The week began with a negative note on Monday
with the rumors that SECP has rejected KSE's request to increase the
limit on futures counter to 5% of free float from the current limit
of 1% of free float. However, market recovered on Tuesday owing to
positive development on PTCL's privatization front. On Wednesday,
the market remained highly volatile with a mix of positive (pre-bid
meeting for PTCL) and negative news (69bps increase in 6M T-bills
cut off yield). Lack of institutional support kept the market under
pressure during the remaining days of the week while bomb explosion
at Bari Imam shrine in Islamabad added fuel to the drowning index on
Friday. Rounding up the week, the KSE-100 index lost 685.23 points
over the last week.
OUTLOOK FOR THE FUTURE
We expect market to remain under pressure during
the last week before the Federal Budget '06 while the pre-budget
rally is unlikely to drive the market owing to the shattered
investor confidence and uncertainty regarding the futures. With the
continuous decline in KSE-100 index, the scrips with fundamentally
strong backing and high dividend yields have become extremely
attractive. Our top picks for next week are Callmate, Fauji
Fertilizer, KAPCO, Hubco, Fauji Fertilizer Bin Qasim, Lucky Cement
and Pakistan Oilfields.
The major developments this week were:
•Reportedly, the Central Board of Revenue (CBR)
has proposed an increase in Withholding Tax (WHT) on shares to 0.01%
from the current level of 0.005%.
•Securities and Exchange Commission (SECP) has
rejected proposals to increase the limit on futures counter to 5% of
free float from the current limit of 1% of free float
•According to data released by Federal Bureau
of Statistics (FBS), trade deficit in the first 10M was recorded at
US$4.84bn (145.2% YoY) as compared to the full-year target of
•Total Foreign Direct Investment (FDI) was
recorded at US$891.5mn (17.2% higher YoY) in the first 10M of
current fiscal year.
•The Privatization Commission (PC) has
reportedly asked Saudi based Kanooz Al Watan to deposit the bid
money for KESC by 15-Jun-05.
•Pakistan Telecommunication Authority has
revised international settlement rates effective July 1 2005.
•In a meeting chaired by Governor State Bank of
Pakistan, a consortium consisting of 5 banks has committed to
provide PkR30bn in margin financing for the stock market from next
•The privatization of National Refinery Limited
is likely to go ahead with the Privatization Commission intent on
holding the bidding for NRL on May 31.
•As per newspaper reports, experts on WTO rules
and regulations are confident that despite being a solo case,
Pakistan's case in requesting for 2-year extension in auto deletion
program is strong.
•A pre-bid conference of prospective PTCL
buyers was held on May 25, 2005.
•The Karachi Stock Exchange has approved the
provisional listing of United Bank Limited and trading in the stock
began on 26-May-05.
•The Oil and Gas Regulatory Authority approved
a 5% (PkR10/mmbtu) increase in industrial and consumer gas tariffs.
•Government is likely to impose 0.1%
withholding tax on cash bank transactions exceeding PkR10,000 in the
•According to newspaper reports, talks between
Federal Minister for IT and Telecom Mr. Awais Leghari and PTCL
employees union ended without results.
•Government has directed all fertilizer
manufacturers to maintain uniform urea prices across the country
through their dealers network.
THIS WEEK'S TOP STORIES
NISHAT MILLS LTD 1HFY05 — RESULTS PREVIEW
Nishat Mills Limited (NML) is set to announce its
results for the 1HFY05 tomorrow, 24 May 2005. We expect the company
to report an after tax profit of PkR1,168mn (EPS: PkR8.04) for the
half year as compared to PkR300mn (EPS: PkR2.07) for the same period
last year. Higher volumetric growth accruing from the Umer Fabrics
merger as well as export led growth contributes to this rise in
profitability. Lower cotton prices as well as higher fabric prices
in the quarter lead us to believe that Gross Margins will stand
improved. We have a positive outlook on Nishat's future growth,
however, we highlight the risk factors, which are i) the duty
structure, and ii) higher cotton prices, going forward.
SBP 3Q REPORT — STRONG MACRO INDICATORS
In its recently released quarterly report, the
SBP has shown full confidence on the country's macroeconomic
indicators. According to the report, 'the economy is continuing to
accelerate and well set to exceed the annual growth target for the
third consecutive year. Against a strong macro backdrop, the SBP has
maintained its previous GDP growth target of 7.4-7.8%. We believe
that SBP growth target for the current fiscal year is realistic
owing to broad based growth recorded in all corners. However, SBP
has yet again raised its concerns over inflationary pressure in the
economy. In the first 10M, average CPI inflation was recorded at
9.27% YoY as against the revised SBP full year target of 8.2%. The
SBP has also revised its inflation target to 9.0-9.4% (from
8.2-8.8%) for FY05 in the recently released report. In our view,
inflation recorded in the first 10M is due to 1) food inflation on
account of supply bottlenecks, 2) rising oil prices on both domestic
and international front and, 3) above target credit off take
(PKR362bn in 10m). Going forward, with the view of rising interest
rates we expect GDP growth rate to slow down in FY06 to 6.8% (from
8.0%). At the same time, we expect inflation to decrease as well,
but with a time lag.
CEMENT SECTOR — SUPPLY ADDITION CONTINUES!
The existing cartel arrangement in the cement
sector encourages capacity additions as everyone, irrespective of
efficiencies gets a share in the pie. Since large players are
undergoing massive expansions, smaller cement companies are also
forced to announce expansion plans in order to maintain their market
share despite their relative inefficiencies. We believe that the
ongoing expansion spree in the cement sector would lead to an idle
capacity of over 20mn tons by FY09. Possible expansions are likely
to be announced by Kohat Cement and Essa Cement while we also expect
commencement of Galadari Cement and Mustehkam Cement. We maintain
our underweight stance owing to concerns over excessive supply
additions and the likely break up of the cement cartel.'
SHORT TERM RATE HIKE — TIME OUT!
The outcome of yesterday's 6M T-bill auction
clearly indicates that short-term rates have peaked out. We believe
that SBP has completed its aggressive monetary cycle at the short
end of the yield curve. According to the details, yesterday SBP
raised 6M cut-off yields by 68bps (against market expectation of
100bps). With monetary tightening, we believe SBP has achieved twin
objectives 1) the pace of private credit off take has slowed down,
and 2) broad money (M2) growth is well under control. In little over
first ten months, M2 growth was recorded at 14.34% YoY (lower than
nominal GDP growth rate). As FY05 draws to an end, we expect short
term interest rate to remain stable from now onwards. However, our
view on increase in longer term interest rates remain intact. We are
not ruling out the possibility of another hike of at least 100bps in
the discount rate from 9.0% to 10.0% in the medium term. Going
forward, we expect longer-term interest rates to rise more sharply
than shorter-term rates over the next few months. We expect 6M
cut-off yield to reach 8.0% by June-05.
NRL — GOING UNDER HAMMER ON MAY 31
Contrary to our expectations, the Privatization
Commission is moving ahead with privatization process of National
Refinery Limited and has scheduled bidding for 51% stake of NRL on
May 31. There are a total of 11 parties that will be bidding for the
government stake in NRL. We were expecting a delay in the bidding of
NRL on account of certain outstanding issues that we thought would
be resolved before the bidding. However, reportedly the PC has
decided to move ahead with the privatization of NRL in its existing
Sustainability of the tariff protection available
to the refineries in Pakistan, in our opinion, is likely to be the
biggest concern for the bidders. In addition, the issue of
outstanding receivables still needs to be resolved.
We therefore are of the opinion that the bidders
are likely to make some adjustment for these concerns in the bid
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