Updated Apr 03, 2004



In line with the expectations of the market, the revision of the index during the week witnessed the entry of OGDC in the list of KSE-100. Given its large market cap, OGDC formed 21.86 percent of the revised index by the end of Friday's trading session. The inclusion of the stock in the index gave its price a healthy boost during the week. The index itself received an upward





push as well and closed 55 points, or 1.07 percent, higher at 5,173.52 on Friday, as opposed to 5,118.52 last week. The bulk of this increase was recorded in the last two days of the week on the back of favorable news in the cement sector. Reports of capacity expansion by D.G. Khan Cement helped in taking the sector, and the index, higher on Thursday, while a statement by President Musharraf that either Bhasha or Kalabagh dam would be constructed within a year added further interest among the investors on Friday.


The decrease in military activity in Wana bodes well for investors. Given that the brunt of the operation seems to be over, the threat to the market from this front appears to have reduced for now. Furthermore, the prophecy that the index would experience a significant correction after testing 5000 points has not proven true yet. On the contrary, the index seems to have formed a strong base around the 5000-point mark. This is further aided by the fact that liquidity remains strong, thus reducing the chances of an overly aggressive slump in the market.


The major developments this week were:

•Privatization Commission is holding a pre-bid conference on April 5 of four pre-qualified parties for the privatization process of Pak Arab Fertilizer. These parties include Nishat Chunian/Umar Fabrics, Fatima Group of Companies, Dawood Hercules and Employees Group of Pak Arab Fertilizer.

•A group of US investors visiting Pakistan showed interest in setting up an oil refinery in Karachi. This was disclosed at a joint meeting of Pakistan American Business Council and officials of Board of Investment. While the specifications of the refinery have not been disclosed, according to the reports, it is estimated to cost US$85mn. A Saudi Arabia based group had also expressed interest a few months back in setting up a coastal refinery in Karachi. National Refinery and Pakistan State Oil had expressed interest in participating in this refinery as joint venture partners.

•Private sector off take grew to PkR230bn for the period July-mid-February 2004. This figure is the highest ever recorded for any year of Pakistan's history and is nearly 3 times greater than the PkR78bn that was recorded during the same period last year and 2.7 times greater than the government's target for FY04. This growth has been caused by 4 main factors; (1) low interest rates, (2) increased industrial credit demand on the back of Pakistan's accelerating economic growth, (3) strong demand from both SME and consumer segments and, (4) higher demand for housing finance.

•Sui Southern Gas Company Limited commenced work on the supply of gas to Khangarh and adjoining areas. The total cost of the project is estimated at PkR144mn out of which PkR113mn is to be provided from the Prime Minister's Development Fund, while the remaining amount is to be arranged by SSGC.

The project is estimated to provide gas supply to 29,000 customers over the next five years. The project envisages the construction of 2 inch to 8-inch diameter 49 kms long supply mains and distribution network of 29 kms of 1 inch to 4-inch diameter.

•TRG acquired the assets of A Alpha Answering Services Inc. located in Temecula, California through another investment of Central Voice, LLC. According to a company statement, Central Voice's annual revenues are expected to increase by 30% to US$4.2 with this acquisition.

•As per the SBP, government borrowing for the period July-March 13, 2004 for budgetary support reached PkR70bn. This figure is nearly 4.7 times the size of the target of PkR15bn that has been set for FY04 and is larger than the PkR34bn that was attained last year as the government retired a large amount of debt.

•The SBP released it 2QFY04 report in which it revised its full year forecasts for GDP growth upwards from 5.3% to 5.5-5.8%. As per the SBP, this revision was necessary on the back of stronger than expected growth in the manufacturing sector and expectations that the agricultural sector would attain its full year target based on the increased area under cultivation of wheat. However, whilst the SBP revised most of its estimates positively, it pointed out two potential problems, (i) slow decline in unemployment, and (ii) increasing inflation.

•As per HSBC, the financial advisor to Unilever Pakistan on the sale of the Dalda business, the sale of Dalda will be completed within the next 4 weeks. As per the bank, 6 parties are in final negotiations for the purchase, which includes the Fauji Foundation, Habib Oil Mills, Soya Supreme, Unilever Employees Welfare Group, Savola Group (Saudi Arabia) and Candyland.

•The Supreme Court issued notices to the federal government, the Privatization Commission and the Aga Khan Fund on a petition challenging the transparency of the privatization of Habib Bank Limited. The petition was filed by Dr. Akhtar Hassan Khan, a former secretary of the Planning Commission.

•DG Khan Cement reportedly signed a deal with a Danish company for supply of 4,000 tons per day cement plant in Khairpur, Chakwal. The proposed project is expected to take DGK's installed capacity to 3.32mn tons per annum.

•The State Bank raised the cut-off yield on 6-month T-bills by 6 basis points from 1.78 percent to 1.84 percent. The Bank had to accept bids worth PkR20.68bn against a target of PkR15bn to achieve this target.

•The State Bank established a US$920mn sinking fund. Out of this fund, US$810mn has been invested abroad, while US$110mn has been placed with the commercial banks of the country.

•As per the Chairman of the Mutual Funds Association of Pakistan (MUFAP), Indian mutual funds have expressed an interest in investing in Pakistan. This interest is based on the premise that the Pakistani stock market with a PER of 11x is undervalued relative to the Indian stock market that trades at a PER of 17x and that Indian mutual funds, unlike their Pakistani counterparts are allowed to invest up to 20% of their portfolio or US$50mn overseas. It has apparently been proposed that initial investments be made through the other country's mutual funds. The Chairman also pointed out that he had received a query from Bajaj Capital Management with regards to setting up a distributing company for mutual funds investment.

•A news report indicated that PSO is planning to import 220,000 tons of Furnace Oil during April-June of the current FY to supply oil to Hubco

•National Refinery Limited announced that it will be exporting 13,000 tons of Lube Base Oil. NRL hopes to earn US$5.2mn through the export of LBO.

•In a meeting of the Cabinet Committee on Privatization, the Privatization Minister directed the Privatization Commission to complete the public offering of PIA and PPL by the end of April and May respectively.

•As per a CBR official, provisional tax collections for the period July-March 2004 of PkR351.7bn met the target for the period. For the month of March however, collections of PkR38.3bn fell short of the target of PkR44bn.



•PICT officially launched full-scale operations at its targeted date of April 01, 2004.


Reckitt Benckiser Pakistan Limited released its annual results for FY03 on March 31, wherein it declared profits of PkR124mn on the back of revenues of PkR2.89bn for FY03. Whilst performance was better than expected, results were substantially lower than the profits of PkR166mn that were recorded last year due to the Korangi factory redundancy costs that were incurred in 2QFY03. With the stock trading at a marginal discount to our DCF based fair value and at a PER of 9x, we issue a HOLD on the stock.

Reckitt Benckiser Pakistan Limited reported profits of PkR124mn on sales of PkR2.89bn for FY03. The company did not declare any dividend on its earnings of PkR3.88/share, whereas last year it paid out a 25% cash dividend on earnings of PkR5.18/share.


The household products segment of the company denoted strong sales revenue increase during the year. However, gross margins in this sector dropped sharply as the company had to incur a one-time redundancy charge related to the closure of its Korangi plant where Ultramarine Blue was produced. As per the company, this had become necessary on the back of rising costs of production and the availability of cheaper imports. This was coupled with a sharp increase in operating expenses during the year as the company spent more on marketing its existing and new products in an increasingly competitive environment. This resulted in a drop in the segment's operating margins, which recovered during the latter half of the year.


The pharmaceutical division continued growing during the year backed up by steady gross margins. In line with strict cost controls especially in 2HFY03, the company was also able to improve its operating margins during the year.


On an overall basis therefore, the company saw a strong 15% growth in revenues for the year. However, this growth in revenues was offset by the faster (18%) growth in cost of sales as a result of the Korangi plant redundancy charge that was booked in 2QFY03. Thus the company's gross margin fell from 37% to 36% during FY03. At the same time, in line with increased competition and the launch of new products during the year the company increased its marketing activities, that paid off in terms of higher revenues, but also resulted in a 34% increase in operating costs during the year, which in turn caused the company's operating margins to slip from 11% to 5% during the year. However, this fall in the company's operating margin was offset by the increase in the company's other income especially during 4QFY03 and resulted in a rise in the company's net margins to 7% from the 4% that was attained during FY02.


As is evident, the 25% YoY fall in Reckitt Benckiser's profits was due to the one time expense relating to the Korangi plant, which the company has announced will be sold for PkR255mn. Had this expense not been incurred, we calculate that the company would have declared profits of about PkR195mn (EPS: PkR6.07) instead of the PkR124mn (EPS: PkR3.9) that it did declare. This projected figure represents a profit jump of 17% YoY. With the stock trading at a slight discount to out DCF based fair value of PkR96.7/share and at 9x






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