The KSE - Overview: Hubco leads the KSE in a fine dance

The market closed at 1358.52 level, 22 points lower than last week's closing at 1380.71. The Average Daily Volume also declined to 67mn shares from 130mn shares, reflecting that the market remained dull during the week. We feel that there are two primary reasons for the lower activity in the market during the week. The first being that the onset of Ramadan has historically mellowed speculative drives. During FY99 and FY00 the ADV through the month of Ramadan was only 148mn and 150mn respectively. However, the ADV during the current week is particularly low. Hence we feel that the second reason, which is the fraudulent announcement early in the week that Hubco's foreign lenders had approved its proposed final dividend, made investors particularly subdued. Another reason that the volumes in the market might have been depressed during the week was the interest generated by the offer for sale of 5% of NBP's shares, which has been oversubscribed by record amounts.

The market closed with practically no change on Monday at 1380.34, from opening 1380.71 levels. However, with the news that Mari Gas has decided to increase its authorized share capital PkR0.5bn to PkR2.5bn, the price of the scrip began an upward rally from the usual PkR20-PkR22 to end at PkR25.9 at the end of the week.

On Tuesday began the Hubco drama which kept the Karachi Stock Exchange in a flutter through the week and was responsible for the ups and downs on a day-to-day level. An announcement on the KSE letterhead was circulated which stated that the foreign lenders had agreed on the final dividend proposed by Hubco in its annual meeting. Although this news was clearly positive and should have boosted the price of the scrip and hence the stock market on the back of the price increase in the large cap, things didn't turn out quite like that. In fact there was heavy selling in the stock and a consequential bearish sentiment in the market. Furthermore, rumors began to circulate midway during the trading day in the market that Hubco's announcement was a hoax. The market eventually closed 26 points down at 1354.07. After the market closed that day, the company reaffirmed the rumor. IT is still unclear why the company waited till the end of the day to make this clarification.

On Wednesday, the market gained four points and closed at 1358.73 levels. Some positive investor sentiment may have been garnered by the news that the GoP had slashed the export refinance rate by 200bps to 8.5% from December 1, 2001. The other positive news for the market that day was the 10% cash dividend announced by ICI. However, since the announcement came just before the market closed for the day, the share price increased by only one rupee to PkR45, at which level it has remained through the week.

On Thursday, following the KSE's declaration that it would wage an investigation with regards to the forged issuance of the Hubco related notification. Investors remained wary and the market declined another five points, which meant that the market opened at 1353.58 levels today. The market's mood has been in general more positive today than on any other day this week.

However, yesterday's announcement that Hubco's lenders had indeed approved its proposed final divided, helped in boosting the market up by 4 points. Furthermore, the market's positive movement maybe attributed to the US indication that it is prepared to extend the repayment period of Pakistan's outstanding loan to 40 years with a grace period of 16 years.

Volumes in the cement sector, particularly Lucky, DGK and Cherat, were high on the back of news of planned reconstruction efforts in Afghanistan. SSGC and SNGPL remained boosted above PkR11 levels throughout the week as they have since the dividend announcement by the management of the two companies over the last two weeks. Overall, we expect the market to remain firm next week and continue its move towards our end-December target of 1550.

Sector outlook

Karachi Electric Supply Corporation

The deadline for privatization of Karachi Electric Supply Corporation (KESC) has been reportedly set somewhere during last quarter of 2002, which could be further delayed under the current regional situation. But setting aside the current regional conflict and its effect on reducing any investor interest, if there is any, in KESC, we look at the prospects of privatization of KESC in the near future simply by looking at its recent performance and historical trend.

By going over the common size statements of KESC, we can see that operating expense and financial charges are the two items responsible for over 100% of the costs involved.

While the net loss in HY01 rose by 118% YoY to PkR8.3 billion, it is important to note that this deterioration in KESC's financial position in the Half-Year is primarily due to higher fuel costs. Fuel and Oil purchased for direct generation rose by 40%, and indirectly via purchased electricity, by 31%. Thus the rise in Gross Loss by 838% is directly attributable to arise in cost of fuel and oil as energy sale revenue increased by a mere 1%.

According to the management review in IH01 accounts, average T&D losses were reduced to 38.6% in Dec 2000 versus 40.2% in June 2000, so the prime culprit appears to be high fuel costs. Other areas squeezing margins were the 19% YOY rise in customer service and administration expenses in IH01 vs. IH00 and a 6% rise in financial expenses. The bottom line impact of all these factors was 118% increase in net losses of KESC to PkR8.3 billion.

Brief Analysis of the balance sheet as at Dec 31,2000, indicates that net accumulated losses rose 39% YoY. Future burden on the company in case of no restructuring can be gauged by the fact that short-term borrowing rose by 42% of YoY to PkR11.6 billion while, Creditors and Accrued Liabilities rose by 25% to PkR33.2 billion. Together, just these two items accounted for 65% of Total Liabilities as at Dec 31,2000 versus 52% in previous December.