MARKET THIS WEEK
Announcement of delay in PTCL's privatization
dented the market performance during this week. However the market
welcomed the announcement of Budget FY06 positively on Tuesday as
the government did not raise capital value tax (CVT) while Nishat
Group stocks (NML, Adamjee and MCB) outperformed the market on the
back of tax incentives to textile, insurance and banking sector. The
market remained under pressure throughout the week owing to
conflicting statements given by PTCL management and Employee Union
Leaders over strikes and privatization. Meanwhile, rumors that the
Prime Minister has resigned from his office on Wednesday coupled
with badla phasing out added fuel to the negative market sentiment.
The market underwent a correction phase on Friday as investors
booked profits. Rounding up the week, the KSE-100 index gained 132
points (1.8%) over last week.
OUTLOOK FOR THE FUTURE
The delay in privatization of PTCL and prolonged
strike by the employees' union could prove to be the major negatives
for the market during the next week as well. Any progress on the
talks between the government and PTCL's employee union leaders and
announcement for new bidding date for the privatization would be the
only factor which can possibly change the depressed market
sentiments. Meanwhile volumes in ready market will further dry out
during the second week of Badla phase out while we may expect some
shift from ready to futures counter. Overall we expect the market to
remain under pressure during the next week. On fundamental basis, we
like Callmate, Fauji Fertilizer, KAPCO, Fauji Fertilizer Bin Qasim,
Pakistan Oilfields and Packages.
The major developments this week were:
•The outgoing fiscal year made history with
attainment of extraordinary (8.4%) GDP growth.
•Twenty-two out of twenty seven employees'
union representatives left Islamabad for their respective stations
to lead another anti-PTCL privatization strike if talks between the
two parties failed to make any progress.
•According to newspaper reports, the Cabinet
has disallowed budget proposals for 6% withholding tax on locally
manufactured cars and 7.5% excise duty on fees and commission to be
charged by banks for services for issuing L/Cs and guarantees.
•The Indian Oil Minister has stated that
Pakistan, Iran and India will finalize all the necessary formalities
by Dec-05 whereas work on the proposed gas pipeline will start in
•Government, in an emergency meeting has
decided to deploy further Rangers and law enforcing agencies on PTCL
installations in order to avoid any untoward incident emanating from
•As per news reports, Engro Chemicals plans to
set up a urea plant in Oman as the government has not ensured
long-term gas supply to Engro for setting up a new urea plant in
•The President has expressed his displeasure on
the rising inflationary trend, and directed the Ministry of Finance
to take appropriate measures to check the trend of rising prices.
•The Chairman Securities and Exchange
Commission of Pakistan ordered a probe in to the decline in the
stock market on Wednesday.
•According to the data released by State Bank
of Pakistan (SBP), current account deficit was recorded at US$1.15bn
in the first 10M of current FY compared to a surplus of US$2.07bn
during the same period last year.
•Oil and Gas Regulatory Authority has
reportedly sought government's approval for a 5.5% increase in gas
THIS WEEK'S TOP STORIES
PTCL STRIKE ENDS — BIDDING DELAYED
The weekend witnessed the stand off between PTCL
employees union and management culminate with materialization of the
worst-case scenario — delay in bidding of PTCL. The development is
likely to carry negative implications for local market sentiments
and other privatization transactions planned by the government
(employees have a precedent as to how to use their influence while
prospective bidders have an additional issue to cater to). We,
however feel that despite the setback, PTCL's privatization is not
likely to head for the backburner given importance of the
transaction and government's continued commitment to privatization.
The deadline of 30 June 2005 though, seems a bit aggressive despite
the assurance of announcement of new date within a day or two. On
the secondary counter, news flow should continue to drive prices.
From a fundamental perspective we recommend a HOLD at current
BUDGET FY06 — EXPORT ORIENTED
•Overall, the Federal Budget does not carry any
specific incentive for the stock market.
•However, stock market participants are likely
to heave a big sigh of relief as rate of Capital Value Tax on
equities has been maintained at 0.01% for the coming year.
•Reduction in import duties on raw materials,
machinery and spare parts are all aimed at providing incentives to
the domestic manufacturers to go for expansion, especially in the
KSE — BADLA PHASE OUT BEGINS!
We expect KSE's performance to remain range bound
over the near term as liquidation of badla position is likely to
result in a supply overhang in the market. Badla positions in the
remaining 7 stocks stand frozen as of yesterday, 7-Jun-05, and have
to be reduced by 8.25% every week. With margin financing still not
available, we believe that the volumes at the KSE are likely to take
a dip, which in turn is likely to affect KSE's performance. We
expect the market to remain range bound in the near term. The only
trigger for the market remains the progress on PTCL's privatization
where we believe that any delay can significantly affect market
SBP — DICTATING THE TERMS
Following the change in format of T-bill auction,
we believe State Bank of Pakistan (SBP) is better placed to dictate
its terms. This is evident in the outcome of T-bill tender held
yesterday. In the tender, SBP lifted PkR108.5bn without raising the
cut-off yield significantly. SBP raised the 3, 6 and 12M cut-off
yield by 15, 12 and 20bps respectively. With this auction, SBP has
achieved the following objectives 1) Wiping off full inflow of
PkR106bn, 2) Keeping the money supply growth under check, and 3)
ensuring positive real interest rates. Year-to-date (June 6th),
money supply growth has been recorded at 15.35% as compared to
full-year nominal GDP growth rate of around 17.5%. However,
inflation statistics for the month of May-05 will be released on
Jun-11, which will set the direction for future interest rates. We
expect inflation for the month of May-05 to remain around 8.0% YoY.
With this, we also expect 6M T-bill rates to remain around 8.0% by
the end of current fiscal year.
PTCL: WILL BID PRICE EVENTUALLY NOT MATTER?
Are we reaching a stage where privatization price
of PTCL no longer remains the focal point for market participants?
With each passing day, things at PTCL seem to be getting from bad to
worse and seemingly progressing towards the worst. Delay in
privatization was probably the best that a sadist could have hoped
for last week. Within the course of the week, however, pessimism has
scaled newer heights. No one seems to be talking about the bid price
any longer. In such a scenario it is quite possible that execution
of the transaction or otherwise becomes the focal point of
privatization rather than the price.
Mkt. Cap (US $ bn)
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KSE 100 Index
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