Updated on Apr 14, 2001

The KSE Overview: A more settled environment

In our overview last week we noted that PTCL, IFL, MCB, NML and Tripak were our main picks, who in the current week have climbed 6%, 3.5%, 5.5%, 5.14% and 1.42% respectively. But the clear winner was ICI Pakistan which climbed 14.45% on strong volumes to reach PkR9.9, climbing almost 8% in the last trading day after a presentation by ICI explaining their proposed de-merger.

Overall the market climbed 3.7% from 1322.81 levels to 1371.71 levels, holding and then bouncing off the strong support level of 1319, and breaking through our resistance level of 1350-55.

The strong performance of the market this week was largely the result of the removal of uncertainty regarding the T+3 settlement, which had led many investors to stay in the sidelines until a clear decision was reached. The SECP and KSE this week had decided to implement T+3 in stages as opposed to over the whole market at once, choosing two moderately active scrips, Ibrahim Fibres and WorldCall, as the initial test cases before the phased implementation goes through. With this behind it, the market rallied, with even the two T+3 scrips performing positively.

PTCL remains an attractive buy from both a trading and fundamental perspective, despite a 6% rise in price over the last week. The scrip will continue to gain strength as the market tests our next major resistance levels at 1380-84, which if it breaks then the market could test the 1400 barrier.

We continue to believe that the index overall will continue to remain range bound within our intermediate target range of 1325-1460. We do not believe that fundamentals would support a rise above that level, unless an exogenous event was to break. Our picks for this week, PTCL, MCB and IFL.

Sector outlook

Fertilizer Sector

The crisis of the water shortage had a severe effect on the agricultural productivity this year. The sector suffered an approximate economic loss of PkR95bn due to a shortage of 41% in water availability in the current Rabi season (October- March). It is expected that in the Kharif season, starting from April, there will be an overall shortage of 17% in water availability due to which, the government has revised the given targets downward for the seasonal crops. The major crops for the Kharif season are Cotton, Sugarcane and Rice.

This also affected Fertilizer sector due to the direct linkage to agriculture. In the Rabi season FY00-01, there was a minor increase of approximately 0.8% in Urea off-take from 2.017mt in the corresponding period last year. The government has estimated that the total demand for urea would be around 2.1 mt for the Kharif season, which in our opinion is quite optimistic in the current situation. According to the industry sources they expect an overall decrease of 2% in the off-take of urea in FY01.

The government has recently imposed 15% sales tax on urea, which is fixed at PkR600/tonnes. This will also hit profitability margins of the urea manufacturers, as the prices of urea have already been increasing steadily, it will be tough to pass onto agricultural consumers at the moment. However, according to the industry they will pass it with the passage of time.

On top of which, the urea producers are now having to contend with the removal of the subsidy on the natural gas utilized by them as feedstock. Multilateral lenders are continuously pressurizing the government to withdraw the subsidy available to the sector to make it more economically independent. Since feedstock is the core raw material used in the production of urea and is 70-75% of the total gas consumed during the manufacturing of urea, the removal of the subsidy at once will raise the question of whether the industry can continue to grow in terms of profitability. Especially when there is a need to attract fresh investment in the industry to fulfil the expected gap of 2.5mn tonnes, expected by FY2010, between the demand and supply of urea.

According to industry sources, they have asked the government to commit one of the gas fields, which is government owned, to the sector. Apart from that, they also have asked the government to link the gas prices to the Middle Eastern gas prices to their fertilizer sector and charge them in US dollars to make the prices more dynamic.

In our opinion, the government is going to remove these subsidies gradually to give enough space to domestic producers to internalize the change. However, we feel that this will give the domestic producers a drawback in comparison to the international urea manufacturers since most of them are using natural gas on subsidized rates. In 1999, we already have witnessed the dumping of urea in the country due to the lower prices, wherein the government had to impose duty on the imports to protect the domestic industry. Which is of course not a permanent solution of the problem. In our opinion the government should lower the subsidies instead of removing it, where the subsidies can be standardized with respect of other manufacturing countries. As for the Fertilizer companies, we feel that they should diversify their businesses to maintain their profitability margins on reasonable levels, since the golden era of high profitability for the sector has clearly ended.

MARKET ROUNDUP
..	LAST WEEK	THIS WEEK	% CHANGE
Mkt. Cap (US $ bn)	5.40	5.65	4.63
Total Turnover (mn shares)	252.00	497.55	97.44
Value Traded (US$ mn.)	147.23	289.04	96.32
No. of Trading Sessions	3	5
Avg. Dly T/O (mn. shares)	84.00	99.51	18.46
Avg. Dly T/O (US$ mn)	49.08	57.81	17.79
KSE 100 Index	1322.81	1371.71	3.70
KSE All Share Index	840.97	867.01	3.09

.Source: KSE, MSCI, KASB

ASIA PACIFIC & AUSTRALIA EXCHANGE INDEX LEVEL CHANGE EXCHANGE Bombay BSE 3565.65 -39.36 -1.09% Hong Kong Hang Seng 12063.71 -520.51 -4.14% Singapore Straits Times 1676.88 +54.89 3.38% Sydney S&P ASX 200 3220.5 +26.20 0.82% Tokyo Nikkei 13381.38 +138.60 1.05%

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EUROPE & UNITED STATE OF AMERICA EXCHANGE INDEX LEVEL CHANGE EXCHANGE Frankfurt DAX 5755.01 +157.35 2.81 % London FTSE 5633.9 +98.20 1.77% Paris CAC 5171.62 +99.80 1.97% Dow Jones Industrial 9485.71 -292.22 . NASDAQ Composite 1673.00 -109.97 .