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The KSE-100 index remained flat over the week, closing at 16,635 points with average daily turnover at 95.8 million shares, down 35%WoW. The market followed the political noise and reacted optimistically on Friday with MQM's withdrawal from the Long March on 14th of this month.

Key new flows during the week included 1) issuance of NOC by State Bank of Pakistan to Fauji Foundation for the acquisition of AKBL, 2) a commitment demanded by the IMF from all political parties that the terms of agreement for a fresh 3-year standby agreement (SBA) will be adhered to by the next government and 3) Remittances for 1HFY13 rising to US$7.2 billion, up 12.5%YoY.

Top gainers included AKBL (on acquisition news flow), UBL and HCAR, while major decliners included ENGRO, PTC and ULEVER. Volume leaders were MLCF, FCCL and JSCL. Continuing the current trend, the market is likely to remain patchy in the week ahead as investors eye the outcome of the threatened Long March. With 2QFY13 concluded, the next trigger for the market will likely be the commencement of the result season. In this regard, Cements and Textiles are particularly expected to report healthy profits.

With imported variants providing stiff competition, total sales for the local auto sector declined by 30%YoY to 57,500 units in 1HFY13. Similarly, December'12 sales of 8,400 units were down by 25%YoY/8%MoM. While sales for INDU and HCAR ahead of the New Year were lower by 26%MoM and 39%MoM, respectively, PSMC was the outperformer with a 7%MoM increase in sales primarily driven by the Bolan and Ravi models. On the tractors front, sales for AGTL and MTL are up by 36%MoM and 25%MoM, respectively, likely due to pre-buying ahead of anticipated GST increase from 5% to 10%. Although, the age limit for imported cars was reduced to 3-years effective 15th December last year, existing stock of imported vehicles will likely continue to impinge on local OEMs sales across the next few months.

Beyond this period however, provided the regulatory environment remains static, local auto sales could be in for sequential improvement where in addition to likely reduced imported competition, we flag revival of auto financing, a weaker yen and soft global steel prices as key positives. Within this framework, PSMC remains our top pick in the Pakistan Auto space where our target price of Rs115/share offers 31% upside.

As per the latest numbers released by the All Pakistan Cement Manufacturers' Association (APCMA), overall cement dispatches in 1HFY13 increased to 16.0 million tons. Local sales increased by an encouraging 7.6%YoY to 11.7 million tons while exports disappointed with a cumulative 1HFY13 decline of 5.3%YoY to 4.2 million tons. During December'12 alone, local dispatches increased by an astounding 11.2%YoY to 2.2 million tons while they grew by 14.4%MoM (compared to November'12) despite the onset of winter season. Exports continued to disappoint with a decline of 10.6%YoY to 0.58 million tons.

With a strong volumetric performance in December'12, prices remained firm despite expectations to the contrary for winter season. Recall manufacturers had already increased coal prices by Rs5-Rs10 per bag in Nov'12. Coal prices have remained fickle over the past month, with Richards Bay coal price increasing to US$90.09 as of 28th December'12. While the adverse coal movement will have negligible (even zero) impact on 2QFY13 results, 3QFY13 results could potentially clock in at the lower end of the spectrum should coal prices continue to rise.

HUBCO emerges as favorite pick in the power sector combining an irresistible dividend yield with a tremendous growth story. Profitability of the company is all set to grow in FY13 too (EPS: Rs7.3) under the prevailing economic scenario. The growth in profitability will be driven by 1) erosion in Rupee value against dollar, 2) increasing revenue stream from Narowal and 3) a 1.5% increase in the company's inbuilt Project Company Equity (PCE) component.

The COD of Narowal brought about a rise in the company's profitability however; all did not go as planned. The Narowal project faces severe liquidity problems as National Transmission and Dispatch Company (NTDC) continues to fall short of its obligations. Furthermore, it is mandatory for the plant (established under the 2002 policy) to pay in advance for the fuel supply, failing to do so results in plant closure, adding to the liquidity woes of HUBCO (Narowal). We do not see any out of the box solution for the circular debt issue this year. However, funds released by the government will ease some pressure off the mounting receivables, we believe.

The government of Pakistan has exhausted the entire amount of power subsidies (Rs170 billion) allocated for the year during the first five months of FY13. This is indicative of the government's insistence to release funds in order to minimize power outages in the election year. The second largest power producer in the country, HUBCO, is likely to benefit from such disbursements along with the entire energy chain.

Despite fresh concerns over the company's cash flows, analysts keep their assumptions intact and expect the company to pay Rs6.5/share dividend during FY13 with the help of short-term borrowings and funds released from NTDC. Even if the company skips its half-year payout as indicated by the market, the resultant depression in stock price would present a wonderful buying opportunity to the investors. Furthermore, analysts believe the management would compensate its investors in the full year.

Laraib Power project (84MW), the second expansion project (HUBCO's stake 75%), is expected to come online sooner than scheduled (mid CY13). As the project is hydel-based, the expansion bodes well for the company due to its relative immunity from circular debt unlike furnace oil based Narowal. Not to forget, the government has laid out an even higher indicative USD IRR for hydel generation at 17%; where currently HUBCO is the only company that is setting up a hydel plant.
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Publication:Pakistan & Gulf Economist
Date:Jan 27, 2013

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