The economic reforms agenda being followed by the
GoP since November 1999, despite the 9/11 incident and subsequent
events, has provided a big boost to Pakistan's equities market. The
four elements of the GoP policies are 1)
stabilizing country's debt situation by restoring macroeconomic
reviving economic growth, 3)
reversing the trend of increasing poverty and 4)
improving governance level.
The growth of equities market can be gauged from
three factors 1)
listed capital, 2)
market capitalization and 3)
the KSE-100 index movement. Listed capital grew from US$ 3.8 billion
on December 31, 1999 to US$ 6.4 billion on May 24, 2004. Market
capitalization improved from US$ 6.3 billion to US$ 25.5 billion. The
KSE-100 went up from 1,409 to 5,465 level. However, after the
announcement of imposition of capital value tax the index eroded. As a
result of hectic negotiations of brokers' fraternity with the economic
managers the issue is expected to be resolved amicably.
Baring the recent downslide, an over reaction to
CVT and keeping the economic fundamentals in mind, the market still
enjoys enormous upside potential. Saying this it must also be kept in
mind that the daily trading volume is expected to go down but the
market will consolidate. The ample liquidity factor and improved
corporate earnings phenomena are still intact. Interest rates may go
up but economies of scale and declining cost of inputs are expected to
further improve corporate earnings.
One of the factors that have kept investors'
interest live in the equities market is the divestment strategy being
followed by the GoP. Public offer of shares of states owned
enterprises has been termed 'Privatization for People' by Dr. Abdul
Hafiz Sheikh, Minister for Investment & Privatization. The three
tranches of National Bank of Pakistan (NBP), including the premium
were worth Rs 1.7 billion and the subscription received exceeded Rs
4.8 billion. The subscription received against public offer of
slightly less than Rs 6.9 billion of Oil & Gas Development Company
(OGDC) exceeded to Rs 28 billion. Similarly, against public offer of
Rs 1.7 billion of Sui Southern Gas Company (SSGC) the subscription
amounting to Rs 13 billion broke all the pervious records.
The sources claim that the public offer of Pakistan
International Airlines (PIA) has been oversubscribed. However, the
figures tell the true story. According to an advertisement placed by
the Privatization Commission in the local print media, the
subscription received amounted to Rs 1.33 billion as against the
target of Rs 1.15 billion. The Commission had offered 5% (57.5 million
shares) with green shoe option of equal amount. Keeping in view the
number of applications received neither the green shoe option could be
exercised nor there was a need for balloting.
One may wonder at the response against public offer
of PIA shares but a little probe can help in finding the root cause.
According to Mohammed Sohail of InvestCap, the lacklustre response was
due to pricing and the announcement that subscribers of public offer
did not qualify to receive the forthcoming dividend payment. It is
necessary to reiterate that some of the analysts had suggested to Dr.
Abdul Hafiz Sheikh that the time was not appropriate for public offer
of PIA shares and the transactions should be deferred. Now all eyes
are set at the public offer of shares of Pakistan Petroleum and Kot
Addu Power Company.
The success story of recent IPOs and public offers
is incomplete without acknowledging the role played by the Central
Depository Company (CDC). Transfer of shares of OGDC and SSGC deserves
specific mention. Nearly 61% of OGDC's IPO was subscribed
electronically from over 30,000 CDS accounts. The smooth and efficient
handling of such a voluminous issue would have not been possible
without CDS. In case of SSGC, out of a total of 67 million shares more
than 24.5 million shares were directly credited to slightly less than
25,000 CDS accounts. CDC made these issues cost effective for both
Issuers and Investors. CDC has revolutionized the financial market by
combining state-of-the-art technology and human resource.
In ushering in 'paperless securities' era the
others joining the CDC and the stock exchanges are the companies
offering online trading of shares. AKD Securities created the first
'disruption' as stated by Ali Ansari, CEO of AKD Trade. At the time of
its launching Ali expressed the hope to achieve the target of Rs 10
billion trade in the first year. However, all were surprised when AKD
Trade achieved the milestone of Rs 100 billion trades within the first
year. Now at least four other companies offer online trading
facilities. This is not the end of story but the beginning of a new
era in trading of equities.
According to Moin Fudda, Managing Director, Karachi
Stock Exchange, "There is huge potential for growth in online
trading. The KSE plans to provide Internet-based trading through 12
additional members. The real challenge is to bring settlement online
through e-banking. This will accomplish the dream of achieving totally
paperless securities environment in the country. Investors will be
able to buy and sell, make or receive payment and off course get
credit or debit of securities in their investor accounts.
Technological advancement and effective risk
management has minimized the market volatility at Karachi Stock
Exchange. Huge investment in technology established its strength on
April 16, 2004 when more than one billion shares, a record, were
traded. However, there is need for further strengthening the
infrastructure because shares of at least three more companies, namely
PPL, KAPACO and United Bank will also be offered to general public.
Shares of Bank Alfalah were also offered to public recently. The
response was overwhelming because one out of ten applicants was picked
up through balloting.
It is interesting to note that the number of listed
companies is on a constant decline but the amount of listed capital is
persistently increasing. Listing of new companies has enhanced the
market float. OGDC and NBP often emerge as volume leaders. However, it
is often felt that the KSE-100 movement does not depict the true
sentiments of market. It is mainly because of very heavy weightage of
OGDC and PTCL in the index. Many analysts suggest that their weightage
should be reduced to make the index better reflective of the market
It is often argued that despite revival of the
economy the number of new listing has not increased significantly.
Some analysts say that the reason for fewer listing is that some of
the industries have still not achieved the optimum capacity
utilization. One such sector is cement where the average capacity
utilization still hovers around 80%, despite significant increase in
cement export. However, it is also true that some of the cement
companies are undertaking expansion programmes. It is expected that
additional 10 million tonnes capacity will come online in next twelve
to eighteen months.
Automobile assemblers are busy in writing a new
chapter. Till recently the number of cars assembled in the country was
around 50,000 units. During 2003-04 they are expected to achieve a
milestone of producing 100,000 cars. The forecast for 2004-05 is above
120,000 cars. The growth in car demand has been driven by auto
financing. It is necessary to reiterate that auto parts assemblers
have played a key role in achieving record production of cars. It is
estimated that they have invested around one billion rupee in BMR and
expansion. After the announcement of budget it was said that the GoP's
decision of not reducing duty on CKD kits was not a wise decision and
it would erode the profitability of auto assemblers. However, some
analysts term this a wise decision to protect the interest of
automotive parts manufacturers. It is believed that with the new
investment the parts manufacturers would be able to achieve economies
of scale and bring down the cost of components, which will in turn
help in bringing downs the price of locally assembled cars.
Another sector enjoying upside potential is
textiles. Lately huge investment has been made in the sector for BMR
as well as adding new capacities. This investment has already started
yielding positive results in the shape of higher export of textiles
and clothing and improved unit price realization. It was often said in
the past that Pakistan's textiles and clothing sector was incapable of
facing the challenge of integration of textile trade and quota phase
out. However, now there are hopes that the situation would not be as
grim as being perceived. Saying this it is also necessary to reiterate
that there is no room complacency. A lot more has to be done to
compete in the global markets.
Fertilizer sector needs immediate attention of the
GoP. Fertilizer Policy announced in 2001 has failed in attracting
investment in grassroot plants. Pakistan needs to add 2 million tonnes
urea production capacity to maintain self-sufficiency in urea
production. Lately, the GoP has constituted a committee to make
recommendation/suggestions in the policy to ensure addition of new
capacity. New investment in fertilizer sector is entirely dependent on
price of feedstock. The economic managers are still engrossed in
discussions about subsidy. Whereas the sector experts say that
fertilizer manufacturers do not get feedstock at subsidized rate, it
is sale of low quality gas at a discounted price.
It is expected that sooner or later investors will
accept the CVT. The only justification for this tax is that when
dividend income is taxes there is also a reason for taxing capital
gains. It is also said that with the imposition of CVT, daily trading
volume would come down. There seems to be no justification for
maintaining exceptionally high daily trading volume if it leads to
higher market volatility.
Though the number of volume leaders has gone up
from less than a dozen companies to more than two dozen scrips, there
is also a dire need to bring down the number of listed companies to
one third, at least. All those companies having less than Rs 100
million paid up capital should be asked to opt for voluntary delisting,
through buy back of shares. As such these companies hardly have any
significant shareholding from the public. Most of these companies were
listed to avail the tax advantage.
Last but not the least there is hardly any
representation of minority shareholders on the Board of Directors of
listed companies. For example individual shareholders, mostly falling
in the category of minority shareholders. Adamjee Insurance Company
own around 34% of total shares but have no representation on the Board
of Directors. Securities and Exchange Commission of Pakistan must look
into this and ensure proper representation of minority shareholders on
the Board of Directors of listed companies.