. .

1_popup_home.gif (1391 bytes) market.gif (6606 bytes)


  1. The KASB review
  2. Finex week

An exclusive weekly Stock Market report for PAGE by Khadim Ali Shah Bukhari & Co.

Updated on Oct 18, 1999

Market Update

The KSE 100 was headed only one way over the course of the week: down, a week which saw the KSE take a dive of 8.63 % dropping by almost 107 points to close the week at 1129.17. However the market would have taken strength from the fact that the positive trend being witnessed over the last few weeks subsided the apparent bear run witnessed on the day the market opened after the change in government. Though despite the economic and political uncertainty prevalent over the market, the market has demonstrated positive trend, mostly being liquidity driven.

Despite the fundamentals remaining under pressure, which saw the KSE 100 fall by 92 points in a single day, the KSE 100 closed on Friday on a positive note. Though the market did not open for the first half of trading and dropped 60 points upon the resumption of trade, positive elements in the later half of the trading time witnessed the market recouping the losses by 50%. This could also be attributed to the announcement of certain policy decisions, thus subsiding the apparent vacuum of authority after the dismissal of the previous government.

Dispelling the apparent panic selling of Thursday, the market would soon find its bottom line in the near future from where future strategy could be worked upon. For the following week we feel that initial support is likely to arrive near the 1080 while major support is likely to appear at the 1000 levels. Resistance will be felt near the 1140 while major resistance will be encountered near the 1180 levels.

Sector Review

Pak Suzuki Motors: Competition looms large ahead

Being the largest assembler of motor vehicles, Pak Suzuki Motor Company tends to reflect the true nature of the automobile industry, primarily in the small car segment.

In the course of time, the automobile market has witnessed a volume decline in the number of units sold. This unhealthy phenomenon could be attributed to two primary reasons,

1. Undeterred price increases.

2. Consumer reluctance for buying new cars in the anticipation of the arrival of new entrants in the small car segment.

In both the cases Pak Suzuki has found itself in a tight squeeze. Though the decline in volumes is across the board, the apparent decline in the sales of the smaller car segment is of greater concern.

With an average monthly production of 1375 units witnessed for the Mehran during FY 98-99, the company has only been able to produce 779 and 223 units for the months of July and August 1999 respectively.

However to counter the stigma attached of Suzuki being awry of any model change, Plans are afoot to introduce a totally changed shape of the Suzuki Khyber in March 2000. This could provide Suzuki the burst of adrenaline it so much requires. Adding to their advantage will be the fact that the various new entrants will also be in the process of entering the market.

On the flip side, Suzuki has yet again been made the scapegoat of ambitious government plans to instill some activity in the economy. Under the much publicized National Transport Scheme, the previous government of Nawaz Sharif had introduced Suzuki Mehrans as Taxis. For this particular purpose, PAK Suzuki produced 450 exclusive units for this scheme, of which only 60 were paid for and delivered. Due to the sudden change in the political climate and the removal of the said government, Pak Suzuki are left with 390 units, the fate of whom is left very much hanging in the balance. In addition the government has also announced the imposition of LC margins on the import of various goods. Under this new arrangement, all the local assemblers will have to pay 10% LC margins in addition to the current taxes in place on the import of CKDs. This is unlikely to go down well with an industry already facing a volume decline. Assemblers having a higher deletion level will be able to squeeze through these trying times as compared to the new entrants about to enter the market. A definite positive for Pak Suzuki.

However even with Pak Suzuki enjoying a relative advantage over the new entrants due to a higher deletion level, the appreciating yen will continue to keep prices under pressure, the single most important variable in the smaller car segment.

The fact that the other assemblers would be importing CKDs from Korea and other countries, thus the relatively calmer Won is likely to add to the anxiety being faced by the management of Pak Suzuki.

With the actual implementation of the Section 9-A, through which companies are forced to pay out dividends, we could not rule out a decent dividend payout, a quite attractive notion given the current low levels of PKR 19. Stay tuned for updates.

Economic Review

Military parade goose-steps over Pakistan economy's grave

In the flurry of policy initiatives, which took place under the new administration of the country, the SBP initially announced the imposition of a cash margin on Letters of Credits:

1 10% on industrial raw materials,

2 20% on machinery

3 35% on all other items (not including imports like petroleum and wheat).

This and the closing of financial institutions on the 13th, money-changers till the 20th seem to point towards a standard plan of action following a political crisis in the economy, note the similarity of these policies with the actions following the nuclear test last year.

The focal point again seems to be in the maintenance of the forex reserves and exchange rate against the onslaught, which inevitably follows any uncertainty in the country. Given the trade situation with a trade deficit of $ 450 mn posted in the first quarter of this fiscal year, and the indefinite postponement of IMF credit.

An interesting thing to note is that Pakistan's demand for imports is so inelastic and our Marginal Propensity to Import so rigid that even the most drastic of measures hardly touch our imports, if you look at the figures the last time such restrictions were put in. But it is also important to bear in mind that the dual exchange rate had an effect of making cheaper food and edible oil imports, which did go up in the June 98 period. What does suffer is the exports emanating from Pakistan, which are dependent upon industrial raw material imports. So this move could well put further pressure on our reserves, going by past experience, but only time can tell. One lesson seems to have been learnt though, in that the cash margin for import of industrial raw materials is below the other categories at 10%.

The SBP followed up on this on the 15th by ordering all banks to stop issuing L/Cs over $25000, unless prior approval is taken from the SBP. This will definitely curtail imports, if not postpone non-essential imports for a period of 2-3 months. This spells doom for importers of items such as fertilizers which Pakistan has capacity to produce internally, and better forecasts for those companies which are hit by foreign competition for these items.

On the forex front, the banks have also been ordered to stop all back-to-back remittances and forward trading. The banks have been allowed to maintain their position on the inter-bank market, but have been clearly told not to issue new rates.

What seems to be different from the scenario following the nuclear tests, is that the SBP seems to have been given a target and a free rein on how to achieve it, unlike the political perspective intertwined in decision-making before.

The SBP was also active on the OMO front on the 14th, releasing Rs 8 billion into the market obviously in a bid to keep interest rates low and stable.

The declaration of emergency and the PCO giving Chief Executive powers to the COAS is definitely not going to be well received by the US and we can count on an indefinite postponement of IMF credit, and the continuation of sanctions which US President had recently been given waiver authority over. Though news on the US's reaction is still not clear, the threat of sanctions (on countries which have had a military coup) being thrown around are redundant as the most stringent of these are already in place for Pakistan.

The outlook for the economy over the next calendar half-year does not look good, with a further slow-down in economic activity on the cards. The uncertainty on the investment front will continue. What the economy desperately needs are credible statements on the future economic policy of the new administration, which are more likely to be believed than those of the deposed government.