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  1. The KASB review
  2. Finex week

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

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 2000 levels.

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 2002.

....... local producers will be unable to bridge the demand-supply gap

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 scenario.

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 and technicians.

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 market share.

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.

Investment implications

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.