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Day after 0 21 59 Sunny
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 PAKISTAN WEEKLY REVIEW

AlFalah Securities (Pvt) Ltd.
Monday, Dec 12, 2005-Friday, Dec 16, 2005

 

BOARD MEETINGS

COMPANY

DATE

DAY

TO CONSIDER

Globe Textile Mills Ltd.

19-12-05

Mon

Approve the interim dividend / bonus issue.

Globe Textile Mills (OE) Limited

19-12-05

Mon

Approve the interim dividend / bonus issue.

UDL Industries Limited

19-12-05

Mon

The resignation of a director and appointment of a new director in place of outgoing director.

Mirpurkhas Sugar Mills Limited

21-12-05

Wed

Financial Statements for the year ended September 30, 2005.

Fauji Fertilizer Co. Ltd.

21-12-05

Wed

The Business plan for the year 2006.

Al-Abbas Sugar Mills Ltd.

22-12-05

Thu

Audited Financial Statements for the year ended September 30, 2005.

Noon Sugar Mills Limited

22-12-05

Thu

Annual Accounts (audited) for the year ended September 30, 2005.

Ansari sugar Mills Limited

22-12-05

Thu

Receiver of the company will review the financial statements for the year ended September 30, 2005.

Sakrand Sugar Mills Limited

22-12-05

Thu

Receiver of the company will review the financial statements for the year ended September 30, 2005.

Baba Farid Sugar Mills Limited

27-12-05

Tue

Annual Financial Statements for the year ended September 30, 2005.

Fecto Sugar Mills Limited

27-12-05

Tue

Annual Financial Statements for the year ended September 30, 2005.

MARKET FOCUS

CEMENT SECTOR: DOWN BUT NOT OUT!

Pakistan's cement manufacturers have cut domestic prices by 10% from PkR300 per bag to PkR270 per bag. The reason for decline in the prices was due to a dampening in construction activities in the winter season and heavy snowfall in the northern region of the country. With the reduction in cement prices we could see some resistance by the cement cartel moving forward, which may create a negative sentiment in the market, especially if the government decides to intervene.

INDUSTRY OVERVIEW:

The size of cement industry in Pakistan in terms of turnover was approximately PkR 80bn (1.19% of GDP) as of FY05 0r a 21.7% increase from the previous year. Unit cement sales have shown strong growth through out the last five years and stood at 16.4 mn tonnes in FY-05. Average gross price in FY-05 was PkR 4,800 (ex-factory) per tonne of cement. A combination of factors bought about a high growth in revenues (21.7% YoY); demand grew at 19.7%; gross price increased by PkR 300 per tonne (7%) and CED which was reduced by PkR 250 per tonne was retained by the manufacturers, thus adding to their revenue.

Exports vs. Local Sales:

Prior to FY-02, all cement produced was consumed domestically. Thereafter, share of exports in total sales increased and stood at 9.60% in FY-05. Import of cement has been negligible so far but may come about now in the aftermath of the destructive earthquake. Building new cities from scratch will require cement in vast quantities and domestic production may not be sufficient to meet the demand.

INSTALLED CAPACITY AND PRODUCTION:

In FY05 24 cement units with a total installed capacity of 17.9 Mn tonnes were operating in Pakistan. D.G. Khan Cement Company has the largest unit on a relative basis with an annual capacity of 1.7 Mn tonnes and occupying a market share of 9.8%. Askari has the largest cement capacity as a Group with aggregate capacity of 2.2 Mn tonnes (12.7%) Maple Leaf Cement is the second largest unit with a market share of 8.7% and an annual capacity of 1.5 Mn tonnes.

Of the total 24 cement units operating in Pakistan, 15 of them are set up in the north, mostly NWFP, providing easier access to Afghanistan - fast coming up as an important region for cement exports. Even units currently operating in Southern Punjab and Sindh provinces are expanding to install a plant in Northern Punjab and NWFP to allow for cheaper and more convenient exports to Afghanistan; a prime example is D.G. Khan, which set up a new plant in Chakwal, NWFP. Lucky cement, which is close to the Afghan border, is setting up a unit in Karachi to export via sea route.

FUTURE DEMAND OUTLOOK:

Cement demand for FY-05, both local and exports, stood at 16.4 Mn tonnes, signifying a growth rate of 19.7% from previous year. A YoY growth rate of 14% is expected for FY06 following which growth is expected to settle at 9-10% for a couple of years. The preceding estimation though is based on a number of assumptions:

* If economic growth of at least 6% pa continues for a couple of years, it will enable infrastructure projects to come up regularly i.e. it may be true if there are no major shocks to the economy, such as oil

* prices or political instability.

* Inflationary pressures are kept under strict check without increasing interest rates too much from their present levels so that cost * of investment stays bearable.

* Budgetary allocation for Development expenditure is continuously increased. 

* Housing Finance gathers momentum on the back of increasing incomes.

* A ready export market exists with unabated construction work in Afghanistan and Iraq.

In addition, in the aftermath of the widespread destruction caused by the earthquake, significant reconstruction activity is expected to begin in the affected areas. This will boost cement demand considerably compelling the government to allocate a greater part of the development expenditure towards cement.

Furthermore, in Iraq almost over, reconstruction work is expected to begin anytime soon. Pakistan is seen as a potential contender for export of cement to Iraq as well. Export to Iraq though will have to be undertaken by sea for which plants will also have to be set up in the south, providing easier access to the port. At present Iraq is importing cement from Indonesia, India and to a smaller extent from China.

ECON FOCUS - POWER IS GROWTH

We estimate Pakistan's Energy shortfall in 2010 to be around 4000 MW if a major dam is not built. This will have a serious impact on economic growth, in terms of presenting significant constraints on Large-Scale Manufacturers and increasing the cost of setting up new businesses. Given that 64% of the workforce is employed in the small-industry informal sector, a severe power crisis will have serious consequences on unemployment.

THE DISTRIBUTION PLAGUE:

According GOP Planning commission's electricity demand estimate by 2010 stands at around 21500 MW, and while installed generation capacity should exceed this power requirement, the actual amount available for consumption is reduced by 28% due to pilferage and distribution losses. Reducing Pilferage and distribution considerably, in a country like Pakistan with a weak administrative machinery is likely to be a horrendous task. Hence other options need to be explored.

INDUSTRIAL PREFERENCE NEEDED:

Load-shedding is a common feature in Pakistan, but unlike our neighbour, Industrial units are not given too much preference over residential units in terms of energy consumption. It is estimated that around 0.75 - 1.25% of economic growth is lost each year due to power outages. With the country plagued with an incessantly volatile political environment, preference for energy supply to industries at the expense of consumers has always been seen as a gift to the opposition. Until some major policy decision are made on how to resolve the energy crisis, industrial units should be prioritized.

THE NEED OF THE TIMES:

A dam at Kalabagh is one obvious choice but apart from its political complexities. The Kalabagh Dam if constructed would initially add 2400 MW of installed capacity which could be upgraded to around 3600 MW in a couple of years. This is apart from the fact that its reservoir could store around 6.1 MAF of water out of the around 26 MAF which are let down below Kotri. Thus Kalabagh could be crucial in exploiting Pakistan's Hydro-Power Potential in generating electricity. At present hydro-power electricity comprises about 32% of the total electricity generated and presents the cheapest and most reliable source of electricity generation in the long-run. 

Partial Achievement Strategy:

The Government's strategy on the dam issue has been to play a waiting game. It has recently allowed industrial units to generate their own electricity. Apart from that it has asked for tenders from various foreign Private Power Producers.

We estimate that if the targeted foreign and local investment to the tune of USD 3.0 bn is attracted over the next four years, these measures could add around 2000 MW of power in the coming five years.

DECISION TIME:

Given the current pace of economic growth however and for long-term needs, the government needs to either construct the Kalabagh dam or work on a war footing to exploit the coal reserves in the Thar Area. Reserves in the Thar area are one the largest in the world, amounting to around 75-100 bn tons of coal.

Major power plants of 200-300 MW 'each' can be set around that area especially given that the Thar coal is superior in quality in terms of low calorific content to Indian Coal (coal forms 54% of India's energy mix as compared to 5% for Pakistan). Most of the Thermal Power generation in Pakistan at the moment is gas-based. With an estimated 15yrs of gas reserves left as a result of expected doubling of consumption by 2010 (to 75 bn cusecs per year), coal along with hydel power will be the nutrients to serve the energy needs of the present and future generations.

MARKET THIS WEEK

December 16, 2005 Page 7 Pakistan Weekly Review Market this week started off with index level at 9431 after a good upside last week. It remained range-bound for most of the sessions, managing to incline above the 9500 index level at the week's close. The index rose 83 points or 0.9% from last week. Average trading volume for the week was reduced to 335 mn shares.(down 25%) and the average trading value dropped to USD 483 mn from USD 639 mn(down 24%). The week finished at 9514 index level after balanced positive and negative news hovered in the week from the construction of dams to a reduction in cement prices.

On Monday, the index rose 27 points to close at 9459 point level after an announcement by Fauji Foundation to sell 52% stake in Fauji Cement company created positive sentiments. The stock advanced 4.8% to PkR 28.25. Lucky Cement advanced 1.1% to PkR 80.85. D.G.Khan Cement also contributed to the upside, increasing 0.7% to PkR 110.85. Pakistan Telecommunication rose 1.9% on optimism of its successful privatization. Among other major gainers was Pakistan International Airlines, closing up 9.2% to PkR 11.85.

The KSE index lost 0.1% to 9451 point level on Tuesday after investors preferred to book their profits before the crucial level of 9500. D.G. Khan Cement declined 0.5% to PkR 110.25. National Bank of Pakistan dropped 0.5% whereas Pakistan Oilfields gained 0.8% to PkR 424.5 on optimism of higher international oil prices. Most of the stocks weakened with the index declining 0.5% to close at 9403 point level on Wednesday. This correction was due to the overvalued prices of many stocks. With privatization hype, SSGC and SNGPL recorded gains of 0.7% and 4.7% respectively. Among the major losers were the cement stocks. D.G. Khan Cement declined 3.9 % to PkR 106. Fauji Cement dropped 4.9% to PkR 26.5 and Lucky Cement fell 3.8% to PkR 76.50.

Thursday saw the index gaining 0.9% to close at 9489 point level, advancing on the back of the banking sector. Among the leading gainers and volume leaders were MCB and NBP, advancing 5% and 1.75% respectively. Cement sector remained under fire due to a reduction in cement bag prices. Fauji Cement was under pressure throughout the day, closing down 7.4% at PkR 24.55. Oil and gas sector helped to push the index upwards with OGDC alone contributing 28% to the day's upside on optimism of gas price revision by OGRA.

The two sessions on Friday led the index advance 0.3% with a turnover of USD 663mn.

The index closed at 9514 point level. Bank and oil and gas stocks recorded fresh gains. National Bank was the volume leader, advancing 2.1% to PkR 195.80. OGDC gained 0.2% to PkR 116.65 on the optimism of gas price hike that is currently capped at $36 per barrel produced locally. PTC, the nation's biggest telecom operator, gained 0.4% to PkR 64.40 on the back of privatization talks between Etisalat and Privatization Commission scheduled on Dec.19. Cement stocks continued to remain under fire after President Musharaf stated to take public opinion on the construction of dams.

OUTLOOK: Though the index has crossed the 9500 level barrier after much battering In cement stocks, market sentiments suggest an upward rally of about 1 to 2% from here on. But profittaking is likely to seep in more often as open interest in futures seems to be on the rise. Moreover, if Privatization Commission succeeds in persuading Etisalat to buy the state-owned PTC in its scheduled meeting on Dec.19, it would boost the investor confidence. Our top picks are SSGC, SNGPL and FFBL.

MARKET OUTLOOK:

With the index above the 9400 level and rising open interest in futures (PKR 16bn) the market appears to be on shaky footing. We advise a cautious approach with our top pick as POL, PPL and OGDC. With the expected meeting of OPEC on the coming Monday and the arrival of strong winter season in North America we expect a rise in international oil prices and hence our strong interest in the oil and gas sector.

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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