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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 Feb 14, 2000

The KSE 100 Overview: The Correction Continues

The Karachi Stock Exchange remained under pressure on account of profit taking on a large number of counters. On Monday the first day of the clearing it retained its momentum developed a week earlier and breached through the 1800 index barrier. However, from Tuesday onwards we saw a gradual sell off in a large number of stocks such as Pakistan Telecom, Hubco, Pakistan State Oil, Fauji Fertilizer, Adamjee Insurance and Engro Chemicals. On the last day of the week the index witnessed a sharp 81 points or 4.5% of its value.

The week also saw some active institutional activity in all the major stocks. Buying was also witnessed from foreign institutional investors in stocks such as Hub Power Company and ICI Pakistan and some commercial banks.

The recent announcement that the Supreme Court of Pakistan will hear on daily basis from February 15, 2000 all petitions and cases filed by Hub Power and Wapda against each other has helped to sustain the stock price around the Rs. 27 levels. We strongly believe that the Hubco resolution is not about the charges imposed by the government but about Wapda ability to repay its liabilities under the current tariff structure.

The Government of Pakistan also announced that all importers of Urea will be required to seek approval of the Ministry of Food and Agriculture before opening any letters of credit for the commodity. This move is expected to provide some respite to the domestic urea manufacturers as domestic prices have been under considerable downward pressure due to cheap imports. It will also provide relief to plants like Fauji Jordan that has recently started production.

The KSE 100: PSF Consumption stays strong

• 5 month Polyester Staple Fibre (PSF) and Cotton consumption numbers show robust growth of 10.95% and 8.26% y-o-y respectively.

• Overall textile-manufacturing activities remain strong.

• Yarn manufacturing has increased by 9.24% y-o-y for the period between Jul-Nov 99, however overall cotton production still continues to account for nearly 75% of total yarn produced.

• The remaining is accounted by man made fibre

• Cotton prices have bottomed out. Strength in global cotton prices and aggressive purchasing by domestic mills for inventory build up has tightened local cotton prices.

• Demand for PSF usage still remains strong, increasing y-o-y by almost 11% for first five months of FYOO.

• Local prices continue to remain at a premium of 12% to imported PSF despite the inclusion of PSF in the no duty no drawback scheme.

• Yarn exports are up 14.75% for 1H FY 00

Discussion Section:

After the rapid decline in cotton prices during the current season, there was an anticipated massive shift towards cotton yarn production and a resulting drop in blended yarn production. However that has not been the case.

The raw material usage has continued to remain strong. Instead of a shift in raw material considerations, there has been an overall increase in yarn production resulting in a uniform increase in both raw materials, cotton and man made fibre, 8.64% and 11% respectively y-o-y.

This increase in the whole size of the pie is an encouraging development for the entire textile sector. Going forward in order to maintain current margins, we again reiterate our earlier stance that value addition is likely to allow further penetration in the regional markets. Though the export growth of 14.75% is quite commendable, future performance is linked to moving up the value added chain rather than continuing catering to the lower of the textile market.

Given the strong demand for PSF, we maintain our overweight stance in the sector. Ibrahim Fibre (Buy, D1-1-7) remains our top pick of the sector based on better then industry earnings. We expect slight pressures in margins for 1H FYOO, a result of not lagging demand but rather an upside cap due to weak regional prices and strong oil prices.