MARKET THIS WEEK
Company Limited (PTCL) was yet again the sentiment driver for the
index. PTCL moved from negative to positive territory on the back of
rumors about the transaction coming through or not, taking the market
along with it. As the week was predominantly marked with optimism
regarding PTCL, we saw the market registering positive closings on
three of the four trading days. Aided by this, the market closed 4.24%
above last week's closing.
OUTLOOK FOR THE FUTURE
It should be more of the same
in the coming week. A final announcement regarding outcome of
negotiations with Etisalat over PTCL take over is expected over the
weekend. Should this come through, it will be a major determinant of
market's direction over the short term. Other than PTCL, review of
domestic oil prices will also be tracked with interest. If the
government decides to reduce prices of domestic petroleum products,
Oil Marketing Companies (OMCs) will be negatively impacted. With the
uncertainty regarding PTCL dominating
the market, one should go
long in fundamentally sound stocks. Pakistan Oilfields Azgard Nine,
Chenab Ltd, Fauji Bin Qasim, KAPCO, ICI Pakistan, Nishat Chunian,
Nishat Mills and Packages are our picks for the week.
The major developments this
•Securities and Exchange
Commission of Pakistan (SECP) has relaxed mutual fund management
regulations by waiving off the requirement of foreign collaboration
for management of open-end mutual funds. Under the previous rules, all
open-end mutual funds were required to collaborate with foreign fund
managers to become eligible for managing open-end funds.
•As per news reports, Adhi
well 17 has turned in to a producing well with production of 1,500bpd
of crude and 5MMCFD of gas. The well would be brought to full
commercial production shortly once the well is linked to main
installation. Local Cement Sales were up 13% YoY for the first four
months of FY06 while exports have dropped by 6% YoY.
•DVCOM along with other
Wireless Local Loop (WLL) operators has moved a petition before Lahore
High Court demanding refund of their license fee.
•Reportedly, the ministry
has proposed (1) cut in OMCs margins (2) exclusion of sales tax from
OMC margin calculation. While, we rule the possibility of cut in OMC
margins, which currently stand at 3.5% of retail price for the
regulated products, the government may decide to exclude sales tax
from margin calculation.
•The government has shown
its preference for issuing GDR of state owned enterprise (SOE) to
raise US$500mn from offshore investment following successful entry
into Euro and Islamic bond market last year.
•World oil prices have
extended their losing streak and touched a four month low of
US$57.80/bbl. Yesterday, oil lost another US$1.13 on news of
unexpected increase in US crude stock and comfortable heating oil
inventories ahead of winter season.
•A statement on the outcome
of negotiations with Etisalat regarding PTCL sell off is expected
today. ???In a meeting held with Aptma members yesterday, the Commerce
Minister announced that Pakistan's textile exports to the EU would be
granted 20% concession in customs duty under the new GSP rules coming
into play from January 2006.
•Dewan Farooque Motors
reported earnings after tax of PRs39.4mn (EPS: PRs0.51) for 1Q06 as
against PRs38.2mn (EPS: PRs0.50), 2% higher YoY.
•Lucky Cement posted after
tax earnings of PRs342mn (EPS: PRS1.30), 35% YoY growth.
THIS WEEK'S TOP STORIES
BANKS - PR REVISION TO LEAD
TO HIGHER PROVISIONS
The revision in the aging
criteria under the Prudential Regulations is likely to lead to higher
provision expenses by commercial banks. With the changes taking
immediate effect, the impact of additional provisions is likely to
affect this year's earnings. Although the revision in the benefit
allowed under Forced Sales Value to loans above PRs5.0mn is also
likely to lead to higher provisions, we believe that the impact of
this would be more on smaller banks.
INFLATION IN OCT-05 LIKELY TO
BE HIGHER (SEASONALITY, CALAMITY)
We expect inflation to touch
higher at 8.83% in Oct-05 (from 8.53% in Sep-05) driven by the Ramadan
effect, and high demand emanating after the earthquake. However, this
is a pure seasonality play. Headline inflation during Ramadan in FY05
and FY04 were recorded at 9.26% (from 8.7% a month earlier) and 5.4%
(from 4.2% a month earlier) respectively. In Oct-05, we expect
transport and fuel inflation to be recorded at 24.7% (from 20.7% in
Sep-05) and 8.9% (from 6.9% in Sep-05) owing to the +7.0% increase in
petroleum prices announced on Oct 1st. Given the change in
methodology, we expect core inflation to remain intact at 7.9%.
However, as per old
methodology, we expect core inflation to touch 10.0%. In today's
T-bill auction we expect low participation owing to very tight
situation in the money market. Additionally, no inflows are expected
during the week. Thus, in our opinion, cutoff yields are likely to
remain unchanged, while there is a possibility that the SBP may reject
the auction if higher yields are demanded. We believe that the State
Bank of Pakistan's tightening cycle is over as credit off take,
headline CPI inflation and money supply is abating. Going forward, we
expect SBP to marginally cut yields on T-bills, as more variables are
pointing in this direction.
INDUS MOTOR: EXPANSION ON THE
Auto stocks have performed
considerably well on the back of increasing auto demand and a weaker
yen. A demand-supply gap still exists in the market, which has
prompted the auto assemblers to increase their production capacity in
order to benefit from the growing consumer demand. Like other auto
assemblers, Indus Motor Company is in the process of expanding its
capacity as well in a number of stages. Furthermore, there is an
increased focus on trading activity by the company via product
diversity. Indus Motor Company has an established product portfolio
consisting of Toyota and Daihatsu brands. In light of growing auto
demand, capacity expansion, impressive 1Q06 earnings profile and good
dividend pay out; we maintain our positive stance on Indus Motor.
CURRENT ACCOUNT DEFICIT
WIDENING - BUT IN COMFORTABLE ZONE!
Despite huge current account
deficit recorded in 1QFY06, we believe Pakistan's balance of payment
position is in the comfortable zone, as Pakistan received exceptional
non-debt generating flows (Worker remittances, FDIs, and FPIs) during
the period. Total current deficit was recorded at US$1,427mn (compared
to a surplus of US$119mn during the same period last year). We believe
huge trade and services account deficit is primarily attributed to
high machinery and oil import. Total trade and services account
deficit was recorded at US$2,742mn in 1QFY06 (compared to a deficit of
US$1,363mn during the same period last year), whilst total current
account transfers were recorded at US$1,913mn. Going forward, we
expect pace of current account deficit to slow down in the remaining
part of current fiscal as oil prices are receding from US$70/bbl to
US$58/bbl. In addition, we also expect machinery import growth to
taper off as most of the industries are completing their Balancing
Modernization and Replacements (BMR) programs. We expect current
account deficit to reach US$4.62bn in FY06.
Mkt. Cap (US $ bn)
Avg. Dly T/O (mn. shares)
Avg. Dly T/O (US$ mn.)
No. of Trading Sessions
KSE 100 Index
KSE ALL Share Index