CAPITAL MARKETS

 

1- FOREX KERB WATCH

2- CFS WEEKLY REVIEW

3- FINEX WEEK

4. STOCK WATCH
5. STOCK MARKET AT A GLANCE
6. PAKISTAN WEEKLY REVIEW

 

PAKISTAN WEEKLY REVIEW

 

AlFalah Securities (Pvt) Ltd.
Monday, Sep 19, 2005-Friday, Sep 23, 2005

 

BOARD MEETINGS

COMPANY

DATE

DAY

TO CONSIDER

Fecto Cement Limited

26.09.05

Mon

Yearly Accounts for the year ended June 30, 2005.

Mari Gas Company Limited

26.09.05

Mon

Annual Accounts for the financial year ended June 30, 2005.

Javed Omer Vohra & Co. Ltd.

26.09.05

Mon

Annual Audit Accounts for the year ended June 30, 2005.

Askari Leasing Limited

27.09.05

Tue

Yearly Accounts for the period ended June 30, 2005.

Pakistan Telecom. Company Limited

27.09.05

Tue

Annual Accounts for the period ended June 30, 2005.

Japan Power Generation Ltd.

27.09.05

Tue

Annual Accounts for the period ended June 30, 2005.

Baluchistan Glass Limited

27.09.05

Tue

Annual Audit Accounts for the year ended June 30, 2005.

Askari Leasing Limited

27.09.05

Tue

Annual Accounts for the year ended June 30, 2005.

Pakistan Engineering Co.

27.09.05

Tue

Audit Accounts for the year ended June 30, 2005.

Callmate Telips Telecom

27.09.05

Tue

Annual Audit Accounts for the year ended June 30, 2005.

Nakshbandi Industries Ltd.

28.09.05

Wed

Annual Audit Accounts for the period ended June 30, 2005.

Noor Sild Mills Limited

28.09.05

Wed

Annual Audit Accounts for the period ended June 30, 2005.

S. G. Power Limited

29.09.05

Thu

Annual Accounts for the year ended June 30, 2005/declaration of any entitlement / any other corporate action.

Pioneer Cement Limited

29.09.05

Thu

Audit Accounts for the financial year ended June 30, 2005.

Sui Northern Gas Pipelines

30.09.05

Wed

Annual Accounts for the year ended June 30, 2005.

Sui Northern Gas Pipelines

30.09.05

Wed

Annual Accounts for the year ended June 30, 2005.

MARKET FOCUS

THE OIL SLICK

OMC MARGINS-THE COST AND THE BENEFIT:

In the light of the meeting between the Prime Minister and the OCAC members, there are rumors that the fixed margins of 3.5% for the OMC's may be reduced to 3%. However, it is our view that this will not take place for the following reasons. Firstly, if the government is attempting to pass on this reduction in OMC margin to the consumers, then this reduction is very minimal and amounts to a mere PKR 0.1. This reduction in prices would have close to no impact on the consumers. The differences in secondary freight margins between OMC's at present times is already PKR 0.07-0.1 for which SHELL at times charges a marginally lower or higher price than PSO. Also in regard to this, the OMC companies would take a hit of PKR 1.15 billion in gross margins where as they are already taking a hit on Price differential claims in the sense of opportunity costs which at levels of 8.5% interest rates and annual PDC levels of PKR 20 billion, would amount to PKR 1.7 billion.

MARGINAL PERCEPTIONS:

Also, popular perceptions are that the PDC being provided by the government on petroleum products has no impact on the OMC's. The reasoning behind this perception is that if there is any positive difference between the Retail price the OMC's wish to set and that of what the government wishes to set, then that difference is given back to the OMC's as compensation in the form of PDC for selling below cost. However what is not realized is that firstly the margins which are given to the OMC's are fixed at a rate of 3.5% of the retail prices. Therefore, in such a case, the margins on OMC's would be higher on say PKR 39/Litre for HSD rather than on PKR 35/Litre. The margins on PKR 39/litre would be PKR 1.365 per liter where as on PKR 35/Litre it would be PKR1.225 per liter.

The Impact: If assume that there is a 4% growth in the demand for HSD in FY06 which would make total consumption of HSD 8042,000 M.tons, then the loss to OMC's on their gross margins from just the sale of HSD would amount to nearly PKR 800 million. If we were to add the losses from Kerosene this loss would add up to about PKR 1 billion. Therefore, though the subsidies are good for the end consumer, the parties which are actually taking a hit are the government and the OMC's.

Deep Impact: In addition to this due to lower gross margins, higher political risk due to uncertainties, in the wake of privatization our calculations show that if the price of PSO is discounted further due to reduction in margins and political uncertainty, the government stands to lose approximately PKR 5 billion. This calculation has been done on the assumption that 51% of the stake in PSO is going to be sold and that reduction in margins as well as uncertainties would reduce fair values for PSO by approximately PKR 50. In addition to this, the image of the country in would also be tainted and other privatizations could well be hampered. Therefore even if PKR 1.15 billion worth of gross margins can be given back to the consumer, out of a total sales revenue for the industry of PKR 330 billion in FY05, the amount would be minimal, and the impact of the loss of PKR 5 billion in privatization proceeds could be more costly than just the monetary value.

ECON FOCUS

GREENBACK RESERVES UNDER THREAT

Balance of Trade and Current account worries: Pakistan's trade balance soared to 1.5 billion for the first two months of this fiscal year, with imports reaching USD 4 billion while exports are stagnant at USD 2.5 billion. The full year trade deficit target of USD 4 billion looks set to be well overshot. Much of the excesses come from the oil and machinery import bills, while export growth has remained largely stagnant. In the past last year, however, a large trade deficit of USD 6 billion did not translate into a parallel increase in the current account. This was due to home remittances of over USD 4 billion, which largely offset the trade imbalance. The trend emerging this year is not so favourable. Remittances, as we had previously predicted, are levelling off at the previous fiscal years levels. The July-Aug foreign remittances amounted to USD 662 million, just 2.56% up from July-Aug 2004. The full year remittances for the current fiscal year are projected to remain around USD 4 billion. With the revised trade deficit at USD 8 billion, the projected current account deficit looms large at USD 4 billion.

Inflation down but not out: Inflation figures for August 2005 show an 8.41% rise in YoY CPI. The notable decrease is in food inflation, which came down from 14.6% in July-August 2004 to 7.8% in July August 2005. Taking July-August together, however, CPI inflation still stands at 8.7% for the first two months of this fiscal year. This is against a full year target of 8%.

Double impact on forex: The high current account deficit and high inflation are exerting a dual pressure. The SBP wants to maintain our stock of foreign reserves above the USD 12 billion marks. Persistent inflation is not allowing the SBP to let the rupee depreciate. Hence, it counters the depreciation pressures by selling dollars and buying rupees. The ever-expanding current account deficit puts a further drain on foreign reserves.

The capital account solution- FDI and portfolio investment: The first best solution to the problem would be to attract greater amounts of FDI. Although FDI is up by 107% YoY for the first two months of this fiscal year to USD 225 million, the govt is worried that some of the privatisation proceeds from Etisalat and other foreign firms would be raised within the local banking sector. This would not mean inflow of much coveted foreign exchange. Portfolio investment is also up by 548% in the first two months of the current fiscal year to USD 65 million. The downside is that portfolio investment is known as "hot money" and by nature very fickle. The Govt. also has an option of buying dollars from the banks that are offering them a discount of 3%. The downside of that, however, is that the banks use the rupees they receive in buying T-bills for which the SBP pays an interest rate in excess of 8%. Thus, just keeping the country's forex reserves stable is costing the SBP in excess of 5% interest.

International capital markets- Sukkuk and Eurobonds to the Rescue: For the short-term, the govt is looking towards borrowing from the international capital markets. Eurobonds worth USD 500million and Sukkuk bonds worth USD 600 million have already been sold. The govt is also planning another sale of eurobonds in the near future and is also considering listing of Pakistani blue-chip companies in international stock markets.

Libor rising- interest rate caps are the order of the day: Our international borrowing has historically been taken place through multi-lateral donor channels. But these loans come with many strings attached. On the back of impressive economic growth and enhanced international credibility, the govt wants to tap the international capital market as a new source of funding. However, rising international interest rates are posing a problem now. The Sukkuk bonds were issued on a floating basis, at a 220 basis points premium to LIBOR. With LIBOR rising and expected to rise further, the govt is now actively looking to hedge its interest exposure on these bonds. Buying interest rate caps is one option. This will put a ceiling to the govts interest rate exposure. Of course the interest rate cap comes at a price, and the hedging shall only be rational if the expected benefit (from interest savings) is more then the price of the interest rate cap. But for now, this seems like the most effective means of protecting our 12 billion stockpile of greenback. The long-term repercussions of issuing foreign debt are of course debatable.

MARKET THIS WEEK

Exciting Times Ahead... This week's KSE activity can be fairly understood if we divide the sessions into two periods. Between Monday and Wednesday, the bulls completely took charge as the market saw an increase of 252 points with some scrips reaching record levels. But from Thursday onwards, selling pressure was witnessed in the market as the investors preferred to book their profits and purchase at lower levels.

The week closed at 8179.9 index level, up 3% from last week. Average volumes traded over the week increased from 351mn to 381mn shares (up 8.5%) and average weekly turnover of USD 622mn also registered an increase of 27%.

On Monday, the index went up 0.5%(38 points) to close at 7972. Intra-day volatility prevailed on the back of mixed effects from corporate announcements. OGDC's earnings, though in line with expectations (EPS of 7.67), went up 1.1% at PkR 110.45 on a higher-than-expected payout (Cash Dividend PkR 2.75). DGKC received severe beating after its below-than-expected result (EPS 7.82), closing down 4.7% at PkR 69.55. NML's result was another nail in the coffin (EPS 10.36), sliding the stock down 4.4% at PkR 86.95. Overall, the gas sector performed well with SSGC and SNGP closing up 1.1% and 3% respectively. NBP continued to remain hot among investors, generating highest volumes for the day to close up 3% at PkR 133.70.

Tuesday saw the Index handsomely breaching the 8000 barrier, up 1.2% from Monday. Share prices scored fresh gains, especially in cement, refinery and fertilizer sectors. As international oil prices surged 7%, our local refinery sector was quick to absorb this hike with PRL and ATRL closing up 5% and 3.2% respectively. DGKC, NML, OGDC and MLCF, after announcing their full-year results a day earlier, closed up 5%, 5%, 1.6% and 2.8% respectively. Cement sector's upside could be attributed to the World Bank's intended funding for the construction Kalabagh and Basha dams. Fertilizer sector also performed well, in line with the local urea demand, as ENGRO, FFC and FFBL closed up 4.4%, 3% and 2.2% respectively.

Volumes were up 70.4% on Wednesday, with all major scrips closing in positive zones. The index closed up 1.5%(120 points) at 8187. Oil related scrips registered handsome gains with PPL, PSO, POL, ATRL and PRL closing up 5%, 2.1%, 2%, 3.5% and 5% respectively. Banking sector performed well with NBP, BOP and MCB closing up 3.2%, 1.9% and 1.43%. PTC did well to close up 2.1% (PkR 66.10) on the back of rumors of Etisalat's payment on Sep 26. But star of the day's show was OGDC, which single-handedly moved the index up 25 points and contributed 13.8% to the total volumes.

Thursday's market kicked off positively with PSO, POL, NBP, BOP and PPL performing well. However, selling pressure gripped the market at close, mainly on the back of !)Two bomb blasts that rattled Lahore city and 2)Etisalat's uncertainty over PTCL's payment, closing the stock 2.3% down at PkR 64.55. The total volumes in terms of traded value reached rocketing high of USD 949mn, up 33%. This was the highest level ever reached after March 16, 2005.

Volatility was observed on Friday as the index closed down 0.07% at 8179, with a drastic decline of 41% in volumes. The day's highlights were 1)Rumors of reduction of OMC margins causing selling pressure in PSO and SHELL, closing down 3% and 1.5% respectively 2)FFBL, the volume leader, closing up 3.4% at PkR 36.90 mainly on the back of increased DAP demand and FFBL being the only local producer, and 3)Banking sector maintaining its upward spree with NBP and BOP closing up 1.7% and 0.35% respectively.

OUTLOOK:

At current levels, market looks heavy. Sentiments do remain positive but we believe that the market is at a point where it is highly sensitive to even a slightly negative news. With full-year results of PTCL (BoD Sep. 27) and SNGP (BoD Sep. 30) to be announced, any lower-than expected result would lead to an overall selling pressure. Moreover, no news from Etisalat's front on PTCL's payment is also a cause of concern. So we recommend playing cautiously. Selective cherry-picking strategy is advised. Our picks for next week are SNGP, NBP, POL and PSO. Exciting times ahead indeed!

Weekly

w-3

w-2

w-1

w

 

Forex Reserves (USD mn)

12,419

12,447

12,406

12,627

Exch Rate:

Exch Rate: PkR/USD

59.70

59.78

59.760

60.760

PkR/Euro

72.98

72.47

73.39

72.34

Monthly

Apr-05

May-05

Jun-05

Jul-05

Interest Rates

3m T-bill

7.2%

7.60%

7.48%

7.69%

6m T-bill

7.8%

7.95%

7.94%

7.97%

12m T-bill

8.3%

8.45%

8.40%

8.69%

Inflation

CPI (YoY)

11.1%

9.8%

8.74%

8.99%

Money

Currency in Circulation (YoY)

15.1%

Na

Na

Na

Deposits (PkR bn)

2290

2320

2355

Na

(YoY)

20.49%

19.4%

18.2%

Na

Loans (PkR bn)

1720

1752

1759

Na

(YoY)

37.5%

36.7%

32.8%

Na

M2 (YoY)

14.1%

Na

Na

Na

External Balance

Exports (USD mn)

1301

1384

1541

1272

(YoY)

Na

Na

23.4%

-17.4%

Imports (USD mn)

1903

2033

2241

1996

YoY

Na

Na

20%

-10.9%

Trade Balance (USD mn)

-601.5

-648.7

-699.5

-724

Yearly

2001

2002

2003

2004

2005

GDP (USD bn)

58.51

63.50

67.70

69.07

75.29

GDP growth

1.84%

3.10%

5.11%

6.40%

8.4%

Agricultural Growth

-2.2%

0.1%

4.1%

2.6%

7.6%

Services Growth

4.76%

5.30%

5.24%

5.49%

7.9%

Manufacturing Growth

9.3%

4.5%

6.9%

13.4%

12.5%

Population (mn)

143

146

148

149

152.5

GDP per capita (USD)

408.6

433.9

457.4

463.6

503

Trade Balance

Imports (USD bn)

10.202

9.434

11.333

15.47

20.6

YoY

6.2%

-7.5%

20.1%

36.5%

32%

Exports (USD bn)

8.933

9.14

10.889

12.27

14.4

YoY

9.1%

2.3%

19.1%

12.7%

17.1%

Trade Balance (USD bn)

-1.269

-0.294

-0.444

-3.2

-6.2

Current Account (USD bn)

-0.513

1.33

3.16

1.73

-1.9

Remittances (USD mn)

1087

2389

4236.85

3800

4168