As the MCB story draws to an end, the focus seems to be shifting to other companies in the line of issuing GDRs.

SHABBIR H. KAZMI, Special Correspondent
Oct 23 - Nov 05, 2006

With the official announcement that MCB has successfully mobilized US$ 150 million through issuing Global Depository Receipts (GDRs), prices of shares of other companies, also expected to issue GDRs, went up. MCB issued one GDR at US$ 17.4 equivalent to Rs 264. Price of Oil & Gas Development Company (OGDC) share is witnessing upward trend on the back that it would issue GRDs ranging from one billion to one-and-a-half billion dollars. Quoted price of National Bank of Pakistan (NBP) has also moved up on the information that it intends to mobilize US$ 200 million through issuing GDRs. Pakistan market seems to have an insatiable appetite for GDR issues. As the MCB story draws to an end, the focus seems to be shifting to other companies in the line of issuing GDRs.

In addition to MCB's own merits, investors were drawn to the fact that the issue offers a leveraged exposure to Pakistan's economic growth, which is expected to grow at an average of 7.5% according to government forecast. The road shows attracted a lot of interest from a wide group of emerging markets funds, FIG funds and other general buyers of Asian equities. This shows that there is at least a clear desire to know more about investing in Pakistan. Reportedly, approximately 60 global investors have bought MCB GDRs. About 40% of the deal was allocated to Asian investors, while the remainder was split evenly between European and US accounts.

Pakistan's economy draws its strength from its indigenous market and exports. It is relatively less affected by the leading economies and mostly driven by local phenomena. This means it could well act as a hedge against negative surprises in the global markets like the US and Europe. One may not be sure how deep the market is, but MCB deal should give other entrepreneurs and also the government the confidence to issue GDRs as a way to raise funds.

According to some analysts, NBP and MCB seem to be leading the market particularly in the banking sector. There is no doubt that NBP just cannot be ignored on the basis of its strength. Besides its holding in NIT and Al-Jazira, the bank benefits from a very low cost of funding generated by the bulging deposit base. NBP's current Advance to Deposit Ratio (ADR) of around 55% as compared to the sector's average ratio of 76 provides ample room to increase advances and improve core earnings.

The turnaround at United Bank, since privatization in 2002, has been exemplary. Value additive initiatives have brought the bank a long way from its dire straits under government control, barely five years back. Of the different initiatives, none has had more impact than the emphasis on consumer finance. On one hand, presence in consumer finance provides desirable exposure to increasing consumption patterns in Pakistan. On the other, higher rates of return cushions spreads in times where cost of raising funds is expected to rise. An upcoming secondary offering in local markets and a possible GDR in international markets should resolve the issue of the relative lack of inevitability. Add to that are analysts' expectations that UBL does not excite markets as an acquirer or acquisition target - the secondary market attractiveness of UBL increases significantly. UBL's size and reach combined with breadth of service means that UBL does not have any incentive to actively explore acquisition targets like some other banks in the market.

Analysts are also impressed by UBL's increasing focus on international business with 15 foreign branches spread primarily in the Middle East and opportunities being explored in Kazakhstan and Iran through representative offices. UBL's management as a policy decision has opted for protection of margins in the volumes vs margins game in the local market. However, growth has not been ignored with the international business serving as the growth component. The strategy adopted in international markets is exactly the opposite of the policy adopted in local markets. In international markets, growth is being given precedence over margins. At present international business represents 18-20% of the total business of UBL. However, the business is on a growth trajectory and serves as a good supplement to the consolidation strategy being followed in local markets.

The government has finalized plans to further divest its holding in OGDC. It plans to issue upto 10% shares (430 million shares) through GDRs issue. Another 5% shares (215 million) would be offered to domestic investors through secondary offer. Analysts expect OGDC's proposed GDR to draw considerable interest from the international investor community, as it would provide exposure into high prospect exploration and production business in a revitalized Pakistan economy. The government targets to complete the transaction by end December 2006. Analysts estimate the likely price of the GDR at around two US dollars. They also do not expect the GDR offer price and the local issuance to vary significantly. OGDC's exploration activity picked up significantly (24 wells in FY06 compared to eight wells in 2005), resulting in five discoveries. Reserve appraisals and continuing aggressive focus on exploration could provide future upside to reserves.

Disappointing production growth in 2006, but future looks bright: OGDC is poised to enjoy a healthy 7% volume addition in FY07 on the back of completion of drilling projects in FY06 and FY07. Analysts expect OGDC to register a production CAGR of 10% over 2006-2010, translating into 7.6% earnings CAGR.

The MCB issue has paved way for a number of transactions. The above stated examples are a few. The GoP is encouraging GDR issue as it will help project Pakistan in the global capital markets.

It was more than 10 years back that PTCL GDRs were issued, which was followed by HUBCO and Chakwal Cement. It is seen how the future unfolds. However, it must be kept in mind that Pakistan's equities market is too small when compared with other global markets.