-After bottoming out in November 2013, the Pak Rupee has picked up sharply of late where so far in March 2014 alone, the domestic currency has strengthened by ~3.2%, trimming YTD FY14 depreciation to 3.2%
–Leading Rupee recovery are (1) an uptick in foreign flows which has lifted FX reserves by ~US$1.4bn since Jan 2014; (2) rising market optimism on continued flows and (3) careful FX management by SBP/GoP.
-While question marks still remain on sustainability of the Pak Rupee at current levels, the situation on the exchange rate front is substantially better than we eyed earlier in the year. Resultantly, we trim our June 2014 Rupee exchange rate outlook to Rs106/US$ (from Rs111/US$ earlier).
-We incorporate a stronger PKR in our Equity models, trimming 2014/15E JS universe earnings by 0.3%/0.9%. E&P, IPPs, Textile & companies with pricing led by international prices (FFBL, LOTCHEM, EPCL) are key losers while the Downstream Oil sector (PSO, ATRL) & Auto companies are key gainers. Non-export oriented Cements will also benefit.
Pak Rupee rallies sharply post start-of-year blues
In a dramatic about-face from its discouraging start to the fiscal year, the Pak Rupee has shown substantial strength of late where so far in March 2014 alone, the domestic currency has strengthened by ~3.2%. Putting YTD FY14 Pak Rupee performance into perspective, note that after sliding by 9.6% to a low of Rs108.39/US$ as of end-November 2013, the exchange rate has corrected by a sharp 6.4% since to close yesterday at Rs101.5/US$. This rapid run-up in Pak Rupee value has trimmed FY14-to-date depreciation to just 3.2%. That same has been driven by a combination of factors, not least of which are:
–Uptick in foreign inflows since February 2014 as a result of which total Pak foreign exchange reserves have reportedly risen from US$7.98bn as of end- Jan to US$9.4bn currently. Available details so far suggest inflows are led by a US$352mn CSF (Coalition Support Fund) inflow last month coupled with two injections of US$750mn apiece from friendly countries.
-Higher optimism on continuation of Dollar inflows which has boosted sentiments and curtailed the run for US Dollars seen earlier this year. Media reports suggest that even exporters, who normally elect to hold their Dollars for longer than the permissible 130-day period, have been offloading their holding adding to pressure on the greenback. Lined up for Mar-Apr 2014 are (1) a third IMF tranche worth US$550mn; (2) another expected CSF release; (3) US$500mn via a Eurobond issue and (4) 3G spectrum auction slated for April 07, 2014 where the government intends to auction off 6 licenses with a cumulative base-price of US$1,595mn of which 50% is payable upfront. Against this, we estimate Mar-Jun 2014 IMF repayments at US$809mn.
-Careful foreign exchange (FX) management by the government and State Bank of Pakistan (SBP) which has included (1) the shifting of oil payments burden from the interbank market to loans against FE-25 deposits and (2) as per media reports, garnering a 180-day credit period from both Kuwait and Saudi Arabia to ease cash flow pressure on the Balance of Payments.
-Improved FY14 currency outlook now the base-case
From our vantage point, question marks still remain on sustainability of the Pak Rupee at current levels, as (1) despite recent improvement FX reserves remain thin (State Bank FX reserves cover just over 1-month of imports) and (2) clarity on the timing of some future foreign inflows (3G auction/Etisalat’s US$800mn/Eurobond) is still limited. That said, post recent Pak Rupee recovery, the situation on the exchange rate front is substantially better than we eyed earlier in the year. Resultantly, we trim our June 2014 Rupee exchange rate outlook to Rs106/US$ (from Rs111/US$ earlier). While quarters of the market and media are now chanting for the PKR/USD parity to slide as low as Rs98/US$, for the reasons cited above, we believe any further Rupee strengthening is likely to be short-lived.
KSE perceptions – limited EPS impact but a sentiment boost
In line with our revised PKR exchange rate assumption, we tweak earnings for our Equity Universe where we trim 2014-15E cumulative earnings by a nominal 0.3% and 0.9% respectively. We flag E&P, IPPs, Textile (revenues are US$-linked) and companies where pricing is determined by international prices (FFBL, LOTCHEM and EPCL) as the key losers, while the Downstream Oil sector (PSO, ATRL) and Auto companies are key gainers. Cement companies with lower export share in their revenue mix would also gain on the margin.