Pakistan Cotton Industry

Cotton Arrivals: Sindh Leads The Path Of Victory!

Pakistan Cotton Ginners Association (PCGA) recently released figures of cotton arrivals up to October 01, 2013. In today's Karachi Stock Exchange Analysis we present an analysis of recent cotton arrivals trend along with our outlook on the same.

Cotton Arrivals Up By 7%YoY In FY14TD

Despite heavy rainfall in upper Sindh and lower Punjab, cotton arrival figures portray a positive picture during the current season. Cotton arrivals, according to  the  data  released  by  PCGA,  during  the  said  period  grew  by  7%YoY  to 3,684k  bales  as  compared  to  3,447k  bales  during  the  same  period  last  year. During  the said period,  Sindh  contributed  59%  (2.2mn  bales)  in  total  cotton arrivals  so far, while  Punjab contributed 41% (1.95mn bales) during  the aforementioned period. On fortnightly basis, cotton arrivals declined by a massive 38%YoY to 1.1mn bales as compared to 1.72mn bales during the corresponding period last year.

Province-wise  analysis  shows  a  massive  change  as  far  as  cotton  arrivals  are concerned.  Sindh,  remained  the  show  stopper,  as  arrival  of  cotton  from  its leading producer district Sanghar posted a colossal growth of 27%YoY to 1,083k bales as compared to 851k bales during the same period last year, sharing 29% of total arrivals.  Similarly, Hyderabad and Tharparker's cotton arrival also improved by 38%YoY to 215k bales and 11%YoY to 274k bales, translating into13% participation in country's total cotton arrival so far. In  the  province  of  Punjab,  cotton  arrivals  from  its  major  producing  districts were  still  subdued  as  its  districts Khanewal  and  Vehari  each  accounted  for  a 6.8% weight in total cotton arrivals posting a massive decline of 27%YoY to 251k bales and 26%YoY to 252mn bales. Following the same declining trend, cotton arrivals from Sahiwal, Bahawalnagar  and Bhawalpur were  also on the declining  path.

Local Cotton Prices Increase By 39%YoY

Expectation of  low  cotton  production  coupled  with  increasing  demand  of cotton on local front are the major concerns fuelling up cotton prices by 39%YoY to  Rs7,250/37.325kg on  October  01,  2013  as  compared  to  same  day  last  year. However during the ongoing season (from 01, Sep 2013 to date) the average prices  remained  at  Rs6,886/maund  as  compared  to  Rs5,523/maund  in  the same period last year. However, during the said period cotton prices on the international front increased only by 16%YoY to 92.95 cents/bbl due to higher backlog of cotton stock.

Outlook: Rising Demand Pulls Cotton Prices Higher

During  the  Current  Season  which  is  expected  to  end  by  May-14  we  expect cotton production to remain at 12.2mn bales against the revised government target of 11.95bales for FY14. Moreover, on the price front we expect cotton prices  to  touch  Rs8,000/maund  mark  during  the  year  as  Cotton  Yarn  and Cotton  Cloth  demand  from  China  is  expected  to  remain  on  the  higher  side which is likely to keep cotton demand high.

KSE Market Summary

Market Commentary

KSE-100 Index ended on a mildly positive note gaining 18 points to close at 21,675 after witnessing a midday drop of nearly 200 points. Value buying from FFC, UBL, PTC and ENGRO helped the market end in green. 

Key Data

KSE-30 16439.94 +20.62 +0.13%

KSE-100 21674.98 +17.76 +0.08%

USD/PKR 106.19 -0.11 -0.1%

NYMEX Crude Future (USD) 102.74 +1.07 +1.05%

Gold (USD) 1292.2 -11.5 -0.88%

FIPI (USD `000) -84225.68 +2008.58 +2.33%

KIBOR (6 months / %) 9.55% +0.01 +0.1%

Notable Price Movers

Sym                 % Chg             StDev change

TELE                       10.40                     2.96

KAPCO                   (2.04)                     2.04

NETSOL                   3.30                      1.84

Notable Shares Traded

Sym                 Turnover         StDev change

NCPL                   3,949,000                    3.77

NPL                      2,183,500                    2.93

MARI                       655,100                    1.51

Top Stories

• World Bank report: Economy resilient, growth to remain steady at 3.5%
• Shutdown impact: US stops offering GSP scheme to exporters
• Earnings dip: Banking sector’s profits may fall as spreads shrink
• Trade imbalance: Deficit in line with IMF trade projections
• PTA issues RFP to hire consultants for 3G auction
• Trade deficit shrinks by 5.15pc in Q1 of FY14
• First quarter of FY14 : Workers’ remittances rise over 9pc to $3.9 billion
• Oil rises to $110 on return of Libyan supply worry
• PM approves issuance of 3G licenses for 15-year term
• Energy sector: circular debt again peaks to Rs 157 billion

Verdict

With news of circular debt relapsing to the tune of PKR 157 billion we expect IPPs and PSO to fall under pressure. However, upward growth forecast of the Pakistani economy by the World Bank could fuel some positivity.

Pakistan Petroleum Sector: Flat production, Sales To Grow

Based on provisional production statistics released by Pakistan Petroleum Information Service (PPIS), the country’s total oil and gas production during 1Q (Jul-Sep) of FY14 stood at 796kboepd (thousand barrels of oil equivalent per day), down 1.3% when compared to the same period last year. Oil production stood at 79.7kbopd (thousand barrels of oil per day) depicting a growth of around 14.5%YoY. On the contrary, gas production dropped by 2.8% to 4.0bcfd (billion cubic feet per day) from 4.1bcfd in 1QFY13.

We believe revenue-impact of oil production growth should more than offset the decline in gas production as net realized prices of oil are approximately 6.5 times than that of gas. Not much gain will be driven from Arab Light prices (reference crude for oil & gas pricing) which averaged US$108.1/bbl in 1QFY14 vs. US$107.9/bbl in 1QFY13. However, during last 3 months, Pak-rupee devalued 8.7% against US Dollar versus average exchange rate in 1QFY13 which will help revenues and profits. Thus, we expect net sales of E&P companies to raise 10-12% in 1QFY14 which as a result will generate better profits.

Pakistan Oilfield Limited (POL): Production up 12%

Oil & gas production of Pakistan Oilfields Limited (POL) rose to 20.2kboepd in 1QFY14 as against 18.0kboepd in the same period last year up 12.1%. The Company’s Oil Production grew by 32.2%YoY to 5.6kbopd during the period while Gas Production stood at 82mmcfd (up 5.9%). The growth in production is mainly attributed to oil production from Tal Block which averaged 15.6kbopd in 1QFY14, up 93% versus 1QFY13 (8.1kbopd) and 47% versus FY13 (avg. 10.6kbopd). Thus, we expect POL’s 1QFY14 EPS to range between Rs14-15 compared to Rs10.85 in 1QFY13.

Pakistan Banking Sector

Banks: Earning assets remain depressed – UW maintained

• With 3Q2013 in the bag, balance sheet figures show a bleak picture for the Banking Sector as credit off take and Investment Portfolios remains weak, both declining by 1% each since the start of year to Rs3.8trn and Rs3.9trn respectively.
  
• Deposits on the other hand have grown by 7% since December 2012, clocking in at Rs7.1trn. As a result, Banking Sector ADR has come down to 54% from 58% during the period.
  
• In line with depleting earnings assets, average weighted spreads also continued slide down clocking in at 6.28% in August 2013, down 3bp MoM and 67bp YoY. Spreads so far in 2013 have averaged at 6.26% compared to 7.02% in 2012.
  
• Going forward, spreads are likely to remain under pressure due to State Bank of Pakistan’s (SBP) new regulation of linking savings deposits Minimum Profit Rate (MPR) to the Central Bank’s Repo Rate. We maintain our ‘Under-weight’ stance on the Banking Sector.

Adv. And Inv. Fall By 1% In 2013 While Deposits Grow By 7%

Banking Sector aggregate deposits so far in 2013 (till September 27, 2013) have registered a growth of 7%, reaching Rs7.1trn. However, banks were unable to emulate this growth on the earning assets front, as credit off take remained weak during the year and gross advances declined by 1% to Rs3.8trn. Similarly, investments, too, declined by 1% during the same period to Rs3.9trn. Consequently, the Banking Sectors’ ADR and IDR have shrunk to 54% each compared to 58% each in December 2012. We anticipate the Banking Sector to continue with its prudent lending policy in the near term, amidst shrinking spreads and the Overall Gloomy Economic Scenario of the country.

Spreads continue to slide in 2012

After averaging at 7.02% in 2012, Banking Spreads have narrowed down to 6.28% in August 2013, down 3bp MoM and 67bp YoY. With the September number still to come, Banking Spreads on a QoQ basis have averaged at 6.30% in 3Q2013 compared to 6.29% in 2Q2013 indicating a weak quarter for banking results. To add to this misery, the SBP recently fixed the MPR on all Pak Rupee Savings Deposits to 50bp below the prevailing SBP Repo Rate (i.e. floor of the Interest Rate Corridor, currently 250bp below the Discount Rate at 7%) with effect from October 1, 2013. We believe this move by the SBP is likely to damage banking spreads further as MPR will now change in tandem with changes in Discount Rate. Our Banking Universe 2014 earnings are likely to come down by 5-17% (see our report “SBP regulations to put pressure on Banking Spreads” on September 30, 2013).

Spreads Continue To Slide In 2013

With spreads on Savings Accounts now due to remain flattish, we can expect to see banks opting to focus more on building up their Current Account deposits base and lowering the share of Savings Accounts in their deposit mix. Nonetheless, banking spreads are likely to remain under pressure and we maintain our ‘Under-weight’ stance on the sector a with ‘Sell’ on MCB Bank Limited (MCB) and Habib Bank Limited (HBL).

Karachi Stock Exchange Daily Analysis

Pak Strategy: Plummeting Volumes; Cyclical or Seasonal?

• The last three trading sessions have seen a dramatic decline in activity on the stock market with ADTO falling to a mere US$29mn (vs. US$95mn post elections). The last time KSE witnessed such low activity was back in Mar-13. Although some decline in volume is seasonal (related to the EID season), that does not explain the huge slump. The more relevant factor has been the dry-up of foreign flows; from Sep 1^st 2013 to date, net FIPI has been a mere US$0.2mn.
• Foreign liquidity has been the fuel on which the KSE had rallied in 2013. 2013 YTD, net FPI has been US$324mn, while mutual funds, NBFC’s, and companies have been large net sellers.
• We find it unlikely that domestic investors, who have been net sellers through the course of this rally, would find the market attractive at current levels. The KSE-100 is currently 16% higher than pre-election levels, and up 31% on a CYTD basis. FIPI flows are also likely to remain subdued till currency concerns abate.
• Market activity is likely to remain subdued until valuations become more attractive or/and there is a breakthrough on peace talks with Taliban, in our view.

Activity Slumps At The KSE; Will It Stay or Will It Go?

The last three trading sessions have seen a dramatic decline in activity on the KSE, Average daily value traded (ADTO) has fallen to a more US$29mn, the last time activity was this low was back in March 2013. This is significantly lower than the ADTO of US$95mn that we have seen post-elections. Some of the impact may be from the upcoming EID break. In 2012 and 2011, we have seen a 10% and 23% decline in ADTO respectively in the last ten trading sessions before that.

It Takes FIPI To Tango! 

Although some of the decline in activity this year may be attributable to seasonal factors, it does not completely explain the huge slump. The major factor has been the drying up of foreign flows – from Sep 1^st 2013 to date, Net Foreign Portfolio Investment (FIPI) has been a mere US$0.2mn. Foreign liquidity has been the fuel on which Pakistan’s stock market has rallied this year. CYTD, Net Foreign Portfolio Investment has been US$324mn, whilst Mutual Funds (-US$185mn), NBFC’s (-US$81mn), and companies (-US$92mn) have been significant net sellers. Banks and individuals have been net buyers, albeit in a modest quantum of US$41mn and US$39mn respectively.

What Can Trigger Excitement Now? Cheaper Vals; Breakthrough On Peace Talks

The KSE-100 on April 30^th (pre-elections) was at 19,982 points, and at yesterday’s close of 22,080, is trading 16% above that level. 2013 YTD, the KSE -100 is up 31%. We believe it is unlikely that Domestic Investors, who have been net sellers through the course of this year’s rally, would find the market attractive at current levels, particularly given the rising interest rate outlook. In our opinion, additional domestic liquidity is only likely to come through at cheaper valuations.

Foreign liquidity and sentiment, on the other hand, seems to have been impacted by recent currency volatility and weakness. As a result, the outlook on recovery in FIPI flows in the short-term remains unpromising. In the medium-term, successful peace negotiations with the Taliban would be the key to attract more investment. On the balance of risks, market activity is likely to remain subdued until 1) a further market correction makes valuations more enticing for domestic investors or 2) a break-through in peace talks with the Taliban unlock the next wave of foreign flows.