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During this past week KSE-100 Index gained 1.91%WoW to close at 24,302 points while average daily traded volumes declined by 25%WoW to 133 million shares. Key news flows during the week included 1) Prime Minister Nawaz Sharif announced various tax incentives for businesses to boost investment activity in the country, 2) PTA selected VPCML, a foreign consortium, as consultant for the upcoming 3G/4G license auction, 3) the GoP and ADB signed a US$430 million agreement to strengthen the BISP program, 4) the PM ordered withdrawal of a notification, which allowed an increase of up to 15% in medicine prices and 5) foreign exchange reserves dropped to US$8.8 billion while SBP reserves fell to a 12-year low of US$3.4 billion. While top gainers of the week included ICI, AKBL, NML, LUCK and PSMC, top losers were HCAR, AICL, LOTCHEM, HUBC and SNGPL. Volumes were led by FCCL, PTC, LPCL, BOP and TELE.

Market displayed resilience in the face of recent macroeconomic weaknesses amid monetary tightening and high inflation likely to further test investors' risk appetite.

InvestCap in one of its reports presented analysis of the aggravating liquidity situation of different IPPs and the resulting re-accumulation of circular debt in the energy chain and also the recently released 1QFY14 results of different IPPs, which also validates the urgency of the situation. A thorough analysis of the financial statements of HUBC, KAPCO, NPL and NCPL for the period ended June'13, revealed relatively cleaner financials on account of debt settlement on 28th June 2013. The government, on behalf of WAPDA and NTDCL, cleared the over dues of different IPPs along with the other entities in energy chain. However, a turnaround became evident within three months of the said settlement when a sharp increase in overdue receivables and payables appeared back in the balance sheets of these companies in 1QFY14 results.

Each one of these four entities strived to address the issue in its own manner. HUBC reverted to a combination of utilizing its working capital lines along with delaying payment to PSO. The IPP also utilized a portion of the residual cash flows from the payment received in June this year to deal with the building crisis. NCPL in the absence of a guaranteed fuel supply agreement resorted to using its working capital lines and utilized the cash flows from prior settlement. KAPCO and NPL were able to successfully manage the increased working capital requirements through cash received in the debt settlement and internal cash flows.

Such might be temporary solutions to which the IPP's reverted to but brokerage house doesn't foresee this situation to be an enduring solution as power purchasers are continuously stretching the payments. This situation has led to rebuilding of the circular debt amounting to Rs150 billion in 1QFY14. Government is continuously taking steps to bridge the tariff differential gap; the prime reason behind inter-corporate debt accumulation. For this purpose tariff rate for commercial, industrial and domestic consumers has already been increased. In the long run, government is trying to shift energy mix from expensive thermal generation to relatively cheaper ones like coal, hydel and alternative energy resources with a number of projects, currently under process. Furthermore, the government also enhanced the power subsidy announced in the Federal Budget FY14 from Rs220 billion to Rs250 billion.

According to an AKD report weighted average banking sector spreads for October'13 have clocked in at 6.20%, down by 11bps MoM/57bps YoY. This was the first month in which the linking of the savings account rate floor to the discount rate became effective and brought the 8MCY13 average spread to 6.26% as compared to 7.11% in the corresponding period last year. It appears that 4QCY13 spreads are headed for their lowest quarterly level of the ongoing calendar year. Heading into CY14 analysts see a marginal uptick in spreads as interest rates rise while other positives include continued strong balance sheet growth, declining credit costs with systemic coverage at a 5-year high of 74% and opportunity to book capital gains on equity portfolios with the KSE-100 Index having gained 42%CYTD/14%FYTD. This should drive 10%YoY net profit after tax growth for some banks in CY14 after a soft CY13.

Within this backdrop, analysts say any dip in banking sector share prices have an opportunity to build positions in quality stocks. At the same time underperforming stocks like SBL, FABL and BOK could also depict a catch-up rally.

Provided no further tweaking of the floor rate, analysts believe spreads are close to bottoming and will likely depict an uptick in CY14 as interest rates continue to rise, they sees a further 100bps uptick in the discount rate across the remainder of the fiscal year. Although weighted average deposit costs have depicted an uptick, averaged lending yields have yet to re-price even as the discount rate was raised by 50bps in September'13. Keeping in view SBP's steps to tighten interest rate margins, 4QCY13 spreads may be headed for their lowest quarterly level of the calendar year. Marginal uptick in spreads in CY14 coupled with strong balance sheet growth, lower credit costs and opportunities for capital gains should drive a rebound in earnings next year.

Auto sector has garnered much limelight of late with all stakeholder eyes on the new auto policy titled 'Auto Industry Development Program II' (AIDP II), with the policy likely to be announced by the end of the current year. The policy will pit manufacturers against dealers where analysts believe the GoP may follow a balanced approach and increase the age limit of used imported vehicles to 5 years from current 3 years. Auto manufacturers witnessed a growth phase over FY13 with margin expansion aided by concurrent product price increases as well as the depreciating JPY. With a recent reversal in JPY, manufacturers have announced further price increase to arrest any potential margin erosion. Going forward, currency movement as well as measures undertaken in the new auto policy is likely to dictate the fortunes of auto manufacturers but some of the scrips may come under pressure in the near term owing to subdued results due to decline in sales as consumers await the new model likely to be introduced in mid CY14.
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Publication:Pakistan & Gulf Economist
Date:Dec 8, 2013

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