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Day after 2 21 87 Sunny
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Day after 0 21 59 Sunny
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updated: Fri - Sun 23-25 Dec, 2005

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 PAKISTAN WEEKLY REVIEW

AlFalah Securities (Pvt) Ltd.
Monday, Oct 17, 2005-Friday, Oct 21, 2005

 

BOARD MEETINGS

COMPANY

DATE

DAY

TO CONSIDER

Indus Motor Company Limited.

22-10-05

Sat

Quarterly Accounts for the period 1st July, 2005 to 30th September, 2005.

Clover Pakistan Limited

22-10-05

Sat

Quarterly Accounts for the period ended September, 30th 2005.

Pakistan Income Fund

22-10-05

Sat

Quarterly Accounts for the period ended September 30, 2005.

Pakistan Stock Market Fund

22-10-05

Sat

Quarterly Accounts for the period ended September 30, 2005.

Pakistan Capital Market Fund

22-10-05

Sat

Quarterly Accounts for the period ended September 30, 2005.

Pakistan Strategic Allocation Fund

22-10-05

Sat

Quarterly Accounts for the period ended September 30, 2005.

Dadabhoy Cement Industries

22-10-05

Sat

Quarterly Accounts for the period ended September 30, 2005.

Askari Commercial Bank Ltd.

24-10-05

Mon

Accounts and to review the overall performance of the Bank for the 3rd quarter ending September 30, 2005.

BOC Pakistan Ltd.

24-11-05

Thu

Fourth Quarterly Accounts for the period ended September 30, 2005.

Packages Limited

24-10-05

Mon

Un-audited Accounts for the third quarter ended September 30, 2005.

Mari Gas Company Limited

24-10-05

Mon

Account for the 1st quarter ended September 30, 2005.

Shell Pakistan Limited

25-10-05

Tue

Quarterly Accounts for the period ended September 30, 2005.

The Bank of Punjab

25-10-05

Tue

Quarterly Account for the period ended September 30, 2005.

Baluchistan Wheels Limited

25-10-05

Tue

Account for the 1st quarter ended September 30, 2005.

Fecto Cement Limited

25-10-05

Tue

Account for the quarter ended September 30, 2005.

Berger Paints Pakistan Ltd.

25-10-05

Tue

Account for the quarter ended September 30, 2005.

Pakistan Cables Limited

25-10-05

Tue

Quarterly Account for the period ended September 30, 2005.

Nimir Industrial Chemicals

25-10-05

Tue

Accounts for the quarter ended September 30, 2005.

Unilever Pakistan Limited

26-10-05

Wed

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

S. G Power Limited

26-10-05

Wed

Quarterly Accounts for the period ended September 30, 2005 / declaration of any entitlement / any other corporate action.

Nishat Mills Limited

26-10-05

Wed

Accounts for the 1st quarter ended September 30, 2005.

Ibrahim Fibres Limited

26-10-05

Wed

Accounts for the 1st quarter ended September 30, 2005.

Wazir Ali Industries Limited

26-10-05

Wed

Accounts for the 1st quarter ended September 30, 2005.

Sitara Energy Limited

26-10-05

Wed

Accounts for the 1st quarter ended September 30, 2005.

Sitara Chemical Limited

26-10-05

Wed

Accounts for the 1st quarter ended September 30, 2005.

Pakistan Refinery Limited

26-10-05

Wed

Accounts for the 1st quarter ended September 30, 2005.

Allwin Engineering Ind. Ltd.

26-10-05

Wed

Accounts for the 1st quarter ended September 30, 2005.

Sui Southern Gas Co. Ltd.

26-10-05

Wed

Accounts for the 1st quarter ended September 30, 2005.

Kohinoor Weaving Mills Ltd.

26-10-05

Wed

Quarterly Accounts for the period ended September 30, 2005.

Sui Northern Gas Pipelines

27-10-05

Thu

Accounts for the 1st quarter ended September 30, 2005.

Pakistan Petroleum Limited

27-10-05

Thu

Financial Results for the quarter ended September 30, 2005.

D. G. Khan Cement Co. Ltd.

27-10-05

Thu

Accounts for the 1st quarter ended September 30, 2005.

Pakistan Telecommunication Co. Ltd.

27-10-05

Thu

Quarterly Accounts for the period ended September 30, 2005.

Atlas Investment Bank Ltd.

27-10-05

Thu

Accounts for the quarter ended September 30, 2005.

Pak Suzuki Motor Co. Ltd.

27-10-05

Thu

Un-audited Accounts for the nine months ended September 30, 2005.

Millat Tractors Limited

27-10-05

Thu

Accounts for the 1st quarter ended September 30, 2005.

Nimir Resins Limited

27-10-05

Thu

Accounts for the 1st quarter ended September 30, 2005.

Fauji Cement Company Ltd.

27-10-05

Thu

Accounts for the 1st quarter ended September 30, 2005.

Dandot Cement Co. Ltd.

27-10-05

Thu

Accounts for the 1st quarter ended September 30, 2005 / declaration of any other corporation action, if any.

Gharibwal Cement Limited

27-10-05

Thu

Accounts for the 1st quarter ended September 30, 2005 / declaration of any other corporation action, if any.

Nishat (Chunian) Limited

27-10-05

Thu

Accounts for the 1st quarter ended September 30, 2005.

Security Papers Limited

27-10-05

Thu

Accounts for the quarter ended September 30, 2005.

Atlas Honda Limited

28-10-05

Fri

Accounts for the 1st quarter ended September 30, 2005.

MCB Bank Limited

28-10-05

Fri

Quarterly Accounts for the period ended September 30, 2005.

Bank Alfalah Limited

28-10-05

Thu

Accounts for the 3rd quarter ended September 30, 2005.

Hinopak Motors Limited

28-10-05

Fri

Accounts for the quarter ended September 30, 2005.

Saudi Pak Commercial Bank

29-10-05

Sat

Quarterly Accounts for the period ended September 30, 2005.

MARKET FOCUS

HSD - THE DUTY OF WHOM?

As of late the government is considering bringing down the duty on HSD from the present level of 10% to a level of 5%. In the wake of increasing local oil prices the Ministry of Petroleum and Natural Resources has proposed a cut on HSD since it is the major POL products consumed within the industry making over 50% of total POL consumption. The impacts if such a policy is approved would be widespread primarily affecting the government, refineries, OMC's as well as the end consumer.

GOVERNMENT - HIT ME ONE MORE TIME:

As per the pricing mechanism put into place, on HSD the government has applied a 10% duty on C&F levels involved in the pricing of the ex-refinery price. At present times the revenue from the duty which the government receives is only on crude oil which is imported and not on the local production. Imported crude oil for FY05 stood at 8.4 million metric tons out of which 32% is used in the refining of HSD. The total revenue for the government stood at PKR 4.14 billion in FY05 where as cutting the duty by 50% would bring down revenues to PKR 2 billion in FY05. The loss in terms on absolute values for FY06 would be greater than PKR 2 billion and could easily touch levels of PKR 3.5 billion considering the increased demand of HSD within the country which is expected to grow by 4% this year as well as increasing international oil prices which affects government revenues by inflating the C&F levels. Therefore in addition to the subsidy the government gives to POL consumers which for the 1QFY06 amounted to PKR 10.5 billion, the government would take an additional hit of approximately PKR 3.5 billion further in FY06 if these duties were reduced from 10% to 5%. However the impact on PDC would be positive for the government if it decides not to reduce local oil prices as the subsidy given to the OMC's would significantly reduce. With current levels of subsidy at PKR 2.3/Litre and with a reduction of ex-refinery price by PKR 1.45, the subsidy on HSD could in effect be reduced to PKR 0.85.

REFINERIES - A LOT MORE THAN JUST POCKET CHANGE:

The local refineries which stay afloat on differentials between crude oil prices and refined product prices as well as on the duties applied by the government on refined products such as HSD would in affect be negatively impacted by any reduction in duties. As stated earlier, the duty revenue only from local production is transferred to the refineries which makes up close to 20% of total crude oil refinement. If however the duty were to be reduced to 5%, a 15 day average of gasoline for the 2nd half of September gives us a FOB price of USD 533/Ton for HSD as shown in

After applying incidental charges as well as the 10% duty the ex refinery price works out to be PKR 30.83 where as at 5% duty levels the ex refinery price works out to be PKR 29.45. This difference of PKR 1.4 would be the hit that the refineries would take (at levels of USD 533/Ton) per liter produced from local crude oil. As a result the refineries would take a hit of approximately PKR 1.2 billion on their gross margins.

OMC'S - WHAT SHARE OF THE PIE IS OURS?

The impact on the OMC's in terms of margins would be zero if the government decides not to change the local oil prices. At present levels the OMC's are receiving PKR 1.3/ liter as margins and with a reduction in duties the government could at USD 533/ton levels reduce the price of HSD by PKR 1.45/liter which would reduce the margins per HSD liter by PKR 0.05. Also, a reduction in ex-refinery prices would reduce subsidies and thus the OMC's would also save on interest payments on short term financing as well as opportunity costs.

END CONSUMERS - BUY MORE, PAY LESS

The impact on the end consumers in terms of lower local oil prices for HSD could very well be on the cards. A reduction in duty on HSD reduces the ex-refinery price and therefore the cost to the OMC's per liter (assuming relatively constant international oil prices). As cost per liter reduces, assuming everything else to be constant, the price of HSD would be lower for the end user. HSD being the main driver of growth for the economy and being by far the most consumed POL product in Pakistan is a key input.

TRADE DEFICIT & INFLATION: - SLEEK MANEUVERING REQUIRED:

With a Month on Month annualized rate of inflation of 6% for September 2005 and trade deficit showing a 188% increase and standing at USD 2.4 bn for the first quarter of the fiscal year, we believe that the government can either control inflation or the trade deficit, but not both. Import liberalization for food imports should be allowed, while currency devaluations will only result in worsening inflationary pressures. For FY06. Rebuilding for the earthquake is necessary and while economic growth this year may not be hurt, the government will have to move carefully to ensure that reconstruction costs do not cloud its ability to achieve macro-economic variable targets in the coming years.

ALARM BELLS:

At a time when our economic managers can't stop gloating about the economy, the Federal Bureau of Statistics (FBS) released figures for the First Quarter 2005, which showed that the country's trade deficit has risen by a staggering 188 per cent to USD 2.4 billion during the first quarter (July-September) of the current fiscal year compared to USD 826 million for the same period last year. Further break has shown that exports in the first quarter (July-Sept) were up 20 per cent to $4.2 billion while the import bill rose by 52 per cent to $6.6 billion during this period. The main increase in imports came from capital machineries and Oil, while exports mainly rose on the back of textile demand created as a result of a still relatively high-growth world economy.

However rising oil prices are bound to slow down world economies, starting with a housing bubble toning down in the US, resulting in slowdown in Chinese Production demand and we may see a recession in the world economy for the next few years. For Pakistan matters have been complicated by the worst disaster in its history, and we have attempted to ascertain, some policies the government may need to follow to bring into line its inflationary targets.

THE QUAKE ON THE ECONOMY:- The Earthquake regions of Northern Pakistan and Azad Kashmir have been labeled as a breeding ground for unskilled labor and in taste which may not suit the occasion, the effect on the industrial and agricultural economy has been termed negligible. However, if a relatively conservative estimate for reconstruction is placed at around USD 7 bn, we expect not more than 40% of it to be comprised of foreign aid.

Below is a table of the major donors so far:

United States

USD 1000 mn

ADB

USD 400 mn

UN

USD 272 mn

Saudi Arabia

USD 133 mn

Kuwait

USD 100 mn

UAE

USD 100 mn

Domestic Sources

USD 50 mn

With donations in kind these figures aren't likely to cross the USD 2.5bn mark. Once the initial media gloss wears off, even the fall of the Berlin Wall takes a back seat and hence we can safely assume that the government would at least have to finance USD 1000 mn from its own budget every year (see our last weekly for details on budget deficit effects).

TRADE DEFICIT - Counting the needs: According to our estimates, based on a displaced population of 2.5 mn people and 200,000 homes destroyed, the imports of tents and blankets would come to about PkR 750 mn in the current year. Furthermore imports of life-saving medicine, predominantly painkillers would come to about PkR 2 bn (FY06). Then there will have to be imports of vegetables, fruits, cotton cloth and rice, which on a per capita consumption basis, we estimate at around PkR 5 bn for the current year. The biggest import jump however would most probably be in pre-fabricated construction material, as cement would not be the preferred material based on longer construction cycles and lax building rules(so ruthlessly exposed by the earthquake). Imports of such raw material would make up around 70% of the total house-building cost and on that basis, assuming that atleast 50,000 homes are built this year, the cost of pre-fabrication material input would be around PkR 25 bn. On the positive side though, with relief and rehabilitation activities in full flow, it is pertinent to mention that we have a surplus of JP1(used in aviation) and JP4 (used in military) and thus incremental imports on this front would be marginal if any. Thus based on the above calculations we revise our Trade Deficit target up by 532 mn dollars for this fiscal year taking the total trade deficit in excess of USD 8.5 bn. With remittances forecast at USD 4.5bn, the current account deficit will be stand at a high USD 4 bn.

THOU WILL NOT DEPRECIATE:

A large current deficit as projected above usually places pressure on governments to devalue their currency to try to jack up exports and curb exports. However demand for most of Pakistan's exports is inelastic with agricultural commodities and cotton cloth and yarn making up more than 50% of total exports. On the flip side Imports of oil and capital machinery is inelastic and we maintain our view that there will be a maximum of 2% depreciation in the coming 3 quarters, especially given the large cushion in foreign exchange reserves. Furthermore the inflationary pressures in the economy make it extremely unlikely that currency depreciation will be the government's mode of controlling burgeoning imports.

INFLATION - HOW TO TAME THE MONSTER:

For September 2005 YoY inflation went up by 8.53%. A more pertinent way of looking at matters is looking it at on a month by month basis. In September 2005, the CPI increased by 0.50 per cent over August 2005. On an annualized basis this comes to an increase in inflation rate of about 6% and if it goes on in the present vain, inflation could go well into double digits at 13% for the full year end.

However the Ramazan factor and the very fact that relief work for the many earthquake victims have jacked up prices of many essential commodities such as wheat and flour, sugar, construction materials, beef, chicken, onions and mutton, cannot be ruled out. However the government may have to move sometime to curb inflationary expectations which may have begun to built in, and for that the government would most likely take an export liberalization policy in the short-run especially for food items which comprise about 40% of the total Consumer Price index (CPI)

Other factors in the rising inflation include increase in prices of housing, food and POL prices which eventually disproportionately affect the poor. The increase in rents could possibly have a domino effect, with owners of houses demanding higher rents in response to an overall increase in general price level, while oil prices continue to break the back of industrial and individual consumers.

The government would do well to encourage alternate sources of energy, including speeding up oil and gas exploration activities and by announcing a dam construction policy. It should also work overtime to initiate low-cost housing societies for the poor and probably look towards legislation for implementing capital gains tax to bring down real estate prices (23% of CPI). A further interest rate hike to control could probably have the effect of suffocating the economy in the face of a stifling energy environment, and so to maintain economic growth certain hard measures will have to be taken.

MARKET THIS WEEK

Bears took the market by storm as the index closed down 570 points or 6.4% wow at 8290 level. This downside can be attributed to some heavy selling across board, especially in the blue chips. Average volume traded over the week declined by 15% to 297 mn shares compared to 348 mn last week. Average weekly turnover also shrunk to USD 548 mn, 4% down from last week's USD 570 mn.

SBP's decision to increase the banks equity exposure by 10% reflected in Monday's activity as the market opened on a high note (up 1.24%). But profit-taking set in when the index crossed the 9000 level. PTCL, on Etisalat's payment uncertainty, received severe beating, closing down 2.5% at PkR 66.50. Selling pressure was also witnessed in PSO as the stock closed down 1.3% at PkR 414.50. OGDC and POL performed well, closing up 2% and 3.3% respectively. Mixed trends were witnessed in the banking sector with MCB and NBP closing up 0.6% and 1.5% respectively while BOP closed on its upper circuit. In cement sector, LUCK closed on its upper circuit while DGKC closed down 0.4%.

Although market opened on a positive note moving the index up 1.3%, correction seeped in from there on, sliding it to 8669 level, down 2.6% at close. Panic selling was witnessed from all corners, providing some sense to the overvalued stocks. Intraday volatility can be judged from the fact that some stocks traded both on their upper and lower circuits. All major stocks were hammered severely, such as PSO, POL, OGDC, PTC, NBP, FFBL, NML, MLCF and LUCK, to close down 2.2%, 3%, 4.6%, 2.8%, 5%, 4.4%, 5%, 5% and 3.8% respectively. FABL closed on its lower circuit on a lower-than-expected 3QFY05 result announcement. Some rumors leading to the downside were 1) Some members of the National Assembly got suspended, implying political instability 2) Some leading brokerage houses were on the selling side to improve their cash exposure.

Speedy recovery was witnessed on Wednesday as the Index gained what it lost in the previous session. The index closed up 2.3% at 8872 level. Cement, Banking, Oil and Gas, and PTC, all received heavy buying after Tuesday's attractive levels. Good day for the cements as LUCK, DGKC, MLCF, FCCL, DCL, DHCL, PIOC, MUCL and ACPL, all closed on their upper circuits. The reconstruction activities to be carried out in the affected areas had certainly given a boost to the sector. Banks also performed well with NBP, MCB, BOP and BAFL closing up 1.4%, 3.1%, 5% and 3.5% respectively. Even oil related stocks participated in the rally with OGDC, POL, PPL and PSO closed up 3.1%, 3.1%, 2.3% and 2.3% respectively. PTC moved up on expectations of a dividend announcement in the scheduled BoD meeting on Oct. 27. It closed up 4.7% at PkR 67.70.

Although market opened on a positive note moving the index up 1.2%, panic gripped near close, with heavy selling from some leading brokerage houses probably to improve their cash exposure. The index closed down 3.6% at 8557 level. All major stocks received severe beating, such as OGDC, PTC, POL, PSO, PPL and DGKC, to close down 5%, 5%, 5%, 3.5%, 5%, and 4.5% respectively. In the banking sector, MCB, NBP, BOP and FABL all closed on their lower circuits. HUBCO also closed on its lower circuit on a lower-than-expected 3QFY05 result announcement.

Bears continued their grip on Friday's market with a 47% decline in volumes. Most of the stocks were traded near their lower circuits for the second consecutive day. Even good corporate rersults from ICI (9 month EPS of 8.36) and CTTL(1QFY06 EPS 4.42) could not create any positive impact. As international oil prices declined, oil related scrips followed with a sharp reduction in their stock prices. PSO, POL, OGDC and PPL closed down 4.4%, 2.6%, 5% and 5% respectively. Sufferings continued for the banking sector with NBP, BOP and FABL closing on their lower circuits. ICI was the odd scrip that closed on its upper cap on announcement of its 9 month result.

OUTLOOK: With such volatility likely to follow, we recommend investors to take fresh positions only when the market has settled, probably after a downside of another 2%. Concerns remain over rollover of future positions next week, however, may not be a big worry as market has already seen a good downside in a short period. Volumes are expected to remain on the lower side.

 
 

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