After a surprise rate cut by Pakistan central bank at the weekend, the benchmark lending rate has also declined by 44bps. Today’s 6-month KIBOR (Karachi Inter Bank Offer Rate) touched a 6-month high of 13.37% down from 13.81%. This bodes well for leveraged sectors as their earnings may improve assuming this trend of KIBOR to continue.
After from Textile and Cement which is likely to be the major gainers due to high leverage, few individual companies in our sample companies like Engro and PSO will also benefit due to this reduction in borrowing cost.
Pakistan’s largest textile manufacturer annualized earnings will likely to increase by 1% while in cement sector DGKC and Lucky earnings to increase by 3% and 1%, respectively. This is based on the recent decline of 44bps in lending rate.
In individual stocks, few highly leverage companies like Engro and PSO will directly benefit through lower financial charges. Engro which has total debt size of around Rs68bn, (excluding LIBOR linked offshore loans and fixed rate) the 44bps reduction in KIBOR rate will improve annualized earnings by Rs0.5 per share.
Similarly, the earnings of heavy weight PSO in the oil marketing sector will improve by Rs1.3 per share, according to our estimates. The company is facing liquidity constraint due to ongoing circular debt as its net receivables would be more than Rs60bn. On the other hand we believe that the decision bodes well for the banking sector in long-term as it will improve advances. However, in short-term, it will reduce banking spread which is hovering around 7.65%.
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