Despite the weak macro economic fundamentals, domestic demand in Pakistan is surging. The fact that credit to private sector is non existent (at least in the past one year), makes this even more astonishing.
Key domestic demand variants performance in 5M
Auto sales: In the first 5M of the current fiscal year, auto sales registered a 20 per cent YoY growth. The rise in sales has come in spite of the average price increase of 4-6 per cent in the last five months. The persistent demand of autos can also be validated from the fact that the import quantum of Completely Knocked Down (CKD), reported by SBP has also increased to US$212mn, up 55 per cent, YoY during the period July-October 2011. Furthermore, it is believed that the surge in auto sales is even more impressive considering the quantum of second hand car imports during the last 5 months.
Oil consumption: Inline with the auto sales, the oil consumption of the country has also increased. Overall, a 5 per cent YoY volumetric growth was witnessed, even after 5-7 per cent jump in the oil prices in the country. It is believed, the reasons for the higher sales could be the re-allocation of the country’s energy mix. However, it is interesting to note that the overall consumption of motor gasoline has increased by 24 per cent YoY and furnace oil by 5 per cent YoY.
Cement sales: The cement prices too have increased by 37 per cent YoY and 13 per cent YTD. However, despite the soaring prices, overall domestic sales have grown steadily at 7.1 per cent YoY in 5M of the current fiscal year.
Fertiliser consumption: Since January, the fertiliser prices have surged by a whopping 45 per cent or Rs460/bag. Nonetheless, fertiliser application still increased by 3 per cent YoY, during the first 10 months of the calendar year. This indicates the feel good factor currently being enjoyed by the farm sector in the country. Real estate: The reality on ground vindicates our view that real estate prices at the posh areas of the main cities have witnessed an increase of 20-25 per cent. As per our discussion with the key stake holders in the real estate sector, buying in real estate is genuine and all on 100 per cent cash basis, said Muzzammil Aslam at JS. ‘They have identified two sources of funds in the real estate sector, overseas Pakistanis and interior Sindh/Punjab areas. The primary reason cited for investment by overseas Pakistanis in real estate is the unrest in the Middle East and recession in Europe, whilst funds from interior areas are a function of windfall farmer income,’ he added.
Does this mean fresh flows to arrive at KSE? He said historically, a surge in domestic demand coupled with real estate boom has triggered a bullish rally at the stock market, but this time around we do not see the same pattern in the stock market, as there is little retail investor interest at the local bourse due to the capital gain tax. However, on grounds of above facts, we are extremely positive on the outlook of the corporate results, he said, adding that banking and fertiliser companies are all set to announce their robust annual results, while the results of the oil and cements companies are also poised to post decent earnings. Currently, KSE trades at an FY12E PE of 6.0x, which is at a discount of 49 per cent to its regional peers (vs historical discount of 34 per cent) and offers a dividend yield of 8.2 per cent.
