Updated Nov 06, 2004


The market remained volatile throughout the week. The KSE-100 Index gained almost 20.06 points (0.38%) to close the week at 5352.30. Tuesday was positive on the back of ease from interest rates fears after SBP intervention on Monday to support the Rupee by directly making oil payments through its foreign exchange reserves. The market continued to be overbought in anticipation of Bush's victory in the US elections. However, it failed to continue its upward momentum and remained range bound in the following sessions.






The market will remain volatile with dry volumes during the last week of the month of Ramadan. We are expecting the market to move to and fro from the existing levels with marginal gain or loss during the coming week. We are not expecting any news flow or results during the next week, which would fundamentally drive the market. We expect the market to stay range bound with a trading range of 5250-5450.


The major developments this week were:

•OGRA has rejected SNGPL's demand to increase tariffs by PkR1.43/unit. OGRA reduced the operating expenses of SNGPL by PkR266.3mn, which included PkR77.5mn on account of Unaccounted For Gas (Line losses).

•Total revenue collection by the Central Board of Revenue increased by 24% YoY to PkR162.9bn during Jul-Oct 2004.

•The Finance Ministry announced the release of PkR1bn to the Oil Marketing Companies (OMCs) to compensate them for the losses faced by them on account of government's decision to freeze oil prices.

•As per a source, the CBR is under great pressure from the Federal Government to raise its collections target to offset the losses the government is facing from subsidizing local petroleum prices.

•Reportedly, the Economic Coordination Committee (ECC) of the Cabinet has fixed the price of imported urea at PkR450/Bag.

•The Rupee gained 48paisa versus the US Dollar to close at PkR60.90 after the State Bank of Pakistan's intervention.

•As per Prime Minister Shaukat Aziz, car premiums will be eliminated by December as more imported cars become available.

•Reportedly, the government expects to earn PkR49bn in dividends from its listed investments in FY05, a 53% jump from the PkR32bn that was targeted in Budget '05.

•Shell Pakistan and Pak Arab Refining Company raised the prices of Furnace Oil by almost PkR1,000/ton.

•The Indus Motor Company announced a increase in prices of the Cuore CL and CX by PkR10,000-20,000 on Monday.

•As per APCMA officials, cement sales rose by 12.68% (YoY) during the month of October to 1.339mn tones from 1.188mn tones last year.

•The import of Liquefied Natural Gas is being considered to meet the growing demand of natural gas in the country.

•George Bush secured another 4-year term in the White House after winning a tightly contested election.

•According to an official of the company, PTCL is expecting a 30% decline in international revenues as a result of the upcoming competition.

•As per provisional figures released by the CBR, collections during October dropped by 0.8% YoY to PkR37.17bn from the PkR37.34bn reported during the same month of last year.

•Karachi Electric Supply Corporation has once against sought a debt to equity conversion of government debt.

•As per the Economic Advisor to the Finance Ministry, the government is not considering the introduction of a mid-term budgetary framework (MTBF) in FY05.

•As per data released recently, duty-paid imports shot up by 48% YoY to PkR119.8bn in 1QFY05 from the PkR80.7bn reported during the same period last year.

•According to a news report, the Planning Commission intends to oppose the proposal to import gas from neighboring countries.


The Pak Suzuki Motor Company Limited announced its 3QFY04 results recently wherein the company declared a 5% decline in profits to PkR376mn despite a 37% YoY jump in revenues to PkR6,602mn. The company has been facing severe margin pressure on the back of the depreciating rupee, which it has been unable to pass on to end consumers. At the same time, the company's capacity expansion is in process and is expected to be completed by mid next year. With the stock trading at a projected PER of 4x versus a sector PER of 6x, we issue a BUY on PSMC.

The Pak Suzuki Motor Company released its 3QFY04 results recently wherein the company declared profits of PkR375.9mn (EPS: PkR7.65) on the back of sales of PkR6,602mn.


In line with the rest of the auto manufacturers, Pak Suzuki saw its revenues shoot up by 37% YoY to PkR6.6bn during 3QFY04 from the PkR4.8bn reported during the same period last year. As a result, the company's revenues for the 9-month period ending September 30, shot up by 35% YoY to PkR18.2bn as consumers continued to be attracted to the company's popular 800cc and 1000cc offerings.




At the same time, the company has seen its margins being squeezed on the back of a depreciating Rupee and political pressures that prevent it from passing on these cost increases to end consumers. Thus gross margins during the year have declined to 10% from the 15% that the company reported last year on the back of the 8% YoY decline in the value of the Rupee versus the Japanese Yen. The company has, however, been able to restrict the increase in its operating expenses, which grew slower than its revenues. Lastly, the fall in other expenses and financing charges offset the fall in other income and led to a relatively smaller decline in net margins to 6% from the 9% recorded last year.


The performance reported by Pak Suzuki is similar to the performance being reported by the other auto assemblers, wherein revenues are rising strongly on the back of the easy availability of cheap financing. At the same time however, political pressures have prevented the assemblers from passing on the impact of the depreciating rupee to end consumers and thus all the companies are facing major margin pressure, which is likely to continue in the foreseeable future. Pak Suzuki is currently expanding its production capacity, which should be completed by mid next year, thus raising its capacity to 100,000units per annum.


Pak Suzuki's highly conservative dividend policy has played havoc with its stock price. However, with the stock trading at a projected PER of 4x versus an industry PER of 6x, we issue a BUY on PSMC.



The SBP released its Annual Report FY04 on Saturday wherein it noted that GDP growth in FY04 came as a result of exceptional performance by the manufacturing sector, which offset the agricultural sector's underperformance. Inflation also grew during the year, surpassing the government's target of 4%. While

Pakistan's fiscal deficit improved during the year, trade deficit increased, thereby putting great pressure on the value of the Rupee. For FY05, GDP growth is likely to come in lower than in FY04, with higher inflation and greater pressure on the Rupee.


OGRA's decision to disallow certain expenditures by SNGPL dealt a bad blow to the stock price. However, an analysis of OGRA's decision leads us to believe that the company's results are unlikely to be as bad as was initially thought. In terms of un-accounted for Gas (UFG), SNGPL is marginally above the target set by OGRA (6.75% as against the target of 6.50%). In addition, OGRA has also disallowed the inclusion of certain capex incurred by the company. While the impact of this has been negative on the profitability of the company, we are of the opinion that it is likely to be in the range of PkR0.25-0.40/share and SNGPL is still likely to post 14% growth in earnings for FY04. We advise investors to BUY SNGPL on dips.


Gas consumption in Pakistan has grown at a 5-year CAGR of 6.6% and all new additions to production are quickly absorbed. As a result, Pakistan is looking for alternative sources to beef up its gas supply to meet growing demand. At an annual consumption rate of almost 1.0 TCF per annum, Pakistan's current gas reserves of 26.1 TCF are expected to last for 20-25 years. However, given the aggressive growth in gas consumption over the last couple of years, both the gas utilities are wary of giving firm long-term commitments for gas supply. We are of the opinion that the government would need to start working seriously on one of the proposes inter-state gas pipeline projects if it wants to ensure long term gas supply.


Lack of availability of natural gas has forced the government to shelve proposals for 6 natural gas based thermal power projects in the country. According to reports, two of these power projects were proposed for Karachi and included projects for which Hubco had submitted its proposal. We are of the opinion that this will for the time being dampen Hubco's plan for expansion. The link up with KESC, however, has been approved and the company expects this link to be established within the next 12-18 months. On the positive side, we expect the majority of the cash releases expected in FY06 to be paid out as dividend. For FY05, we expect that annual dividend to be in the range of PkR3.20-3.50/share, whereas the FY006 dividend is likely to be higher as Hubco is likely to pay out all excess cash. We maintain our Neutral stance on Hubco with a 12month price objective of PkR35.4/share.


With the stock price loosing almost 10% value in just 4 trading sessions, we believe that the negative news flow has already been discounted. We maintain that the impact of OGRA's determination is unlikely to be very significant, and expect SNGPL to be able to register double digit growth in earnings. We expect the company to announced its FY04 results soon and expect SNGPL to post after tax profits of PkR2,291mn (EPS; PkR4.59). The stock is currently trading at 10.6x FY04E earnings. We recommend Buy on SNGPL with a price objective of PkR64/share.








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