This week KSE-100 index opened on a downward
trend on the back of rumors that SBP might increase the discount
rate to 10.0% from 9.0%. On Monday, KSE-100 index lost 95.83 points
with oil & gas and banking stock leading the selling pressure.
However, market recovered on Tuesday owing to PTCL privatization
related news. On Wednesday, heavy badla/COT volumes concerns
resurfaced on the scene. This led to selling pressure and evaporated
the early gains recorded. Stock specific activities in Oil and Gas
sector caused another recovery on Thursday. On Friday market plunged
owing to rumors that the SECP might not renew the extension of COT/BADLA
phase out date. Rounding up the week, the KSE-100 index lost 111.24
points over the last week.
OUTLOOK FOR THE FUTURE
We expect market to remain range bound next week.
However, SECP decision on COT/BADLA phase out date could trigger the
market either ways. Our view on PTCL privatization hype remains
intact for the next week and we expect PTCL to be the major driver
for market sentiments during next week. On the risk side, any
adverse news flow regarding forthcoming budget could have a negative
impact on market sentiments.
Our top picks for next week are Callmate, Fauji
Fertilizer Bin Qasim and Pakistan Oilfields, while we also like PTCL
purely as a privatization play.
The major developments this week were:
•MSCI weightage of Pakistan has increased to
0.29% from the previous level of 0.19%.
•Prime Minister Shaukat Aziz indicates better
than expected agriculture sector growth is likely to help Pakistan
over 8% GDP growth.
•As per data released by SBP, Pakistan's
external debt stood at US$36.62bn as of Mar-05, compared to
US$35.26bn in Jun-04
•The meeting of the steering committee on the
Turkmenistan, Pakistan, Afghanistan pipeline project ended with no
•Domestic petroleum prices maintained for the
fourth consecutive week.
•Newspaper reports quote State Minister for IT
and Telecommunication, Mohammad Asjad Malhi that bidding for
Pakistan Telecommunication Company Limited (PTCL) would be held as
per schedule on June 10, 2005.
•The Privatization Commission fixed a price of
PkR50/share for the public offering of United Bank Limited (UBL).
•As per newspaper reports, the federal
government has hardly utilized PkR72.5bn (36%) of the Public Sector
Development Program's (PSDP) total allocation of PkR202bn in the
•The Privatization Commission finally released
the names of 14 companies that have submitted Expression of
Interests for Pakistan Petroleum Limited (PPL).
•Reportedly, the government has sought the
services of International Monetary Fund (IMF) to restructure the
Consumer Price Index (CPI) basket.
•Rumors indicating that National Refinery
Limited (NRL) may fetch PkR370/share on its privatization.
•In the first 10M of FY05 total worker
remittances were recorded at US$3.45bn as compared to US$3.21bn
during the same period last year.
•Federal budget 2005-06 to be presented on
•Total forex reserves declined by US$232.4mn in
less than 2 weeks.
•According to a press release, expansion work
in Indus Motor Company (IMC) will commence from September 2005.
THIS WEEK'S TOP STORIES
PAK-ARAB FERTILIZER LIMITED — PRIVATIZED!!!
Privatization Commission has received the highest
bid of PkR14bn (PkR190/share) from the consortium headed by Fatima
Group, followed by PkR12bn offer made by Dawood Hercules. As per the
management of Fatima Group, they plan to raise urea production
capacity by 300k tons in the next two years from existing production
levels of 115k tons. The commencement of Fatima Fertilizer and its
acquisition would be a bigger threat for Engro Chemical (for NPK
business) rather than Fauji Group. Thus our views regarding growth
in FFBL and FFC remain intact. We maintain our Overweight stance on
Fertilizer Sector and a BUY for FFBL.
POL — PRODUCTION GROWTH OFFSETTING PRICE
International crude oil price have stabilized for
the time being, after sliding continuously. Crude oil prices are
currently at their three-month low. Continuous rise in US stockpiles
(currently at their 6-year high), assurance of continued supplies by
OPEC, strengthening of the US Dollar, and a decline in oil demand
have all prompted a decline in crude oil prices. We are of the
opinion that oil prices will continue to hover within the
US$40-50/bbl range in the medium term. Despite a decline in crude
oil prices, Pakistan Oilfields Limited remains our top pick in the
upstream oil and gas sector. We believe that production growth
coming through Pariwali Well No. 5 (expected to increase POL's oil
production by 20%) is more than likely to compensate for the decline
in crude oil prices. As it is, the crude oil forecasts that we have
incorporated in our models are well below the current price. Hence,
we believe that our profitability forecasts for POL are
conservative. We maintain our Buy recommendation on POL with a price
objective of PkR340/share.
PAKISTAN TO ACHIEVE 8.35% GDP GROWTH IN FY05!
In his recent statement Prime Minister Shaukat
Aziz has indicated that Pakistan will achieve 8.35% GDP growth rate
in FY05 against the target of 6.6%. The strong macro picture
presented by the Prime Minister continues to support our high
agriculture growth target of 5.5% (refer to March-11 weekly review).
We concur with the recently released PM declaration of 8.35% GDP
growth expected in FY05, on the following account
1) Services sector is set to achieve 7.9% YoY
growth owing to the robust performance expected in wholesale &
retail trade (carrying 18.4% weight in GDP), 2) Agriculture Sector
to achieve 7.5% YoY growth, owing to bumper cotton crop (14.6mn
bales) and expectations of a good wheat output (21mn tons), and 3)
Large Scale Manufacturing (LSM) to achieve 15.4% growth owing to
rising domestic demand. The government has also set a 7% GDP growth
rate target for FY06. We are of the opinion that to achieve 7% GDP
growth target, substantial investment would be required in LSM. LSM
is already operating at high capacity utilization. However, we
believe that Services sector will lead GDP growth in FY06. Our only
concern is, can Pakistan grow at 7-8% rate over the next 4-5 years
with expensive oil?
WORRISOME INFLATION RECORDED IN APR-05
Inflation statistics for Apr-05 have come in
above expectations (+11.10% YoY). We believe food inflation was the
primary trigger behind the Apr-05 CPI inflation statistics upward
march. We are revising our inflation estimates to 9.0% from our
previous estimate of 8.5%. Year to date, SBP has raised the 6M
cut-off yield by 511bps to curb inflation. However, we believe that
the monetary tightening has not succeeded in curbing inflation so
far. This indicates rising inflation is fueled by bottlenecks in
food supply rather than demand-pull inflation. In addition, rising
oil prices on the domestic and international front fueled transport
inflation, which along with Housing Rent Index (HRI) are not
controllable through monetary policy. Going forward, we believe that
the recent move by the government to allow duty free import of major
food items from neighboring countries, coupled with bumper wheat
crop will cool down food prices. However, our medium-term view on
inflationary expectations remains intact. We expect higher
international oil prices to remain a threat for GDP growth and
expect them to continue feeding medium-term inflationary
UREA — FAVORABLE DYNAMICS INTACT
Global urea prices (US Gulf) are at record high
levels and are expected to peak this year on the back of stronger
fertilizer application and supply shortages. This coupled with
domestic supply shortages will act in favor of domestic fertilizer
companies enabling them to pass on more than the impact of cost side
leading to healthy improvement in earnings of fertilizer companies.
Strong demand from agricultural sector and supply issues, coupled
with fears of rising prices have already resulted in an exceptional
growth of 48% in urea offtake during the first four months of 2005.
With no major increase in input cost expected in 2QCY05 we expect
fertilizer companies to report improvement in gross cash margins for
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