The KSE Overview: Market weakens despite trading curbs

Updated on Nov 27, 2000

The market had a roller coaster week starting with the Index at 1409.27 on the previous Friday and ending 3.8% down at 1355.86 last Friday. As we highlighted last week, technical weakness ensued almost immediately from the opening on Monday, when the market closed 22.95 points down for the day at 1386.32.

The combination of domestic and foreign institutional selling, shorting by local speculators and absence of retail interest pushed the Index down to its year low of 1348.46 on Tuesday. Intervention by SECP in the form of restrictions on blank selling on a selected group of index heavy weight stocks, caused a temporary reversal on Wednesday, but weakness set in once more by Thursday. With PTCL, Hubco, PSO and ICI on the restricted list the weakness spread, as we had expected, to other counters. The net result for the week was the Index slipping down to close at 1355.86.

In terms of individual stocks, PSO and Hubco remained at the center stage of action all week. Hubco started the week at 1760 and lost 13.6% of its value to close at 15.2 - a direct result of the latest collapse in negotiations between the government and the company, whereby the counter offer by WAPDA to Hubco was rejected by the latter as being unacceptable from its shareholders' perspective. With the World Bank being dragged into the picture by both the sides, there might be some reprieve for the hapless minority shareholders eventually. In the meantime, Hubco continues to get battered down by all and sundry.

PSO also lost PkR5 for the week but in percentage terms, the loss was 3.35%. The scrip was at the center of struggle between the bulls and the bears, and after the SECP intervention, managed to close exactly at its major support of 144, but continued to exhibit weakness throughout the week. The next support for PSO is at 140.40 and after that at 134.70.

PTCL came out the relative winner for the week, closing almost unchanged at 22.25 last Friday, versus 23.30 in the previous week. This strength is a reflection of expectations of Rs2 or more dividend with the FY00 results due to be announced on the 28'h of November. Consensus forecasts for full year earnings range from Rs 17bn- 18bn, depending on how various analysts are treating the effective tax rate as this is the first year that the Telecom monopoly has come into the tax net.

Another major casualty for the week was ICI Pakistan Limited, losing more than 13% to end the week below par at 9.90. The general market weakness, along with increasing apprehensions about higher than expected losses for the PTA division, and uncertainty about the mechanics of recently announced corporate restructuring, took a heavy toll on the stock. The next immediate support is at 9.70, followed by 9.59.

In the synthetics sector, Dewan Salman lost almost 10% of its value to close the week at 20.75. In contrast, Ibrahim Fibres's decline was limited to 4.4%. Engro slipped 1.3% but Fauji fell 4.5% for the week. Nishat Mills was hit harder and closed the week at 9.5%, down at 21.

The outlook for the coming week is that trading is expected to be volatile with downward momentum continuing amidst confusion in the market regarding settlement of short positions. We expect the major Index scrips to depict choppy behavior as short sellers are forced to cover their positions, but institutional cash raising is likely to keep them on the sell side, thus capping the upside of the market in the near term.

PTCL may be an exception to the rule due to its impending FY00 result announcement. A positive earnings surprise might act as a confidence builder for market sentiment in the short term, but any 'below expectation' results would lead to strengthening of the weak trend.

Sector outlook

PSF Remains Hot

The synthetic fibre sector is moving full steam ahead bolstered by solid demand growth and firm domestic prices. Industry sources indicate that fibre consumption in Pakistan is likely to cross 440,000 tonnes in FY01 versus an estimated 390,000 tonnes last year, representing almost 13% yoy growth.

The key driving forces for this robust demand are dual. Firstly, a sharp rise in domestic cotton prices, which are now averaging PkR2350/maund, as compared to PkR1500-1600/maund during the same time last year. Moreover, value added textile exports are holding up surprisingly well in the current fiscal year. As the synthetic component is higher in this segment of the textile business, there has been a natural upsurge in demand for synthetic fibre in this quarter.

Our discussions with major domestic producers indicate that the slight contraction in conversion margins for PSF seen in mid-2000, has now corrected itself for local producers after the rupee depreciation in October. At present, we estimate the conversion margin for various PSF manufacturers in Pakistan to be ranging from US$390-US$400/tonne, depending on individual plant efficiencies.

Local PSF price is currently PkR64/kg, compared to the landed cost of imported fibre at PkR66 /kg. Domestic producers reduced the price by PkR2 last month, despite strong demand in order to discourage bulk imports. However, continued high off-take by the local textile industry has the fibre 'alliance' mulling PkR1/kg increase by December. This would further strengthen their gross margin and consequently, the bottom line.

As far as raw material cost is concerned, the major players are currently opening Letters of Credit for PTA purchase at around US$525-530/tonne. However, they expect that by the time the settlement price is finalized at the end of the current quarter, their average cost for I H0 1 is likely to come out lower. MEG continues to trade in the range of US$495-US$500/tonne and we do not expect any significant change in the near term. Similarly, we do not foresee a large increase in PTA prices until well into 2Q01.

A new development has been the recent clamoring by APTMA (All Pakistan Textile Manufacturers Association) for a reduction in import duty on PSF from 25% to 15% with the argument that their export competitiveness is at stake because of high PSF prices. We do not believe there is a risk of duty reduction as the government has an agreement with ICI Pakistan to maintain a duty differential between PTA and PSF.

Investment Perspective

In view of the above factors, while we are bullish on the entire sector, our best bet remains Ibrahim Fibres Limited. The stock has outperformed the market by 24.5% over the last six months and over 6% in the last one month. We expect it to continue doing so during the balance of CY00 based on expectations of a positive earnings surprise.

MARKET ROUNDUP
..	LAST WEEK	THIS WEEK	% CHANGE
Mkt. Cap (US $ bn)	6.53	6.21	-4.90
KSE 100 Index	1409.27	1355.86	-3.79
Total Turnover (mn shares)	667.04	727.69	9.09
Value Traded (US$ mn.)	578.29	449.55	-22.26
No. of Trading Sessions	5	5
Avg. DlyT/O (mn. shares)	133.41	145.54	9.09
Avg. Dly T/O (US$ mn)	115.66	89.91	-22.26
MSCI Pakistan Index:
Pak Rs.	96.31	92.80	-3.64
US $	43.64	41.61	-4.67

.Source: KSE, MSCI, KASB

ASIA PACIFIC & AUSTRALIA EXCHANGE INDEX LEVEL CHANGE EXCHANGE Bombay BSE 3868.34 +15.94 0.41 % Hong Kong Hang Seng 14376.9 -186.61 -1.28% Singapore Straits Times 1984.36 +44.09 2.27% Sydney S&P ASX 200 3280.6 -0.60 -0.02% Tokyo Nikkei 14315.35 +14.04 0.1 %

.

EUROPE & UNITED STATE OF AMERICA EXCHANGE INDEX LEVEL CHANGE EXCHANGE Frankfurt DAX 6664.18 +63.18 0.96% London FTSE 6327.30 +40.30 0.64% Paris CAC 6145.65 +92.61 1.53% Dow Jones Industrial 10470.23 70.91   Nasdaq Composite 2904.38 149.04