Government�s Decision To Privatize PIAC
By Ashfaq Ahmed

Government of Pakistan has sold its 5% equity in Pakistan International Airline Corporation with minimum subscription of 500 shares for Rs. 10,000/- the date of subscription was 7th to 9th June 2004.

The CCoP (Cabinet Committee on Privatization) has approved sale of 57.536 million shares of the national flag career. It was decided to offer five percent shares of airline and its size would be doubled in case of over subscription

Recently GOP has successfully launched the share of National Bank of Pakistan (NBP), Oil & Gas Development Company Limited (OGDCL) and Sui Southern Gas Company (SSGC). The response of public is very positive. But Pakistan International Airline Corporation is very different case for privatization due to adverse condition in aviation industry and heavy losses of past.

Organizational Restructuring: The aviation industry recently hit adversely by low growth and profitability due to 9/11 event, threat of terrorism, decline in passenger traffic and rising cost of fuel. Under these circumstances the PIA�s performance has been satisfactory. This can be depicted by the Earring before tax graph.

Current management which was appointed on April 2001 has taken number of step to restore the past glory of the Airline. Fleet renewal program, introduction of new ticketing and reservation system, maximum utilization of spare capacity, rationalization of route structure in line with prevailing demands, entering in code sharing agreement with major airlines of the world are few measures to convert the PIA into result oriented organization. All such steps to make the PIA a profitable organization has under taken by the support of Government. For this purpose PIAC has to issue equity of Rs. 16.58 billion to GOP for reimbursement of mark up on TFC issued for bridge financing of critical overdue debts out of this Rs. 8.70 Billion is used for part financing of feet renewal program.

The recent financial results and business expansion plans are result oriented. Over the year 199-2004 the performance of PIA is remarkable registering significant growth in sale, profitability and cash flows.

Share Pricing: The price set by the CCoP is Rs. 20/- which include the premium of Rs. 10/-. The privatization Committee has fix the price after calculating the average market price. Currently market quotes the price around Rs. 21/-

It seems that decision to offer the shares to general public is being made in haste. The timing of sale of shares is not correct, recently the market price of the shares is low as compared to price at the end of March 2004. At present average price of share is Rs. 20/- where as it had crossed Rs. 27/- at the end of the March 2004 in the expectation that PIA would announce the dividend after announcement of its favorable financial results, in board of Director�s meeting held on 30th March, 2004 the management has declare the Pre-Tax Profit of Rs. 3.7 billion.

The management has announced in his 279th meeting (held on 27th May, 2004) the dividend of Rs. 0.50 for class �A� shares and Rs. 0.25 for Class �B� shares. This tactics has worked as the shares of PIA have been over subscribe by Rs. 176 million according to initial information received from Privatization commission.

Share Pricing & Future Value: The share offer price set by Committee is not realistic and does not reflect the intrinsic value of the share. The intrinsic value is calculated on the basis of future inflows, although it is very difficult to calculate the intrinsic value, but we can estimate the value by its future prospects as claimed by the management of the corporation. As I have discussed earlier that due to remarkable performance both operationally and financially PIA is in a better position ever in last 15 years. The future of the organization is bright and prosperous.

In this context it is not sensible to offer GOP�s shares to general public. Govt. should wait till the rise in market value of the share. Because all investment decisions are based on forecasts of future, investor would like to predict the future accurately. Stock market is efficient mechanism which would always predict the future value of share. As soon as favorable result comes, there will be rise in market value.

On the other hand unfavorable events would also affect the shares prices of company; recently the serious qualification of auditors and allegation of corruption in the deal of Aircrafts has effect the market prices of shares. The value of share has fallen to Rs. 18/- from Rs. 22/-

Equity or Borrowing: The borrowing interest rate is in a single digit which is lowest in the financial history of Pakistan. The management of PIA should have to use debt to over come the losses instead of issuing additional equity to Govt of Pakistan. In this scenario the management of PIAC should replace expensive debts with cheaper debt, use existing spare capacity and do investing in new fuel efficient aircrafts. The emphasis must be on finance leasing of new aircraft instead of issuing the equity for financing. However Government has injected $150 million for part financing of new Boeing 777 aircraft. The PIA has to issue Rs. 8.70 billion equity to govt. in this respect.

All these additional equity would dilute the earning per share and also affect the dividend per share. According to Privatization Commission the share offering is directed towards the small investors who have limited salary and is interested in dividend rather then capital gain. Here the question arises that: Is a prudent investor would buy shares of organization which is not efficiently financed?


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