Updated on Aug 11, 2001

The KSE - Overview: Give us a trigger!!

The KSE-100 Index closed on Friday at 1226.85, down 14.59 points from 1252.59 last week. The market's failure to hold its ground during this week resulted from large institutional selling in shares of PSO. PTCL and Hubco, the leading blue chip stocks which account for over half the volume traded on the KSE - 100 Index, also came under heavy selling pressure during the week. Though there was no concrete news regarding PTCL except rumors about strategic sale, the selling in Hubco came after the company's announcement regarding the interim dividend payout announced earlier this year. The extra time being taken by the lenders for the approval of dividend payout exacerbated the prevailing negative sentiments in the market, prompting panic selling in some other major scrips also.

The KSE -100 Index, as a result, fell to an intraday low of 1210.82 on Friday before correcting upward and closing at 1226.85. We believe that the last minute buying spree, which stopped the market from breaching its 1200 support level, occurred because the KSE - 100 Index had fallen low enough for punters to jump in and take positions in various low priced blue chip stocks. At the same time, several short sellers also covered their positions before the weekend.

We believe that the market's tight range bound movement in the recent weeks has shown the indecisiveness of key players regarding its future direction. The declining interest of market players as evident by the falling volumes is a sign that the market awaits some trigger to prompt serious and sustained reentry by local investors. We believe that with such low valuations prevailing in the market, the potential of a reversal is good if such a trigger occurs. These triggers include a positive outcome from the upcoming negotiations with the IMF. Recent revelations regarding the shortfall in CBR revenue from June-end targets has heightened market tensions. Any improvement in the law and order environment, particularly in the commercial hub of Karachi will be positive for market sentiments. Finally, a potential trigger may be the announcement of the roadmap for transition to a democratic government. This has become very important in light of the flak that General Musharraf has received from the G-8 nations on his assumption of Presidency. A credible roadmap would do much to allay these fears and ease the flow of concessionary credit to Pakistan. Another sectoral trigger as early as next week could be the announcement of large development/infrastructure projects that could help basic industries increase their capacity utilization for example cement, engineering, electrical, and chemicals.

Meanwhile, corporate results and associated news for 1H01 have started to flow into the market during the current week. A 55% rise in profits of Bank AL Habib from last year shows an improvement in performance of the financial sector going forward. The fertilizer sector companies also announced their half-year results — with Engro reporting a rise from its last half-year profits. On a quarterly basis though, Engro showed a decline in its second quarter profits, which resulted in selling in its scrip. Adamjee Insurance also came under heavy selling pressure and closed at PkR33.7 on Friday after losing over 17% of its share value (The news of potential insurance claims from the UK and the UAE operations is believed to be the reason for this fall in its stock price).

Looking towards the next week, technically the market could show a short-term rebound, with the scrips that have taken the most hits over the last week showing gains. While the Index has the potential to test 1240 levels next week, we believe the investors should continue to adopt a cautious stance. As before we recommend that trading oriented players follow the five day weekly cycle and buy in early in the week with clear exit level targets as the Index tests its immediate resistance.

For longer-term players we are providing below our fundamentally based earnings forecasts for FY01 and valuations. We shall be frequently looking at this core universe and accordingly updating our numbers and views.

Pharmaceutical Sector

Industry overview

The pharmaceutical industry in Pakistan comprises over 400 licensed companies including both domestic firms and multinationals. The MNCs in the sector, which number just over 30, have about two-thirds of the market share. MNCs operating in Pakistan in the pharmaceutical industry make very few generic building blocks locally, and a large majority of both over-the-counter as well as specialized drugs are imported in finished liquid, semi-liquid or powder form into the country. These companies then package them in capsules, bottles and cartons and market them to doctors across the country. Most of these MNCs have even outsourced final packaging to ancillary industries, and thus their major expenses are restricted to Selling General and Administration and Marketing expenses.

Debate over price increase

Over the last few months, the pharmaceutical companies' have come into the limelight in their efforts to get the government to agree to a hike in price of both controlled and decontrolled drugs. The debate continues to rage between the Pakistan Pharmaceutical Manufacturers Association (PPMA) and the Pakistan Medical Association (PMA). The former claims that the industry finds it hard to keep its head above water at the current retail price of drugs while the latter laments that the price of most drugs has risen beyond the reach of the common man.

The adoption of market-based exchange rates in July 2000 has led to a depreciation of 21% in the value of the Rupee as against the Dollar. Since the MNC operations in the industry import a large majority of their finished goods and raw materials from abroad, and are in essence involved in marketing of those drugs in Pakistan, SG&A becomes a critical cost component for these companies.

The nagging issue of value addition and real profitability

There has been an ongoing debate regarding the real profitability of pharma companies in Pakistan, particularly the MNC's and what value addition they actually bring to their Pakistan operations.

The MNC pharma industry complains that due to restrictions on pricing of regulated drugs, their return on investment in Pakistan is generally too low and does not even cover the pro rata allocation to their global Research and Development (R&D) budgets. They point out the low research-to-product ratio and long lead times in bringing new drugs to the market as the main reason for high cost of drugs. Thus, the industry argues that unless the government allows a reasonable return on capital via high end prices they would be unable to expand their operations in the country and introduce latest drugs in the market at a consistent pace.

In this context, the pharma industry has welcomed the recent decision by the government to allow up to 10% increase in various categories of controlled drugs. However, the implementation has again been delayed and there is uncertainty about the time frame.

The opposing view to that of the industry comes from critiques who charge that, with rare exceptions, over the last 20 years the MNC's have not really brought any benefit to the country in terms of basic research, technology transfer and any sustained effort to foster pharmaceutical research in Pakistan's educational institutions. They say that real value-added is missing because multinationals simply import the key manufactured bulk drugs from their home countries and simply finish them here rather than manufacture from basic building blocks. With a huge demand from a population base of 140 million, the MNC's can certainly do more to improve their performance in this area. Further, the critiques point to end-price discrepancies of some medicines between Pakistan and India, saying that in the latter country many of these are much cheaper even after stripping away duty and tax effects. While the pharma industry takes a unified stand against such criticism, increasing number of domestic pharma companies in the country do end up benefiting from the outsourcing by MNC's, they do acknowledge areas where the industry can do more to promote technology transfer and guidance in basic research at educational institutions.

Nevertheless, from an investment perspective there are both pluses and minuses regarding putting money into domestically listed pharma stocks. The plus is of course steady growth and stability of earnings along with reasonable payouts, while the minus is stock illiquidity.

Stock Market Synopsis
	Last week	This Week	%Change
Mkt. Cap (US $ bn)	4.92	4.84	-1.63
Total Turnover (mn shares)	303.10	302.40	-0.23
Value Traded (US$ mn.)	119.38	147.31	23.40
No. of Trading Sessions	5	5
Avg. Dly T/O (mn. shares)	60.62	60.48	-0.23
Avg. Dly T/O (US$ mn)	23.88	29.46	23.40
KSE 100 Index	1252.58	1226.84	-2.05
KSE All Share Index	806.06	791.72	1.81

 

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ASIA PACIFIC & AUSTRALIA
EXCHANGE	INDEX	LEVEL	CHANGE	EXCHANGE
Bombay	BSE	3316.21	-3.40	-0.10%
Hong Kong	Hang Seng	11765.8	+49.04	0.42%
Singapore	Straits Times	1641.43	-0.48	-0.03%
Sydney	S&P ASX 200	3401.3	-15.50	-0.45%
Tokyo	Nikkei	11735.1	-19.50	-0.17%

 

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EUROPE & UNITED STATE OF AMERICA
EXCHANGE	INDEX	LEVEL	CHANGE	EXCHANGE
Frankfurt	DAX	5433.49	-78.79	-1.43%
London	FTSE	5427.2	+24.30	0.45%
Paris	CAC	4846.02	-42.28	-0.86%
Dow Jones	Industrial	10416.25	117.69
Nasdaq	Composite	1956.47	-6.85