Updated on Apr 10, 2000
The market continued to
remain range-bound over the week trading between 1850-2000 levels. At the same time, a
high degree of volatility was observed as the Index remained under pressure for the better
part of the week, but eventually made a come back during the last two sessions with the
support of financial institutions and market players, to close at 1943 this week. The
force commanding market sentiment was, of course, the verdict to be announced on Thursday
regarding the plane hijacking case involving former prime minister Nawaz Sharif along with
six other aides, including his brother Shahbaz Sharif. Volumes, slashed by almost 30-40%,
moved at a snail's speed and almost halved just a day before the verdict was supposed to
be announced. Institutions remained on the sidelines and even the retail side maintained
restraint fearing a political backlash, but once the verdict was announced awarding life
imprisonment to Nawaz, investors leapt back into the ring. There appeared to be a sense of
relief that there was no draconian sentence was declared, as some quarters had feared.
With the legal process now slated for appeals, investors refocused back to more immediate
economic matters and improving corporate fundamentals. There was renewed interest for
executing fresh deals in choice scrips. Major activity was noticed in PTC, Hubco and PSO,
with reports of foreign buying in the first two scrips. Massive liquidity continued to
prevail in the market, with equity/repo rates lingering at 12-13% / annum. They started at
20-21% but have been continuously slipping.
The market breached through the 1950 support level to close the week at
1943. Reasonably strong support is expected at 1920 while the major resistance is at the
Dewan Salman Fibre: Another Strategic Move
A look at the regional scenario
Despite a surge in demand with the comeback of Far Eastern economies,
until recently, PSF prices had remained under pressure due to excess supply, as a result
of large expansions undertaken during the previous boom cycle of the industry. China's
move to ban PSF imports in order to shield its domestic producers, added to the supply
glut, with regional producers constrained to cut back production to avoid stock up of
inventories. This regional scenario is now changing with the turn around in ASEAN
economics leading to an acceleration in PSF demand over the last quarter.
Market dynamics pamper local industry
Contrary to the regional scenario, the local producers have had no
worries regarding a supply overhang with historic demand growing at a robust 3-year CAGR
rate of 25%. Mainly driven by easy substitution over cotton (due to sufficient production
and competitive prices), demand has shown a steady trend of moving in swiftly to devour
all the PSF produced by the sector. This strength has allowed the major players of the
industry to enhance profitability by raising domestic prices and also contemplating new
expansion as well as diversification within the overall synthetic field.
Despite recent expansions/ diversifications......
Dewan Salman took the initiative and is the first to set up a 25,000
tpa unit for the manufacture of Acrylic fibre, a cheap substitute of wool, all of which
was being procured from outside the country previously. Ibrahim Fibres (IFL) also plans to
add 140,000 tpa to its present 70,000 tpa capacity, expected to come on-line by December
....... local producers will be unable to bridge the demand-supply
We believe that demand will continue to outstrip supply, as local
producers are already operating at near full capacities. Even the coming on line of new
capacities will not suffice to exhaust demand. Current production and demand are
approximately matched at 380,000 tpa. Even if a conservative growth trend of 12% p.a. is
taken, by the time Ibrahim Fibre's new capacity.
New Merger emerging from under wraps
Rumour has it that Dewan (DSFL) has made yet another strategic move by
acquiring a key holding of Dhan (DFL). Even though details of the acquisition have not
been disclosed by the company yet, we have presented our view point to give investors an
idea as to what such a consolidation could mean for the company in the existing operating
Larger Market share, Pricing power During the year 1997-98, although
the installed capacity of PSF doubled, DSFL controlled 28% (taken as a percentage of total
installed capacity) of the total market share of the country. Once the merger is in place,
it would bring the total combined market share of the companies to a massive 52%.
Dhan had often tended to be the cartel breaker in the past due to its
initial teething and quality control problems, the PSF cartel power is expected to
increase in the new consolidated scenario implying greater monopoly of prices, and margin
control by the remaining players in the sector.
What happens to costs?
The merger transition is expected to be a fairly smooth affair, keeping
in mind the close proximity of the plants. In the past, the two players have been known to
compare notes about operating conditions and problems, even reportedly exchanging workers
DSFL's greater marketing prowess sense due to its long association with
the textile industry should ensure a painless transition, allowing it to throughput DFL's
output quite easily into its own distribution channels. Consolidation of central office
and common administration functions should also help in diluting common overhead costs,
enhancing overall profitability.
Dhan's unleveraged balance sheet means that obtaining additional
financing would not pose a problem for Dewan. However, it remains to be seen how the new
capital structure evolves as the management is keeping the financing aspects of the
transaction under wraps.
Impressive price outlook
If DSF and DFL merge as one legal entity, the combined company will
become one of the Top 10 market cap stocks that cannot be ignored by index-investors and
is likely to become a core portfolio holding for value investors. We assume here that at
some stage, DSFL will definitely consider this option.
Where competitors stand
ICI may end up being a net loser in this changing scenario. In the
past, 100% of Dhan's PTA requirement was met by ICI. On the other hand, Dewan has enjoyed
an extended partnership with Mitsubishi (owning 12.328% shares) as its supply partner. It
is highly probable that Mitsubishi may interfere with the present ICI-DFL arrangement, and
compel DFL to procure its PTA requirement from Mitsubishi in future, encroaching ICI's
We do not envisage any negative short-term impact on Ibrahim Fibres
Limited due to the take over of Dhan by Dewan. If anything, as sector valuation expands on
the back of positive fundamentals and Dewan's increased market strength, we believe that
IFL's valuations are likely to dovetail upwards with Dewan's. In fact, once IFL opens LC's
for its 200% capex, it should likely command greater premium by being classified as one of
the two biggest players in the PSF Industry in Pakistan.
Based on improved sector fundamentals, upturn in the global PSF demand
cycle, continuing robust domestic demand growth, enhanced pricing power of remaining
domestic producers, Dewan looks a sure winner, commanding (a combined) 52% PSF market
share. We are conducting a comprehensive review of the sector and the company and would
come up with an investment opinion shortly, with a more vivid outlook on the merger as
more details and future plans of the merger become transparent.