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US Dollar 59.9 60
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Japanese Yen 0.508 0.51
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Last updated: Friday 23 Dec, 2005-12.30 P.M (PST)

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3 DAYS FORECAST
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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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KARACHI         - 021 LAHORE          - 042 ISLAMABAD    - 051 FAISALABAD   - 041 MULTAN          - 061 PESHAWAR    - 0521 CANADA          - 1 KUWAIT           - 965 INDIA               - 91 IRAN                - 98 U.K                   - 44 U.A.E                - 971 U.S.A                - 1

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  STOCK WATCH

By SHABBIR H. KAZMI
Updated Dec 17, 2005

* Election of five member-directors of KSE held
* Gas pricing formula under review
* Stage being set for privatization of Sui twins

During the week KSE-100 index hovered around 9,500 levels and managed to close around 9,515 level. Expectations and fears about ultimate fate of PTCL transaction continued to create surges. Elections of the new member directors on the Board were held and it seems that the brokers' fraternity is ready to accept non-member as Chairman of the Board.

Exploration and Production companies have submitted a proposal to Ministry of Petroleum and Natural Resources to withdraw present ceiling on gas prices fixed under Petroleum Policy 2001. Lower gas prices being offered in Pakistan, compared to other markets, have restricted investment in the sector. The withdrawal is expected to provide incentives to E&P companies for accelerating monetization of gas reserves by making required investments. This would also help the government in meeting future needs of gas through higher production. Pakistan faces possible gas shortage of 200-250 MMCFD in next couple of years. Reportedly the government has hired foreign consultants to advice on this possible policy move and the final decision is expected in next 3-4 months. This decision would be incorporated into gas price revision to be notified in July 2006. Gas prices in Pakistan are revised semiannually in January and July every year. For fixing gas prices, the average of imported crude oil prices for the last six months is the basis. Gas pricing is regressive and the incremental effect on wellhead prices lowers as price moves up. For crude prices above US$ 36, there is a ceiling. On the final applicable crude price, zonal discount is applied and conversion is made for the energy content of gas. Zonal discount are 22.5%, 27.5% and 32.5% for Zone I, Zone II and Zone III respectively. The Oil and Gas Regulatory Authority (OGRA) has last factored in US$ 43 in its calculation of gas prices. We estimate for upcoming revision, OGRA is likely to consider US$ 52 prices, 21% higher. However, prices for only those fields would have an impact, which enjoy no such ceiling on crude prices. The proposal effectively translates into 15% change in gas prices for the three zones respectively. Apparently no major impact on gas prices for end consumers is expected because most of the gas fields either do not have such a ceiling or follow old Petroleum Policy. Only 5-8% production comes from such fields, as per estimates. However, acceptance of this proposal may encourage gas producers with gas production coming from fields following old policies to pursue the government for change in pricing formula. For gas distribution companies, there is no impact (barring UFG losses which would be higher if prices are increased in future) as returns are determined based on their operating assets.

The two gas distribution companies are expected to go under the hammer as the Privatization Commission has invited Expressions of Interest (EoIs) for SSGC and SNGPL. The last date for the submission of SoQs has been fixed for 11th February 2006. Currently, Sui twins both are working under the fixed return formula. Under an agreement with foreign donor agencies, the twins' profits are guaranteed, based on their asset base. With repayment of foreign loans, the GoP is no longer bound to carry on with this inefficient ROA based formula. There are various studies going on to decide on the new formula, and future profits of gas distributors will depend on the new formula. There may be a couple of options worth looking at. Firstly, both gas distribution companies' returns could be linked with some floating benchmark interest rate that could be helpful in making the returns more market-based. Another possible formula that is doing the rounds in the market is Return on Equity (ROE) based formula, in which the gas distribution companies' returns could be linked with their equity. If that becomes the case, then there is a possibility that the companies may refrain from issuing good dividends. This is because dividend distribution would reduce their equities. It is yet to be seen what formula makes it way up.

The figures for the first five months of the current financial year exhibits continuing growth of the auto industry, both in terms of capacity expansion and rising demand. Sales of cars and commercial vehicles compared to corresponding period last year have increased by 29%, led by Honda Atlas which showed 79% growth. Honda Atlas, having increased production efficiency and moved to double shifts remains the leader in 1300-1600cc category with a market share of 52%. Sales of Pak Suzuki increased by 31%, followed by Indus Motor (9%) and Dewan Farooque Motors (5%). Indus Motor showed a growth of 20% in November. It is expected to register further sales growth as it expands annual production capacity by 32% to 50,000 units. The auto industry is in expansion phase. The booming demand has already led to capacity enhancements, but at the same time, WTO rules are forcing the government to open up the market to imports. Import duties have been reduced over the years, and the deletion program is expected to phase out. The understanding is that with the end of the deletion program, the local auto parts industry will be protected by tariffs barriers of up to 50% on parts manufactured in Pakistan as compared to 25% on CKD kits and parts not manufactured in Pakistan. In this way, companies with lower deletion levels (a greater component of imported parts) such as Honda Atlas will face higher duties on parts than companies with higher deletion levels such as Pak Suzuki. The overriding force in the industry may continue to be volumetric growth rather than any changes in the cost structure or margins as a result of the new tariff mechanism. Lowering of tariff on CBUs has opened a new avenue for top-line growth as capacity constraints prevent local manufacturers from meeting demand through local production alone. Trading margins are higher on imported CBUs than locally assembled vehicles. Therefore, a shift in the revenue mix towards greater imported car sales can improve the bottom line.

 
 

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