State Bank of Pakistan’s surprise decision of reducing benchmark interest rates to 13.5 per cent from 14 per cent would bode well for many stocks at the local bourse. Even though Pakistani industrialists and general investors would like further reduction so that country’s economy could revitalise, however, it is indeed a terrific beginning from all standards. It is also one of the outcomes of complex Pakistan–US relationship that has recently broken down given differences erupting on foreign policy matters. Pakistan is quickly taking a breather from the IMF laden approach of increasing interest rates.
Equity Markets
“This reduction in 50bps is good for equity markets in general and many companies in particular. We may see many commercial banks thronging into equities after some easement in the three day discount window of SBP,” said Faisal Shaji at SCS Trade, adding that we may see banks suffering from book losses on bonds and commercial papers but they can make money on equities. Analysts view Saturday’s cut in the cost of borrowing by the central bank as a good omen for the leveraged sectors saying their earnings might improve if the current downward trend in Karachi Inter Bank Offer Rate (KIBOR) persisted. The latest easing of the policy rate, the economic observers believe, would also benefit the banking sector in the long term however it would erode their 7.65 per cent spreads in the shorter term. “Today’s 6-month KIBOR touched a high of 13.37 per cent down from 13.81 per cent,” analysts at Topline Research said, adding, “This bodes well for leveraged sectors as their earnings may improve assuming this trend of KIBOR continues.”
Textile and Cement sectors
They said apart from textile and cement, the likely major gainers due to high leverage are companies like Engro and Pakistan State Oil (PSO) who would also benefit due to this rate cut. “Pakistan’s largest textile manufacturer annualised earnings are likely to increase by one per cent while in cement sector DGKC and Lucky earnings are expected to increase by three per cent and one per cent, respectively. This is based on the recent decline of 44bps in lending rate,” the analysts said. In individual stocks, they said, few highly leveraged companies like Engro and PSO would directly benefit through lower financial charges. “Engro which has a total debt size of around Rs68 billion, (excluding LIBOR linked offshore loans and fixed rate) the 44bps reduction in KIBOR rate will improve annualised earnings by Rs0.5 per share,” they said. Similarly, the earnings of heavy weight PSO in the oil marketing sector would improve by Rs1.3 per share. “The company is facing liquidity constraints due to ongoing circular debt as its net receivables would be more than Rs60 billion,” analysts said.
Companies to benefit from rate cut
Many leveraged companies are to take a breather on financial charges that are often linked with Pakistani bonds or 6M KIBOR, while many other companies including Fatima, Engro Corp., Agritech among fertiliser and DG Khan Cement, Lucky Cement, Fauji Cement among cement companies shall benefit from the reduction in financial charges. Some positive impact is also expected for companies who are presently suffering from heavy circular debt such as PSO, Nishat Power, Nishat Chunian Power etc. Some companies are already in a good position to gain from this move like FFC & Fatima (due to gains on urea and favourable gas treatment); FFBL is also recording growth given price margins on DAP fertilisers. Lucky and Fauji Cement are also considered among beneficiaries by dint of favourable supply situation in respective markets. Pakistan Oilfields among exploration companies will benefit from exceptional gains from Thal & Ikhlas Block. Among banks, MCB, UBL, ABL, HBL and NBP are to benefit. Analysts believe that the downward revision of interest rate would augur well in the long-term for the banking sector which would improve its advances.