Oil stocks stole the limelight this week. On
Monday, oil and gas companies led the index, owing to the
privatization hype of PSO and on the expectation of a hike in gas
tariffs. Earlier in the week, OGDC has triggered the market momentum,
on the back of its announcement of oil well discovery and the
expectation of higher earning. As expected, PTCL bounced back again as
the news related to Malaysian Telekom's participation in the bidding
process reinforced the sell-off expectation. Banking sector also
remained positive during the week on the backdrop of good earning
expectations. On Wednesday, market observed some profit taking and
index maintained its previous closing level. Market sentiments
remained positive throughout the week on account of good earning
expectations in Oil and banking sector. On the whole, KSE index gained
252.28 points over the last week.
OUTLOOK FOR THE FUTURE
The major trigger for the market in the short-term
remains the upcoming result announcements by the top market cap
companies. Both banking and oil sector companies would remain the
focus as far as trading activity is concerned. Much awaited
provisional trading of KAPCO will also be starting from Monday. Market
sentiment seems positive for the upcoming week, however, we advise our
investors to carry on trading with calculated strategy. We expect
cement companies to announce the dates for their half yearly results,
which may trigger some stock specific activity. On the risk side,
small investor may liquidate their holdings to participate in much
awaited Initial Public Offering of KAPCO, to be held on Feb 21-24.
The major developments this week were:
•The Privatization Commission has announced that
the Initial Public Offering of Kot Addu Power Company (KAPCO) would be
held on Feb 21-24.
•In the bidding held for KESC, the Privatization
Commission (PC) received the highest bid of PkR15.860mn
(PkR1.65/share) by the consortium headed by the Saudi Kunooz Group.
•To provide benefit to Balochistan, the Federal
Government has reportedly proposed an increase in gas tariffs of the
Sui Gas field.
•Oil and Gas Development Company Limited
announced that it has discovered oil and condensate in its exploratory
well Pasakhi Deep No. 1.
•According to the data released by Ministry of
Industries and Production, industrial sector grew by 17.12% YoY in
•The National Electric Power Regulatory Authority
has allowed a 10-15 paisa/unit increase in power tariffs for the eight
corporatised entities of WADPA.
•The public offering of Attock Petroleum Limited
was oversubscribed by almost 18 times.
•According to the company and Privatization
Commission, the successful applicants of KAPCO's public offering would
also be entitled to any interim dividend that is announced with the
half yearly results.
•Net government borrowing has increased to
PkR44.77bn till Jan-22.
•World Bank raises official assistance to US$1bn.
•The figure for auto sector loans from banks and
leasing companies has reached Rs.22.1 billion.
•Cabinet and Parliament to debate over Kalabagh
•Current account deficit was recorded at US$885mn
•Pakistan Telecom Authority is expecting the
telecom industry to fetch around US$2bn in investment by this
•Askari Commercial Bank announced its FY04
results. The bank posted after tax profits of PkR1,923mn (EPS:
PkR15.31/share) for year, 74% YoY higher.
THE IMPACT OF OIL PRICE ON INFLATION
With the recent 5% increase in petroleum prices, it
is widely expected that the headline inflation will swell further in
months to follow. Since Dec-15, Oil Companies Advisory Committee (OCAC)
has increased the POL prices by 15%. We believe that the impact of oil
prices is mainly reflected in fuel and transport inflation. Transport
and fuel account for 7.33% & 7.29% weight respectively in the CPI
index. Our analysis suggests that an increase of PkR1.00 in POL prices
results in a 49bps increase in the fuel inflation index, and a 130bps
increase in transport inflation index. On the basis of our finding, we
believe that the fuel and transport inflation in Jan-05 are likely to
be around 2.52% and 6.84% YoY respectively. However, our view on the
impact of oil prices on food inflation is slightly different from
market consensus. In our view, the impact of oil prices is already
accounted for in the transport inflation index. This indirectly
represents the marginal increase in the transportation cost of food.
Therefore, food prices should be adjusted with marginal change in
transportation cost to avoid duplication. Looking forward, we expect,
the central bank's "Neutral" monetary stance and high base
effect to work their way through to contain inflation in the remaining
half of the current fiscal year. Our target for inflation stands at
7.1-7.3% for FY05.
OIL PRICES — TRANSLATED IN TRANSPORT AND FUEL
We believe that the impact of oil prices is mainly
reflected in the fuel and transport inflation. Transport and fuel
account for 7.33% & 7.29% weight respectively in the CPI index.
Our analysis suggests that an increase of PkR1.00/litre in POL prices
results in a 49bps increase in the fuel inflation index, and a 130bps
increase in the transport inflation index. On the basis of our
finding, we believe that the fuel and transport inflation in Jan05 are
likely to be at 2.52% and 6.84% YoY respectively. Going forward, in
light of recent 5% increase in POL prices, our estimate for Feb-05
fuel and transport inflation stands at 2.995% and 8.825% YoY
OIL PRICES AND FOOD INFLATION
Our view on the impact of oil prices on food
inflation is slightly different from market consensus. In our view,
the impact of oil prices is already accounted for in the transport
inflation index. This indirectly represents the marginal increase in
the transportation cost of food. Therefore, food prices should be
adjusted with the marginal change in transportation cost to avoid
duplication. To validate our view further, in Dec-04 alone, POL prices
have increased by 6.98% but the food inflation index decreased from
127.00 points to 122.78 points.
INTEREST RATE HIKE — ANTI-INFLATIONARY MEASURE
To suppress the inflationary expectations in the
system, the State Bank of Pakistan (SBP) has adopted a
"neutral" monetary stance. This indicates that the policy
accommodation can be moved at a pace that is likely to be measured.
The SBP has increased the yield on 6-months T-bill by 264bps to
4.8684% so far this year.
Going forward, we expect that the short-term
interest rate will increase to counter the inflationary expectation
from the system.
OUTLOOK FOR INFLATION IN FY05
We expect the central bank's "Neutral"
monetary stance and high index base effect, will work their way
through the system to contain inflation in the remaining half of the
current fiscal year. Our target for inflation stands at 7.1-7.3% for
THIS WEEK'S TOP STORIES
CEMENT DISPATCHES — DECELERATING GROWTH
As per the data released by APCMA over the weekend,
overall cement dispatches reported a 7.36% growth in Jan '05 and 21.5%
growth during the first seven months of FY05. However the rate of
growth has been decelerating. We are expecting a 19% overall growth in
cement sales for FY05. Lucky Cement reported a 39% growth YoY basis in
cement sales, followed by DGKC (29% growth), Maple Leaf (20%) and
Fauji Cement (14%). We maintain our underweight stance on the cement
sector owing to our concerns regarding additions on the supply side.
KESC _ PRIVATIZED!
The Privatization Commission has been able to pull
off one of the most difficult task in our opinion. The privatization
of KESC, though at a substantial discount to the market price, can be
termed as a big success as the PC has been able to sell a loss making
entity. We are of the opinion that the major concern of the government
as far as KESC was concerned was the annual cash injection that the
government was required to make to meet the utility's cash shortfall.
The other major concern was to transfer the management to the party,
which would be able to bring a turnaround in the utility and cut down
on its operational losses. We are of the opinion that the new owners
initial focus would be to improve the transmission and distribution
network of the utility and cut down on the line losses, which alone
can result in a substantial improvement in KESC's financial health.
However, this is likely to be a long drawn process and in our view
would take atleast a couple of months.
ENGRO — STRUGGLING WITH SUBSIDY SHOCK
Engro Chemicals is expected to announce its annual
results for CY04. We expect the company to post after tax earnings of
PkR1,483mn (EPS: 9.69). We expect the company to announce 35% or
PkR3.50/share cash dividend, however, there are low possibilities of
bonus dividend owing to lack of growth in earnings. We maintain our
underweight stance on Engro with the price objective of PkR107/share.
We may expect Dawood group to come up with purchase offers from time
to time with an objective to claim takeover of the company with
complete management control, which will eventually trigger some
activity in the stock. Sell Engro!
GAS PIPELINES – CHANGE IN INDIAN STANCE
The change in Indian stance towards the proposed
transnational gas pipeline projects is very significant given that
India had been previously out-rightly rejecting the idea of
participating in the project. We believe that the change in Indian
stance has been primarily driven by the growing energy demand in
India. And import of natural gas is the most inexpensive alternative
available to meet this demand. Pakistan stands to benefit in the form
of transit fees should India opt for gas pipeline either from
Turkmenistan or Iran as both these pipelines will have to pass through
Pakistan. We are of the opinion that the proposed gas pipeline from
Iran is currently being the most seriously considered option owing to
lower cost of the project. The Iran gas pipeline should benefit SSGC
as the gas pipeline is proposed to be laid through Balochistan and
Sindh, both of which are SSGC's franchise areas. We maintain our Buy
recommendation on SSGC with a price objective of PkR35.4/share. We
have not incorporated the impact of the proposed gas pipeline in to
ENGRO — PLOWING ON!
Engro Chemical announced after tax earnings of
PkR1,610mn (EPS: PkR10.53) for the year as compared to PkR1,557mn
(EPS: PkR10.18) during the same period last year. The company also
announced a final cash dividend of PkR4.00/share. The results came in
above our expectations as well as market consensus mainly due to lack
of availability of information about the dividends from subsidiary
companies. On the other hand, a PkR4.00/share dividend by Engro will
add PkR2.89/share to Dawood Hercules's EPS.
Mkt. Cap (US $ bn)
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$ mn.)
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