AKD Quotidian about — Mar’12 CPI Review and Inflation outlook

Karachi, Mar 28, 2012 (PPI): According to the latest data released by PBS, CPI in Mar’12 has clocked in at 10.79% YoY, inline with AKD Securities expectation of 10.82%YoY, and translating into a 117% MoM increase.

According to AKD Securities, as a result, 9MFV12 average CPI has registered at 10.81% YoY vs 1395% YoY during the same period last year. This is more than 100bps lower than the Discount Rate at 12%. MoM rise in inflationary pressures has come on the back of increase in Food inflation (34.83% weight in CPI basket; +9.81% YoY/1.54% MoM), Clothing and footwear (7.57% weight; 16.6% YoY/3.35% MoM) and Transport (72% weight; 19.1% YoY/ 1.94% MoM). Sequentially, Housing and Utilities (29.4% weight in basket) remained muted, up 7.55% YoY/0.04% MoM. At the same time, Core/NFNE inflation maintained its upward trajectory and was recorded at 10.8%YoY in Mar12 vs. 1O.6%YoY in Feb’12. Going forward, in consideration of the recent petroleum price hike, some escalation in price pressures may be witnessed in the coming months of FY12. Assuming a sequential CPI increase of 1.4%MoM going forward, full- year FY12F CPI will average 11.06%YoY. While FY12 inflationary target will be within the 11%-12% expected by SBP, medium-term ambition to bring CPI in single digits seems challenging on the back of 1) potential sticky int’l prices (Arab Light: US$ 125.26/bbl) which consequently has spill over effect on the entire CPI basket, 2) expected potential populist decision-making leading to fiscal profligacy, 3) PkR depreciations of 5.4%FYTD leading to imported inflation and 4) waning rebasing effect.

Inflation Review: CPI rose by 1.17% MoM in Mar’12, translating into an annual increase of 10.79%. As a result, 9MFY12 average CPI registered at 10.81%, more than 1% lower than the Discount Rate (12%). The sequential increase in price pressures is primarily on the back of the increase in Food inflation, up 9.81% YoY/1.54% MoM (MoM increases – Pulse Gram; up 33.47%, Besan; up 23.79%, Fresh Fruits; up 17.12% and Sugar; up 11.80%). At the same time Core/NFNE inflation in Mar’12 continued its sequential upward trend and was recorded at 10.8%YoY. Sequential Increase in Non food terms includes Motor Vehicle Tax (up 20.34%), Footwear (up 14.25%), Kerosene Oil (up 3.45%) and Marriage Hall Charges (up 2.88%).

Inflation Outlook: Should MoM CPI average 1.4% for the remainder of FY12, full-year FY12 CPI will average 11.06%, inline with the SBPs projections. While sub-DR inflation may lead to status quo in the upcoming MPS, potentially extending the KSEs recent bull run, risks to medium-term inflation emanate from 1) any increase in int’l oil prices (Arab Light US$1 25.26/bbl) which consequently has spillover effect on the entire CPI basket, 2) potential populist decision making and GoP indiscipline in borrowing from SBP, 3) intensifying pressure on the PkR with IMF repayments and reserve erosion going forward and 4) waning rebasing effect.

Morning Call about Meezan Bank Limited – Arif Habib Limited

Karachi: All in good faith

Arif Habib Limited initiates Arif Habib Limited’s coverage on Meezan Bank Limited (MEBL) with a Dec-12 Target Price of PKR 35.7/share.

According to Arif Habib Limited’s valuation is based on Justified P/B basis wherein sustainable ROE is estimated at 22.6% and growth at 12.1%. At the last closing of PKR 27.8/share, the scrip provides an upside of 28.5% to Arif Habib Limited’s Target Price. The scrip is current trading at CY12 and CY13 P/B of 1.4x and 1.2x respectively. Arif Habib Limited expects the Bank to post EPS of PKR 4.23 and PKR 4.71 in CY12 and CY13, respectively.

The growth drivers
Arif Habib Limited identifies rising share of Islamic Banks in Pakistan, Meezan Bank’s sheer dominance over the Islamic banks and its ability to mobilise deposits at a low cost, as the key value enhancers which in Arif Habib Limited’s view, will keep the Bank’s earnings stable going forward. In terms of asset quality the Bank over the period has successfully been able to shift its assets from advances to investments, which has resulted in relatively low non-performing loans (NPLs).

Deposit growth – Tapping the niche market
Overall, the Bank’s deposits have seen a faster rate of growth than conventional banks – albeit from a low base – reaching PKR 170bn in CY11 from PKR 55bn in just 5 years. The Bank’s ability to attract this phenomenal growth partially lies in growing share of Islamic banks in the overall banking system and an aggressive phase of branch expansion (275 branches by CY11). Composition-wise, saving deposits constitute almost 37% of the Bank’s deposit base (PKR ~63bn; 5YR CAGR 37%), followed by fixed deposits at 28% (PKR ~48bn; 5YR CAGR 40%), and translating to a low cost CASA of 65%.

Best in terms of earnings growth seems behind us
CY11 turned out to be an exceptional year for the Bank. Improved interest rate scenario along with bank’s ability to keep the cost of deposit at low levels led to MEBL registering a profit after tax (PAT) of PKR 3,392mn (+106%YoY). The net interest margins (NIMs) for the year rose to 7.4% compared to an average of 5.7% during CY06-10 and 3.1% during CY02-04. Improvement in NIMs is linked to high discount rate and increased investments in GoP Sukuk (priced at 6 months T-bill yield). Going forward Arif Habib Limited thinks this growth is likely to take a respite, owing to squeezing NIMs as interest rate have been slashed by 200bps in 2HCY11 and resulted in re-pricing of Ijarah Sukuk.

NPL absorption remains well within comfortable zone
The Bank’s stringent lending policy and its ability to manage credit risk prudently has left it relatively less exposed to Non-Performing Loans (NPLs) as compared to the industry. NPL’s to gross advances ratio remains considerably lower at 7.2%, compared to the industry average of 16.2%. In addition to this, during CY11 the Bank booked higher provisioning against NPL’s, taking the banks coverage ratio to 114%. This Arif Habib Limited believes is due to higher amount of NPLs being categorized as ‘Loss’ (~88%) and the Bank’s cautious approach towards lending. Asset base – Shifting paradigm The Bank’s advances portfolio remained rather subdued, growing by a 6-year CAGR of 17%. While, this is in-line with the overall banking industry – owing to challenging economic circumstances – but in case of Meezan bank; the Advance to- Deposit Ratio (ADR) dropped considerably to 34.8% in CY11 compared to industry average of 59.5%. During CY11, MEBL’s advances grew by ~9%YoY, which is considerably lower than what it had been in the past (23%YoY average growth during CY06-10).

Sukuk’s blessings
Nevertheless, this subpar growth in bank’s advances was partially facilitated through an unprecedented rise in investments, causing a significant shift in the Bank’s asset mix. Bank’s Investment-to-Deposit Ratio (IDR) increased to 58.2% in CY11 owing to increased availability of GoP Ijarah Sukuk. During CY11, the Bank deployed a substantial portion in GoP Ijarah Sukuk, making up almost 77% of its total Investments. Moreover, Meezan being the largest Islamic bank and the prime dealer for SBP Islamic Bond market has actively traded and benefited from its investments in GoP Isaiah Sukuk over the period.

March CPI inflation recorded at 10.8%YoY – Alfalah Securities Limited

Karachi: Consumer price index (CPI) is reported to stand at 10.80% in March 2012 lower than Securities Limited’s expectation of 11.14%.

According to Alfalah Securities Limited, the Core inflation measured by non‐food non‐energy (NFNE) increased by 10.8% in March 2012 as compared to an increase of 10.6% in February 2012 and by 9.6% in March 2011. Inflation during March witnessed a significant surge is several segment where food and non‐alcoholic beverages prices gone up by 9.8%, alcoholic beverages and tobacco by 8%, clothing and footwear prices soared 16.6%, housing water, electricity and gas fuels 7.5%, health care charges 12%, transportation 19%, education 12% over March 2011. Moreover, furnishing and household equipment maintenance charges went up by 19.6%, recreation and culture by 6.5%, restaurants and hotel charges by 11.2% against corresponding month of the last year.

Considering the current inflation data the discount rate are likely to be kept unchanged at 12% in anticipation of higher inflation ahead, continued high government borrowing and risks on the balance of payment despite a considerable positive real rates. State Bank of Pakistan (SBP) is scheduled to release Monetary Policy Statement (MPS) on April 13, 2012 for the next two months. The CPI inflation is likely to inch up further going forward mainly due to exorbitant increase in petroleum prices, electricity tariffs and rising food prices.

ICTSI to acquire stake in PICT – Alfalah Securities Limited

Karachi: ICTSI Mauritius Limited, a wholly‐owned indirect subsidiary of International Container Terminal Services, Inc has informed KSE that the company has entered into a Share Purchase Agreement (SPA) with majority shareholders of Pakistan International Container Terminal (PICT) to purchase up to 35% (approx. 44.5 million shares) of PICT’s stake at PkR 150 per share.

According to Alfalah Securities Limited, ICTSI Mauritius Ltd. had earlier announced its intention to acquire between 35%‐55% of the voting shares in PICT through public offer or agreement. Jahangir Siddiqui and Co. Limited (JSCL), one of the PICT’s majority shareholders, has notified that the company would sell a minimum of 13 million shares of PICT to ICTSI Mauritius Limited at the above stated price.

PICT has a total paid up capital of PkR 1.271 billion and asset size of PkR 8.6 billion as of December 31, 2011. It is trading at a high estimated FY12E P/E of 12.74x therefore Alfalah Securities Limited recommends a Hold on the stock.

Gas supply to DH Fertilizers suspended – Alfalah Securities Limited

Karachi: Dawood Hercules Corporation had notified the stock exchange yesterday that gas supply to their 100% owned subsidiary Dawood Hercules Fertilizers Limited’s plant has been suspended by Sui Northern Gas Pipelines Limited (SNGPL) due to curtailment in gas supply on the SNGPL network.

According to Alfalah Securities Limited, Sui Northern Gas Pipelines Limited (SNGPL) had informed DH Fertilizers that the supply of gas from several gas fields on their network has been cut due to several sabotage activities and in order to manage the demand‐supply situation, the gas distribution company has temporarily suspended gas supply to their fertilizer plant.

Gas supply to DH Fertilizers Ltd. remained suspended for a total of 197 days during CY11 from the SNGP network, which as a consequence severely hampered the urea production of the company as the plant was able to produce only 199.9 thousand tons against 456.12 thousand tons produced in CY10. The gross profits of DH fertilizers also fell from 40.2% to 35.9% in CY11 mainly due to the company incurring additional production cost for restarting fertilizer operations after every notification of gas supply resumption. Alfalah Securities Limited expects more or less the same situation would continue during CY12 keeping in view the country’s increasing energy demand where no significant addition has been made to improve the supply situation. Alfalah Securities Limited recommends a Hold stance on Dawood Hercules Corp. at current levels as it trades at a CY12E P/E of 6.4x.

FBR freezes account, Hubco appeals in Supreme Court for stay – Alfalah Securities Limited

Karachi: The Federal Board of Revenue (FBR) has blocked the accounts of the Hub Power Company (Hubcap) along with dispatch of PkR 3.0 per share interim dividends as the firm was unable to pay over PkR3 billion worth of taxes as well as penalties, as notified to KSE.

According to Alfalah Securities Limited, the company is facing difficulties in paying due taxes as the government is unable to clear outstanding amount to Hubcap because of the circular debt issue. Consequently, Hubcap filed an appeal in the Supreme Court along with a stay application to avoid the restriction imposed by the FBR. In this regard, Hubcap has also applied to SECP a request to delay the payment of dividends.

The company operates an oil‐fired power station of 1,200 MW in Balochistan (Hub plant) and 214MW oil‐fired power station in Punjab (Narowal plant). It also has a 75% controlling interest in Lariat Energy Limited which is an under construction hydel power project of 84MW. Alfalah Securities Limited believes that Hubcap is worth a stock to hold in one’s portfolio due to its risk aversive business model, upward earnings curve, handsome payouts and business growth. The stock offers FY12E dividend yield of around 17.0% however, the uncertainty is likely to prevail till the matter is resolved.

Islamabad Stock Exchange Closing Rate of Engineering Sector dated 03-04-2012



Company Name Symbol Code Opening Closing Volume Change
Ados Pakistan ADOS 5.55 6.10 0 0.55
Crescent Steel CSAP 19.50 20.00 0 0.50
International Ind. INIL 29.70 29.52 0 -0.18
Pakistan Engg. PECO 55.28 52.55 0 -2.73


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