Updated on June 02, 2001

The KSE-100 Index staged a smart 2.4% recovery this week to close at 1381.84 compared to 1349.61 last week. Total turnover rose marginally to 318mn shares from 307mn shares last week. The leader of the week was World Call Payphones rising a hefty 37.5% WoW on volume of 27.5mn.

PTCL finally showed some sign of life and rose 2.2% to PkR18.25 but on a much more reduced volume of 42mn versus 68mn last week. PSO seesawed throughout the week but generally maintained a positive trend after news that POL product prices would be deregulated starting next fiscal year. Consensus estimate has been of possible inventory gain of PkR200-250mn in FY02 due to this. However, other rumors circulating in the market cut short PSO's recovery as reports suggested that restructuring and downsizing costs could touch a billion rupees and might be taken in one go rather than be amortized over two-three years. Hubco came in for selling pressure as a new uncertainty was injected when a third party approached the court stating that its name had been sullied by Wapda during the case against Hubco. This party asked the court not to dismiss the cases as Wapda and Hubco had wanted until its name had been cleared. This has delayed the mutual withdrawal of cases and has had a negative effect on sentiment for the scrip.

On the other hand, badla rates dropped again this week and badla volumes in major scrips like PTCL and Hubco literally halved. Market participants say this is a move by some major players to make it appear as if delivery was being picked up — the idea being to poise the market for further upward push next week. Investigations reveal however, that there are unlikely to have been genuine long-term purchases on any significant scale, thus it is the speculative element that is attempting to change market sentiment. It is possible that certain participants are anticipating that forward trading may be allowed on the exchanges soon and are positioning themselves for such an eventuality.

While on the subject of forward trading, our view is that by itself, merely bringing in foreign trading is meaningless. What is needed is proper framework that facilitates futures trading. This would entail a comprehensive regulatory regime both at the exchanges level as well as the SECP level along with the development first of an Index Futures. Such an Index in our opinion, can be constructed based on 25-35 large-medium cap, liquid quality scrips. The exercise of simply starting forwards of itself makes little sense to us, both from the perspective of hedging capability for the fund management profession as well as overall interest in general market scrips. What is likely to happen if only forward is brought in, is that the five or eight scrips chosen for this purpose are going to suck in the entire market's liquidity and many of the other scrips are going to be left completely out in the cold. This would be neither good for market participants, nor genuine investors. We believe the Exchange is rushing ahead to start the forward business as it perceives that there is a positive inclination from the SECP at the moment, and does not want to lose this opportunity as a quid pro quo for bringing in the T+3 as the SECP desires. We believe that investor interest will not be served by this partial approach. While we accept the exchange's argument that its members are familiar with a forward instrument because they used to have it before (called WADAA) and the Exchange now has a strong control mechanism to avoid speculation, we very much doubt whether the forward alone serves any economic purpose. What is needed is a proper derivative instrument, which in our opinion is Index Futures and Options on a few selected large scrips. It is these that will not only help domestic institution fund managers in terms of hedging but also taking calculated bets to enhance the total return of their portfolios. For example, what an option does is to skew the general normal distribution of returns for security, which are symmetrical, into asymmetrical returns, thereby allowing several strategies for portfolio insurance to be executed. That is when Options serve the economic purpose, along with the opportunity for speculators to make bets on which they can either gain or lose.

Just having forward would be akin to bringing back the badla system in another form. As our readers would recall, we believe that the badla system is an archaic form of speculation, which increases the system risk without providing any benefits in terms of hedging and portfolio risk management. The world is going towards T+1 and instantaneous settlement, and we still seem to be going around in circles caught in a time capsule of a time that no longer exists. That is no way to progress, nor does it serve genuine investor interest, in our opinion.

Regardless of our view, the management of The Exchange is going to do what it is going to do, so all we can advise investors is to wait and see the shape of the new animal and its impact on market behavior before taking major investment decisions. And as we have highlighted in the Economics Section, the weak macro-economic outlook leads us to limit our exposure to the equity market in the short term and keep our focus on stocks with low relative valuations and above average expected growth rates.

Nishat (Chunian) Limited: Value Addition will Pay

Nishat Chunian Limited (NCL), an upcoming star of the Nishat Group, recently announced 1H01 results, showing a decline in NPAT of 37% YoY. Co-incidentally, this is exactly the decline in NPAT that the flagship Nishat Mills Limited, experienced in the first half of the current financial year. But here the difference ends. Sales grew by a healthy 20%, driven primarily by volume increases as part of the new capacity came online and in part due to the positive local currency impact of the large rupee devaluation. This helped mitigate the impact of a sharp 26% growth in COGS which was driven by sharply higher cotton prices this season. As a result, gross margin narrowed to 2% in the current half from 25% in the previous half, and Gross Profit slipped by 1% to PkR287mn.

Operating Expenses showed a massive 88% rise, attributable primarily to marketing expenses. This is of concern to us although we understand that perhaps, it may include special discounts and incentives for buyers as demand slowed and competition increased in major export markets. Nevertheless, a close eye should be kept on this head by the investors as continuation of this trend could jeopardize longer term profitability growth. As a result of the above, Operating Margins fell from 22% in 1H00 to 16% in 1H01. Further, pressure on earnings during this half came in the form of 23% increase in financial expenses. This is likely due to both the larger financing requirement driven by sales growth and higher cotton prices and also increase in export refinance charges. Thus, Net Margin suffered a narrowing to 7% this year versus 14% in the same period last year.

MARKET ROUNDUP
..	LAST WEEK	THIS WEEK	% CHANGE
Mkt. Cap (US $ bn)	5.42	5.44	0.37
Total Turnover (mn shares)	307.56	318.01	2.39
Value Traded (US$ mn.)	253.02	177.12	-30.00
No. of Trading Sessions	5	5
Avg. Dly T/O (mn. shares)	61.51	63.60	3.40
Avg. Dly T/O (US$ mn)	50.60	35.42	-30.00
KSE 100 Index	1349.61	1381.84	2.39
KSE All Share Index	858.40	876.59	2.11

.Source: KSE, MSCI, KASB

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