Karachi: Inflation numbers for Sep’11 are likely to be released before the Oct 8’ll monetary policy statement.
According to AKD Securities, they expect CPI to clock in at 1O.7%YoY/1.25%MoM in Sep’11, which would imply real interest rates of 2.8%. While this implies SBP has the space to cut the DR swiftly, particularly if the central bank targets core inflation (1O.1%YoY in Aug’11), AKD Securities believes recent currency weakness (the PkR has depreciated by 1.6%FYTD against the US$) and nascent risks on the external front may reduce the quantum of the rate cut to 50bps (at least) this time around. This should result in valuation expansion at the KSE – AKD Securities estimates a rerating impact of +5% – considering that the KSE has gained 2.5% since the release of Aug’11 inflation data, a major downward kneejerk reaction on a 50bps cut appears unlikely. Going forward, anticipated continuation of monetary easing in Nov’11 should again lead to a fresh round of rerating impetus. At current levels, our top picks are ENGRO, LUCK, PSO, POL, NML and MCB.
Inflation projections: CR rose by 1 .4%MoM in Aug’11. While the Ramadan effect should filter away, Sindh floods are likely to keep monthly inflation ticking. AKD Securities expects CPI to clock in at 1O.7%YoY/1 .25%MoM in Sep11. Note that weekly SPI data suggests monthly inflation in Sep’11 has risen by 1%. Going forward, even if sequential inflation continues to increase at 1%MoM, a high base effect implies `toY CPI would likely continue to stay below 11 %YoY by Nov’11. In our view, this supports the continuation of near-term monetary easing despite recent PkR weakness – going by Aug’11 core inflation, the SBP has room to cut the DR by 3%+.
Implications for KSE: At current levels, the KSE trades at a FY12F PER of 6.4x. Based on the Justified PER multiple ((Payout/(k-g)), AKD Securities estimates that a 50bps cut in the DR should, ceteris paribus, expand the FY12F PER to 6.8x implying a rerating effect of 5%+. Considering the KSE has gained 2.5% since the announcement of Aug’11 rebased inflation data, AKD Securities believes a major downward kneejerk reaction on a 50bps cut is unlikely. Going forward, anticipated continuation of monetary easing in Nov’11 should lead to a fresh round of rerating impetus.