AlFalah Securities (Pvt) Ltd.
Monday, June 13, 2005-Friday, June 17, 2005




The KSE-100 Index closed up 14% since last week closing at 7398.43. The week remained pivotal for the market with massive expectations vested in the index taking an upward trend with the Pakistan Telecommunication Ltd (PTCL) finally materializing. However, the index remained range bound unable to cross the 7500 barrier, however, it found support at around 7300 level. The volumes were unable to back the hikes as the investors remained side-lined. Bringing the much anticipated privatization finale to an anti-climax. The average volume for this week (202 mn) remained well below the trading volumes for the previous weeks. The value traded was in a relatively higher region (USD 367 mn) The market was majorly hindered by the lag between the COT/ Badla phase-out and the induction of margin financing into the system. If the Badla phase out had been implemented after the privatization process, the market could have taken an upward trend.

While reacting contrary to expectations, the market did open at positive levels induced by the announcement of the new privatization date of June 18. On the subsequent days the index remained oscillatory. The major catalysts were the liquidity crunch induced by COT/ Badla phase-out, agreement reached by the PTC union and government. The market then reacted positively to the submission of earnest money by the three main bidders; SingTel, Etisalat and China Mobile. This positive development spelt a hike for Pakistan State Oil (PSO) which is next in line for privatization. Pakistan Petroleum Ltd (PPL) was also actively traded with news of offshore discovery and the latest rumors of discovery at Thal. The scrip gained 5% closing at PkR. 213.5.

OUTLOOK: Neutral, we expect the index to remain range bound (7300-7500) next week.

The privatization process continues to be the major mover of the market. The market still seems to be in the hang-over of the March crash. Investors still seem to be nursing scars from the crash and utilize any positive news flows to exit the market. Privatization of PTCL has become a card, which the speculators seem to be utilizing in both ways. The market went up with the news of new bidding date but dipped down on the back of news of only three bidders paying up the earnest money. The price fluctuations in PTCL is indicative of the high risk and volatility it caries. We believe that investors should remain away from the stock and avoid the excessive risk. We have been advising our clients since the last few months that the market would remain range bound and investors should remain sideline until end-Aug-05. Nevertheless, the long-term benefits from privatization should not be underestimated. We believe that privatization will not only improve the quality of service and bring efficiencies in the telecom sector it would also lead to inflow of foreign investment. Contrary to the perception that the boom in the economy has been driven by liquidity influx triggered by 911, we credit the macro-economic and financial reforms to be the main stimulus for the current growth cycle. Further reforms in other sectors and entry of foreign players can help sustain the economy on a high growth path.


At the sake of sounding like a broken record, we reiterate that the privatization rally around PTCL has historically shown to be a speculators trump. In a news-flow and rumour driven market like our, investing in such volatile scrips may not be advisable. In the last week the stock price of Pak Telecom has been fluctuating like a Yo-Yo. On the news of new privatization date, the scrip remained under bull's control on Monday and Tuesday, then news that only three bidders have submitted earnest money, brought the scrip down. It is very likely that once the company is privatized, the stock would once again rally up in the first few days of the next week. However, we advice our clients to stay away from stock as it carries huge risks. By Monday, the situation on the privatization would be clear. We expect the bidding price to be depressed and range around USD1.2-USD1.3 per share. In our report, PTCL: Who is Who? We highlighted Ehtisalat and SingTel as the main players and it comes as no surprise to us as these two along with China Mobile have deposited the earnest money for the bidding. The fundamental valuations of PTCL would change depending on who eventually acquires the management stake. We expect around 13% maximum upside to the current price target. We consider privatization of PTCL a risky option to rally upon and advice our clients to avoid any rally driven by speculative expectations.




The last few weeks have been very interesting as most negative triggers, which were being anticipated, have not materialized. The Budget FY06 came as a positive surprise and no additional CVT was imposed on the capital market. The data for inflation (CPI-May) which came out on Wednesday also was positive for the market, as the CPI increased by 9.8%YoY as compared to 11%YoY a month earlier. Core inflation increased by 7.9%YoY as compared to 8.4%YoY in April. The other threat to the market was a rise in 10-year PIB yield. However, the government scrapped the last PIB auction as well keeping the coupon rate on 10 year PIB tied at 7.9%. The biggest threat, which the market was facing, was a canceling in the privatization of PTCL due to the opposition of the unions. Now when this negative trigger has also been resolved, the market should react positively. However, last week whereas the index was up by 14%WoW, the volumes went down by 7%WoW. We believe that this is an indication that the hang-over from the March-crash is still not over. The phasing out of COT is playing large on investors psyche. Most investors still have large holding of investments bought at higher prices, which they would like to get rid off. Hence, each positive rally is being utilized for an exit from the market. We think that the market would remain range bound till August 05 and have been advising our clients to avoid any speculative rally. Stocks like National Bank of Pakistan, Pak Suzuki Motors, Fauji Fertilizers and Pakistan Oil Field still remain below their fair values and remain our preferred stocks.


In the beginning we highlighted the risks associated with the privatization of PTCL. However, we do not doubt the long-term benefits, and gains from privatization. The telecom sector is likely to get more competitive leading to improvement in quality of service and growth for the sector. The experience of privatization in the banking sector in the late 90's shows that privatization and entry of foreign players can lead to significant efficiency gains. Privatization of PTCL and other key entities would also open the economy for further foreign investment. Table below shows the overall inflows in terms of foreign investment in the economy through upcoming and on-going privatizations. The economy can get around USD3.5bn from privatization proceeds of these entities. This massive influx of foreign investment, along with efficiency gains, which it brings in, would be able to keep the economy on a sustained high growth level.




Pakistan State Oil


Pak Petroleum Limited


National Refinery Limited


Kanooz Al Watan


Pak Telecom




Source: Alfalah Securities Research