Lahore - The profit taking during the last week dragged down the bourses, registering a negative growth of 0.8 percent ahead of the MSCI review being made on Tuesday. The week started off on a positive note over continued optimism on a potential upgrade for Pakistan to MSCI Emerging Market Index and largely ignored the Federal Budget FY17 announcement, which held more negatives than positives for the capital markets. Of the key sectors, chemicals, cements, banks and electricity witnessed profit-taking whereas heavyweight oil & gas gained on a WoW basis. The commencement of Ramadan with reduced trading hours resulted in an expected dip in activity with volumes edging down by 36 percent WoW to 152mn shares/day and average daily traded value receding to US$79mn (down 25 percent WoW).

XTM research analyst Lukman Otunuga commented that global stocks swiftly departed from their gains during trading on Thursday as the horrible mixture of mounting Brexit anxieties and elevated concerns over the global economy rapidly eroded risk appetite. Asian markets were already on a slippery decline from the tepid China data which rekindled concerns over slowing economic momentum in the world’s second largest economy, and they may open to more losses if an appreciating Yen caused by risk aversion drags Japanese stocks lower. The remarkable rebound displayed in European equities at the start of the week was unsustainable as most European equities plummeted amid plunging oil prices. Lukman Otunuga observed that although Wall Street triggered excitement when the S&P 500 lurched to fresh 10 months highs, most American stocks should descend deeper into the red territory when risk aversion encourages investors to scatter from riskier assets.

The key highlights of the week in the country included: (1) release of tax collection numbers (impressive growth of 20 percent YoY to Rs2.64trn in 11MFY16), (2) approval of CCoP to divest GoP’s stake in Mari Petroleum (MARI), (3) news of cement manufacturers planning to increase prices by Rs34/bag post changes in FED, (4) strong growth in cement dispatches (+23 percent YoY in May-16), (5) record petrol sales of 566k tons in May-16 and (6) Engro Corporation (ENGRO) completing private placement of 295mn shares of Engro Fertilizer (EFERT) at a strike price of Rs65.47.

According to experts, textile sector has emerged as a major beneficiary of the recently announced federal budget with i) grant of zero rated status and ii) 50bps reduction in Export Refinance Rate (EFF) amongst the notable ones.

Experts believe the grant of zero rated status will likely resolve the issue of tax refunds held with the government and thus, improving the sector’s liquidity. The reduction of 50bps in EFF rate will likely lead to a positive earnings impact of 1 percent-2 percent on NML and NCL, on an annualized basis. However, the increase in minimum wage rate by PKR1,000 to PKR14,000 will potentially impact the earnings of the sector negatively by 1 percent-2 percent for every 10 percent workers coming in the segment.

According to experts, oil sales during May 2016 grew by an impressive 11 percent to clock in at 2.4mn tons driven by 14 percent growth in Furnace Oil (FO) to 0.9mn tons. FO sales had been declining in past few months, but have now recovered because of higher demand. We believe this is most likely from the Power sector.

Retail products, including Motor Gasoline (MOGAS) and High Speed Diesel (HSD) also showed strong growth due to lower oil prices.

 MOGAS sales were up by 13 percent YoY to 0.5mn tons during the month under review, whereas HSD sales was up 5 percent YoY to 0.9mn tons. Prices of both retail products have come down by 13 percent YoY in May 2016.  

In 11MFY16, oil sales were up 5 percent to 21.2mn tons driven by strong growth in MOGAS, which was up 23 percent. Similarly, HSD was also up 4 percent to 7mn tons. We expect oil sales to clock in at 23.2mn tons in FY16 and 24.3mn in FY17. Strong demand in retails products driven by lower oil prices, improving macros and increasing car sales will drive oil sales going forward.

Experts continued liking for the OMC sector due to increasing demand of retail products, improving economic activity and rising car sales. Higher OMC margins on retail products and increasing oil prices also bodes well for the sector as it could result in inventory gains for the company.