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3 DAYS FORECAST
In oC

CITIES MIN MAX

HUM%

FOR.

KARACHI
Today 12 26 38 Sunny
Tomorrow 11 27 38 Sunny
Day after 11 28 38 Sunny
LAHORE
Today 1 20 87 Sunny
Tomorrow 2 20 87 Sunny
Day after 2 21 87 Sunny
ISLAMABAD
Today 0 18 59 Sunny
Tomorrow 0 18 59 Sunny
Day after 0 21 59 Sunny
HUM%: Humidity In %
FOR.: Weather Forecast
updated: Fri - Sun 23-25 Dec, 2005

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  CAPITAL MARKETS
 
 

 

 

 

 
 PAKISTAN WEEKLY REVIEW

AlFalah Securities (Pvt) Ltd.
Monday, Sep 26, 2005-Friday, Sep 30, 2005

 

BOARD MEETINGS

COMPANY

DATE

DAY

TO CONSIDER

Gul Ahmed Textile Mills Limited

01-10-05

Sat

Account for the period ended June 30, 2005.

Tobacco International Ltd.

03-10-05

Mon

Account for the period ended June 30, 2005.

Southern Electric Power Co.

03-10-05

Mon

Account for the period ended June 30, 2005.

Sitara Chemical Industries Limited

03-10-05

Mon

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

Sitara Energy Limited

03-10-05

Mon

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

Ghani Glass Limited

03-10-05

Mon

Annual Account for the year ended June 30, 2005.

Dandot Cement Co. Ltd.

04-10-05

Tue

Annual Account for the year ended June 30, 2005.

Nishat (Chunian) Limited

05-10-05

Wed

Audit Account for the year ended June 30, 2005.

Ghandhara Industries Ltd.

05-10-05

Wed

Annual Account for the year ended June 30, 2005.

Pak Electron Limited

06-10-05

Thu

Annual Account for the period ended June 30, 2005.

Sapphire Fibres Limited

06-10-05

Thu

Audited Accounts for the nine months ended June 30, 2005 / declaration of any entitlement.

Sapphire Textiles Limited

06-10-05

Thu

Audited Accounts for the nine months ended June 30, 2005 / declaration of any entitlement.

Chenab Limited

07-10-05

Fri

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

Shell Gas LPG (Pakistan) Limited

19-10-05

Wed

Quarterly Account for the period ended September 30, 2005 and for declaration of any entitlement.

Rafhan Bestfoods Limited

20-10-05

Thu

Financial results for the 3rd Quarter ending September 30, 2005.

Unilever Pakistan Limited

26-10-05

Wed

United 3rd Quarter financial results for the period July 2005 to September 2005.

KSE-100 WEEKLY MARKET PERFORMANCE

CAPITAL MARKET SHAKER?

The PTCL stock has the second-largest Market Capitalization on the Karachi Stock Exchange and has been one of the main market drivers along with OGDC over the past 2-years. If Etisalat fails to take-over, then not only will PTCL fair valuations be brought down, but it will be cast aside as a fixed-return stock, rather than a market mover. In case of Etisalat pullout, it seems that any further attempts to privatize this company will have to wait for at least a few years, and the bids received will be even lower than the lowest bids received today, vis--vis a de-regularized environment. Hence any news in the negative regarding Etisalat's payment will severely dent the markets upward drive, and the season of Cherry-Picking of second-tier stocks will await the fate of the KSE, until a new star appears on the sentiment horizon.

THE LATEST ?

"The deal is not off yet" Etisalat's spokesman blurted out in response to intense media speculation over Etisalat's intended pullout from the Pakistan Telecommunications Co. USD 2.69 bn bid. Later on that same date (September 29th) (PTCL). Etisalat Communications Director, Mr. Ahmed bin Ali said that Etisalat is in negotiation with Pakistan Telecom to clear out some serious issues, and a one month timeframe has been given for this purpose. What has gone wrong and who is responsible?

WHO WILL BE THE LOSER?

Any fallout on the PTCL privatization deal will be disastrous for both Etisalat and the Government of Pakistan (GOP). For the GOP, it presents a serious risk, that the whole privatization process will be derailed. For Etisalat, it will mean that it will not be taken as a serious contender for privatization, anywhere else it seeks to expand. The stakes are hence immensely high on both sides. The GOP has placed a lot of hopes on the success of its privatization program to (1) Provide funds for Debt Reduction (2) Attract Foreign Direct Investment (3) Present Pakistan as having a favorable business environment. With the Privatizations of heavyweights Pakistan State Oil, Pakistan Petroleum Limited and other entities in the pipeline, it will not be surprising if the top echelons in the government will be trying vehemently to reach a solution. Etisalat meanwhile is also bidding for a 35% stake in Tunisia's second largest telecom company, as well as seriously eyeing the Egyptian market. With its local market saturated, and a second telecom operator licensed in the UAE, finishing Etisalat's monopoly, the company is desperate to expand into new markets to maintain its earnings growth. A good reputation is hence very important.

ISSUES AT THE STAKE?

Both the Privatization Commission and Etisalat are mum over the exact nature of their dispute, which apparently relates to some items in the contract. We believe that since Etisalat knows the importance of its payment to the GOP, it is trying to draw out some last minute concessions. The major issues we feel under discussion are; (1) Staggered Payment Options (2) Duty free import of telecom machinery (3) Pledging of purchased shares for further finance (4) Rights to buy additional Class 'A' shares. By not announcing a dividend the government seems to have met at least one of Etisalat's demands, and shows that it is prepared to go to some distance to get this transaction through. But the October 28th deadline is just as far as it can go as the government can't afford to look too lax. Staggered payment options would seem to be the most contentious issue, because even a three year time frame will mean that the time value of monetary payments will become considerably lower than if it is paid today. Apart from these, there may be some off the key, news such as Union tussles which may be hindering a management takeover. Some Unions have now started raising there voices again, demanding even more compensations and it is clear that these voices will become stronger if uncertainty persists. The question is bound to arise, whether all these issues had been taken into account in the pre-take-over agreements.

WHOSE FAULT IS IT?

When the bid of USD 1.96 per share was announced on National Television, a celebratory mood seemed to have gripped the government and financial circles. It was however plain for all to see that Etisalat had overpaid. The second highest bidder China Mobile could only quote USD 1.06 per share. Furthermore the market consensus of the analyst community had placed PTCL's fair value at around USD 1.15-1.20 per share. Even taking into account a strategic stake, a premium of 63% over fair values seemed to portray the Privatization Commission as an angel. Etisalat had clearly made a miscalculation but stories of Petrodollar mania had swept any issue relating to the greenback finance under the carpet. It may quite be possible that the recent revamping of the Etisalat board signals some disenchantment within the UAE government over the size of the payment committed to. This seems surprising in the light of the good diplomatic relations between the two countries, and that financing by a consortium of seven banks had already been arranged. If the pullout rumor turns out to be correct, we could witness a descent into an ugly blame game, with disastrous consequences for both stakeholders. The GOP it appears cannot be found at fault, but if there are certain elements in the shareholder's purchase agreement or other pre-takeover agreements which have not been fulfilled, then we should see a move towards a resolution of those issues within certain limits. It is thus hoped that wording of the contacts will not be unjustifiably scrutinized by either party and that a quick amicable resolution is worked out.

BALANCE OF TRADE AND CURRENT ACCOUNT WORRIES:

TRADE IMBALANCES DEEPENING:

We have been witnessing a deprecation pressure on the rupee for some time now. The reasons- an expanding trade deficit and remittances leveling off. With its USD 12 billion stock of foreign reserves, the govt is trying hard to keep the rupee stable. But with oil prices at a sustained high and machinery import to maintain BMR also taking place consistently, the SBP is fighting a losing battle. We are experiencing a trade imbalance and by not allowing the currency to depreciate, the central bank is not allowing market prices to reduce the distortion.

DEPRECIATION WOULD BE ACCOMPANIED BY COST-PUSH INFLATION:

The SBP logic in keeping the exchange rate relatively stable is that any depreciation would result in much dreaded cost-push inflation. This is due to the relatively inelastic nature of both Pakistan's imports and exports. The central bankers are fearful that depreciation would increase the oil and machinery import bill while the export revenues would not increase significantly. To an extent, this traditional logic makes sense.

EXPORT PROMOTION IS THE ADVANTAGE:

But in the post-WTO textile regime, the time is ripe to translate our comparative advantage into a competitive advantage. If we do allow our exchange rate to correct, Pakistan can hope to move away from our import substitution model of development and move to the more successful export promotion version.

FOREX RESERVES TAKING A BEATING:

Regardless of which argument is more intuitive or economically rational, maintaining exchange rates in the face of growing current account imbalances is eventually going to drain our reserves. We estimate that imports for this fiscal year should be around USD 24 billion. USD 12 billion in forex reserves amounts to 6 months of imports, and is falling. While it is not known how comfortable the State Bank would be with reserves of less then two months worth of imports, an educated guess would be in the negative. Thus, even if the central bank does allow reserves to fall in the neat-term, in the medium to long-term it is not a sustainable option. We cannot continue distorting true market signals indefinitely with a diminishing forex reserve base.

2-3% EXCHANGE RATE DEPRECIATION NEEDED BY END OF THE YEAR:

In our view, inflation is on its way down, if only gradually. Ramadan might be a small blip in the way, but aside from that, we see inflation coming down to around 8% for the month of Dec. Once the downward trend in inflation is confirmed, the SBP shall by the beginning of next year be in a position to allow the exchange rate to slide by around 2-3%.

CAPITAL FLIGHT OR CAPITAL INFLOW- THE ROLE OF TIMING AND EXPECTATIONS:

Of crucial importance in this chain of events is both timing and expectations. If the investing public expects a future depreciation of the rupee, capital flight shall ensue and the expectation shall become a self-fulfilling prophecy, resulting in actual deprecation to stop the capital outflow. Or interest rates would have to be raised further, which could dampen growth prospects.

STABILITY VERSUS SUSTAINABILITY:

An unexpected depreciation of the rupee on the other hand would result in a capital inflow. Our foreign portfolio investment should increase. Thus, it is of paramount importance for the SBP to come across as sincere in their efforts to keep the rupee relatively stable. Once inflationary pressures seemed to have eased off meaningfully, SBP should allow depreciation of the rupee. Make no mistake; we are not advocating constant depreciation of the rupee, as the IMF frequently demands. That is wholly inappropriate for a country with the inelastic import and export portfolio that Pakistan has. As long as the SBP has sufficient reserves, it should try to maintain the exchange rate within a certain band. But stability is only desirable if it is sustainable, and at the moment, exchange rate stability is not.

WHEN INFLATION COMES DOWN- TIME TO BUY THE BUCK:

Our forex recommendation is to look keenly at inflation figures. As soon as a discernable and meaningful downward trend can be observed, we would recommend buying US dollars. Given our prediction of 2-3% depreciation early next year, this investment promises to deliver a smart return in a short span of time.

This week the index slowly and steadily moved up 45 points or 0.56% to close at 8225 level. Average volumes traded over the week declined by 12.8% to 333mn shares from 381mn shares last week. Average weekly turnover also decreased by 14.9% to USD 529mn.

This sluggishness stunted the market's upward drive, mainly because of the negative news on the PTCL front of Etisalat pulling out from PTCL's bid on the basis of various issues cited. Moreover, SECP gave a verdict to the KSE to ban member-to-member trade effective Oct 10 which further dampened the sentiments.

SECP's decision to ban member-to-member trade reflected in Monday's activity as volumes shed by 26% at USD 417mn. Index closed up 0.46% at 8217 level. PTC, on its good dividend expectations (Full-year DPS of 5.5), was the out performer, both in terms of volume and price, as the scrip closed up 2.2% at PkR 66.05 and contributed 23.5% to the total volumes. DGKC was up 4.3% at PkR 73.50. ENGRO, on expectations of expansion subject to gas allocation, moved up 3% at PkR 143.15.

On Tuesday, the index closed down 0.28% at 8194 level. Activity was quite lifeless on the back of long-awaited PTCL result, only to be announced near the sessions close. Moreover, Etisalat payment rumor dampened any positive sentiments. Cement sector was the out performer with LUCK, DGKC, PCCL and DCL closing up 5%, 1.29%, 2.62% and 6.67% respectively. Apart from PTC, major activity was concentrated in side scrips such as NML and FFBL, closing up 0.76% and 4.3% respectively. PTCL full-year announcement of EPS 5.22 and nil dividend was contrary to the market expectations of EPS 5.8 and dividend 3.50. As a result the scrip received severe beating, closing down 3.1% at PkR 64.

After the disappointing result by PTC, market remained lackluster for the entire day on Wednesday with minor active spikes at the end. Index remained flat on the 8195 level. Market opened in the positive however profit taking soon set in. Banking sector took the major hit especially NBP and MCB, to close down 1.9% and 1.8% respectively. Cement sector continued to perform well with LUCK, DGKC, and DCL closing up 0.3%, 1.6%, and 6.3% respectively. Major gainers for today were PAKRI, CTTL and DCL. As expected, PTC came off 1.4% at PkR 63.10.

Mixed sentiments lead to another volatile session on Thursday as the index went down 0.5% at 8217 level. Volumes reached the week's high at USD 752mn. The days highlights were 1) Rumours of resignation of SECP Chairman, creating some positive sentiments across board 2) Handsome rally in banking and oil sector with POL, NBP, BOP and BAFL closing up 2.7%, 1.2%, 1.2% and 2.1% respectively 3) PTC severely hammered on its sell off being delayed to Oct. 28, coming off 4.9% at PkR 60.

Friday saw the index progressing 0.9% at 8225 level as buying interest seem to be common in most scrips. All major scrips closed in the green zones. PTC recovered slightly on its publication (Khaleej Times) that Etisalat will not back out from the deal. The scrip closed up 2.5% at PkR 61.50. Cement sector traded strongly, with LUCKY and DGKC closing up 2.8% and 4.9% respectively. Banking sector continued to invite fresh buying as NBP, BOP and MCB closed up 3.1%, 1.6% and 1.5% respectively. Announcement from SNGPL (EPS 5.52, Div. 30%) lead the scrip to close up 2.4% at PkR 64.40.

OUTLOOK:

PTC so far has not affected the market to a great deal and positive sentiments in other stocks have been improving the index. Although PTC did try to pressurize the index, it was compensated by handsome upsides in the banking, cement and oil sector. Keeping in view the prevailing sentiments, we see an upside. However, direction of the market will also depend on the way PTC issue is resolved. While the issue is resolved, we do not expect any negative news next week. However one should keep in mind that the stock prices are getting close to their fair values so there may be a deck on this progression once there has been an upside of another 2 to 3%. Our picks for next week are LUCKY, NBP, SNGP, PICIC and UNBL.

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

 
 

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