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THE KASB REVIEW

  1. The KASB review
  2. Finex week

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

Updated on Jan 17, 2000

Efforts at sustaining the current rally which saw the market improving to the 1600 levels proved successful. The KSE 100 continued its upward climb breaching the 1600 levels to close the week at 1626.10, a 2 year high for the KSE 100. This 8.42% jump over last week's closing of 1499.77 can be attributed to an across the board rise in stock prices.

Increased investor interest was witnessed in almost all the blue chip stocks as volumes touched a high of 314.78 mn. Main catalyst for the current run up is the recent cut by the State Bank in the interest rates by 2%. Also providing background support has been the recent positive news regarding the Energy sector. With the report on Hubco for the perusal of the Chief Executive, we might see some additional interest streaming into Hubco.

We believe there still exists an upside potential of 100-150 points for the KSE 100. For the initial term we feel that the KSE 100 is likely to breach the barrier of 1700 with relative ease. Though a technical correction might be in line but it would be insufficient to dampen the bullish sentiments. Accumulate.

Nishat Mills: Overvalued

Largest sector of the economy

The Textile Industry has the distinction of being the largest economic sector of Pakistan, logical, as Pakistan is basically an agrarian economy. The entire textile sector contributes to just over 60% of exports, and provides 38% of overall employment.

However the phenomenal increase in installed capacity over the years does have its drawbacks as well. Over the gradual span of 50 years, the textile sector has gamed the dubious distinction of being the largest loan defaulter, with the amount in question to the tune of PKR 48.3 bn, accounting for 32.7% of total defaulted amount of PKR 148 bn.

Year Factories Spindles
(000)
Looms
(000)
Rotors (000)
94 471 8419 14 138
95 494 8610 14 132
96 503 8717 13 143
97 440 8230 10 143
98 442 8368 10 150
99 442 8358 10 166

Source: APTMA


The Company

Nishat Mills commenced business as a partnership in 1951. Incorporated as a private limited company in 1959, NM went public in 1961 and was listed on the Karachi Stock Exchange.

It is engaged in the business of spinning, weaving and Dyeing unit making it the largest composite unit operational in Pakistan.

Raw material prices continue to weaken: Indian refusal to add more stocks

Due to the continuous oversupply being witnessed in the cotton market, the cotton market is likely to remain highly liquid. With a crop expected to cross the 10 bn bale mark, we expect substantial ending inventories of cotton stock. In addition the recent refusal of India to lift cotton stocks is likely to further aggravate the situation thus adding another 200,000 bales into the market. Even if this is a temporary development, the local price of cotton is going to remain under pressure at PKR 1100 per bale.

International cotton prices stabilizes

The surplus cotton crop is not only in abundance in Pakistan rather globally the situation is much the same. Oversupply has been of phenomenal size. This has resulted in international Cotton prices hovering around the 48-52 US cents mark. As Pakistan deals mainly in lower qualities of colon, Pakistan raw cotton prices tend to fluctuate around the 35-38 US cents.

Recommendation

Though the profitability of the company has been improving at a steady rate, the company is in a continuous process of adding yet more capacities, which allow it to take advantage of economies of scale amidst a textile sector, engaged primarily in low value added functions.

Aside from the fact that raw material pricing has touched rock bottom on the domestic as well on a global front, there has been a drop in yarn prices accordingly as well. However the margins have bettered y-o-y. With overall yarn prices likely to remain in oversupply we feel that the recent run up in share price has caused the share to enter choppy waters and due to the stock being over valued, we expect price weakness to set in.

Profit and Loss Statement

Net Sales 1998A
8,919
1999F
8,534
2000F
8,922
Cost of Goods Sold 6,963 6,572 6,896
Gross Profit 1,956 1,962 2,027
Gross margins 22% 23% 23%
Operating Expenses 466 525 564
Operating Profit 1,491 1,437 1,463
Operating Margins 17% 17% 16%
Other Income 22,720 25,450 27,486
Financial & other Charges 1,079 1,014 1,033
Profit Before Tax 412 424 430
Tax 68 64 54
Profit After Tax 344 360 377
Net Margins 3.9% 4.2% 4.2%