Cement sector continued to lead the pre-budget rally
and outperformed the market on Wednesday. The Finance Minister
emphasized on his visit to KSE on Wednesday, the likely increase in
development expenditure and its focus on building the country's physical
infrastructure; which allowed investors to continue the rally in cement
stocks for another day. However, fears of worsening Law and Order
situation in the city after two explosions at PACC pulled the index down
again by 0.11% on Thursday. The last trading session of the week
witnessed a strong move upwards crossing the 5,500 mark and the index
closed at 5,502.89 on Friday, thus reducing the WoW loss to 0.0015% over
last week's close of 5,511.00. The fears regarding a possible increase
in PIBs yields could not make any negative impression on the stock
OUTLOOK FOR THE FUTURE
Favorable Budget expectations should have positive
impact on the index during the next week. We are expecting a significant
increase in Public Sector Development Fund (PSDF) as hinted by the
Finance Minister, which would have a direct positive impact on the
Cement sector. Apart from cement, we do not expect the budget to have
any stock specific impacts. The positive results announcements from KTML,
Nishat Mills and Nishat Chunian are likely to create
a positive sentiment for the textile stocks. We also expect this
positive trend to be followed by other Textile companies. Pakistan
Telecommunication Authority will be issuing licenses for local telephony
on Monday, which will have a positive impact on Private sector
Telecommunication companies like Telecard and WorldCALL. On a net basis,
the continuation of neutral to positive consolidation in the market is
likely next week.
The major developments this week were:
•The Oil and Gas Regulatory Authority has allowed
an increase in gas tariffs of industrial, commercial and domestic
•The government has hinted at a possible reduction
in rates of General Sales Tax on 45 textile related items in the
•Various textile associations, in consultation with
the Ministry of Industries and Production, have prepared a number of
proposals for the upcoming budget. These include demands for a reduction
in tariffs and sale taxes, enhanced duty drawback rates on certain items
and amendments in the DTRE.
•The Annual Plan Coordination Committee chaired by
Finance Minister Shaukat Aziz, approved GDP growth projections of 6.8%
•The government decided to provide a subsidy on
petroleum prices and adjust the Petroleum Development Levy against any
further increase in international oil prices.
•National Refinery Limited (NRL) has sought bridge
financing from the government for purchasing crude oil.
•The State Bank has allowed banks and DFIs to
invest in TFCs of other banks/DFIs.
•The SBP has announced a target of PkR2bn for the
6-month T-bills auction on Wednesday.
•The CcoP decided that subscriptions for 115mn
shares of the government's holdings in PIA would take place between June
7-9. Applications would be for a minimum of 500 shares at an offer price
•The NA Speaker appointed Mr. Fazlur Rehman as the
•An advertisement by Bank Alfalah states that the
offer for sale of its shares has been oversubscribed by 10 times, as
over 370,000 applications were received.
•OMCs do not expect a favorable response by the
Ministry of Finance to the proposal by the Board of Investment for the
abolition of the Petroleum Development Levy in the next budget.
•As per a CBR official quoting a Ministry of
Industries report, government revenues would grow strongly by allowing
the import of reconditioned cars. As per the official, the government
would earn half the annual direct revenues collected from the assemblers
i.e. PkR4bn by importing 20,000 cars under the current duty structure.
•The Finance Minister emphasized on his visit to
KSE on Wednesday, the likely increase in development expenditure and its
focus on building the country's physical infrastructure.
•The SBP raised the yield on 6-month T-bills by a
higher than expected degree to 2.23 percent in Wednesday's auction.
•Nishat Chunian posted PAT of PkR237 (EPS: 5.35)
for 1HFY04. This translates into earnings of approximately PkR157mn
(EPS: 3.55) for 2QFY04.
•PIA announced a PkR0.5/share cash dividend for
category A shareholders and PkR0.25/share for category B shareholders
•Atlas Asset Management Company announced that it
will be launching two more funds by July 2004.
•In light of volatility in the country's exchange
markets, the State Bank has asked banks to hold capital to account for
interest rate risk, equity position risk and foreign exchange risk.
•As per government sources, the CBR, BoI, Experts
Advisory Cell and the Ministries of Commerce and Industries have
finalized a set of guidelines that would assist in the process of tariff
rationalization in preparation for WTO in Budget '05.
GAS UTILITIES — BUDGET EXPECTATIONS
We do not expect the Federal Budget FY04-05 to have
any direct impact on the gas utilities. Both the gas distribution
companies are currently operating under a fixed return formula under
which the profitability of the company at EBIT level is linked to the
asset base of the company. The return formula is governed under the loan
covenants of the World Bank and Asian Development Bank, which were
previously the largest lenders to the two utilities. With the loans from
these International Financial Institutions to the gas utilities still
outstanding, we expect the current return formula to continue in the
near future. However, sustainability of this formula over a longer
period is uncertain. We expect the upcoming budget to present some
expectation of the government over the interest rates during the year.
Since majority of the loans of both these utilities are now linked to
Treasury Bills, we believe that an expectation of a rise in interest
rates by the government would negatively affect investor sentiment
regarding the profitability of the sector. The Budget is likely to focus
on reliance on indigenous resources to meet the energy needs of the
country, and natural gas tops the list. Increased allocation of gas to
industrial and power sector is likely to be pushed by the government and
gas utilities are likely to increase the pace on their expansion plans.
Lastly, the budget document is also likely to include government
expectations of dividends from the two gas utilities. In the last
budget, the government used the historical dividend numbers as projected
dividend income from the two gas utilities. This year is unlikely to be
different, and we expect the government to use FY03 dividend payouts by
the two gas utilities as the projected dividend income.
We believe that the stock prices of both SSGC and
SNGPL have currently discounted the expansion plans of the two gas
utilities based on the increased demand for gas. We therefore expect a
Neutral impact of the Budget on SSGC and SNGPL.
•The upcoming budget should not have any direct
impact on the gas distribution companies as the rate of return to the
gas utilities is already fixed and governed under the loan covenants of
the World Bank and Asian Development Bank.
•However, we expect an increased allocation of gas
to the industrial sector to promote gas conversion, ultimately leading
to a lower reliance on furnace oil. This step would enable the
government to reduce its oil import bill, reflecting favorably on the
balance of payments.
•While we might see some statements relating to the
privatization and unbundling of the two vertically integrated gas
utilities, we do not expect any significant progress in the coming year
on this front.
•The government is likely to touch upon the issue
of available subsidy on gas tariffs for the fertilizer sector. We are of
the opinion that a gradual removal in subsidies on fertilizer feedstock
is likely to curtail the extent of increase in gas tariffs for
industrial, commercial and domestic consumers.
•Any increase in government's budgetary support
borrowing target should have a negative impact on interest rates. Gas
utilities are likely to get negatively affect as a result of any upward
movement in interest rates as their current borrowing rates are on a
floating basis, and in most cases linked to the 6-month T-Bill. More
importantly, government estimates of borrowing expenses are likely to
give some indication on the government's expectation on the direction of
the interest rates.
•The government might also suggest a strategy for
prepayment of foreign loans by the gas utilities. A decision to prepay
foreign currency loans should have positive impact on gas utilities as
these will be able to refinance their foreign expensive loans through
local banks at competitive rates.
•The government is also likely to come up with its
expectations of dividend income on its holding in the two gas utilities.
In our view, the government is likely to maintain last year's dividend
income in calculating its estimates, whereas anything above that will be
taken as an extra income. In the Budget FY03-04, the government adopted
a similar approach by maintaining a dividend payout equivalent to last
year. The absolute amount of dividend income from SSGC is likely to be
lower on account of the recent divestment by the government of its
holdings in SSGC.
Mkt. Cap (US $ bn)
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$ mn.)
No. of Trading Sessions
KSE 100 Index
KSE ALL Share Index