owing to the news on government
being asked to reduce OMCs' margins to offset the impact of high
oil prices. On the political side, we expect the market
to take Quetta blast news negatively. Meanwhile, the overall economic
indicators will remain a net positive factor for the market. Fertilizer
and Energy stocks are our picks in the market while we do not expect
cement sector to outperform the market. On a net basis, the continuation
of neutral consolidation trend is likely to continue next week.
The major developments this week were:
•Pakistan's trade deficit reached US$2,511mn during
July-November FY05 against the US$3,000mn target set for the entire
•President Musharraf completed his short visit to
US. Both the Presidents have agreed to further strengthen the
relationships between the two countries and have also agreed to
strengthen their trade relationships.
•PkR2bn paid to OMCs for Import Price Differential.
•PM to visit Iran in Jan-05 to discuss gas
•The Privatization Commission (PC) in its meeting
held recently approved the offering price of Kot Addu Power Company's (KAPCO)
public offering, however the price was not disclosed.
•Government to spend PkR100bn on subsidies in FY05.
•Interconnection charges proposed by Pakistan
Telecom Company Ltd. (PTCL) were slashed by up to 45% by the Pakistan
•Security arrangements in the country halted the
timely implementation of Mirani Dam and canal projects.
•The Executive Committee of National Economic
Council approved projects worth PkR203bn.
•The Economic Co-ordination Committee is reportedly
considering a plan to waive the Workers Profit Participation Fund for
Independent Power Producers (IPPs).
•After the rejection by the Privatization
Commission (PC) of the three proposals forwarded by Pakistan State Oil (PSO),
the Ministry of Petroleum and Natural Resources (MPNR) has also put its
weight behind the PC.
•New car makers to be allowed production at 40%
•State Bank of Pakistan (SBP) scrapped the 6 months
T-bill auction held on Dec 8.
•International oil prices continue to display
volatility on account of fears lingering over oil are a possible supply
cut by OPEC producers.
•The government is reportedly working on issuing
fresh guidelines to NEPRA to accept an average of 20% line losses of
distribution companies as "prudent cost" to be charged from
•According to a news report, the price range of
KAPCO's offering is likely to be in the range of PkR3235/share.
•PSO's share in white oil rises to 60%.
•Country's forex reserve fell to US$11.71bn on
December 4 from US$11.99bn on November 27.
FISCAL IMBALANCES SHRINK AS REVENUE INCREASES
Pakistan's fiscal deficit was contained to PkR24.9bn
as against the target of PkR89.5bn set for 1QFY05. This extraordinary
performance has been attributable to impressive growth in revenue
collection and remarkable dividend payout by public enterprises. The
performance during 1QFY05 leads us to believe that the government would
be able to maintain the fiscal deficit at 3.2% target set for entire
FY05 on account of impressive revenue collection and reduced debt
servicing burden. We also expect CBR revenue collection to surpass
PkR590bn target set for FY05.
Country's fiscal deficit remained at PkR24.9bn during
the first quarter of current fiscal year compared with PkR40.9bn during
the same period last year. The fiscal deficit was recorded at at 0.4% of
GDP against the target of 1.45% of GDP for 1QFY05. Total revenue
collection was recorded at PkR202bn as against the total expenditure of
PkR227.1bn during July-September FY05. On account of some shortfall in
petroleum surcharges on revenue side and over 25% increase in Public
Sector Development Program (PSDP) on expenditure side, the overall
fiscal deficit is targeted at PkR199bn or 3.2% of GDP for FY05.
Revenues- Income tax leads from front Revenue collection during Jul-04
to Oct-04 grew by 22.4% to PkR166.6bn from PkR136.1bn during the same
period last year. On account of Universal Self Assessment Scheme as
voluntary tax compliance, Direct tax revenues rose by 28% YoY. Under
indirect tax category, sales tax increased by 15% and custom revenues
advanced by 31.3% YoY. Relatively higher custom revenues are primarily
driven by 49% YoY increase in imports during the period. Going onward,
higher than expected tax revenue collection is likely to help the
government in offsetting reduced PDL earning on the revenue side.
EXPENDITURES — UNDER UTILIZED PSDP FUNDS
In 1QFY05 total government expenditures stood at
PkR227bn or 3.7% of GDP. Government spending under Public Sector
Development Projects (PSDP) stood at PkR32bn, which remained under
utilized than targeted. In our view, the pace of PSDP will increase on
account of the recent approval by Executive Committee of National
Economic Council (ECNEC) of projects worth PkR203bn.
We believe that the impressive tax revenues
collection with much improved dividend payout on revenue side and
reduced debt servicing burden on expenditure side is likely to provide
some fiscal space to the government. The performance during 1QFY05 leads
us to believe that government would be likely to contain budget deficit
near the targeted level of 3.2% of GDP in FY05.
WEEK'S TOP STORIES
CEMENTS — RIGHTS & SUPPLY TO ECLIPSE DEMAND
As per the data released by APCMA, Cement dispatches
reported a 24% growth (YoY basis) during the first five months of the
FY05 to 6.5mn tones as opposed 5.3mn tones during the same period last
Continous delay in any announcement on dams and right
issue fears are the net negative factors limiting the sector's
performance despite the positive news flow on the demand side. We
maintain our Negative stance on the Cement sector. Owing to the
demand-supply argument, we do not expect cement companies perform well
despite a healthy growth in their top line during FY05.
BALANCE OF TRADE — GAP CONTINUES TO WIDEN
Pakistan's trade deficit reached US$2,511mn during
July-November 2004, almost 84% of the target of US$3,000mn set for
entire fiscal year. The massive increase in trade deficit has been
triggered by a higher than expected import growth. Country witnessed
colossal import growth in metals, petroleum products, machinery,
agriculture chemicals, and food items during first five month of FY05.
We believe that the country's import bill has been amplified on account
of higher oil & commodity prices and strong domestic demand. We also
expect that country's trade account deficit is set to surpass US$4,500mn
during FY05 on account of internationally weak dollar and escalating
SEPCOL — REDUCTION IN DEPENDABLE CAPACITY
Southern Electric Power Company Ltd. (SEPCOL)
recently reached an agreement with WAPDA whereby the Annual Dependable
Capacity of the plant has been reduced to 95.805MW for the current year.
The ADC has also been reduced for FY2004 as a result of which SEPCOL is
liable to pay a total of PkR32mn in Liquidated Damages to WAPDA. We
believe that this is likely to directly affect the equity return
component of the company, and thus, dividend payouts. We recommend
investors to book profits in SEPCOL.
BANKING SECTOR — EXCITING TIMES
Only efficient banks with competent management, a
reasonably large branch network and an agriculture and consumer focus
should excel in the future banking industry scene. For a little over a
decade now, the Pakistani banking sector has been undergoing a profound
transformation, and if the existing scenario is any indication, the next
ten years are likely to be just as exciting. The future of the industry
is likely to be earmarked by increasing competition, further
consolidation and continued growth in consumer financing. Additionally,
the management of potential portfolio losses is also likely to be a key
factor affecting the performance of the banking sector in the short to
AUTO SECTOR — DOWN BUT NOT OUT!
The Federal Budget FY05 dealt a negative blow to the
stock price of almost all the major auto assemblers. While import of
cars have picked up substantially, it has failed to resolve the issue of
car premiums. This suggests that there still exists a strong demand for
locally assembled cars, and the current production volume plus imports
are still insufficient to meet domestic demand. Thus, we foresee auto
sales to continue to exhibit strong growth over last year. On the cost
side however, there has been some deterioration owing to the rise in
steel prices coupled with depreciation of the Pak Rupee. These two
factors are likely to negatively affect the profitability of the auto
sector. In terms of valuations, the auto sector continues to remain at
much lower multiples compared to the overall market. Excluding dividend
yield, Pak Suzuki remains the most inexpensive on all other valuation
multiples. On dividend yields, Indus Motors appears to be the most
attractive. On absolute valuation multiples, we maintain our Neutral
stance on all the auto scraps as they are all trading close to our DCF
based price targets.
Mkt. Cap (US $ bn)
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$ mn.)
No. of Trading Sessions
KSE 100 Index
KSE ALL Share Index