AKD Securities Limited – Business Confidence Survey 2015: Decoding the Corporate Pulse

Karachi, May 20, 2015 (PPI-OT): In the backdrop of an improved macroeconomic environment, our latest ‘Business Confidence Survey – 2015’ echoes an optimistic operating environment sentiment, particularly with respect to business growth.

Our survey suggests that business confidence is relatively high and the current soft inflationary environment (low input cost pressures) coupled with a lower interest rate profile should have a visibly positive impact on corporate earnings and future growth.

Managements in major manufacturing sectors foresee improving business conditions over the near term with the highest optimism coming from: 1) Oil and Gas, 2) Chemicals (incl. fertilizers) and 3) Automobile and Parts sectors. Assuming continued macro positivity along with low inflation and monetary easing, AKD Securities Limited expects margin expansion and sustained corporate profitability, to unlock valuation re-rating of the benchmark KSE-100 Index.

Quantifying the survey: AKD Securities Limited conducts the second round of our ‘Business Confidence Survey – 2015’, with the aim of measuring the corporate pulse with respect to the business growth outlook. AKD Securities Limited interviews respondents from over 100 listed companies representing a broad spectrum of manufacturing industries along with few from the services sector.

The survey results indicate the corporate sector’s high confidence for the business environment, with recovery on the macro front emerging as a key driver of the positive sentiment.

AKD Securities Limited have quantified the survey results through: 1) A Diffusion Index calculated to be 72.6 compared to 58.0 for last year’s survey (measured on scale from 0-100, a level higher than 50 indicates an optimistic outlook, while 0 indicates the extreme for a worse outlook) and 2) A Growth Sentiments Index for this year calculated to be ~6 (a weighted average standardized score on a range of 1 to 10 with 10 being the highest).

The jump over the year in the Diffusion Index combined with the Growth Sentiments Index for 2015 reflects improvements on multiple dimensions which together build up the confidence of the corporate sector, in our view.

Favourable Business Conditions: Our survey results demonstrate growing optimism among business executives, where 68% of over 100 listed corporate have witnessed an improvement in business conditions in the past year. Moreover, 65% have demonstrated positive sentiments regarding the business environment, anticipating favourable conditions to continue at least for the next six months. Owing to the soft inflationary environment and low input cost pressures, 77% of managements do not see any significant changing in price levels over the short term.

Lower interest rates have led to an improvement in credit availability where 68% of corporate managements see easier borrowing going forward. 40% of businesses also plan to undertake capital expenditures with a primary focus on expanding operations (85% expansion projects) in Pakistan, with 15% looking to enhance their footings in the foreign market. Redundancies will also remain low with 77% expecting employee levels to remain same, while others are likely to hire in relation to said planned expansions.

Investment Perspective: In the backdrop of our survey results and expectations of healthy corporate profitability in the ongoing year, AKD Securities Limited expects the market to continue to re-rate. The KSE-100 index has gained 1.5%CYTD, to trade at a P/E of 9.14x. Though performance may remain sluggish over the short-term owing to budget and Ramadan effect, AKD Securities Limited expects a quick recovery thereafter, where AKD Securities Limited reiterates our index target for Dec’15 at 37,000 pts.