Updated July 24, 2004


The market volume touched its lowest mark in 8 months on Monday as most of the investors were inclined to subscribe for PPL shares, which pulled the index down by 0.17%. Even the tariff re-balancing news at PTCL could not create any excitement at the KSE. Tuesday was positive, with market was hit with the rumors regarding PC considering inviting fresh EOIs for PSO privatization. The board meeting dates announcements triggered a positive rally in the market on Wednesday (0.95% up) where higher dividend





expectations from oil, gas and telecom companies attracted institutional buying. The rally proved short lived owing to: (I) the institutions were on the sidelines and (II) retailers capacity to play the market was substantially affected after depositing most of their liquid funds for the PPL IPO.


The next week is full of corporate result announcements. Interestingly, four of the active sectors, oil, fertilizer, textiles and auto will see major result announcements. We are of the opinion that this week will set the tone of the market direction for next few weeks. The week will start with textile sector results where three of the important companies, Nishat Chunian, KTM and Gadoon will be releasing their 9 monthly results. Engro, the premier company within fertilizer sector will be the next one to come with results. We feel that this announcement will also give a hint about FFC's results. Auto sector will see Honda to come up with its results while PSO will announce its results on the 29th. Two result announcements have the capacity to become turbo boosters for the market; PSO and FFC. Both the companies are currently shrouded with the bonus rumors. Logically, there is little sense for such rumors, but our investors should not rule out any surprises as both the managements have the capacity to give surprises. We expect the trading volumes to pick up. Though retailers may not become very active in the market owing to stuck up money with PPL subscriptions, institutional activity is likely to be revived in the days to come. PPL subscription numbers have also the ability to become a trigger for the market. We suggest investors to stay tune to the market. KSE 100 Index is likely to move towards its recent highs of 5500+.


The major developments this week were:

•Bosicor began Commercial Production from Monday.

•The Iraq Business Council (IBC) has identified 500 industrial and infrastructure projects for investors where Abu Dhabi would be used as a hub for the reconstruction activities in Iraq.

•The State Bank intended to auction PkR70bn worth of 6-month T-bills on Wednesday.



•The government is taking various steps to increase cotton production to 15mn bales by 2010.

•The auction for Allied Bank Limited was held on Friday, 23rd July. Five pre-qualified bidders namely, Pak Kuwait Investment Company, Askari Bank, Jahangir Siddiqui Investment Bank, NIB/Temasic and Ibrahim Group participated in the bidding. Ibrahim Group won the bid.

•As per sources, Pakistan's FY05 exports target has been revised upwards to US$13.7bn, 11% higher than the US$12.3bn attained during FY04, on the insistence of the President and the Prime Minister during a presentation of the proposed Trade Policy for FY05.

•The Parliamentary committee on water Resources on Tuesday failed to achieve a consensus on large dams where Sindh and NWFP rejected Kalabagh Dam.

•The State Bank issued the monetary policy for the first half of the current fiscal year on Wednesday.

•The State Bank auctioned PkR66.9bn worth of 6-month T-bills on Wednesday against a target of PkR70bn and total bids of PkR97.8bn. The central bank raised the cut-off yield on the T-bills by 35bps from 2.23 percent to 2.58 percent.

•HBFC has revised its Debt-equity ratio to 80:20 from 50:50 for its 'Aasan Ghar' scheme to facilitate borrowers.

•Chanda oil & gas field has started its commercial operations.

•The latest report from International Monetary Fund (IMF) re-affirmed the government claim of achieving more than 6% GDP growth in FY05.

•Standards & Poors maintained its positive outlook for Pakistan in its recently released regional report.

•The construction proposal of controversial Kalabagh Dam came under severe criticism in the National Assembly when a few of the treasury members issued supporting statements for this proposal.

•KASB Securities launched its newest offering, KASB Direct, on Thursday, 22nd July.



The Government of Pakistan is offering a total of 102.5mn shares of Pakistan Petroleum Limited under its divestment program. At an offer price of PkR55/share, PPL's valuations are very attractive and are at a significant discount to the valuation multiples of the industry. PPL's net profits are likely to grow at a CAGR of 16% over FY04-08, driven primarily by the increase in gas prices under the revised pricing mechanism announced for PPL. Our price objective for PPL is PkR94/share and we recommend investors to subscribe to the issue.


PPL's valuations at the offer price are highly attractive. The stock is being offered at 6.7X FY04E earnings, 3.8x EV/EBITDA, and at a dividend yield of 7.3%, all signifying a significant discount to the peer group as well as the market. The stock is also at a steep discount to its peers on an EV/boe basis. However, we believe that the stock is likely to continue trading at a discount to its peers on account of the lower gas selling price compared to other E&P companies listed at the KSE. Our DCF based price objective for the stock is PkR94/share. The surge in the stock price of PPL during provisional t rading however, has brought its valuation multiples at par to its peer group. We believe that the surge in the stock price during provisional trading is not abnormal, as investors generally do not have to incur any significant costs. Post listing on the ready counter however, we expect PPL to continue to enjoy a liquidity premium.

It is difficult to assign a premium due to the peculiarly illiquid nature of the stock (free float 7.5%). However, the maximum liquidity premium that can be justified to any extent is where the stock valuation comes at par with OGDCL's EV/boe value basis. On the other hand, a discount is also necessary for PPL, the quantum of which will remain dependent upon the investors' appetite for the shares and the perception about the company's declining reserves.


With the dismantling of the Gas Price Agreement (GPA) 1982, PPL's profitability is likely to soar even if crude oil prices remain stable and production remains stagnant. The government has put in place a revised gas pricing mechanism for the pricing of gas from the Sui and Kandhkot gas fields, which will be completely implemented by FY08. Under the mechanism, the prices of gas from the two fields will be increased to a level of 50% of the prices under the Petroleum Policy 2001. Currently, the gas prices of Sui and Kandhkot fields are the lowest among all the fields. Although this anomaly is not likely to be removed completely, we believe that it represents a substantial improvement over the previous pricing formula.




The GPA 1982 was a major hindrance to the growth of the reserve base of the company, as it did not provide any incentive for exploration. Although PPL was among the first companies to initiate oil and gas exploration activities in Pakistan, its efforts to explore oil and gas in the country completely died down during the period of 1960-1990. The company was mainly concentrating on production from its existing fields and no major additions to its reserves were being made. With the new pricing mechanism in place, PPL is aggressively exploring oil and gas in the country.


With Sui accounting for almost 73% of the total gas production of Pakistan Petroleum Limited, there has been a concern over the company's ability to maintain growth in production. However, increased production from Sawan, Miano, Kandhkot and Qadirpur are likely to more than compensate for the decline in production coming from Sui. In addition, the company is also making further exploration efforts at Sui, where the company has encountered indications of additional reserve prospects at deeper levels of the field. Tal block is also on the verge of commerciality, which is likely to be a good addition to the overall producing fields of PPL.



The much awaited tariff cuts have finally been announced by the telecom ministry. The tariff adjustments include a drastic reduction in outgoing international calls, 25-29% reduction in DLD calls, free local calls from midnight to early morning, reduction in bandwidth charges and reduction in the urban connection charges.

We do not expect any significant negative implications for PTCL. Our view is based on: (I) the reduction in ILD call rates would not have much of an affect on PTCL owing to its insignificance in total revenues and lower TAR levels; (II) the reduction in DLD will fuel the growth as it has been doing for the past many years, however, the growth is unlikely to mitigate the full impact of this reduction owing to the higher quantum of tariff cuts; (III) reduction in urban connection charges will be set off against volumetric gains. The market should react positively as the announced package is somewhat better than market expectations. We maintain our earlier Buy recommendation on the stock with our target price of PkR50 per share. This fair value has potential for further upward revision, as the 4QFY04 traffic data is significantly higher than our earlier estimates. And we are in the process of revising our earning estimates for the company, which will be available next week. PTCL also stands out taller than everybody else in terms of dividend yield.


The National Credit Consultative Council proposed the Credit Plan for FY2004-05 last Saturday. The plan targets monetary expansion of 11.6 percent, or PkR280bn. The growth is based on Net Foreign Asset growth of PkR30bn and Net Domestic Asset growth of PkR250bn. The main driver of growth is anticipated to be private sector credit, which is predicted to reach PkR200bn. The government also intends to borrow PkR50bn, while the Agriculture Credit Advisory Committee has suggested a target of PkR85bn for the agri sector. We feel that monetary expansion in FY05 will exceed the target set in the credit plan.


The fertilizer sector, which has been on the sidelines for quite some time, is expected to become exciting again. The latest data release by the National Fertilizer Development Centre is well above market expectations and is a clear indicator that the fertilizer sector will not stay behind in terms of growth vs the other industrial sectors. We are of the opinion that this sector generally provides a defensive feature within the commodity sector with a low beta, high yield and growths marginally below the market. FFC is our top pick in the sector whereas we feel that Engro is fairly priced at this level.


The State Bank issued the monetary policy for the first half of the current fiscal year on Wednesday. The SBP indicated that it expects inflationary pressure to persist during the coming months, mainly as a result of the last two years' monetary expansion. It thus intends to continue its policy of shifting towards a "measured tightening" of monetary policy by gradually raising interest rates. The central bank also highlighted a few threats for the current fiscal year, particularly, the need to match foreign interest rate hikes, an increase in asset prices and worsening of the trade balance. On the brighter side, it expects the Fiscal deficit to remain at 4 percent of GDP, a lowering of inflationary pressure from capital inflows and a reduction in cotton prices during the coming year. Additionally, the Bank foresees decreased pressure on private sector credit due to reduced capital expenditure, particularly by the textile sector. Moreover, the SBP has again indicated that it does not intend to pursue an aggressive tightening of the monetary policy to prevent stifling of economic growth.






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