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

Updated on Jul 10, 2000

The market moved within a very tight band during the week. The KSE 100 Index began the week at 1520.73 and closed at 1514.86, showing a decline of 0.39 per cent.

In the absence of fresh buying, volumes remained modest at an average of 71 million, and trading continued to remain dull. Domestic institutions indulged in minimal activity, while overseas funds were conspicuous by their absence due to peak holiday season in the US, Europe and the Far East. The present phase of inertia, the worst this year has seen, can be attributed to the after shocks of the speculative bubble burst in June. With the whole episode now taking a legal twist, market participants fear a can of worms opening up, as a result of which investor nervousness is not likely to subside any time soon. If an early resolution in the Lahore court does not occur, there remains a possibility of a sharp slip in the index of 50-100 points before stability and liquidity return to the market.


Developments on several fronts during the last few weeks are likely to impact the cement industry in Pakistan. We provide highlights of these and also our take on possible implications.

First, the good news. The Chief Executive has reportedly given a deadline of three months to various ministries for arriving at a consensus regarding the fate of Kalabagh Dam. With previous governments having made half-hearted attempts to address political sensitivities and then backing off, the whole project's future appeared bleak. With the army-backed government now appearing to take up the issue seriously, the probability of the project actually getting beyond the drawing board has risen.

Theoretically, if the Kalabagh Hydroelectric Project is approved and implementation begins, it would provide the much-needed shot in the arm for the beleaguered cement industry. Industry sources suggest that additional demand of upto 1.0 mtpa could be generated during the construction phase, which can reportedly range from 8-12 years. Add to this the need to resettle villages and provincial population centers and one can see how capacity utilization of the northern zone producers, in particular, can rise from the present 60-65 per cent.

There is no doubt that a large new reservoir is desperately needed. Tarbela, the Tarbela, the country's largest water reservoir, has lost its original 11.9 billion cubic meters water storage capacity by 24 per cent after having crossed 24 years (average age of a dam is 55 years). Heavy silting is another grave problem that Tarbela and Mangla face.

If the Kalabagh Dam Project, with 6 MAF storage capacity, does pull through, it will be the third largest dam in Pakistan after Tarbela (also on the Indus) and Mangla. The cost of the project is estimated to be over $6 billion, and is expected to be completed in 12 years.

The current situation spells ominous implications for agriculture as well industries, that, according to news sources, lose production worth Rs. 100 mn daily due to water shortage / irregular supply. Despite the technically accepted necessity for Kalabagh Dam, the project has become a political football with politicians from smaller provinces, particularly NWFP and Sindh, using the issue to accuse the largest province, Punjab of supporting Kalabagh to usurp water from them.

Our assessment, however, is that these arguments are not justified. Some political observers have stated that the real opposition comes from the feudal lords. It is these large land holders who currently benefit from the seasonal flooding and river overflows as they get free water. As soon as a dam is constructed, they will only receive their respective share and have to pay for the supply, which of course is anathema to them.

The current administration is in a strong position to bring together the various competitive constituencies and convince them in the technical feasibility of the project while creating sufficient legal safeguards to allay concerns of the smaller provinces. We are, therefore, cautiously optimistic that progress on the dam front is likely to be seen over the coming twelve months.

In terms of investment implications, as the Kalabagh Dam story slowly moves towards a concrete blueprint over the next 12-18 months, we expect long-term investors will begin to factor this into the share price, and a gradual sector re rating is likely to ensue.

And now, the bad news. A recent stay order by the Supreme Court has over ridden Lahore High Court's earlier directive restricting the government from imposing sales tax on the cement industry. Market expectations are that the government will now go ahead and impose sales tax. If that occurs, then the sales tax exempted companies will immediately gain a competitive advantage, which they could use to undercut other producers and gain market share. Should this happen, it would spell the end for the cement cartel. A price war would reverse the nascent recovery in earnings that the sector has seen in lH00.

We feel however, that the above outcome is not necessarily the only scenario going forward. The Supreme Court, while staying LHC's decision, has also turned non-sales exempt units' petition into appeals, for which hearing has been postponed until September, 2000. In the meantime, more non-exempt producers are reportedly planning to file appeals. Once the legal process gets fully underway, it is likely to drag on well into FY 2001. The original sales tax exemption was in any case set to expire in June 2001. Thus, even if the final decision goes in favor of the sales tax exempt units, their competitive advantage will be rather short-lived.

In view of the above, we feel that investors should not get distracted by the market's 'noise' on this issue and remain focused on specific company fundamentals in terms of core earnings generating capacity of specific companies and long term outlook for the industry as a whole, which we believe, is gradually turning positive.

Another point to be highlighted is the potential for electricity tariff increases during the next few months, as the power utilities attempt to cope with the higher furnace oil prices, and the recent 15 per cent gas price increase. While electricity price increase certainly raises the production cost per ton, the effect is not spread equally for all cement producers. More efficient producers are affected less adversely than the less efficient ones. Moreover, the cement companies which have captive plants (e.g. D G Khan), are insulated even more. Therefore, while we expect electricity charges to rise during the current fiscal year, we believe that margins of efficient producers will not be significantly dented.

In conclusion, we maintain our positive outlook on the cement sector and continue to recommend long term BUY on D. G. Khan Cement which we feel has fundamental competitive advantages over its peers that are likely to translate into its long term out performance in the sector.







Mkt. Cap (US $ bn) 7.54 7.52 -0.27
KSE 100 Index 1520.73 1514.86 -0.39
Total Turnover (mn shares) 551.42 356.18 -35.41
Value Traded (US$ mn.) 342.09 266.98 -21.96
No. of Trading Sessions 5 5  
Avg. Dly T/O (mn. shares) 110.28 71.24 -35.41
Avg. Dly T/O (US$ mn) 68.42 53.40 -21.96
MSCI Pakistan Index:      
Pak Rs. 106.12 106.25 0.12
US $ 52.35 52.34 -0.004



Bombay BSE 4905,94 +20.34 +0.42%
Hong Kong Hang Seng 16829.96 +340.37 +2.06%
Singapore Straits Times 2092.63 +27.88 +1.35%
Sydney S&P/ASX200 3305.3 -1.60 -0.05%
Tokyo Nikkei 225 17398.24 +115.87 +0.67%



Frankfurt DAX 7052.22 +101.13 +1.45%
London FTSE 6497.5 +77.90 +1.21 %
Madrid General 1001.61 +12.81 +1.30%
Paris CAC 6565.97 +112.00 +1.74%
Stockholm General 5978.01 +133.14 +2.28%








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