Updated June 12, 2004


The week started with a positive note due to improving law and order situation in Karachi. The Pre budget rally led by Cement Sector, decrease in Badla rates and the news about Fauji Fetilizer's expansion plan pushed the index up by 1.01% during the first session of the week. Removal of Sindh Chief Minister and PIB auction kept the market under pressure throughout the second day of the week. The market, however, managed to recoup the losses as a result of the news about SBP rejecting 





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.


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 government.

•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 rates.

•Reportedly, the three chiefs were holding a meeting with President Musharraf to seek support on the capital gains tax exemption.

•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 activities.

•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 test.

•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 anytime soon.


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 rates.


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 unlikely.



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 developments.


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 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.


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 compromised.






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