POL's USD 107/bbl and USD 105/bbl respectively. Moreover, realized price of gas for 2H FY12 has already been notified and with OGDC accruing 48% of its revenue from gas, downside risk from declining oil prices for 4Q FY12 is further mitigated. We lower our estimates for 4Q FY12 by 3.4% to PKR 5.97/share, bringing FY12E earnings to PKR 22.07/share, up by 49% YoY.

Gas buffers PPL
PPL generates more than 70% of its revenues through gas which is why the impact of lower than expected oil prices translates into a 3.4% downward revision in our estimate for 4Q FY12E to PKR 9.02/share. However, the impact on PPL is magnified if oil price continue at current levels as the well head prices will be revised downward for 2H FY13. Moreover, combined contribution of the Tal block and Nashpa to PPL's oil revenue is estimated to be around ~60% during FY13. Both these blocks do not incorporate caps in their pricing mechanism and as such a revision in oil prices magnifies risk (both upside and downside). With our revised estimates for 4Q FY12, PPL's FY12 expected earnings work out to PKR 33.57/share, up by 40% YoY.

POL – the most affected
Oil contributed ~50% to POL's topline but the company's low equity base and exposure to high yield oil fields (positive in an environment with upward trending oil prices but also amplifies downside risk) makes it the most vulnerable. We revise our 4Q FY12 estimates down by 6% to PKR 13.08/share which translates into FY12 EPS of PKR 52.53, up by 15% YoY.
(GLOBAL)

Sector Update – E&P

Gas to Engro new plant to resume from June 10, 2012

As per notice available on KSE, SNGPL has notified to resume the Gas supply to Engro new Plant from June 10,
2012. In order to further manage the gas supply issues, the Gas supply to fertilizer plants on SNGPL network will
be supplied on 30 days rotational basis to two units at single time.
(InvestCap)

Gas to Engro new plant to resume from June 10, 2012

EFOODS valuation update

We have revisited our investment case for EFOODS and have upgraded outlook by 14%-36% through our forecast range. Earnings revision is underpinned by recent increase in dairy product prices. Furthermore, we have also tweaked our capex assumption for CY12 and have resultantly raised our Dec-end TP of EFOODS by 31% to PkR69/share. At current levels EFOODS is trading at CY12 PE of 25.6x and PS of 1.1x respectively, offering limited upside of 2%, leading to a ‘Neutral’ stance. However, the scrip looks cheap when compared to peers on PEG ratio, where EFOODS is trading at a PEG ratio of 0.4x compared with peers ULEVER and NETSLE which are both trading at 1.1x, underscoring the company’s superior growth potential.

Earnings revised up by 23% over the forecast range: We revise our earnings by 14%-36% through our forecast range after taking into account i) the recent hike in dairy product prices (Olpers and Tarang) and ii) increasing margin assumption for ‘Dairy Omung’, where the product is likely to be only slightly margin dilutive despite it being a lower priced alternative to ‘Olpers’. Furthermore, we have raised our CY12 earnings estimates by 36% to PkR1,971mn (EPS: PkR2.62) after incorporating the said changes in addition to revising up dairy volumetric sales assumption by 4% as well as reducing financial charges by 24% to PkR1.1bn after lowering our capex assumption.

2Q has historically been the best for ice-Cream sales: Taking ULEVER as a proxy, the second quarter (Apr-Jun) has historically been the best for the ice-cream segment, which over the last five years (CY07-CY11) has accounted for 33% of annual sales. Similarly, operating margins have also been the highest during the quarter, averaging at 11% compared to the annual average of just 4%. For EFOODS, we expect a significant jump in ‘Ice-cream segment sales in 2QCY12’, in line with the trend in industry although electricity shortages, particularly in Punjab may be a bit of a dampener.

Milk consumption in Pakistan grew by 3.2%YoY in FY12: As per the FY12 Pakistan Economic Survey, milk consumption grew by 3.2%YoY to 38.7mn liters, in line with the annual consumption growth of ~3% over the last five years. Besides the population growth (avg. of 2.4% pa over the last ten years), per capita consumption has also been rising at an average rate of 1%pa, which is driving milk consumption demand in the country.

Asia Pacific region to drive global growth in LDPs: As per Tetra Pak’s liquid dairy product (LDP) forecast, the Asia-Pacific region (including Pakistan, India and China) will drive the global growth in demand where Tetra-Pak expects the regions LDP demand to grow at a CAGR of 4.6% during 2011-2014, compared with the global CAGR of 2.9%. Consumer switch from loose to packaged milk is set to continue, where in CY11 packaged milk accounted for 49.8% of total white milk consumption, which is still relatively higher when compared with the conversion rate in Pakistan where packaged milk is still less than 10% of total milk consumption, underscoring the growth potential in the sector. Amongst the LDP sub-categories, ‘Lactic Acid Drinks’ (+11.9%) and ‘Baby & Toddler Milk’ (+9%) are forecast to be the highest growth categories. As for EFOODS, any JV with a foreign food operator, particularly in the infant nutritional category could be a game changer given the segments superior growth potential as well as premium margins.

Recommendation: At current levels we recommend ‘Neutral’ stance on EFOODS, which offers limited upside to our Dec-end TP of PkR69. However, the scrip is cheap when accounting for its growth potential where the company’s 5-yr earnings CAGR is forecast at 57.9%, superior to NESTLE (26.7%) and ULEVER (17.5%). Resultantly, the scrip is trading at relatively undemanding PEG ratio of 0.4x compared with 1.1x for ULEVER and Nestle, respectively.
(AKD)

EFOODS valuation update

MPS : status quo stance on discount rate to 12%

Expectation on Monetary Policy Statement (MPS) announcement scheduled today by the State Bank of Pakistan for Jun-12.

Average inflation still under control
The State Banks of Pakistan is all set to announce its Monetary Policy Statement today for the next two months. We expect the central bank to keep the discount rate unchanged at 12% in Jun-12 MPS. The major factors which we are considered for this status quo stance are: i) declining in international oil prices which will reduce the pressure on external accounts ahead as well as price on local front, 2) contained average inflation by far and 3) CY12 a pre-election year where the gov’t would not vote for a rate increase at this point at least. Therefore, we expect this time too the discount rate to remain unchanged. However, due to IMF loan repayments coupled with declining FX reserves, PKR is expected to depreciate further against USD which will put further pressure on SBP to maintain tight monetary stance. However, materialization of the pending Coalition Support Fund (CSF) from the US and planned 3G licenses may provide, if materialized, some cushion to bridge widening fiscal deficits in FY13.

May-12 inflation to 12.3%, not the settler
During the month of May 12, inflation surged to 12.3%YoY whereas food inflation remained at 11.3%YoY and non-food inflation augmented to 13.0%YoY. However, Jul-May average inflation remained at 10.97% which is still below from the revised annual target of 11.5% for FY12. Moreover, during May-12, spike in non-food inflation was mainly due to increase in electricity tariff by 16%YoY, however this time around, reduction in international oil prices by 22% from its peak will also help reduce fuel cost for power sector going forward.

Current account position remains alarming
The external account position also remained weak during the last 10MFY12 with current balance posting a deficit of USD3.4bn. Owing to weaker financial inflows, overall balance recorded a deficit of USD2.5bn during the same period. For full fiscal year, the gov’t is expecting current account deficit to reach USD4.0bn. Furthermore, the gov’t expects external sector weakness continues in FY13 as well as reveals in FY13 current account deficit forecasts of USD4.8bn. In the wake of a weakening BOP position, an installment of USD394mn paid to IMF and depleting foreign reserves, Pak rupee depreciated by 4% against USD from last month. The above would also exaggerate to inflationary pressure amid higher prices of imported goods. However, during the last few weeks, the global commodity prices especially petroleum products witnessed sharp decline tumbling significantly from 20% to 22% from their recent peaks, on better supply situation and major global meltdown fears. If the declining trend continues it will definitely dispel pressures on Pakistan's fiscal deficit.
(InvestCap)

MPS : status quo stance on discount rate to 12%

Fertilizer Sector Is the worst over?

Event
We discuss the latest development in the sector pertaining to imports and GIDC, and discuss our outlook for the upcoming period. We have also incorporated the increase in GIDC in our model resulting in downward revision in earnings and target prices.

Impact and analysis

• Higher quantum of imported urea reduced pricing power: In FY12 the government is expected to have imported around 1.6mn tons of urea resulting in subsidy of around PKR45bn as per the Economic Survey FY12. Majority of this import came in 2HFY12, resulting in reduced pricing power for the local manufacturers who despite producing around 1.4mn tons (in 4MCYCY12), were able to sell only half the produce. Though urea imports will continue in Kharif season with 100k tons finalized and tender for remaining 200k set to be given soon, we believe that the quantum of imports seems to be subsiding (See side table).

• Price discount offered by local players seems to have partly worked with channel checks suggesting MoM rise in sales. Due to this, urea price is set to increase by PKR50/bag from 16th June. We expect local producers’ sales to further improve in June as NFML’s imported urea stock is on the lower side, and Kharif season demand is on the upswing. Another price hike is possible from July in our view to partially compensate for GIDC.

• Increase in GIDC will reduce margins: As expected GIDC on Feed and Fuel stock has been increased resulting in cost impact of around PKR160/bag. With government’s focus on upcoming election (keeping farming community happy), we feel that local players will find it difficult to fully pass on the cost hike and restore their margins. We believe that producers will only be able to hike the prices only to the previous level of PKR1,790/bag for 2HCY12. We are of the view that post-election/entering in a new IMF program, imports volume and subsidy will be rationalized/reduced and local players will again get their pricing power. Thus we expect CY13 to be a relatively better year for the industry compared to the current year.

• Though GIDC collection will be substantially more than the projected figure of PKR30bn, we believe that the government will likely be putting the remaining balance in a separate escrow account. It may be recalled that the purpose of GIDC is to use the collection to fund IP/TAPI gas pipeline.

Conclusion
In CY12, all players seem to be at the receiving end be it due to gas curtailment, rising working capital needs, lower selling price (resulting in lower margins) or possible impact of increase in GIDC. Amongst our FSL Fertilizer universe, Fatima is the key beneficiary due to fixed feed price agreement. While Engro and Fatima both provide the most in terms of target price upside potential (See side table for FSL fertilizer universe snapshot).
(FS)

Fertilizer Sector Is the worst over?

OMC: HSD and MS Drove the Oil Sales in May12

Total oil sales for May12 have improved by 24% MoM. However, the consumption continued to show negative momentum for the sixth straight month (down 2% YoY) when compared to the same period last year    Oil consumption in 11MFY12 has concluded on negative note as sales showed a decline of 1% YoY to 17.8mn tons    Thanks to marked improvement in off takes of HSD (up 48%) and continuous improvement in MS sales (up 25%), total sales of major products have clocked in at 1.8mn tons compared to 1.44mn tons in Apr12    Slowdown in 11MFY12 sales is attributable to 1) rising circular debt which led the oil marketing companies to shy away from FO sales, 2) higher product prices and 3) halt in supplies to NATO forces    With relative immunity towards cash strapping circular debt, greater share of high margins and cash stable products (Asphalt) and improving share of fixed margins products (HSD and MS), APL stands as our top pick in the oil marketing chain

OMC: HSD and MS Drove the Oil Sales in May12