The profiteering of money changers was unabated despite repeated calls but it could not halt warranting strict actions. The economic managers made security personnel sit in or outside their offices forcing the open market rate of dollar to fall Rs 10 within a day, which still has a difference of Rs 17 than interbank.
Stock market showed a positive sign after news of army chief meeting and giving courage to the investor and businessmen side. However, statement from government with $ 25 billion to many many billion dollars in next few years is also making headlines. We hope promises converting into realities. This will lead to a better economic outlook in future.
Some sectors showed upward sales trends with higher inflation scenario maintaining its pace. Some of the sectors’ growth is listed here:
Inflation: Aug-23 NCPI at 27.4% Y/Y, Persistent Challenges Ahead
Inflation clocked in at 27.4% Y/Y. NCPI saw a slower increase of 1.62% M/M, driven mainly by a substantial 6.09% M/M rise in the transportation index and a 1.52% M/M rise in the housing index, whereas food inflation increased modestly by 0.46%. Meanwhile, core inflation rose by 1.8% M/M (20.8% Y/Y).
Fuel prices driving 6.1% hike in transportation index. Soaring global fuel prices/spreads and PKR devaluation translated into Motor Fuel index jumping by 8.29% M/M, whereas transportation services saw an increase of 3.95% M/M.
Food prices increase slowed down to 0.46% M/M. 28 items witnessed an increase out of a total of 39 items under the food basket. The major food items contributing to this hike are fresh-tomatoes/spices/eggs/sugar/milk, which increased by 75/17/16/9/2% M/M. On the other hand, the fresh-fruits/vegetables/chicken/cooking oil and few other helped bring down the food index by 0.82 ppts.
Continued increase across all the inflation measures. The core inflation increased sequentially by 1.8% M/M (20.8% Y/Y), whereas the food and energy inflation increased by 0.6%/4.6% M/M (39.9%/10.7% Y/Y).
Cost and supply pressures to keep inflation elevated. Inflation is expected to remain high due to reflection of already increased fuel prices, depreciation of PKR and the lagged impact on food and other prices. Food shortages caused by smuggling are anticipated to further pressure the heavyweight food index. We estimate jump in NCPI to 31% Y/Y in Sep-23, before averaging at around 28% in 2QFY24, bringing the FY24 avg to ~24%. Based on these estimates, 12-months forward looking real interest rate (incl. Sep-23) stands at ~-0.1%.
Fuel price hikes & falling PKR imply burden on prospective CPI –
- Aug-2023 CPI clocked in at 27.4% YoY, lower than street estimates as MoM increase came in at 1.7% vs estimate of 2.83% MoM. This was in contrast to trajectory depicted by SPI (+410bp MoM) and WPI (+420bp MoM).
- Core inflation (excluding food and energy) clocked in at 20.7% – lowest in seven months, reflecting base effect beginning to kick in, especially in the Urban inflation basket.
- In line with CPI methodology, the Aug-2023 data does not incorporate last two domestic POL price hikes of cumulative Rs36/ltr (the 15th Aug hike will be reflected in Sep alongside the increase implemented from 1st Sep). In addition to these two hikes (which account for currency at Rs300/US$), ongoing depreciation and rising international oil price pose further upside risk.
- Pertinent to note that Sep-2023 CPI will also face base effect anomaly as Sep-2022 CPI had seen a short-term downward blip due to power tariff adjustment – this will also push YoY inflation print for Sep-2023 higher than the ongoing trajectory.
Monthly OMC Sales: Despite enormous price increases, OMC sales jumped by 4.1% M/M
MS sales up 2.5% M/M in Aug-23. MS sales clocked in at 672 KT in Aug-23, showcasing a 2.5% jump in volumes despite increase in average price from PKR 257.5/ltr in Jul-23 to PKR 281.7/ltr in the period, depicting a 9.4% jump in average price on M/M basis. The reason for which is (1) likely resumption of schools in the month, and (2) possible hoarding due to expected price increase. Furthermore, a 5.4% Y/Y increase in sales can be attributed to the low base effect of heavy floods in the country in SPLY.
HSD sales up by a huge 11% M/M. HSD volumetric sales witnessed an increase of 11% M/M and stood at 548 KT in Aug-23, again despite a whopping 10% increase in average HSD prices from PKR 257/ltr to 283.4/ltr in Aug-23. Probable reason for which is (1) absence of rainfalls in the period, (2) likely uptick in economic activity after the easing off of import restrictions, and (3) movement of harvested cotton. On a Y/Y basis, sales also increased by 10.7% because of the aforementioned reason of heavy floods in SPLY.
FO sales came in at 118 KT in Aug-23. FO sales decreased by 18.3% M/M in Aug-23, down from 144 KT in Jul-23, likely due to increase in Hydel generation in the month coming from resumption of Neelum-Jehlum Hydropower which was non operational since Jul-22, causing FO usage to phase out. Furthermore, on Y/Y basis, FO sales plummeted by a massive 64% amid low reliance on FO by power sector.
PSO’s market share increased by 1.4 ppts M/M. PSO performed better than its competitors and increased its market share to 51.6% on M/M basis, with APL trailing behind with an increase of 0.9 ppts in the month to a market share of 10.7%. While, SHEL remained stable at 7% market share, and HASCOL declined by 0.7 ppts to a meagre market share of 2.5%.
Volumes to remain under pressure. We anticipate that volumes will remain under pressure in the short term due to the expectation of further increase in domestic fuel prices, emanating from PKR weakening and anticipated cut in oil supply of 1 MMBPD by KSA in Oct-23 as well. Nevertheless, a slight recovery could be witnessed in the later half of the year, driven by improved agricultural output and economic activities.
Fertilizers Offtake
- We expect Urea sales in Aug-2023 to clock in at 650k tons, up 18% YoY, taking 8MCY23 offtake up 3% YoY. Similarly, DAP offtake for Aug-2023 is expected to clock in at ~259k, depicting an improvement of 10x YoY on a low base driven by floods last year.
- With production estimated at 575k tons, we expect the industry’s closing inventory to clock in around 100k tons for Aug-2023.
- Engro Fertilizer (EFERT) is expected to post Urea sales volumes of 231k tons (+32% YoY) during Aug-2023. Fauji Fertilizer Company (FFC) is likely to post 236k tons Urea sales, up 37%YoY due to low base effect.
- Our long-term view on the sector remains positive with Overweight stance, given its stable revenue stream. Despite the increased tax, CY24E D/Y for FFC and EFERT stands at 23% and 24%, respectively.
Cement: August sales recorded at 14-month high
▪ Cement sales in Pakistan recorded at 4.5mn tons, which turned out to be
highest sales in 14 months, up 37%YoY.
▪ Local sales in August 2023 remained higher by 31%YoY which remained
above market expectations as construction activities in the country seems to
remain upbeat.
▪ On MoM basis, local cement offtake posted healthy recovery of 37% as well.
This is unusual in a sense that during last 5 years, local cement sales in
August posted average MoM fall of 8% (barring FY23 due to severe floods).
▪ We relate MoM growth of local cement dispatches due to relatively drier
weather which prompted construction activities in the country. Interestingly,
this August turned out to be second driest month in 63 years due to lowest
rainfall, according to Met office.
▪ Last year, local offtake during same month plunged to 2.9mn tons due to
devasting floods which hampered construction activities. Thus, such a low
base also inflated growth numbers for August 2023.
▪ Other factor which also supported uptick in local cement demand is the pre-
buying by cement dealers in anticipation of hike in cement prices. During
August 2023, cement prices in north region increased by 3%MoM (Rs36 per
bag) owing to upward adjustments in fuel and utility prices.
Exports, on the other hand, remained around 0.72mn tons during August
2023, up by 87%. This is highest monthly export recorded by the country in 27
months.
▪ Total cement sales in Jul-Aug FY24 clocked in at 7.7mn tons compared to
5.3mn tons in the same period last year which resulted in a 45% increase YoY.
▪ Local sales clocked in at 6.6mn tons compared to 4.8mn tons during the same
period last year, up by 37%. Moreover, exports increased sharply by 115% YoY.
▪ Going forward, we believe that cement demand to remain sluggish owing to
higher interest rates and lower PSDP allocation. Leading cement industry
players are eyeing local cement to remain flat during FY24 due to project
delays amid rising construction cost and cut in PSD amid government’s fiscal
constraint.
Pakistan Banking Sector – 2QCY23 in pictures
September 2, 2023
- 2QCY23 marked another record quarter in terms of profitability of the sector.
- While asset repricing led to record high interest rates keep core income growth intact, Non Interest Income growth also remained strong.
- With differentiation in strategies in light of each bank’s individual positioning, dividend announcements were the key theme this quarter.
- We review banking sector performance for 2QCY23 with our sample size of 12 banks to dissect the key differentiating factors and their respective impact on relevant ratios
- Our sample size listed alongside accounts for 85% of the banking sector market capitalization.
