Pakistan Equity | Strategy

December 19, 2023

REP-057

Record leverage position and market correction

Share financing rate at 30%

Sunny Kumar
sunny@topline.com.pk
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Topline Securities, Pakistan
Leverage position at Rs40bn, 2-year high
PSX’s reported leverage (Open Interest + MTS + MFS)  Pakistan market has recovered sharply in last few months with the benchmark KSE-100 up 52% from its level
of 41,453 on Jun 27, 2023, and 64% from its recent low of 38,342 on Jan 17, 2023.
Rsbn
50  Better than expected IMF Stand By Agreement (SBA) in Jul-2023, followed by the successful completion of the
first IMF review, a stable currency, and the announcement of elections, helped improve investor sentiments.

40  However the recovery in share prices has been faster than our expectations.
 This sudden recovery in prices has been accompanied with significant improvement in volumes with average
30 traded value in ready/cash market improving to around Rs14bn/day (US$49mn) in 2H2023 vs Rs6bn/day
(US$20mn) in 1H2023. Interestingly, in last 2 weeks volume and value traded has jumped significantly with
average daily volume of 1.3bn shares and value of Rs31bn/day.
20
 As a result of this substantial increase in share prices along with abnormal trading activities, the official
reported leverage (Futures Open Interest, MTS, and MFS) has also substantially increased to a around 2-year
10
high of Rs40bn.
Jan-22

Dec-22

Dec-23
Jun-22

Jul-23
Sep-21

Nov-21

Mar-22

Aug-22

Oct-22

Mar-23

May-23

Sep-23  Last time levels were at this level was on Sep 27, 2021, at Rs46bn. This time, share financing rates are 30%
while 2 years back when financing was at record high the rates was near 10%.
Source: NCCPL, PSX, Topline Research
 This high leveraged buying at higher rates ahead of year end has generated margin calls which caused market
to fall 3.64% today.
Leverage as % age of market and free-float capitalization
2.5%  Although absolute leverage position is at record high but in relative terms this is not a big risk. Current
Leverage to Total Mkt. Cap. leverage is 1.6% of the market’s Free Float capitalization and 0.4% of the market’s Total capitalization. In last
Leverage to FF Mkt. Cap. 3-years (2020-2022) these ratios averaged at 1.2% and 0.4%, respectively.
2.0%
 Open Interest Futures: Open Interest in single stock futures has increased to Rs24.8bn from Rs14.3bn in end
1.5% of Jun-2023. This is highest since Sep-2021. Average annualized spread yesterday was at 30%. In few stocks it
was at 33%.
1.0%  Margin Trading System (MTS): Leverage has shot up to Rs9.2bn, which is also 2-year high. The last few days
have also seen average MTS rate shooting up to around the cap rate of 30% mark from its recent low of
0.5% 18.04% on Jan 02, 2023.
 It is also surprising as 6M KIBOR has come down over the past few months, with the spread between the MTS
0.0% rate and 6M KIBOR rising to 8.6% vs. 10-Years average of 2.5%.
Dec-23
Jul-22

Jun-23
Sep-21
Nov-21
Jan-22
Mar-22
May-22

Sep-22
Nov-22
Jan-23
Mar-23

Aug-23
Oct-23

 Margin Financing System (MFS): MFS value stood at Rs6.1bn, not seen since Sep-2021.
 Interestingly, short position in futures have not increased substantially in absolute terms. Short position stood
Source: NCCPL, PSX, Topline Research at Rs1.7bn as of Dec 18, 2023, compared to Rs0.6bn on Sep 27, 2021 as per PSX data.

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MTS rate as high as upper limit of 30.13%
Open Interest Futures (Rsmn) Margin Trading System (MTS) (Rsmn)
35,000 MTS Amount (LHS) MTS Rate MTS Rate-Kibor 6M
13,000 35%
30,000
30%
25,000 10,000 25%

20,000 20%
7,000 15%
15,000
10%
10,000 4,000 5%
0%
5,000
Nov-21

Jan-22

Jul-23
Sep-21

Mar-22

Jun-22

Aug-22

Oct-22

Dec-22

Mar-23

May-23

Sep-23

Dec-23
1,000 -5%

Sep-21

Nov-21

Jan-22

Mar-22

Jun-22

Aug-22

Oct-22

Dec-22

Mar-23

May-23

Jul-23

Sep-23

Dec-23
Source: NCCPL, PSX, Topline Research Source: NCCPL, PSX, Topline Research

Margin Financing System (MFS) (Rsmn)

Rsmn
7,500

6,500

5,500

4,500

3,500

2,500
Sep-21

Nov-21

Jan-22

Mar-22

Aug-22

Oct-22

Dec-22

Mar-23

May-23

Jul-23

Sep-23

Dec-23
Jun-22

Source: NCCPL, PSX, Topline Research

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Stocks having high leverage positions
Future Open Interest (Dec 18, 2023) Top 10 Leverage Stocks (Dec 18, 2023)
Rsmn Amount (Rsmn) Average Spread Symbol Total Amount (Rsmn)
TRG-DEC 3,370 25%
TRG 3,638
PPL-DEC 2,121 26%
OGDC-DECB 1,959 30% PPL 2,889
PSO-DEC 1,663 33% OGDC 2,722
AIRLINK-DECB 1,108 29%
PSO 2,029
Others 14,556 29%
Total 24,777 30% AIRLINK 1,870
Source: PSX HBL 1,296
UNITY 1,223
Margin Trading System (Dec 18, 2023)
Amount (Rsmn) Average Rate PRL 1,151
HBL 840 30.13% DGKC 1,010
PPL 673 30.12% SEARL 1,005
OGDC 657 30.11%
Others 21,297
SNGP 388 29.85%
AIRLINK 374 30.05% Total 40,130
Others 6,282 23.05% Source: PSX, NCCPL, Topline Research
Total 9,214 30.09%
Source: NCCPL

Margin Financing System (Dec 18, 2023)

Amount (Rsmn)
AIRLINK 389
SAZEW 286
TRG 259
BOP 241
GHNI 198
Others 4,766
Total 6,139
Source: NCCPL

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In spite of leverage, valuations attractive
PSX’s P/E (x) vs. MSCI EM  The increase trend in leverage is somewhat concerning for the market in the near-term in our view.
Pakistan Market Discount to MSCI EM (Asia) Normally many lenders don’t lend before Dec closing thus increasing rates to new high.
80%
10 Year Average  The trend suggests high demand for leverage with relatively limited liquidity. Generally speaking, if
60% the rate goes higher or if leverage is not available, than investors will look to offload positions.

40%  In spite of recent stock market recovery, Pakistan continues to trade at a big discount to regional
indices. Pakistan is now at 66% discount to MSCI EM PE of 14.9x and at 49% discount from MSCI FM
10 Year Average 34%
20% PE of 9.9x.

 Pakistan market currently trades at 2024E P/E of 3.6x compared to historical long term average PE
0%
of 8x. Dividend Yield of our sample companies is 10% on an average for 2024E which is above the
-20% last 10-Years average of 7%. Similarly on price to book value (PBV) listed firms of Topline sample is
Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22

Dec-23
0.8x compared to last 10-Years average of 1.2x.

 Pakistan’s market capitalization to GDP is near all time low of 9% which is almost half of last 10 year
Source: Blomberg average and far lower than regional countries. Thus having lot of potential to grow.

PSX’s P/E (x) vs. MSCI FM  We like cyclical sectors including Cement and Steel due to expected decline in policy rate and
better volumetric sales. We also like Banks due to unmatched valuation.
Pakistan Market Discount to MSCI FM
80%
10 Year Average  Our 2024 Top Picks include Meezan Bank (MEBL), United Bank (UBL), MCB Bank (MCB), Mari
60% Petroleum (MARI), Lucky Cement (LUCK), Maple Leaf Cement (MLCF), Fauji Cement (FCCL), Engro
Corporation (ENGRO), Pak Elektron (PAEL), Indus Motors (INDU) and Interloop (ILP).
40%
Pakistan Stock Market: Key Numbers
10 Year Average 36%
20% 2021A 2022A 2023A/E 2024F 2025F
PE(X) 6.4 5.3 4.0 3.6 3.3
0%
Earnings Growth 38% 20% 32% 13% 7%
-20% PBV(X) 1.2 1.0 0.9 0.8 0.7
Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22

Dec-23

Dividend Yield 6% 7% 9% 10% 12%

ROE 19% 20% 23% 23% 21%
Source: Bloomberg Source: Topline Research

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 Analyst Certification and Disclosures
The research analyst(s), denoted by an “AC” on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her
personal views about all of the subject companies/securities/sectors and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views
expressed in this report.
Furthermore, it is stated that the research analyst or its close relative have neither served as a director/officer in the past 3 years nor received any compensation from the subject company in the past 12
months.
Additionally, as per regulation 8(2)(i) of the Research Analyst Regulations, 2015, we currently do not have a financial interest in the securities of the subject company aggregating more than 1% of the
value of the company.

Rating System
Topline Securities employs three tier ratings system to rate a stock, as mentioned below, which is based upon the level of expected return for a specific stock. The rating is based on the following with
time horizon of 12-months.
Rating Expected Total Return
Buy Stock will outperform the average total return of stocks in universe
Neutral Stock will perform in line with the average total return of stocks in universe
Sell Stock will underperform the average total return of stocks in universe
For sector rating, Topline Securities employs three tier ratings system, depending upon the sector’s proposed weight in the portfolio as compared to sector’s weight in KSE-100 Index:
Rating Sector’s Proposed Weight in Portfolio
Over Weight > Weight in KSE-100 Index
Market Weight = Weight in KSE-100 Index
Under Weight < Weight in KSE-100 Index
Ratings are updated daily to account for the latest developments in the economy/sector/company, changes in stock prices and changes in analyst’s assumptions or a combination of any of these factors.

Valuation Methodology
To arrive at our 12-months Target Price, Topline Securities uses different valuation methods which include: 1). Present value methodology, 2). Multiplier methodology, and 3). Asset-based methodology.

Research Dissemination Policy

Topline Securities endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as email, fax mail etc.
Nevertheless, all clients may not receive the material at the same time.10

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