The stocks of oil marketing companies, independent power producers (electricity generating companies), and cement companies are likely to benefit from the reduction in monetary policy rates, a research note by Sherman Securities said Monday.
Pakistan’s economy, just like the rest of the world, is struggling during the COVID-19 pandemic. Demand for everything dropped as the lockdown was imposed and as a result, the State Bank had to cut interest rates five times between March and June. The latest rate cut was on Thursday, which brought the rates down from a multi-decade high of 13.25% to the single-digit 7%.
This rapid reduction in such a short time will bring down the debt servicing cost of leveraged companies (ones that have high debt on their books) by 40%. All things equal, this reduction in expenses is likely to improve their profit margins and eventual earning per share.
The interest rate, also known as policy rate, is a tool used by the central bank to boost economic growth. Lowering interest rates makes borrowing cheaper for businesses, individuals and the government and encourages spending. Businesses take loans to expand and do new projects, individuals go for car financing and more credit card purchases while the government borrows more to spend more on development projects.
Pakistan’s economy has slipped into the negative zone for the first time in 68 years so the SBP is lowering interest rates to give it a boost. The rate cut will help stimulate economic growth but market analysts have identified a few sectors that may benefit from this as well.
According to research analyst Ahmed Rauf, oil marketing companies, independent power producers and cement companies will benefit from the policy rate cut.
The analyst’s research is based on selected data of listed companies, which represent almost 80% of the market capitalization at the Pakistan Stock Exchange. These companies have total loans of more than Rs2.2 trillion, which is 25% to 30% of the total loans given by the banking sector.
“After adjusting for cash and investment in government securities, the listed corporate sector owes approximately Rs1.5 trillion. A 6.25% reduction in the interest rate will provide a net relief of Rs95 billion to Rs100 billion to the listed corporate sector,” he said.
In other words, this sharp rate cut means listed stocks will benefit by Rs100 billion and will now be paying off their loans at reduced rates of 7% as opposed to 13.25% four months ago.
However, the analyst also said the actual relief will be slightly lower than their estimates since the economic slowdown may exert pressure on the corporate sector, which may rely on additional borrowing.
Rauf said that 60% of the listed corporate debt is contributed by five sectors–oil manufacturing companies, independent power producers, cement, fertilizer and engineering. Apart from the engineering sector, the other sectors mentioned above are fairly insulated from economic slowdowns and thus a sharp reduction in the interest rate may improve their earnings in financial year 2021.
Meanwhile, another analyst, Karim Punjani, pointed out that the policy rate cut will also increase consumer buying, which includes cars, house financing and other goods sold on credit.