LAHORE

The equity market closed a volatile week where the benchmark KSE-100 index dipped 0.2% WoW to close at 28,872. Average trading volumes plunged by 26% WoW to 124mn shares as compared to 169mn shares traded previously. The weak sentiment was mainly attributed to the ongoing political uncertainty in the country where a leading opposition party is protesting against the government and demanding the resignation of the prime minister and holding of mid term elections with electoral reforms. Even corporate results failed to boost market sentiment as NBP and FCCL declined by 1.7% and 5.1%, respectively this week, despite reporting respective 42% and 27% EPS growth. However, HUBC gained 4.4% WoW as it announced a higher than expected cash dividend of Rs4/share. Also, the cancellation of IMF visit to Pakistan on account of political unrest further dented the market sentiment. Meanwhile, the Auto sector (+3.5% WoW) was the star performer of the week as the Minister of Water and Power announced the submission of auto industry policy for approval. Other key highlights of the week were: (1) Pak rupee depreciated by 1.7% WoW against the US$ hitting 6-month low at Rs101.73, (2) Trade deficit at US$1.4bn, down 16.58%YoY, (3)FDI in July 2014 amounted to US$24mn, down 80%YoY, and (4) July 2014 textile exports amounted to US$1.17bn, up 5% MoM.

According to experts, as a consequence of the breakdown in negotiations, the market witnessed a pullback from peak intraday level, as investors once again became skeptic on the political outlook of the country. A major thaw in negotiations continues to be the insistent demand of the opposing parties for the resignation of incumbent Prime Minister Nawaz Sharif. Consequent to the protests, pressure has already been witnessed on the PKR with the exchange rate closing at PKR101.1/USD in interbank trading during the week. Further, the recent political developments could potentially be a setback to economic reforms being carried out and lead to populist decisions being undertaken going forward. The situation in Pakistan has already started making headlines in international media with various statements particularly from Western states being of key prominence. Experts expect the market to remain fickle till the outcome of the protests and highlight any potential selling by foreign investors as a key negative indicator for the market (Foreign investors are estimated to hold 34% of the market free float). That said, foreign investors appear to have adopted a wait-and-see approach for the time being with FIPI data showing a net inflow of USD7.5mn since Aug 14 2014.

According to financial market experts, since Oct 2013, sugar companies listed at Karachi exchange largely underperformed the benchmark KSE-100 Index as they posted total return of 7.6% versus 32.5% by benchmark index, thus underperforming by a massive 25%. Similarly, when compared to ‘Food Producers’ segment, sugar companies underperformed by 25%. In 2014 to date, sugar stocks have declined 4% as against KSE-100 return of 14%.

In 9MFY14, earnings of profitable sugar companies dropped by 20%. During the period, revenues of profitable companies declined 12% to Rs73b versus Rs83b in 9M2013. However, 12% decline in cost of sales resulted in flat gross margins at 12%. On the other hand, bottom-line declined due to 24% increase in finance cost. In 3QFY14, net earnings of profitable sugar producers declined by 20%, mainly due to significant increase in finance cost by 31% to Rs1.7b.

Meanwhile, during the week, ENGRO posted a disappointing NPAT of PKR2.7b in 1HCY14 compared to PKR3.3b (EPS: Rs6.53) in same period last year, down 20%YoY. While the group’s main cash cow, Engro Fertilizers Limited (EFERT), reported a growth of 137% in profitability to PKR3.4b, earnings were dragged by unlisted import/export business EXIMP which posted a loss of Rs2.1b in 1HCY14 against loss of Rs352m in 1HCY13.

Another factor dragging profitability was higher effective tax at 59% in 2QCY14. As per the management, the company decided to reverse deferred tax asset booked in 1QCY14 on account of losses in  On the fertilizer front, the company has extended Gas Supply Agreement (GSA) with Mari SML for another year.  Fauji Cement Company during the week announced FY14 profit of Rs2.6b as against Rs2.1n (EPS Rs1.4) in last year, up 25%. The result is also accompanied by final cash dividend of Rs0.75 per share, taking total dividend to Rs1.5 per share for the year.

In FY14, FCCL recorded revenue of Rs17.5b as against Rs16.0bn last year which is up 9.8%.