FY15 flood less severe than 2010, but fiscal pressures could arise Apart, it is worth mentioning that the previous flood started from upper parts of River Indus basin and disturbed the belt from Mianwali to Thatta. Sindh emerged as the most affected area that time. Resultantly, major crops in the precedent area include (rice, cotton, sugar cane) registered increase in prices and enhance food inflation during the period.
On the flip side, recent flood has started from Azad kashmir with low intensity than previous one and has prevailed in the area surrounding river Jhelum and Chenab. However, it has already knocked the geographical boundaries of Sindh where we expect the damages would be less severe than the previous
calamity. Resultantly, inflationary impact in the country would be lower but this could lead heavy government borrowings from domestic sources (fiscal house disorder phenomenon) and might urge SBP to adopt ‘Wait & See’ approach in the monetary policy of Sep‐14.
Fertilizer: Local despatches to remain intact
According to the Data of NDMA as of Sep 15’14 total crop affected area is around 1.7mn acres which is approximately one third as compared to that of 2010. The chances of increase in affected crop area has gone down due to latest hydrological conditions and breaching of bunds between Qadirpur and
Punjnad on River Chenab reducing the possibility of high flood level at Guddu and Sukkur, particularly Sindh province. To recall, in 2010 the total affected cultivated area was around 5.2mn acres that resulted into decline of approximately 550k tons and 200k tons in urea and DAP sales, respectively. In
depth analysis reveals that government slashed down the imported influx during the post flood Rabi season in 2010, while the domestic urea and DAP sales showed growth of 14%YoY and 58%YoY respectively during the same period.
Thus we believe current floods to have a ‘Neutral’ impact on fertilizer sector in the medium term.
Our pre‐flood estimations suggest gap of around 600k tons between urea demand and local
production for the coming rabi season.
Cement sector: Short term jolts are there, but stable in long term
Cement sector is known to be significantly affected by floods. To recall, during 2010 floods local
despatches were down by 24%YoY in Aug’10 and Sep’10. To add to that, local dispatches in FY11 saw
a decline of 7%YoY. Despite such negative results we downplay a similar effect in FY15 to a certain
extent due to i) the current flood is lower in density than the previous one. ii) FY11 saw lowest
allocation in the PSDP (revised) in the last five years which further added to the low demand in FY11.
In such environment, we believe local offtakes would decrease in (Sep‐Oct14), though demand is
expected to recover in the later part of the FY15. Meanwhile, production haults are unlikely as the
manufacturing sites of major players are outside the affected area. We maintain our growth rate of
5%YoY for FY15E for now due to i) reconstruction in the aftermath of floods ii) possible development
of infrastructure projects as the budget allocated to PSDP is realized (allocation to PSDP is almost 2x
of FY11).
Bourse to respond on multiple factors
We anticipate the sluggish activity at the local bourses were mainly on account of prevailing political
chaos and slowing economic activity amid recent flood in the country. However, key triggers which
could rejuvenate the stock market include 1) reschedule of Chinese President visit to Pakistan ii)
acceptable solution of the ongoing political rift iii) successful completion of IMF quarterly review for
US$550mn tranche and 4) Post flood development in the affected areas could jack up activity at the
bourse. Therefore, positive news flows from the precedent triggers would clarify stock market
direction in the upcoming month.
