Updated Aug 07, 2004



The week started on a negative note on Monday owing to the increasing domestic political risk. The suicidal attack on Shaukat Aziz exposed the market to a risk similar to what the market had been fearing in Musharraf's case which eventually pulled the index down by 1.57% during the first trading day. Tuesday was, however, positive on the back of institutional support. The index continued to perform well the next





day with another 0.88% gain owing to indications that the SBP wants to keep interest rates low. Trading volume remained low on Thursday, primarily due to funds stuck up in PPL subscriptions. Friday was positive but the market continued to move in a narrow band. On the whole, the index gained 1.01 percent WoW and closed at 5,343.52 on Friday as opposed to 5,290.04 in the previous week.


Trading volumes are likely to pick up after the allocation of PPL shares to investors during the next week. Meanwhile, the unsuccessful retail investors will reposition their investment portfolios after getting their stuck up funds in the PPL subscription back towards the end of next week. No corporate results are expected during the next week so there won't be any stock specific movements. The SBP will likely remain active by mopping up extra liquidity from the money market in order to protect the rupee. We also expect that the Pak Rupee's movement against the US Dollar will eventually normalize, though we expect some speculative funds to move from equities into the currency market. On the political side, we expect the current volatile situation to continue where the government will be able to control the situations in Wana and Balochistan though at the expense of further unrest among the general public. Any breakthrough on Siachin during the ongoing India-Pakistan talks can change market sentiment significantly.


The major developments this week were:

•OCAC maintained the existing prices for all POL products for the next fortnight as well.

•PC received 755,000 applications for PPL. The balloting took place on the 4th of this month and the stuck up money is likely to be released by next weekend.

•Shaukat Aziz survived an attempt on his life while 7 died and 70 were hurt after a public meeting at Jaffar village near Attock.

•As per provisional results, the CBR collected PkR28.6bn in levies during July. This amount represents a jump of 22% over the PkR23.4bn that was collected during July last year.

•The Hub Power Company Limited has informed the Karachi Stock Exchange that it will be announcing its FY04 annual results in September.

•The State Bank announced its plan of auctioning PkR3bn worth of PIBs on 17 August. The Bank intends to auction PkR1bn each for 3, 5 and 10 year PIBs. The coupon rates for these issues will be 6 percent, 7 percent and 8 percent respectively.

•As per a source, the federal government is considering applying a 5-year ban on the transfer of vehicles imported under the gift, baggage and transfer of residence schemes.

•The government has asked fertilizer manufacturers to submit price stability proposals within 10 days.

•Oil prices crossed the US$44/bbl mark on Tuesday. Fears of supply disruption, rising demand, and inability of oil producers to pump more oil are some of the factors that continue to drive oil prices to their new highs.

•The National Accountability Bureau has decided to investigate the financial position of the four local auto assemblers.

•European Commission has decided on its own to initiate a partial interim review of the 13.1 percent antidumping duty imposed on Pakistani bedlinen imports.

•The State Bank accepted bids worth PkR51bn against a target amount of PkR60bn in Wednesday's Tbill auction.

•The Minister for Petroleum and Natural Resources has said in a recent statement that Pakistan will be finalizing one of the options for a gas pipeline by the end of the current calendar year.

•The Minister for Privatization in a recent statement indicated that the Privatization Commission will be finalizing the price of the Global Depository Receipts (GDR) for the Oil & Gas Development Company Limited (OGDCL) in the next two to three weeks.

•The Rupee continued its fall against the US dollar on Thursday when it lost 13-paisa to close at PkR58.92 on the back of heavy forward buying of US dollars by importers and debt payments by corporates.

•Exports for Jul-04 were recorded at US$1183mn, rising by almost 33% over Jul-03. At the same time, however, imports rose by almost 37% YoY to US$1372mn in Jul-04. As a result, the trade deficit shot up by 73% to US$189mn.

•UBL is planning a public offering of a PkR500mn worth of Term Finance Certificates (TFC) on August 9 and 10.

•The State Bank carried out an OMO on Thursday and mopped up PkR54.7bn in the process.


We are reproducing our July 13, 2004 top story over here. This story covers the sectoral impacts of the rupee's depreciation. On a net basis, we believe that all the index heavyweight sectors are likely to benefit from a weaker rupee. Our top picks in a weaker rupee scenario are Pakistan Telecom and Pakistan Oilfields. Hubco is another stock, which will get positive impact from a strong dollar.


A weak rupee means a positive outlook for PTCL. About 1/4 of company's revenue is dollar based and PTCL will show improvement in rupee terms in case of rupee depreciation. In our existing PTCL model, we are assuming 3-5% devaluation for next FY. Our target fair value for the stock is PkR50 per share. At present, the stock is under review owing to recent changes in the telecom sector.


There will be no direct impact on the urea fertilizer sector as local prices have very little to do with international urea prices. However, some impact will come through (I) a relatively higher increase in fuel stock prices in line with RFO prices and (II) the capital expenditure of the urea manufacturers will increase in case of rupee devaluation. As far as DAP fertilizer is concerned, the manufacturers are likely to pass on the entire price increase to end-users. We maintain our liking for Fauji Fertilizer.


The auto sector is directly affected by exchange rates primarily because vehicles are assembled locally from Completely Knocked Down (CKD) kits that are imported from the Far East. The assemblers have to then make payments in the relevant foreign currencies to their suppliers. However, under the State Bank's regulations, the payments have to be converted from rupee first to US dollar and then to the third currency. Therefore, in a situation where the rupee is depreciating against the US dollar, as is expected, the assemblers' variable costs will rise, thus putting pressure on their margins. This effect will be multiplied, if the US dollar also happens to be depreciating against the third currency.




The entire oil chain industry is likely to benefit positively from the rising trend in the Pak Rupee-US Dollar parity. With oil prices denominated in US Dollars, upstream oil and gas companies would see their rupee margins increasing even if crude prices remain stable. The refineries and oil marketing companies are also likely to see positive impacts owing to their return being calculated as a percentage of the selling price. Gas utilities on the other hand remain unaffected as their return is being calculated as a percentage of their net operating assets. Thus, any increase in wellhead gas prices will translate in to higher gas tariffs.


Independent Power Producers (IPPs) are widely recognized as a dollar bull industry. With tariffs denominated in US Dollars, IPPs will be positively affected by any increase in the Pak Rupee-US Dollar Parity. However, most of the IPPs have dollar denominated debts. Those companies that are regularly obtaining forward cover on their foreign exchange cover will not see any negative impacts. On the other hand, IPPs with unhedged dollar denominated debt would see their Pak Rupee converted interest costs rising.


An appreciation in the dollar is likely to have a two-pronged impact on the textile sector through (1) an increase in sales and (2) a rise in the cost of importing machinery. A stronger dollar will result in a higher rupee value of sales by manufacturers. This, in turn, should translate into greater margins for the industry. On the other hand, a rise in the dollar is also likely to raise the cost of BMR and expansion being carried out by textile companies. Overall, increase in sales should offset the rise in capital expenditure. A strengthening of the dollar thus bodes well for the textile sector.


The strengthening of the dollar is likely to lead to an increase in the dollar deposits at banks, with a simultaneous decrease in rupee deposits. In case this shift takes place at a drastic pace, banks could face problems in expanding their consumer finance offerings. Banks will also be forced to offer new dollar based saving schemes to attract investors. Last, but not the least, a rising dollar is likely to lead to higher "Income from Dealing in Foreign Currencies" for the sector. Consequently, the net impact on the banking sector of an appreciation in the dollar will depend on the pace of its rise. While a slow rise should result in higher Other Income for banks, a sharp move towards dollarization could disrupt ongoing developments in the sector.






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