Updated May 29, 2004


The week started with Bullish spells due to the news of Pakistan's re-entry to Common Wealth. Higher badla rates weakened the investor's confidence and pulled the index down by 0.83% on Monday. Higher than expected results by Nishat Mills, Nishat Chunian and KTML triggered bullish activity in these stocks. 
President Musharraf's invitation to Sonia Gandhi to visit Pakistan and his telephonic conversation with the new Indian premier hinted a further improvement in Indo-Pak relations, which restored the investors' confidence and pushed the index up by 0.32% on Wednesday.





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 market.


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 consumers.

•The government has hinted at a possible reduction in rates of General Sales Tax on 45 textile related items in the upcoming budget.

•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% for FY04-05.

•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 of PkR20/share.

•The NA Speaker appointed Mr. Fazlur Rehman as the opposition leader.

•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 for FY04.

•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.


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.






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