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Karachi, March 24, 2015 (PPI-OT): Measured rate cut; room for further easing remains
A measured 50bp cut in discount rate (DR) announced
State Bank of Pakistan continued its easing campaign by cutting benchmark policy rate on 21 st Mar’15 by another 50bp to 13-yr low of 8%. Cumulatively, the central bank has slashed policy rate by 200bp since Nov’14, supported by declining CPI and improving external account. While SBP has broadly painted a positive macro picture in its commentary, two highlights are noteworthy; (1) SBP has raised concern on possible inflationary pressure beyond FY15 due to pick up in aggregate demand, and (2) absence of SBP comment on the much-anticipated new interest rate corridor.
From KSE’s perspective, the market’s reaction will largely be muted as the central bank decision is not a major surprise given divergent consensus expectation of 50-100bps cut in policy rate and current secondary market yields (6,12mth papers trade in the range of 7.8-7.9% while 10yr bond is priced at 9.1%). Lower rate cut, SBP concerns on CPI and major underperformance of banking stocks (12% in 3Mth vs KSE-100) should drive a likely relief rally in banks. KASB Securities Limited’s top picks in banks are ABL and UBL. Meanwhile, focus on two themes on D/Y (top five D/Y stocks are Fatima, Kapco, POL, Hubco, NBP) and leveraged companies (Engro, MLCF, DGKC, Fatima, textiles) should continue to generate market interest.
SBP highlights macroeconomic progress and lowers CPI forecast
The SBP cited a broadly stable macroeconomic outlook in its MPS – including broad-based decline in CPI inflation, on-track fiscal deficit in 1H, increase in consumer confidence as per IBA-SBP Survey, expected improvement in LSM (on lower rates) and agri (additional farmer incentives) growth, as well as a stable outlook for external accounts. SBP has revised down its FY15 inflation forecast range to 4%-5% from 4.5%-5.5% quoted in Jan-15 MPS. On the growth front, SBP expects GDP to outpace the growth seen in FY14 (4.1%). KASB Securities Limited believes the minutes of the SBP board meeting (to be released in fortnight) may convey details on (1) any inclination of further cut in the policy rate, and (2) plan to introduce changes in the interest rate corridor.
Room for 50bp DR cut; gas tariff and budgetary considerations
KASB Securities Limited believes market is likely to read SBP’s latest decision and its comment on CPI as a signal that interest rate has bottomed out at current levels. Given KASB Securities Limited\s CPI projections for FY15E (<4% in remaining months) and in FY16E (6%), KASB Securities Limited believes SBP will likely consider another 50bp cut in DR to 7.5%, once more clarity emerges on major external flows. To this end, KASB Securities Limited flags divestment of government’s share in Habib Bank Ltd (US$750mn target by April ) and approval of IMF’s tranche (US$518mn, meeting scheduled on Mar 27’15. Timing and possibility of further cut will, in KASB Securities Limited’s view, depend primarily on the extent of (1) increase in gas tariff from next month and (2) possible inflationary impact of budgetary measures (expected to be announced on May 29th). KASB Securities Limited strongly believes CPI outlook beyond FY15 is largely hinged on uptick in oil and food prices (cost-push). Excess capacity across major industries and easy import option will likely limit the risk of demand-pull.
PRs180bn tax exemptions to be withdrawn (Dawn): The govt has decided to withdraw tax exemptions worth PRs180bn or 0.5% of GDP, in budget of FY16 in a bid to lower the fiscal deficit. The exemptions granted through SROs currently stand at PRs483bn. Of this, PRs104bn exemptions were withdrawn in the first phase in FY15 budget. While the news report does not suggest potential sectors to be affected by upward increase in tariffs/tax, another news report suggests that the govt may seek to impose general sales tax on cotton at local/import stage.
Ministry allowed to supply LNG to fertilizer sector (Tribune): Economic Co-ordination Committee (ECC) of the Cabinet has allowed Petroleum Ministry to supply imported LNG to fertilizer sector after fulfilling power sector’s needs. The government has exempted fertilizer manufacturers from payment of GIDC on liquefied natural gas (LNG) consumption and has cut general sales tax on LNG import in an effort to provide the fuel to Punjab plants that have been running partially over the years. However, the fertilizer plants would have to pay incremental charges to Pakistan State Oil (PSO) and a set margin to gas transmission firm Sui Southern Gas Company (SSGC) if they import LNG from their own resources.
Nestle reduces price to PRs110 (Tribune): Given the favorable domestic and international dynamics, Nestle has decided to reduce the price of Milk Pak to PRs110 from PRs120, previously. With the new price now on par with Efoods’ Olpers, KASB Securities Limited expects volumetric growth in Nestle unless Efoods also decreases its price to maintain price gap and focus on volumetric growth and maintaining market share.
FATIMA CY14 results review (Analyst comment): The board meeting of Fatima Fertilizer limited (FATIMA) is scheduled today where KASB Securities Limited expects the company to post PAT of PRs3.6bn (EPS: PRs1.74) during 4Q to take 2014 earnings to PRs10bn (PRs 4.80), up 26% YoY. Strong volumetric growth of 19%/17% in Urea/CAN during 4Q is expected to boost topline during the said period. On a full year basis, NP/CAN/Urea offtake increased by 4%/2%/7% during the year.
Gross margins of the company are expected to clock in at 66% vs 63% last year, as a result of higher CAN (+5%) and NP (+9%) prices during the year. In addition to this, KASB Securities Limited expects the financial charges to dip 7% YoY during the year on the back of continued deleveraging further providing cushion to the bottom line. Amid international operations, KASB Securities Limited expects the company to declare a final cash dividend of PRs2.5/sh (payout ratio:52%).