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The KSE Overview: Consolidation reaches critical point

Updated on Aug 07, 2000

After a lackluster performance, the KSE-100 Index that started out at the level of 1569.39, closed at 1562.45, registering a decline of .44 per cent wow.

Volumes declined further, and the average daily turnover for the week was only 116.90mn shares, as compared to the 155.09mn shares reported last week. However, in view of government's assurance of having a contingency plan, in case IMF funding is delayed, the index remained well supported at 1550 levels. The RSI of 49.38 per cent implied that downside risk is limited despite the persisting negative momentum.

Institutional investors engaged in minimal activity and preferred to stay on the sidelines.

Once again, World Call remained the apple of the investors' eye, and maintained its top five volume leaders slot. It was interesting to note that unlike last week when PTCL was the center of attention, this time the Hubco scrip attracted local jobbers. Although the Hubco story remained on the boil with the scrip moving both ways on rumours, there was a surge in interest in textile stocks on expectations of a favourable textile policy announcement. PTCL eased down by 2.95 per cent while Hubco gained 4.93 per cent. ICI reported a loss in its half yearly results, which showed in the downslide of its scrip by 5.37 per cent. Hubco's result expected on August 9 could be major trendsetter for the market in the forthcoming week.

Technically, the flattening of the index level is an indication of a steep move ahead to at least 100 points. If the level of 1550 holds, then recovery to 1650 is possible which could lead to a new selloff at higher levels. Failure of support at 1550 can lead to a slump down to a band of 1400-1450.

Sector outlook

ICI Pakistan Ltd

It is not quite there. Though we are not refuting the fact that the chemical cycle is on a turnaround, it is the pace of this turnaround that continues to fuel our concerns. Looking at the chemical cycle we bear witness to improving primary margins, one of the main precursors to a profitable earnings path.

Shrugging off the financial chaos of yesteryears, ICI registered a 40% jump in sales, with margins also in the upturn at 13%. As the PTA plant goes into higher gear, the operating expenses have increased by 18%. Operating income remained on the lower side, primarily due to the absence of any dividend income from Powergen, which in our view has been caught in the cross fire of rising oil prices and corresponding cap on electricity prices. As PTA continues to become the largest revenue generator for the company, we believe that ICI should be positioned as a bulk commodity producer.

After poor performance in 1998 and 1999, the PTA industry should enjoy wider margins in 2001-2002 driven by more stable raw material prices and stronger demand worldwide, particularly in Asia. Although traces of this have trickled down in the HY 2000 results, the full impact of a peak in the cycle is still some time off.

Narrowing our focus we take a closer look at PTA margins. PTA operations are to be the earnings driver for the company going forward thus positioning ICI to be analyzed as a bulk commodity producer. Any change in pricing and margins is likely to be translated into the bottom line of ICI. We believe that the worst for the PTA plant is over. As margins make a partial turnaround, continue to look forward to a healthier bottom line, albeit a red one.

On the prospects of exports, we see that, China has reduced PTA and polyester imports as its domestic plants are now running at full capacity, a trend that will impact for some time on South Korean and Taiwanese suppliers as they comprise the bulk of China's import needs.

In the short term we believe that possible Chinese import reductions would be mainly due to resistance to current PTA prices., as the country will continue to require large PTA imports from the international market. This will continue to support of our argument that the timing of the peak in the PTA cycle is still a little bit off in the near future.

With PTA demand on the increase, we believe that by FY 2002 demand of PTA will outstrip supply. This is kept after keeping in view the fact that PTA plants at best could operate at 94-95%, thus allowing a 10% production increase for the regional players. In the wake of this gap, we feel that ICI Pakistan will find it most conducive to prod export prospects in the regional markets and ride the chemical cycle to the fullest with margins expansion being the main earnings driver.

In terms of sale and margins, we continue to rule out any out performance in FY 2000. The basic thrust in earnings will appear in FY 2001-2 due to the absence of additional capacity of PTA plants, the region will be facing a PTA supply shortage thus allowing PTA margins to peak in that period.

Although the bottom line growth of ICI will continue to be influenced by high financial charges and depreciation in FY 2000, the magnitude should be less significant in the coming years, thus loosening up the squeeze on profitability.







Mkt. Cap (US $ bn) 7.77 7.66 -1.42
KSE 100 Index 1569.39 1562.45 -0.44
Total Turnover(mn shares) 775.46 584.49 -24.63
Value Traded (US$ mn.) 758.97 408.31 -46.20
No. of Trading Sessions 5 5 .
Avg. Dly T/O (mn. shares) 155.09 116.90 -24.63
Avg. Dly T/O (US$ mn) 151.79 81.66 -46.20
MSCI Pakistan Index: . . .
Pak Rs. 109.25 107.79 -1.34
US $ 52.72 52.19 -1.00



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