all the bids for T-Bills auction on Tuesday.
The Index again climbed for another consecutive session with the news of
government planning to offer Global Depository Receipts of OGDCL within
the next few months. The market received a set back on Thursday after
the news of an attack on a military convoy in Karachi. Cement Sector
also started performing weakly due to decline in expected cement prices
in the budget. The last trading session of the week witnessed a slow
move upwards and the index closed at 5,384.48 on Friday, thus managing a
WoW gain of 0.4% over last week's close of 5,362.86.
OUTLOOK FOR THE FUTURE
Federal Budget 2004-05 announcement will create
excitement in the market during the next week, which should have a
neutral to mildly positive impact on the index as the pre budget
expectations have already been discounted by the market. We might see a
"Sell on News" behavior by the market after the announcement
of the budget. We expect the continuation of capital tax exemption in
the budget. On a net basis, the continuation of neutral to positive
consolidation in the market is likely next week.
The major developments this week were:
•IT Minister made a statement in the National
Assembly about a possible reduction in local call rates.
•PPL is working on drilling its first exploratory
well in Pasni.
•As per India's new foreign minister, the Indian
government is willing to look in to the possibility of participating in
the gas pipeline project from Iran.
•As per figures released recently, Pakistan's trade
deficit reached US$2.67bn in July-May 2004, 128% YoY more than was
attained during the same period last year.
•Chairman Securities and Exchange Commission
announced that the commission will be announcing the margin financing
rules in the next few days. 29 companies listed at the KSE, 30 companies
listed at the LSE and 26 listed companies at the LSE are to start
trading under margin financing rules from June 21.
•The Sindh Chief Minister submitted his resignation
to the Governor on Monday, citing personal reasons.
•In response to the Indian demand, the Pakistan
Foreign Office announced that Pakistan is ready to provide international
guarantees for the proposed gas pipeline to India.
•The first pre-bid meeting of Karachi Electric
Supply Corporation is scheduled to be held in Islamabad on Tuesday.
•According to the Minister for Privatization, the
government plans to offer Global Depository Receipts of OGDCL within the
next few months.
•The privatization of Karachi Electric Supply
Corporation is said to be at the top of the priority list of the
•Arbab Ghulam Rahim received the confidence vote
for the position of Chief Minister in the Sindh Assembly.
•The State Bank rejected all the bids received for
the 3 and 12-month T-bills auction as primary dealers demanded higher
•Reportedly, the three chiefs were holding a
meeting with President Musharraf to seek support on the capital gains
•The State Bank only accepted bids worth PkR1.87bn
during yesterday's PIB auction against a target of PkR30bn and total
bids of PkR13.25bn.
•PPL has announced that it plans to drill 35 wells
over the next five years under a program to enhance its exploration
•The government's resolve to maintain the level of
oil prices through reduction in Petroleum Development Levy has been
estimated to cost PkR8-10bn in lost revenues to the government.
•President Musharraf announced Farmers' Incentive
Plan on Thursday
•Saudi Arabia has declined to Pakistan's request of
reviving the oil facility ex tended to Pakistan post the 1998 nuclear
•Cement prices declined to Dh17 per bag on
Wednesday as opposed to Dh25 per bag following a settlement reached by
the UAE Contractors Association with the local manufacturers.
•As per a source in the auto industry, the car
manufacturers are not planning to reduce prices of their products
ECONOMIC SURVEY 2003-04 RELEASED
The Economic Survey 2003-04 was released today in
which GDP growth was reported at 6.4% against the 5.1% that was attained
last year. Growth came on the back of the strong performance of the
manufacturing sector coupled with the availability of cheap and easily
available consumer financing. At the same time however, inflation has
reared its ugly head and Pakistan's Balance of Payments position has
been threatened by the increasingly smaller current account surplus.
As predicted, real GDP growth came in at 6.4% for
FY04 versus the 5.1% that was reported last year. This growth came
primarily on the back of the 13.3% growth in industrial production and
the 5.2% growth in the service sector. It may be mentioned here that
manufacturing growth was boosted primarily by the 17.1% growth in large
scale manufacturing on the back of low interest rates, availability of
consumer financing and improved business confidence. Stronger GDP growth
however was hampered by the lower than targeted growth in the
agricultural sector that grew by 2.6% versus a target of 4.2% primarily
on the back of the 6.5% shortfall in cotton production as a result of
the pest attacks in South Punjab and the 1.2% shortfall in wheat
production as a result of low rainfall during winter. Another sector
that performed very well during the year was the construction sector
that saw 7.9% growth versus a target of 5.4% on the back of the
government's attempts to promote the sector.
The government's efforts over the past few years in
reforming the tax system, controlling current expenditures and prepaying
expensive debt seem to be bearing fruit as is evident in the reduction
in the overall deficit to 3.3% of GDP versus the 3.7% that was attained
in 2002-03. While the government expects 8.1% growth in overall tax
revenues by the end of the fiscal year, current expenses are expected to
remain at last year's level, on the back of the relative decline in
interest related expenses from 29.7% to 21.1% of total expenses over the
year, with PSDP related expenses expected to grow by 17.6%. If current
performance is maintained, it is entirely likely that Pakistan will
eliminate its revenue deficit well in advance of 2008 as targeted under
the Fiscal Responsibility Law.
One of the drivers of growth over the last year has
been the easy monetary stance that was taken by the SBP. The result was
a massive expansion in the money supply by 12.3% during the first 9
months of the current fiscal year, with 15% being the expected growth
figure by the end of the year against a target of 11.1%. Unlike last
year however, when money supply growth came from overseas, current
growth has been driven primarily by the incredible growth in private
sector credit off take that reached PkR245bn on the back of low interest
One of the major concerns outlined has been
inflation, which averaged 3.9% during the first 10-months of the fiscal
year, on the back of the 4.9% average growth in food prices. At the same
time however, core inflation remained on the lower side, averaging 3.3%
during the 10-month period.
The one area where Pakistan's economic revival can be
clearly seen is in the growth in trade. During JulyApril, exports grew
by a strong 13.3%, while imports during the same period grew by a
relatively stronger 19%, resulting in a trade deficit of US$2.5bn
against a target of US$0.7bn. Exports, which grew primarily on the back
of the 14.3% growth in textile exports, are expected to reach the
targeted level of US$12.1bn by the end of the current fiscal year.
Imports on the other hand grew primarily on the back of increased
machinery imports and are expected to reach US$14.5bn by the end of the
current fiscal year
Pakistan's Balance of Payments remained positive
during the year on the back of a current account surplus.
However, it must be noted that the current account
surplus is a lot smaller than was recorded last year on the back of the
high trade deficit and the slow growth in remittances. With the trade
deficit expected to continue widening in the future, the likelihood of a
fourth consecutive year of current account surpluses looks increasingly
THIS WEEK'S TOP STORIES
INSURANCE SECTOR — BUDGET EXPECTATIONS
We do not expect the government to pay any attention
to the long-standing demand of the insurance companies for capital gains
tax exemption. However, insurance companies can turn out to be direct
beneficiaries if the government applies a minimum holding period clause
for every investor. The general insurance companies will derive
significant benefits from the overall growth orientation of the budget.
The increased trade volume will help the general insurance companies to
sustain their exceptional existing growth in the marine and cargo
insurance. Motor sector is one segment that has gone through the most
exciting times owing to the fact that most of the vehicles are being
purchased on lease financing. Though the government is likely to
allocate a significant sum towards the improvement in the law and order
situation, we are of the opinion that insurance companies will keep
facing high loss ratios in the motor business. With the settlement of
Adamjee Insurance and MCB case, we feel that landscape in the general
insurance industry will see significant changes. We are of the opinion
that competition rise further and larger commercial banks will start
considering acquisitions of insurance companies to compete with MCB in
the tough motor leasing business. We maintain our cautious stance on the
insurance sector in the medium term with a belief that the market, in
its recent bull run, has already discounted most of the positive
AUTO SECTOR — BUDGET EXPECTATIONS
The auto sector has grown strongly over the last
couple of years. However, this growth caught the assemblers by surprise
and resulted in an excess demand situation, which in turn resulted in
long waiting periods for delivery and the advent of immediate delivery
premiums. The issue was further compounded by the intervention of the
government, which politicized the issue, and led to rumors of the
imminent revocation of the ban on the import of reconditioned cars.
Furthermore, with WTO likely to be applicable on Pakistan in 2005, duty
rates were expected to be reduced, opening the local producers up to
international competition. Against this backdrop, we foresee increased
competition in the sector from new entrants however, we are positive on
the existing assemblers given the rise they are likely to see in their
gross margins, trading incomes and the continued strong volumetric
growth. Our top pick is Indus Motors.
ICI PAKISTAN — MIXED FORTUNES
ICI Pakistan is likely to see a mixed year. While the
Paints business continues to flourish, other business segments of the
company are dealing with their own particular issues. In the Soda Ash
business, the threat of a further reduction in import tariffs on Soda
Ash coupled with rising gas prices are likely to exert downward pressure
on the profitability of this business segment. The PSF industry on the
other hand is currently trying to come to terms with the supply overhang
that has been created post commissioning of IFL's expansion project. The
surprise performer last year, the General Chemicals division, also
reported lack luster performance with a reduction in demand for furnace
oil. While FO trading is a low margin business, its contribution to
ICI's overall profitability in FY03 cannot be ruled as insignificant. We
maintain our Neutral recommendation on the stock with our DCF based
target price of PkR74/share.
BUDGET '05 — A PREVIEW
Over the last few years, the government has been
successfully following a strategy that was eventually expected to place
Pakistan on a path towards long-term prosperity. In the first phase of
this strategy, discipline was successfully inculcated into the economic
management process. In the second phase, growth and investment was
promoted so as to attain a high GDP growth rate. In our opinion, Budget
'05 will launch the next stage of this strategy, wherein the government
will begin to focus on the distribution of the benefits of this growth
among the masses, while ensuring that its earlier successes are not
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