Updated May 28, 2005



In the latest auction of 6-month T-Bills, the State Bank of Pakistan indicated a change in gear. The central bank mopped up only Rs491 million, against a target of Rs12 billion and bids received worth Rs22 billion. The cut-off yield rose by 69 basis points, from 7.18% to 7.88%. The market expected more than 100 basis points increase. Alfalah Securities believes that interest rates are about to peak out and expects the rate on the 6-month T-Bills to settle around 8%. The fears of another rise in the discount rate have also been subsided by the move of the SBP. Inflation, which has been the primary driver of the rise in interest rates, has also shown signs of peaking out last month. Alfalah also forecasts inflation to settle around 9.7% by June 2005.

Since December 2004, the cut-off yield on 6-month T-Bills has risen by 413 basis points. The market got a shocker in March, when the SBP raised the discount rate by 150 basis points from 7.5% to 9%. Since then, interest rates have been rising by more than 100 basis points in each auction. Consequently, in the last auction, the market was expecting the SBP to remain hawkish. The SBP conservatism in the latest auction vindicated analysts' stance. The capital market is still nervous about another rise in the discount rate. However, the recent change of gear by the SBP subside the fears of rise in the discount rate. Analysts expect a bull run in the market when interest rates start to come down and the uncertainties regarding CVT and the phasing out of COT settle down.

The Privatization Commission met with 8-prequalified prospective bidders of Pakistan Telecommunication Company last Wednesday to clarify issues/concerns regarding its sell-off. As per the Minister of Privatization, PTCL bidding will be held on schedule (June 10, 2005), with the entire process completed by June 30, 2005. Secretary Privatization Commission also dispelled fears of employee union agitations affecting the sell-off process. There has been a lot of talk going on regarding the reference price of PTCL. Reference price is the minimum price at which the government intends to sell an asset. Information regarding the reference price remains privy to the CCoP (Cabinet Committee on Privatization) and the PC Board and is not shared with prospective bidders. While people could have their own estimates regarding what price target the government has in mind, this information may not be made public officially.



Fauji Fertilizer Bin Qasim announced its result for the first quarter on April 18, 2005. It posted profit after tax of Rs375 million (EPS: Rs0.40) for the quarter as compared to Rs110 million (EPS Rs0.12) for the corresponding period last year. This represented a growth of 233% in profitability. Higher urea and DAP production, higher fertilizer prices and higher other income were the major contributors towards this growth. Gross margins of the company during the quarter improved significantly to 36% as against 23%. FFBL's fertilizer production during the quarter under review was substantially higher as compared to 1Q2004. This was primarily due to moving forward of plant maintenance turnaround which is normally carried out in January every year. This has been moved to a later part of the year in order to meet the local urea demand in the Rabi season. According to InvestCap FFBL will continue to show impressive growth in its earnings in the coming year due to: 1) favorable agriculture environment in the country and the consequent higher fertilizer demand and prices, 2) feed gas price for FFBL is fixed at a subsidized rate of Rs49.39/MMBTU till 2009 (feed gas prices for Fauji Fertilizer and Engro Chemical are currently at Rs72.93/MMBTU), and are revised as per the 2001 Fertilizer Policy annually, 3) FFBL will get after tax cash compensation from the government of Rs455 million each in 2005 and 2006 and Rs210 million each for 2007 and 2008 in lieu of implementing the 1989 fertilizer policy, 4) future expansion plans of the company include de-bottlenecking of both its urea and DAP plants. This would increase the urea production capacity of the company by approximately 207,000 tonnes and DAP production capacity by 214,000 tonnes. Currently feasibility studies are being undertaken and the expansion is not expected to come online before 2006.

The government has finally disclosed the details of Expression of Interest received for Pakistan Petroleum sell-off. This announcement has come after a gap of 18 days from the last date of submission of EoIs. The Privatization Commission received a total of 14 EoIs, mostly from foreign companies. A total of 12 foreign/MNCs submitted EoIs while only 2 local parties showed interest. The government is offering 51% stake along with transfer of management control. Analysts expect an active interest shown by the foreign companies to continue till the consummation of the transaction and one of the foreign parties emerging successful. Among them analysts consider BP Pakistan, OMV, MOL, CNODC and Kufpec to be strong contenders. All these parties have decent exposure of local economy, politics and regulatory framework. OMV, MOL and BP Pakistan have substantial operations in Pakistan. Owing to weak financial position of both the local groups, participation by them is unlikely to extend till the end of privatization process. Barring BP Pakistan, which is a group company of British Petroleum, most of the foreign E&P players are categorized in medium size independent companies.