Recently, Pak rupee (PKR) has come under considerable pressure against the US dollar on account of more than expected weakness in the current account while financial account has also failed to provided any support. Resultantly, country’s forex reserve has declined to $16.7billion for the week end December 02, from the high of US$18.3billion touch in mid-July. In addition, IMF’s loan repayment of $1.2billion due in 2 half of fiscal year12 with government showing intentions of not seeking new loan is also weighing its weight on the Pak Rupee/ US$ parity. Resultantly, Rupee has depreciated by 4.0 percent against the green back in fiscal year 2012.
In this scenario, we believe our initial assessment of PKR depreciate by 4-5 percent against the dollar in FY12, has turned out to be lower side and we are revisiting our PKR/USD parity assessement. Incorporating the recent developments that is more than expected weakness in the current account (due to adverse commodity price shock), strained finance account (reduce FDI, outflow in portfolio investment and debt repayments particularly towards 2HFY12), we believe PKR would depreciate by 7 percent in FY12 to close the year around the levels of PKR 92 per USD in June, 2012. This is inline with last 20-yrs (FY91-11) average depreciation of 7.1%, while it is above the last 10-years average of 4.1%.
With USD dominated revenue stream, we expect Oil and Gas E&P sector to benefit from the prevailing phenomen. Within the sector, Pakistan oilfields (POL) stands out to be the chief beneficary on account of higher portion of oil in its revenue mix, while positve impact on PPL remains on the lower side.
Similarly, IPPs’ ROE component is indexed to PKR/US$ parity and thus, PKR deprication would yield positively for listed IPP sector. Furthermore, PKR/US$ parity, Pakistan ’s textile exports would yield better returns in absolute terms benefiting export oriented cos.
With product prices and margins based on USD (PTA), LOTPTA would benefit from decline in PKR. However, this impact would be limited as PX, the primariy raw material for PTA would also be imported and exchange losses on US$30mn foreign loan.
For OMCs, sector would enjoy higher absolute margins on deregulated products like furnace oil rendering into improved gross margins. For refinery sector, PKR depreciation would render into higher deeemd duty in absolute terms. However, for both the sector exchange losses on account of higher reliance on imports will offset the increamental benefit. Hence neutral-negative for OMCs and refienries.
After continuous rise in Japanese yen, PKR deprecation would further increase the import bill for the Auto assemblers, thus adversely impacting the sector gross margins. Moreover, sector’s ability to pass on the cost pressures to final consumer would remain under question in heightened regulatory risk environment. Thus, we expect the phenomena to have a negative bearing on the sector.
The recent depreciation of Pak rupee against USD would have a negative impact on cement sector as coal, major component, is an imported factor. However, this impact would nullified for the companies like Lucky, having higher export share in the revenue mix.
For fertilizer sector, the PKR devaluation will have no major impact on urea manufacturers since since local urea prices are at approx 35% discount and are primarily a function of local gas prices and curtailment. For producer also having DAP in their product mix (FFBL), the devaluation would slightly augment its profitablity given higher cost on imported phosacid will be more than compensated by the gain on DAP prices.
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