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 PAKISTAN WEEKLY REVIEW

AlFalah Securities (Pvt) Ltd.
Monday, Nov 28, 2005-Friday, Dec 02, 2005

 

BOARD MEETINGS

COMPANY

DATE

DAY

TO CONSIDER

Huffaz Seamless Pipe Industries Limited

05-12-05

Mon

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

Shakarganj Mills Limited

05-12-05

Mon

Annual Audited Accounts for the year ended September 30, 2005.

Zephyr Textile Limited

05-12-05

Mon

Annual Accounts for the year ended September 30, 2005.

Chanda Oil & Gas Securitization Co. Ltd.

07-12-05

Wed

Annual Audited Accounts for the year ended September 30, 2005.

The premium for most locally assembled cars remains high as a considerable demand supply gap continues to persist. High Interests Rates seem not to have dampened consumer sentiment, while auto-financing seems to be a marketing priority for most financial institutions, which are still flushed with liquidity.

According to production and sales figures released by PAMA which is the representative body of four large scale motor manufacturers in the country, car production and sales surged by 26% and 23% respectively as compared to the corresponding period last year. This surge in demand shows that consumers still prefer locally assembled cars despite rising imports of new and used cars after duty concessions given in the FY06 budget.

It was assumed that the increase in interest rates would have a negative impact on car demand but so far it has yet to cause a major stir. There were also predictions that the import of new and used cars will change the market scenario and buyers would go for foreign cars. So far, the budgetary decision of cutting import duties on completely built-up units has yet to pose any serious threat to the local assemblers and even many buyers are still reluctant to take the risk of purchasing imported cars, until a spare part industry is sufficiently developed. We expect car sales would continue to show decent growth on the back of positive economic indicators and rising per capita income.

Currently there is a demand supply gap due to which customers have to wait 3-6 months for the delivery for the cars in demand. It is due to this supply shortage that the middlemen are charging premiums for timely deliveries. Once the supply meets demand the menace of premium can be curtailed. The reduction in prices at current levels will only benefit the middlemen who are booking profits to the tune of 20%-25%.

Premium on locally assembled cars are still flying high between PkR30,000 to PkR200,000 depending on the models in demand. Besides there has been no change in the delivery period which still dangles around 2 months to 6 months despite the fact that local manufacturers have expanded their production capacities. The government had been pressuring car assemblers to take notice of this situation but no strict action has been taken so far to redress the grievances of car buyers. Besides car assemblers have also allotted quota to authorized dealers by regulating new car booking as per supply requirement. In this situation authorized dealers discourage buyers who prefer cash buying.

Premium on Suzuki Mehran with and without CNG ranges from PkR30,000 to PkR65,000. While premium on Toyota models hovers between PkR100,000 to PkR200,000. Premium on Santro is PkR50,000 to PkR60,000 and on Honda it ranges between PkR60,000 to PkR100,000.

We expect that during the current calendar year the auto industry would be able to produce 165,000 units as against 129,000 units produced during CY04. This 28% surge in production will negate the menace of premium in the future along with further expansion in the industry which is also expected to come online in FY06. Premiums can only be curtailed once the supply meets demand.

We expect that the production in the industry will grow at a CAGR of 7% till CY10. Though the industry will be facing challenges and would be under pressure as used cars are being imported.

AUTO FINANCING

Auto financing has played a vital role in escalating the demand in the sector. Nearly all banks in the industry, now offer auto financing schemes In fact almost 65% cars sold in Pakistan are sold through different financing schemes. The ordeals of buying a car for oneself have no doubt become extremely easy via auto financing.

There was a general perception that car sales will decline with the rising interest rates. Though interest rates are on the rise we expect that the impact on monthly rental will only be marginal i.e. 13%-14%. The auto financing market is expected to remain robust in days to come due to the growing liquidity available with the financing companies.

As on June 30, 2005 total auto loans amounted to PkR66bn (which is 32% of the total consumer loans amounting to PkR206bn). Total automobile loans have grown by almost 318% since June 2003. Moving forward we expect interest rates to ease off which will facilitate growth through this avenue.

In seemingly ominous news on the Public Finance front, the budget deficit figure for the First quarter for the first quarter of the current fiscal year stood at PkR 37bn which was a 50% increase over the corresponding period last year. We however believe that if the present political set-up persists for at least the next two years, the country can maintain economic growth rates of above 6% as well as keeping budget deficit within moderate levels.

THE NEWS ON GROWTH

Both Agricultural and Large Scale Manufacturing (LSM) have apparently showed a disappointing performance so far. Agricultural Growth for this year is projected to be about 5%, down from 7.5% last year. The main reason has been the 20% fallout in cotton output to around 12 millions bales, primarily because of floods and pest attacks. The textile sector which contributes 58% to our exports should theoretically be badly hit by this rise in raw material costs. The effect on the economy should nevertheless be mitigated by the many opportunities which still exist in the post-WTO quota era. The large composite manufacturers have committed massive capital investment especially over the past three years to increase capacity of the high value added ready made garments and specialized fabrics and so the effect of higher raw material cost this year should be to some extent minimized.

LSM growth in single digits for the first quarter over the corresponding period of 17.5% for last year can be attributed to a high base effect as well as the fact that many industries such as cement, automobiles and fertilizer are operating at full capacities. Once their expansions come on line most evidently by the third quarter of the current fiscal year, we would see that the State Bank would have another tool to address its inflation worries, ie. the supply side.

WHOSE STABILITY IS IMPORTANT?

The Oil prices are predicted to maintain a stable slide to around the USD 45 dollar mark over the next two years from t he present levels of in the high 50's. OPEC realizes that a sustained high price rally would most likely lead to a global recession, which would then result in an even sharper fall in price. For Pakistan that scenario means that interest rates stability do not need to be raised to address inflation. This will be important in sustaining credit growth when economic capacity increases. In other words Pakistan can meet a large part of its investment boom through its domestic consumption.

The post-earthquake economic scenario in Pakistan has been dictated by two schools of thought. On the one hand are those who believe that the economy will barely suffer a irritation while there are those who say that problems of aggravated unemployment and poverty will aggravate it. We see a slight hit on the economy this year in terms of the economic growth coming down to around 7% from 8.4% in FY05, but we see a greater challenges for the government in the years to follow.

THE PERCEPTIVE ENVIRONMENT

One of the serious tests for the government was its ability in preventing the budget deficit from getting out of hand. Pledges of USD 5.8 bn dollars had been raised by the International Donor Conference very recently and although questions have been raised about the deliverance of most of these gestures we remain optimistic. In our conversations with various foreign investors and corporate heads, we have gathered that General Musharraf and especially Shaukat Aziz have been the one of the better faces, that could have been projected by the Pakistan Government. The only problem that investors seem to have is the law and order situation relating to religious extremism. If such issues are tackled in a systematic manner, and there is no doubt great international pressure to do so, we could see a massive inflow of FDI's from the non-GCC countries as well.

THE PRESSING ISSUES

Till the present setup persists we feel that Pakistan should receive the foreign aid that it is looking for. We have revised our budget deficit target for the full year to 4.5% as we believe that the devastation caused by the earthquake does not only mean rebuilding the older infrastructure, but rather to undertake construction in a better, more expensive way.

Meanwhile the government's three most pressing issues remain (1) Water Availability (2) Power Generation and (3) Religious Extremism. Our best chance of resolving these issues lie with continued political stability.

Market this week started off with index level at 9064 after making crawling movement above 9000 level in the last week The market once again on a newly initiated Broker - Regulator tussle on the election of non-member director on the KSE Board as proposed by the SECP in its directive issued on Wednesday lost 200 + points in a day but later short-covering was seen at lower levels and market managed to close at 108 points down on the same day. But bulls later on took control over the market on the last trading day of the week and managed to close the index above 9200 level at 9226.

Market this week rose to 164 points from last week, up 1.78 %. Average trading volume for the week was reduced to 381.61 mn shares.(down 7.5%) and the average trading value dropped to $555 mn from $ 587.4mn(down 5.44%). The week finished at 9226 after balanced positive and negative news hovered in the week from bourse-regulator tussle to the construction of dams but in the end its still bulls that led the market.

Monday witnessed an increase of 82 points (up 0.9%) and witnessed the weeks highest volume with a turnover of 530.2 million shares and the index managed to close at 9147 level with some heavy buying in Mansha scrips and led to the closing of MCB, NML & AICL on upper circuits due to cross holdings. Cements remained in the limelight with LUCKY, DGKC, PCCL closing up 1.7%, 2.2% and 2.6% respectively.

Tuesday performance was witnessed as range bound market and index finished at 13 points down to close at 9134.55 with a turnover of 525.4 million shares. National bank showed the most volatile movement and made an intra-day high of 191.40 and there after also made a intra-day low of 179.50 but later to managed to close at 182.70 down 0.6%. MCB also lost 1.1% to PkR 158.95. PPL, OGDC and PSO, all closed in the negative. Cement sector performed well on the back of meeting between President Musharraf and Ministers of four provinces to discuss the construction of dams. As a result, DG.Khan Cement, Lucky Cement and Maple Leaf Cement, all remained active, gaining 2.4%, 2.7% and 1.8% respectively.

Wednesday came off as the most firing and battering day of the market due to the directive issued by the SECP to KSE for election of director on the KSE board to be a non-member on the which market behaved much negative and the index breached the level of 9000 in a day and made an intra-day low of 8925 down 208 points, most of scrips went down to their lower circuit level. To further worsen the situation were the news for textile sector that of Pakistan's quest for GSP status in US & EU may not be granted. However the index covered 100 points from its intra-day low of 8925 and managed to close above 9000 level at 9026 and later finished at 108 points down. Oil and Gas scrips the were the main index supporters in index recovery, PPL recovered from low of Rs.200.65 to Rs. 204.05 down Rs.5.35 (down 2.55%) OGDC recovered from a low of 108.70 to 109.75 down Rs.1.25 (down 1.12%).

Thursday also showed volatile movement and the index made an intra-day low of 8980 down 45 points after making an intra-day high of 9111 but later on the index finished on at 9081up 55 points on the expectation that SECP will opt for an elected stockbroker as the chairman of KSE, boosting confidence amongst investors. National Bank added 1.7% to PkR 184.45. OGDC rose 1.4% to PkR 111.25. Cement sector remained under pressure with Lucky Cement, DG Khan Cement, Maple Leaf Cement and Fauji Cement all closing in the red zone despite announcement from the President for the construction of Bhasha and Kalabagh dams.

Long awaited stocks finally performing on the last day of trading of the week on the back of high international oil prices. OGDCL was the main contributor, gaining 2.5% to PkR 114.00, adding 33% to today's upside. Pakistan Telecom rose 3.3% on the optimism of its successful privatization soon. Amongst the Cement stocks, Pakistan Cement rose 6.3% to PkR 17.00. Kot Addu Power Co. rose 4.6% to PkR 46.75.

MARKET OUTLOOK:

Index seems to have crossed the 9200 level resistance after much battering on Wednesday on the SECP directive issue. But rising open interest in futures which has risen to Rs.14.3 bn is also quite worrisome. Moreover the ongoing newly initiated Regulator-bourse is further going to dampen the investor confidence. Therefore we recommend a cautious strategy for the coming week with top pick as FFC, MLCF & UNBL.

Pakistan Economics Snapshot

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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