. .



Updated on Sep 08, 2001

Khadim Ali Shah Bukhari & Co. Ltd

The KSE Overview: Market is likely to be tedious

With the final implementation of T+3 settlement procedure, the KSE-100 Index declined a further 11 points more to close at 1246.80 on Friday. The overall market remained technically driven, displaying choppy behavior within the range of 1227 1258 during the week, where the average daily volume remained subdued at 34.7mn shares showing the general lack of interest from speculators and short-term investors. This group of investors has gradually shifted towards the future's counter.

The main reason for market remaining sluggish this week was the completion of the implementation of the T+3 system, where the remaining last two sectors Telecommunication & Transport and Chemicals & Pharmaceuticals were inducted into it. The volumes declined incredibly on Monday, testing a seven years low of 15mn shares. Further pressure on volumes came from the commencement of the Future Contract system, which started from August 30, including top eleven stocks PTCL, Hubco, PSO, MCB, Fauji Fertilizer, Engro Chemicals, Ibrahim Fibers, FFC Jordan, Sui North, and Dewan Salman. The KSE is likely to create a separate index for the future contract trading as a benchmark for the daily volatility in the business and price movement.

We have been discussing fundamental reasons for the Index to bottom out where we expanded on the expected earning growth, relatively easier monetary policy, improving government policies and also the impact of the approval of PRGF programme from IMF on the macro risk. This week we will explain why we think the market has bottomed on a technical basis on top of the fundamental rationale we explained in previous weeks.

Taking the intermediate term trend, the Index is trading near its oversold zone with 14-week RSI at around 34. The trading band is continuously shrinking, while the volumes are also decreasing due to the above given reasons, indicating a major breakthrough in the near term. This, theoretically speaking may lead the Index in either direction. Now the question is why we think that the market is likely to move in upward direction. With Index near its oversold zone and a very strong support at 1220 levels another argument for the Index not to go further downside is, intervention of the government through the much publicized support fund of PkR4-5bn. According to market reports this support fund has sprung its action buying into specific stocks, when they hit target. Hence with such low levels downside risk is likely to remain limited, implying an upward rally in the near term.

This view is also supported by short-term market trend. With 14-days RSI at around 42.5 Index is trading in a small convergent triangle with range of 1248 1222. This convergent triangle has its breakup point near 1233 level. We may witness weakness after the breakup where support at 1220 is enough to hold any weakness in the short term. However, for any upward rally in the short term, the Index has to cross resistance at 1260, after which, the rally in the intermediate term may lead it to test 1320 level. This as we discussed earlier in our weekly is the main hurdle for any longer term positive trend.

On a fundamental note, we believe that the liquidity is just not available in the market for a sustained upward rally, especially as institutions remain reluctant to deploy funds fro a longer horizon. We, therefore, foresee a more gradual rise in the Index, which may even seem tedious at times, as longer term funds from provident pension funds are slowly deployed in the market. As has been in the past, it has been foreign portfolio investment, which has provided any sustainable upward spurt in the market. Foreign fund managers though remain cautious of the global economic recovery, and at present will stick to OECD defensives and fixed income investments. Currently, a lot of funds are being invested in US bonds to take advantage of the Fed easing. The completion of the Fed easing cycle, will then see funds deployed in Euro and (to take advantage of ECB easing) and emerging equities.

Sector Review:

National Refinery Limited

Brief Industry Overview

Pakistan has a total refining capacity of 11.17 million tonnes per year, which constitutes 63% of the domestic POL-consumption. The refining capacity increased by over 67% after the commissioning of Pak Arab Refinery (PARCO), which has reduced the import of refined petroleum products, thus saving around US$200mn per year in foreign exchange.

The ministry of petroleum had deregulated the Furnace Oil (FO) business last year, just two months before the start of commercial operations by PARCO. This move resulted in heightened competition for the other refineries as, besides being older units, their production capacities are relatively small compared to PARCO.

The late commissioning of PARCO in FY00 (PARCO started its operations in Sep 2000) has kept the import of POL products up 9% to 11.9mt during FY00 from 10.9mt in FY99. We believe that going forward, the country's requirement for LPG, motor gasoline, kerosene, JP-4, LDO and FO (for power plants) will be met entirely through indigenous production, thus reducing refined POL imports substantially.

Furthermore, any surplus could also be exported since the Ministry of Petroleum (MoP), under the new regulatory changes has allowed the private and public sectors to export POL products. The MoP has announced that Pakistan is likely to earn around US$200-210mn foreign exchange during FY2001-2002 by exporting petrol and liquefied petroleum gas (LPG).

Brief Historical Performance and FY01 Results

The company faced a decline in production and sales over the last couple of years. Production declined by 1.5% to 2.72mt in FY00 to 2.76mt in FY99. The sale of finished products also saw a fall of 3.8% in FY00 as compared to FY99. Even though the Lube Base Oil (LBO) production declined marginally, the fall in rupee sales by 8.3% to PkR3.42bn in FY00 from PkR3.73bn has kept its margins under pressure. As the lube industry is not subject to pricing control by the government, the rising competition from imported LBO available at lower prices and reclaimed lubricants from unregistered producers resulted in falling sales revenues for NRL.

National Refinery announced its FY01 results recently showing an improvement of 16% in its net sales figures, which increased from PkR29,628mn in FY00 to PkR34,331mn in FY01. However, the rise in COGS by 17% over the last year limited the increase of gross profit to 2%. In our opinion, fixed consumer prices Ex-refinery prices regulated by the government - during rising international oil prices kept the gross profit down in FY01.

The admin/mktg expenses increased by 6% in FY01 to PkR246mn from PkR232mn in FY00. This rise in admin/mktg expenses kept the increase in operating profits and EBITDA to a mere 1% in FY01 to PkR1,027mn and PkR1,155mn respectively. Other income saw a fall of over 7% in FY01 to PkR238mn and other expenses increased by over 16% to PkR 81.7mn in FY01 from PkR70.24mn in FY00. This resulted in the overall decline of net other income by 16% in FY01.

The change in other income in FY01could be attributed to a one time development surcharge of PkR78.33mn received in FY00, which was due from the government on furnace oil, used as feedstock in lube refinery in respect of period commencing from FY95-FY96 to FY98-FY99.

However, the fall in financial charges by over 40% to PkR68mn in FY01 from PkR114mn in FY00 resulted in a positive EBT figure in FY01. EBT, as result of falling financial charges, improved by over 2% in FY01 to PkR1,116mn. The fall in tax rate by 12% in FY01 helped National Refinery Limited to post a rise in NPAT of 10% to PkR776mn in FY01 from PKR707mn in FY00.

Even though NRL net sales grew by over 16% in FY01, we believe that the falling LBO margins (Lubricants business has faced severe competition due to new entrants and unregistered producers) have subdued NRL's gross margin in FY01. Operating margins also declined to 3% in FY01 from 3.4% in F00. The net margin fell marginally as financial charges and tax declined by over 40% and 12% respectively in FY01.

ROA declined to 6.5% in FY01 as compared to 8.3% in FY00. The stagnant operating profits coupled with rise in total assets of over 23% in FY01 have resulted in this fall of ROA in FY01. ROCE, similarly declined to 28.5% in FY01 from 38.7% in FY00 implying a higher level of debt assumed going forward. ROE declined marginally over the last year to 28.48% in FY01. The differential between ROCE and ROE has narrowed considerably in FY01. Although the company has consistently paid cash dividends historically, the incidence of ROCE falling below ROE in the future would justify their action.

Debt/Equity and Debt/Capital ratio have both risen to 52.5% and 34.4% in FY01. This we believe has resulted due to an increase in short-term running finance of over 110% in FY01.

Current ratio has remained stable over the last year at 1.09 in FY01. We however believe that, even though the ratio is over 1.0 in FY01, the rise in short term finances due to higher receivables from the government could result in higher financial expenses going forward.

Future Outlook

NRL has managed to report a rise in EPS of 10% to 11.64 in FY01 from 10.61 in FY00. We believe that NRL's drive to revamp its lubricants operations and a shift in focus to HSD from FO production could help it insulate from the fierce competition from PARCO and other refineries. The rising competition from PARCO-TotalFina and smaller LBO producers could result in falling sales volumes and thus lower margins going forward. Also, in our opinion, the production cost efficiency of the new PARCO facility is bound to impact the deregulated FO prices and would affect the margins of NRL in the future.

Stock Market Synopsis


Last week

This Week


Mkt. Cap (US $ bn)




Total Turnover (mn shares)




Value Traded (US$ mn.)




No. of Trading Sessions




Avg. Dly T/O (mn. shares)




Avg. Dly T/O (US$ mn)




KSE 100 Index




KSE All Share Index












Hong Kong

Hang Seng





Straits Times





S&P ASX 200