Updated on Jan
First week of this year brought bullish sentiments
to the investors, who led the KSE-100 Index to gain 93 point during
the week after a fall of 139 points. ADV also showed a massive
improvement of 56.31% from last week's of 84mn shares to 131.3mn
shares this week. The scrip under the spotlight were Hubco, PTCL, PSO,
FFCJ and ICI which gained by 16.5%, 11.4%, 4.65%, 25.76%, and 7.44%
The Market was relatively dull on Monday where it
only gained 3 points to close at 1273 level. However, after a positive
development on the political front capture the interest of not only
domestic but the foreign investors which led the market to gain almost
50 points on Tuesday with high volumes and the Index closed at 1322.
Hubco was the investors' favorite and held around 50% of the total
market volume during theweek.
The Index remained choppy within the range of 1265
- 1360 in a positive direction where after gaining 7%, it closed at
1362 for the week. Technically the Index is again on the point from
which it started two weeks back. It is now again in the caging region
of 1360-1380 where it was captured for 4-5 weeks and the break led it
to shed 139 points in one pace. This week is likely to be very
important in terms of that if the Index succeeds in breaching this
strong band of resistance and support in the coming week we may
witness a strong rally leading it to test its next strong resistance
of 1425 in a hurry. However, in our opinion the potential for such is
very low at least for the coming week. We expect the market to remain
choppy in the near term, within the band of 1340-80. We expect a short
term correction in the following stocks: Hub Power, Fauji Fertilizers,
Fauji Jordan, Askari Commercial Bank and TriPak.
India continues to flex its muscles on the border,
while the government of Pakistan attempts to continue its crackdown on
extremists groups without losing face. While President Musharraf has
reiterated his invitation to India to meet at any time and any place,
the Indian government continues to prefer to do its talking at the
barrel of a gun. This inevitably led to another visit to China where
the Chinese government acceded and made even stronger statements in
support of Pakistan to give India pause. All in all though, barring an
"accident," we feel we can continue to rule out war with
India. This a view that the market seems to have taken in the past
week as well.
Regarding the cement sector, we reiterate that we
do not believe that any major windfall will come for the sector
through the Afghan reconstruction effort, in our view. An explanation
for this is the focus of our political discussion this week. However,
we are bullish on the sector for two reasons. 1) Development projects
in Pakistan are likely to take off by 2Q02 and the sector will benefit
from the enhanced domestic demand, with some residual demand coming
from Afghanistan. 2) The sector has responded strongly to calls for
conversion to gas or coal, and we are expecting a significant shift to
coal in the current year and almost a complete shift by the next
calendar year. This will have significant cost advantages for the
companies. In that context we believe that D G Khan cement will
probably benefit most as a result of location advantage and due to the
already working supply chain for provision of coal. While the Afghan
residual demand advantage will most likely flow to Lucky Cement.
Its asset allocation season for global fund
managers, where there is reportedly already one at work where a
rumoured 27-28 million shares of Hub Power (US$5mn) were picked up.
Asia will most likely continue to be index or under weight, hence we
do not expect any major fund flows into Pakistan. Most of the entrants
are likely to be taking out-of-Index bets, and hence will be fickle
about any event risk.
Seriously speaking, does no one care about what's
good for the country anymore???
Over the next 12 months, two deadlines have emerged
as most important for PTCL: May 30, 2002 by which date the company
must be privatized as per IMF guidelines for the PRGF and December 30,
2002 after which PTCL loses its monopoly over fixed line telephony.
Hence 2002 is an important year for PTCL.
Much too important, in our opinion to not be taken
seriously by the regulators, management and indeed, the government!
PTCL has been rebalancing its tariffs since 1997.
This is an exercise that is important for the company since it is to
lose its monopoly status by the end of this year. Before the market
opens up to competition, PTCL must rebalance its tariffs by reducing
prices on nation wide dialing (NWD), corporate leased lines and
international calls. Better technology and higher competition have led
to falling inter-connect charges in the region.
Consequently, to maintain profitability the company
must phase out existing subsidies particularly on local calls and
monthly rent. Although the company also subsidizes installation, this
is to encourage new subscribers in a fixed line telephony, and since
it is one-time revenue from subscribers, it works out better to
maintain this subsidy.
However, the company must operate under certain
regulations when adjusting its tariff structure. The overall guiding
principle mandates that PTCL may adjust tariffs such that the
collective weighted average price change of its basket of basic
services is CPI-x%. The x% which is to be determined on a tri-annual
basis by the Pakistan Telecommunication Authority (PTA) has been fixed
at 7.5% for the next three years.
Accordingly, keeping the existing tariff structure
in mind, PTCL had put forward its proposal for the revised tariffs
from January 1, 2002. In fact the company proposed to lower its prices
beyond the mandated amount on installation charges, NWD and
international outgoing calls. According to the proposed tariffs PTCL
would have changed its prices by CPI-14.2%.
However, the PTA appears to have yielded, in
response to the hue and cry of the domestic industry and disallowed
the increase in local call tariffs, while agreeing to the reduction in
tariffs proposed by PTA for the other services. Monthly rental is the
only service to register an increase. This has in effect meant that
the overall change in tariff is over CPI-17.0%.
the PTA Decision
Was the PTA justified in spurning the request for a
raise in local call charges? We think not. First of all the proposal
by PTCL for tariff rebalancing was a very clear-cut document. It
highlighted the reasons for tariff rebalancing and then declared that
for the company to be able to continue to operate profitably, it is
imperative that local call charges be raised such that erstwhile
granted subsidies be done away with and hence the exposure to
international calls, whose tariffs are rapidly falling, be reduced for
The company's net profit breakup reveals that in
fact, it is at existing tariffs currently incurring a net loss on
installation and in particular on local calls. Furthermore, let us not
be misguided by the large component of profitability from incoming
international calls. In dollar terms, these revenues are declining and
declining very fast. Over the last two years the international
settlement rate has fallen by as much as 45%. It is only because of
massive rupee depreciation that these numbers are what they are in
local currency terms. A strategic investor will be looking at dollar
based numbers and they won't be growing for international incoming
revenues over the coming years, especially since we forecast a more
stable rupee over the next year or so.
We should also touch upon the fact that it is
important for PTCL to be profitable not only because the public entity
has become one of the largest tax paying entities since FY00, but also
since the company will hence be able to recycle its cash flows for
capital expansion and upgradation. The company estimates that if the
change in tariffs had been implemented following the proposal, it
would have earned revenue of PkR67bn during the year. Consequently, of
the PkR16.5bn that PTCL plans to invest over the next twelve months,
the majority would have been raised from its own cash flows.
The PTA's decision, according to the company, could
cause a shortfall of almost PkR1bn to PTCL's top line. These 12 months
are particularly consequential for PTCL and the PTA's crumbling under
public pressure is just not what the doctor ordered.
We took a look at the regional tariff structure of
local call charges and found that as far as local call tariffs are
concerned, countries continue to price them based on domestic
considerations as opposed to international or regional benchmarks. To
illustrate, local call charges in Australia are US$0.28 per 3 minutes,
while the local call tariff in South Korea is US$0.03 per 3 minutes.
Further our study of the region has also revealed
that PTCL local call tariff is well within the average for the region,
excluding Australia, Japan and Thailand, at US$0.02 per 3 minutes.
Even if the PTA had allowed local call charges to be raised, in terms
of USD local call tariff would remain US$0.02 per 3 minutes. In view
of the above factual comparison, we believe that domestic industry's
competitiveness would not diminish due to the company's proposed
tariff rebalancing. Thus the industry's hue and cry in this context
seems to be misguided or intended to misguide the regulators. In our
view, the domestic industry's sources of lack of competitiveness stem
from more fundamental causes rather than telephone charges in any
With the IMF laid deadline for the privatization of
PTCL before May 30, 2002, the strategic value of the company becomes
of paramount importance. At this point we need to give serious thought
to whether the GoP is serious about privatizing the company or is this
just the bureaucracy's way of pushing back the privatization deadline?
Further, we also need to examine the management's role
pre-privatization and whether it is fulfilling its responsibility.
Mkt. Cap (US $ bn)
Total Turnover (mn shares)
Value Traded (US$
No. of Trading Sessions
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$
KSE 100 Index
KSE All Shares Index