Updated June 19, 2004


The week started with a negative note due to the announcement of imposition of 0.1% Capital Value Tax (CVT) on share purchases which pulled the index down by 3.1% on the first trading day after the budget. The index recovered by 1.93% on Tuesday on expectations that the government would remove CVT to regain investors' confidence. The news about cement cartel planning to increase cement prices and appreciation by S&P on the budget were the other factors behind the



recovery. Confusion over CVT continued for the next two days and eroded the benchmark index by another 1%. Friday was another interesting day with the index shown extreme volatility by showing a movement of positive 27 and negative 97 points. Though reduced by nearly 90%, the imposition of CVT disturbed the speculators interest in the market while long terms players remained on sidelines owing to fears of a possible backlash from the militants on Wana operations. 


CVT issue is likely to be resolved during the next week. However, this will increase the transactional costs of the speculators resulting in relatively lower trading volumes. Thus the market sentiment is likely to stay negative in the very short term. On the other hand, political risk is also likely to increase in the short term owing to two factors: (I) uncertainties attached with PM Jamali, and (II) a possible backlash from the tribal warriors on killing of their leader at the hands of Pakistani army. The interest rate outlook is also likely to come under question as SBP may try once again to convert its short-term liabilities into long term PIBs. Moreover, the usual year-end factor will also affect investor sentiment negatively. On an overall basis, the continuation of neutral to negative consolidation in the market is likely next week.


The major developments this week were:

•According to an official of the Privatization Commission, the bidding for KESC is planned in September.

•The Karachi Stock Exchange has reportedly received the listing application of Pakistan Petroleum Limited.

•Pakistan will touch the US$1bn mark in Foreign Direct Investment during the current year. This landmark has been made possible on account of the proceeds received against the privatization of Habib Bank Limited and sale of two cellular licenses during the current year.

•As per figures released by the Federal Bureau of Statistics, inflation in the first eleven months of the year rose by 4.2%, on the back of the 7.1% YoY rise in inflation during May.

•Reportedly, deposits in the National Savings Schemes dropped by 92% YoY in the first 9 months of the current fiscal year to PkR5.7bn against deposits of PkR74bn reported during the same period last year.

•Reportedly, in a meeting between the Finance Minister and other members of the Ministerial Committee, the auto dealers and the assemblers held a few days before the Budget presentation, the assemblers were asked to reduce their booking advance from 100% to 10%, to reduce the delivery period and to reduce their prices.

•As per a statement released by Standard & Poor, the international credit rating agency, Budget '05 marks a shift in Pakistan's fiscal policy away from purely deficit and public debt reduction towards growth.

•Oman has banned the export of cement to the UAE. If Oman continues with the ban for a long period, UAE contractors will be forced to import cement from other countries like India, Pakistan, Saudi Arabia and Egypt.

•The government is making CBR's June target even more difficult as it has allowed the business community to take advantage of tax withdrawals effective June 12th.

•For the third consecutive fortnight in a row, prices of domestic oil prices have remain unchanged.

•ICI Pakistan has announced that it will be seeking shareholders' approval to sell its stake in Pakistan PTA.

•The State Bank mopped up PkR55.7bn from the market yesterday through a one-week repo sale of Treasury Bills at 1 percent.

•Reportedly, in the first 11 months (July-May) of the current fiscal year, net remittances from overseas Pakistanis reached US$3.473bn, 6% YoY lower than the US$3.704bn received during the same period last year.

•As per the Chairman ABAD, incentives announced by the government in the Federal Budget to boost up construction activity in the country are unlikely to give real flip to the construction industry.

•Under the revised arrangements, the CVT rate has been lowered to 0.01% whereas three more levies have been introduced: (I) 0.005% WT on the purchase value of the shares, (II) 0.005% on the sale value of the shares and (III) 10% WT on COT.

•According to an official of the Privatization Commission, the IPO of Pakistan Petroleum Limited is likely to be held in July.

•Pakistan PTA Limited (PPTA) has announced that it will be redeeming all its issued Term Finance Certificates (TFCs) on 2 August 2004.

•As per the projections, the government is projecting growth of 10.2% in the manufacturing sector in the next fiscal year on the back of 12% projected growth in large scale manufacturing and 7.5% growth in small and medium enterprises.


There are at least four developments that we will be discussing in this week's article. First, the NFDC released its latest numbers where both types of fertilizers, urea and DAP, have shown drop in offtake, which we feel has more to do with early purchases of the dealers on the back of a possible price increase in June. Second, the fertilizer manufacturers have raised their product prices to partially absorb the gas price increase likely to hit the sector in July. Third, the presidential package for the agriculture sector is likely to provide a long-term bull story for the manufacturers owing to massive credit allocations for the farmers under this package. Fourth, the possible review of the fertilizer policy will provide some relief to the players who would show aggression at this point in time to expand their capacity. Our top pick in the sector will remain FFC while Engro will remain a market equivalent performer. We do not like Fauji Bin Qasim.


A 14.7% decline was observed in total nutrient offtake during May 2004. Nitrogen offtake went down by 17.1 per cent, while phosphate offtake increased marginally by 0.9 per cent. Urea offtake was 314 thousand tonnes, which decreased by 17.6 per cent and DAP offtake was 32 thousand tonnes, which went down by 8.7 percent. Product-wise, urea went down by 17.6 percent and DAP offtake decreased by 8.7 percent. There are two reasons attached to this declining trend: (I) The dealers have accumulated substantial inventories in April owing to the fear of a possible price hike in May/June; (II) Some of the experts are also blaming water shortage for this fall in offtake. The centre is further highlighting the fact that DAP offtake will remain depressed in June as the farmers would wait for the implementation of PkR100 per bag Presidential subsidy. On urea the centre is very comfortable in terms of short term demand supply situation whereas it is forecasting a gap towards the end of CY04 which may force the government to initiate some urea imports. Manufacturers came up with a price hike.

There were two attempts from the manufacturers to absorb the forthcoming gas price hike. First was in March/April and the second was in the beginning of the current month. On both occasions, the manufacturers came up with small price hikes (within the range of 1%) to absorb the gas price hike. We are of the view that both these price increases would help the manufacturers to partially absorb the cost increase whereas these companies will also be taking some minor hit on their margins. Interestingly the political government has not come up with any reaction to these price hikes. And it appears that farmers will also accept this owing to the optimism attached with the increased credit allocation for agriculture. The price increases are in line with our price expectations for CY04 and we stick to our existing company forecasts.


Just before the federal budget FY05, the President has also come up with a comprehensive agriculture package. The announcement has two objectives; firstly, to revive the agriculture sector which has failed to contribute its due share in the recent economic recovery; and secondly, President Musharraf wants to earn some political gains by facilitating the largest community of the country. The package is likely to boost agricultural growth in the years to come. Cheaper loans along with a reduction in the import duties on tractors bode well for the government's efforts to improve the mechanization level in the sector. The package also offers a direct subsidy of PkR100 per bag on DAP fertilizer to improve the balanced fertilization in the country. While we like higher credit allocations for the agriculture sector owing to its direct positive impact on the productivity of the farmers, we are not in favor of the government offering a direct subsidy to the farmers on fertilizer, rather an increase in support prices can help farmers in absorbing this cost.


The President has also announced to review the fertilizer policy with an objective of making its more attractive for the investors to take initiatives to invest in the capacities. We believe that this is a step in the wrong direction. Agreed, the current fertilizer policy includes very little incentive for the existing players to expand their production capacities and any government effort to create attractions in the sector via playing with gas prices is likely to create problems for the government in other sectors as well. The government has already seen the negative implications for the gas sector owing to subsidized gas prices under the previous policy. However, we feel that those players who show aggression at this point in time to expand their capacity will gain substantially.






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