THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Dec 11, 2004

 

OUTLOOK FOR THE FUTURE

We expect the market to remain range bound with further improvement in turnover after crossing the record high level of 5620. We expect Energy sector to remain active during the next week on the back of continuous news flow regarding the sector. Oil marketing companies (OMCs) might under pressure

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

FUNDAMENTAL CHANGES

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 FY05.

•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 pipeline.

•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 Telecom Authority.

•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% deletion rate.

•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 consumers.

•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.

FISCAL DEFICIT

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.

EXPECTATIONS

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.

 

 

THIS 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 year.

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 commodity prices.

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 medium term.

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.

MARKET ROUNDUP

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LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

26.07

26.66

2.26%

Avg. Dly T/O (mn. shares)

218.95

449.09

105.11%

Avg. Dly T/O (US$ mn.)

215.72

449.65

108.44%

No. of Trading Sessions

5

5

 

KSE 100 Index

5575.96

5700.82

2.24%

KSE ALL Share Index

3668.31

3753.56

2.32%