Updated Sep 11, 2004


The market continued with the bearish spell initiated last week. Monday's fall was triggered by news over Capital Value Tax and Margin Financing. The SECP Chairman ruled out chances of removal of CVT onshares, while also announced the timeline for the gradual phasing out of Badla. Investors had been generally speculating on the removal of CVT on shares trading. On a WoW basis, the Index lost 2.76% to close the week at 5172. Average daily volumes for the 





week also remained low at 158.33mn, though showed a marginal improvement of 1.14% over last week. Disturbance in Waziristan where the army carried out an operation, and lack of any major development on the Kashmir issue in the recently held Pak-India talks also served to depress market sentiments.


The market has witnessed a substantial decline over the past couple of weeks. We believe that lack of any positive news flow, and depressed sentiments are two factors that can further affect the market in the near term. Trading volumes have also dried down which is another indicator of low participation in the market. We believe that the market is likely to further edge downwards. Pakistan Oilfields Limited will be announcing its FY04 results on Monday, which could provide some support to the market. However, if results and dividend announced by the company falls below market expectations, we expect some further pressure on the stock price of the company. The two market heavy weights, OGDCL and PTCL are due to announce their FY04 results towards the end of this month, which can generate some renewed buying interest in these stocks.


The major developments this week were:

•The Punjab Chief Minister's extension of 5 years for the Presidential uniform.

•Badla will be phased out from October 08.

•After witnessing an almost 47% decline last year, it is being expected that FO demand will rise by around 20% in FY05.

•Shell Pakistan launched the "Shell Card" recently.

•The third GSM player, Paktel, is likely to start its business in the next few weeks. The pending issue of the US$38.8mn pay ment to the regulator was resolved last week.

•The Privatization Minister hinted that the new PM has sent a strong signal to the business community about the government's resolve to raise the level of investments in the country from the BoI meeting.

•Dewan Salman Fibre Limited (DSFL) has announced that it has acquired a 49% stake in Rally Energy Pakistan Limited.

•Pakistan's trade deficit jumped 361% YoY to US$489mn in July-August from the US$106mn reported during the same period last year.

•PTCL is considering free local calls.

•Exporters feared outbreak of price war in Textiles in a quota free regime.

•The Initial Public Offering of Kot Addu Power Company is now being targeted to be held in mid October.

•CBR has confirmed to the IMF's visiting mission that it will collect PkR590bn in taxes in FY05, 2% more than the target of PkR580bn that was set for the year.

•PTA chief hinted further reduction in telecom tariffs in an interview in the daily Jang.

•The Ministry of Commerce (MoC) has voiced its opposition to the proposed import of diesel from India and has also refused to give a "No Objection Certificate" to the Ministry of Petroleum for the import of diesel from India.

•As per the Minister of Water and Power, the present government has no intention of holding a referendum on the Kalabagh dam, but will finalize its large dam decision soon with the consensus of all the provinces.

•50 killed in air raid in Wana while the independent newspapers have not confirmed government claims of killing foreign terrorists in this attack.

•Pakistan State Oil (PSO) is seeking approval from the government to enter into long term contracts for the import of High Sulphur Furnace Oil (HSFO).

•Presiding over a meeting to review the supply of electricity and gas in the country, the Prime Minister (PM) has asked for a proactive power policy to meet the rising electricity demand in the country.


FY04 is likely to be the best earning year for the Cement Sector but the hype in the sector is leading towards the beginning of the end owing to: (I) lower than expected sales revenue by cement companies; (II) loss of potential benefits from coal conversion; (III) increasing interest rates in the country; (IV) manipulation of earning numbers from realization of deferred tax asset; and (V) poor payouts. Market sentiments for the cement sector are getting matured over the period while investors have started realizing the riskiness of investment in the cement sector as compared to the market.

We maintain our Underweight stance on the Cement Sector. Maple Leaf Cement is the only stock we recommend for investors wanting to take exposure in the sector.




FY04 is expected to be the Best Earning Year for the entire Cement sector but the Cement Hype is leading towards the Beginning of the end owing to the following reasons:

•20% Volumetric Growth in Sales Not Reflected. A 20% jump in sales volume is not truly reflected in the net sales revenue reported by the cement companies in our opinion. This has disappointed high expectations of the investors, which were based on: (I) 20% volumetric growth in sales; (II) increasing cement prices, and (III) a 25% reduction in CED announced by the government for FY04.

•Loss of Potential Benefits from Coal Conversion. Most of the cement companies converted their cement plants from furnace oil to coal firing system by the end of FY03, which was expected to result in reducing fuel cost per ton by 45-60% for the industry depending upon the plant technology. However, an almost 100% increase in coal prices during FY04 gradually wiped off the net advantage expected from the conversion, which is evident from declining margins (QoQ).

•Increasing Interest Rates. Taking advantage of the declining interest rates, cement companies restructured their expensive foreign currency loans with cheap local credit available during FY04, resulting in a reduction of financial cost from 15-17% to 5-7% depending upon the credibility of the company. With the increase in interest rates, the potential benefit expected from the financial restructuring exercise is vanishing owing to the floating nature of interest rates on these local currency loans.

•Bottom line Manipulated by Realization of Deferred Tax As set. Taking advantage of the best operating year, the cement companies have manipulated their bottom line through the realization of deferred tax asset with the hope of improving profitability in future years. Meanwhile these non-cash transactions are creating confusions for the general investors.

•Poor Payouts. Repeating their track record of poor payouts, cement companies are not likely to share their profits with the investors. Thus, the entire sector fares poorly on dividend yields.


Market sentiments for the cement sector are getting matured over the period while investors have started realizing the riskiness of investment in the cement sector as compared to the market. Moreover investors can no longer rule out the short sightedness of these cement companies over the deteriorating demand supply situation in the long term with the implementation of their announced expansion plans.


We maintain our Underweight stance on the Cement sector. Though we are not very bullish on the Cement sector but Maple Leaf Cement is our only recommended stock if investors want to take exposure in the sector.



Fauji Cement is due to announce its results for FY04 tomorrow. We expect FCCL to post after tax profits of PkR886mn (EPS: PkR2.39) for the period. However, we do not rule out a positive surprise in earnings owing to a relatively better 4QFY04. We do not expect the company to announce any dividend for the said period. The turnaround in FCCL's earnings came from: (I) a 30% increase in sales volume; (II) relatively higher margins during FY04 owing to cost savings from reduced dependence on furnace oil, (III) a 46% decline in financial charges in FY04 from loan restructuring and (IV) PkR710mn deferred tax asset realization by FCCL during 3QFY04. We maintain our SELL recommendation on the stock with a price objective of PkR14/share while the stock is currently trading at a PER of 33x based on its expected EPS for FY04 (excluding the impact of Deferred Tax).




The controversy over the Presidential uniform appears to be heating up. Various factions within the ruling alliance have already started issuing statements supporting the continuation of the Presidential uniform. The opposition's anger is also understandable given the fact that the issue of the Presidential uniform has been covered through a constitutional amendment. Though the market is overlooking this development at this juncture, we believe that this has the ability to become a bigger political risk in the long run.


Pakistan Oilfields has announced that the board of directors of the company will be meeting on Sept. 11 to announce its FY04 results. We expect the company to post after tax profits of PkR2,384mn (EPS; PkR18.14) for FY04 and announce a cash dividend in the range of PkR10.50-11.00/share. We believe that high oil prices and increased production rates are two factors that are likely to result in the rising profits of the company going forward. We maintain our Buy recommendation on POL, with our 12-month price objective of PkR261/share.


Fauji Cement (FCCL) announced its results for FY04 yesterday. The company has posted after tax profits of PkR314mn (EPS: PkR0.85) for the period as compared to the net loss of PkR531mn for the last year. The announced results came in far below market expectations as well as our forecasts mainly due to: (I) the write-off of Deferred Cost and (II) Taxation. We recommend Hold for FCCL owing to a narrow premium to out DCF based fair value of PkR14/share however, we don't expect the stock to perform in line with the market in medium to long term.


The government set a number of targets for FY05, which in our opinion, will need to be revised. Against a GDP growth target of 6.6% and an inflation rate of 5% for FY05, we expect growth of 6.4-6.5% on the back of a 5.5-6% inflation rate as a result of underperformance by the agricultural sector and rising core inflation. At the same time, we also expect the government's fiscal deficit to come in at 4.5% versus a target of 4% as a result of revenue pressures, which coupled with increased administration expenses will likely offset the expected increase in the CBR's collections. Finally, Pakistan's trade deficit is likely to come in US$1bn above target as a result of the faster than projected growth in imports, which will continue to put downward pressure on the Rupee.






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