Updated May 14, 2005



It's finally about to happen. PTCL, on the privatization slate for over a decade, is to go under the hammer on 10th June. Eight pre-qualified parties (plus one conditionally pre-qualified contender) are to bid for PTCL's 26% ownership and 58% voting rights. While not running down the others, SingTel, Telekom Malaysia, Etisalat and Saudi Oger will be ones to closely look out for. Pakistan's risk profile has changed significantly from frequent political changes, to nuclear detonations to military coup.

Pakistan now is a different story. President Musharraf has done wonderfully well in elevating Pakistan's image abroad and Prime Minister Shaukat Aziz, a banker who understands business, wants to restrict the government to governance issues. Post sell-off, the government would retain 62% economic ownership of PTCL with the remaining 12% held by general public (also the current status). PTCL is being sold as an integrated unit, with major attractions being its fixed line telephony network and wholly owned cellular subsidiary that operates the Ufone brand. With 6 mobile operators (including Alwarid), 14 LDI players and some serious competition in WLL, the telecom landscape in Pakistan is turning increasingly competitive.

The growth numbers in the recent past have been phenomenal, from 2.4 million subscribers as of end-June 2003, cellular subscriber base has crossed 10.5 million as of April 2005. Ufone is the second largest players in the cellular market with an estimated market share of 20.8% (behind Mobilink An Orascom Company at 61% market share). Sustainability of PTCL's high EBITDA margins will be extremely difficult going forward.



The privatization of National Refinery has entered into its final stages as the Privatization Commission and the interested parties have agreed to hold a pre-bid conference on 21st May and the final bidding on 31st May. The government has received record number of Expression of Interests (EOI) of 29 parties for the acquisition of the only lube producer in the country. Privatization of NRL comes at the most appropriate time. Analysts expect the final number of serious bidders to reduce to 5-6 from the current list of eleven. They estimate the privatization prices to range 375 to 425 rupees per share. The total proceed from sale of 34 million shares is estimated from 12.74 billion rupees to 14.4 billion rupees. The party specific reason, perception of economic and industry fundamentals and competition among the bidders may result in higher prices.

The pre-bid meeting coming after 6 month from the issuance of SOQ, seems a formality rather than a serious meeting point to put forward the remaining issues. The issues of future course of deregulation of the sector and possible change in pricing mechanism can be discussed thoroughly. The privatization of NRL seems most appropriately timed owing to: 1) higher oil prices, translating into better earning of the refinery sector, 2) international supply deficit gap translating into firm POL prices in medium term, 3) growing energy needs leading to 5 year CAGR POL demand growth of 6.2%. The energy demand is expected to grow by 7.2% with a GDP growth of 7.5%, 4) realization of government pro market economy policy and 5) improving country's image. NRL too has some distinctive advantages to offer to the buyer which include: 1) the only producer of high margins lube and asphalt, 2) stable earning stream, resulting from diversified product portfolio of energy and non-energy products, 3) capacity to milk the investment through higher dividend (there is a cap on dividend for refining income, lube income is not included refining income) and 4) refining representing an important line in the oil chain and privatization would allow the opportunity for integration.

There has been significant improvement in performance of banking sector. As a whole, banking sector deposits have increased by 4.91% QoQ from the beginning of year till the end of March 2005. This has led to a 6.2% growth in advances over said period. This has helped in pushing the advances to deposits ratio to 75% compared to 64% at March end 2004. An interesting point is that despite a 4.2% QoQ increase in investments, overall banking sector investments on a YoY basis have declined by 14%. Reasons to supplement advances growth over the near term are: 1) continued strong growth in GDP, 2) SBP approval of financing for procurement of wheat and 3) aggressive transition to Margin Financing (small proportion of total advances initially).

Drawbacks to advances growth remain: 1) further sharp increases in lending rates, 2) retraction of leverage from speculative sectors and 3) lending restrain due to a number of banks being currently around the statutory capital adequacy requirement of 8%. While the stellar advances growth witnessed in recent times is unsustainable and will slow down, from profitability perspective, loan pricing should compensate for volumetric cooling.