were apparent 1) death penalty awarded to Omar
Sheikh for the murder of Daniel Pearl 2) massacre in Indian
occupied Kashmir. On the positive front 1) institutional support
at low levels as it provided good buying levels 2) United States'
decision to ignore India's call for Pakistan to be declared a terrorist
THIS WEEK'S PERFORMANCE
As dollar was losing its ground investor focus
shifted to the capital market that led the average daily volume for the
week to increase by 102% at 82mn shares as against 41mn shares last
week. However, the stagnant market behavior of the KSE-100 Index was
just a continuation of the last week's momentum. The KSE-100 Index
gained marginally by 0.86% to close at 1799, as compared to 1783 last
week. Badla volumes remained low within PkR3 - 3.3bn concurrently badla
rates remained low between 7-9% for the week.
OUTLOOK OF THE COMING WEEK
Pakistan stock market holds appeal for both foreign
and domestic investors at the current levels. With the foreign investors
shift of focus from the US market to other yielding markets, we feel
Pakistan stock market is likely to attract attention as it is yielding
high returns relative to other world markets. Similarly, for domestic
investors equity market offers better returns than the return in the
other investment avenues. With badla rates already yielding around 6-7%
and the upcoming half yearly results of major companies the focus, in
our opinion will be on the high yielding stocks.
THE DAILY DRAMA
On Monday, the market opened at a higher note
however, during the latter half the index fell by 48 points to 1735
level by the end of the day. This was a result of panic selling
triggered by the two reasons mentioned above. Similarly, National Bank
announced a net profit of PkR1.15bn for FY01 and proposed a cash
dividend of 12.5%, which was lower than the market's expectation of a
bonus. This led to a 5% decline in the scrip to close at PkR18.95 as
against PkR19.95 in the previous trading day.
On Tuesday, institutional buying put a floor under
the KSE-100 Index that gained 27 points to close at 1762; a growth of
approximately 2% relative to the day before. Attractive buying levels
along with an overdue technical correction conducted the Index to an
intra day high of 1764. As a result, trading remained bullish where
Hubco and PTCL remained the major contributors to the volumes traded.
Wednesday, the market enthusiasm prevailed and the
KSE-100 Index notched another 28 point to close at 1791 level leading to
a 17% in the volumes at 74mn shares for the day. Out of the total
turnover PTCL's share alone was 43mn shares. The scrip gained around 4%
to close at PkR17.85 for the day. Local institutional investors are
building up fresh position in the scrips.
Thursday, the market went offbeat and declined by 4
points to close at 1786 level, however, the decline was contained by
ready demand at dips. Market indicated the wait-and see attitude of
foreign investors with regards to the standoff between Pakistan and
India. The dullness in the market contributed to the shrinkage in the
trading volumes from 126mn shares to 71mn shares.
With half yearly results of major companies expected
to be announced by the end of the current month, the market rebounded 12
points to close at 1799 level on Friday. PSO was the major gainer that
rose by PkR5.75 to close at PkR142.30, followed by Lever Brothers that
rose by PkR11 to close at PkR899 for the day.
FERTILIZER POLICY: DO WE REALLY NEED ONE?
Why blame fertilizer policy for being unable to
attract any new investments in the sector? This is simply a matter of
market conditions where neither government can afford to offer similar
incentives that it offered to manufacturers in the last policy nor
manufacturers are likely to find attractive investment opportunities in
the local industry. In our opinion, manufacturers have to alter their
business philosophy to survive in the changing business scene in this
business. Where they may not need a strict fertilizer policy — rather
they will be looking for simple market based business model to move
We believe that managements at both Engro and Fauji
are well aware of changing ground realities. And are already planning to
combat the future challenges. We like both companies, however, Engro
looks pricey at the current levels while Fauji is still attractive, as
In this week's sector theme, our focus is why last
fertilizer policy was successful and how will current be unable to
generate any investors interest. And what fertilizer manufacturers need
to do in future to acquire further growth.
WHY WAS LAST POLICY SO SUCCESSFUL?
Following reasons can be cited:
•Demand supply situation at that time. If
one recalls the demand supply situation of late 80's, a relatively
attractive investment policy was desired to encourage the local players
in the industry to plan for mega capacities. And that's what we had seen
afterwards when the entire capacity expansion of nearly 1 million ton
was absorbed in the local market without any pain.
•Availability of gas supply. Moreover, the
availability of the excess gas was also there. It was the time when the
power generating was mainly through hydel resources and Pakistani
utilities were out of the debt crisis — thus there was no urgency on
their part to grab the available gas resources to generate cheaper
•Less focus of IFIs on the agri subsidies.
We believe that IFIs were also responsible for the effectiveness of last
policy. This never bothered to stop government to not to offer
unrealistic subsidies to the fertilizer manufacturers. In fact a few of
the IFIs were themselves involved in financially supporting the key
players in the fertilizer industry.
•Higher international product prices.
Relatively depleted forex reserves and high trade deficits were also
responsible as government was in no position to afford imported urea at
US$225+ per ton. Thus its policy of reverting back to cheaper domestic
resources was understandable.
•Capacities of the companies to acquire growth.
Owing to early gains of pricing deregulation, both FFC and Engro were in
a comfortable situation to embark upon large capex. The opening of the
local capital markets to the international investors was also pivotal in
earning financial support for these. The availability of supplier
credits and other bank loans were primarily a function of a better
country standing at that time.
•Relatively lower pressures on the revenue side.
Despite large budget deficits, the government was under relatively less
pressure from the IFIs to improve its revenue collections. The granting
of tax exemptions and the duty rebates was made available only under
WHY WILL THE NEW POLICY BE UNABLE TO SERVE THE PURPOSE?
Here are the justifications that force us to think so:
•Lower potential in terms of demand. For
last two years, the demand side in the country seems to be slowing down.
Though we are not advocating that demand side will remain sluggish, it
is unlikely to expand to an extent in the short term where a large-scale
project of 500K+ would become feasible. Also we believe that both Engro
and Fauji are planning to come with small debottlenecking plans that
will lead to add at least 150K+ capacity. Here we are not considering
any capacity increase in Pak Saudi which has a potential of producing an
extra 100K tons with some minor modifications. With these potential
capacities, we do not believe that both players FFC and Engro are
interested in any new capacities.
•Supply constraints on the gas side. The
cheaper gas is definitely a history now. With growing demand from the
power producers and cement manufacturers, it is unlikely that government
will grant any cheaper gas to the fertilizer manufacturers. The pricing
in the new policy for the upcoming capacities has too many ifs and buts.
This precisely means that both the players would not even think of any
capacity expansion in a scenario where the international urea prices are
also struggling within the band of US$100-125/t.
•Lower international product prices. Unlike
past, the international urea prices are unlikely to come back to over
US$200. Given the idle capacities lying around the globe, the units will
start producing once the prices start moving above US$150/t. Even if
government comes up with some sort of price guarantees to the local
players, the fate of US$250/t guarantee for FFC Jordan is likely to irk
the fertilizer manufacturers to not to accept any such assurances.
•More focus of IFIs on agri subsidies. On
the backdrop of WTO conditions and the poor revenue collections, the
IFIs have also become cynical about the various subsidies the government
has been offering to various sectors. Fertilizer sector being one of the
major recipients of such subsidies was their target when finance
minister and a few of the agencies opposed any sort of subsidy to the
fertilizer manufacturers in the new fertilizer policy.
•Lower capacities of the fertilizer
manufacturers to take on further capex. One should also not
over-look the financial health of the two fertilizer players. If one is
struggling with the restructuring FJFC the other is trapped in a
relatively inefficient plant and its investments in the unknown
businesses. Frankly speaking, both the major companies have very little
capacities to venture into any new sizeable capex at the moment.
Mkt. Cap (US $ bn)
Total Turnover (mn shares)
Value Traded (US$ mn.)
No. of Trading Sessions
Avg. Dly T/O (mn. Shares)
Avg. Dly T/O (US$ mn)
KSE 100 Index
KSE All Shares Index