The KSE - Overview: Bulls go into overdrive!

Updated on Feb 05, 2001

The KSE-100 Index jumped 4.3% last week or 61.4 points, to close at 1478.97 on Friday. Monday was sluggish when the index touched its near term low of 1408, continuing declining trend from the previous week - under pressure from poor sentiments related to PTCL's half year results.

On Tuesday the mood of the market changed completely on the back of a significant positive earnings surprise by Engro Chemical — a key index heavyweight, pushing the Index up by 32 points for the day. The momentum was further strengthened on Wednesday on widely circulated talk of foreign buying. It was after quite some time that there was news of foreign funds on the buy side, as over the last 2 months, they had mostly been seen on the sell side. PTCL, which had been languishing in high 19's finally broke out of its post earnings spell and climbed back to 20.55. Shell, also on news of foreign interest, shot up by more than 5% in a day to 306 levels. Meanwhile, rumors began circulating that Hubco was likely to declare a "feel - good" dividend on February 7, 2001. PSO ended up as the star of the week, finally touching the elusive 150 mark after a long range-bound period to close at 149.75. With positive sentiment driving the market, the Index shed all inhibitions and rose more than 20 points on Friday to close the week at 1478.96.

Going forward, we are sensing that the bottom of the market is appearing to move up gradually. While earlier we felt that the market was likely to bottom out around the 1400 level, if the present strength is maintained into the coming week, it is likely that near term bottom of the market will move up to 1425-1440 levels. The positive aspect is that key index scrips have touched higher levels not seen for sometime (even during minor upsurges recently). Now if the remaining index laggards such as ICI, Dewan Salman, PTCL, Nishat Mills and MCB also gain strength next week, we could see the Index attempting to test 1500 levels. But technicians remind us that the key resistance level of 1486 must first be breached with strength.

Over a two-week horizon, from a purely trading perspective we feel that banking sector is likely to show a degree of out-performance as full year results begin to get anticipated by local punters. We feel that Askari, Faysal and MCB thus hold promise as short term trading buys.

Similarly ICI, Nishat Mills, Telecard and World Call, having missed this round of bullish fever have a good chance of playing catch up - IF this weeks performance leaders can hold the tort at their present levels. However, the key to a sustainable rally to the 1500 levels will likely be held (as usual) by the giant PTCL. The good news here is that the badla in PTCL — which started at 7 paisas — ended at around 5 paisas, indicating some squaring of positions before the long week-end. The overall average badla rate also ended up in the 17-18% — not a major move implying that the overbought positions of the market is still relatively moderate compared to the upside move seen during the week.

In view of the above we expect the trend to remain generally positive, although certain risk factors could dampen sentiments. If there is no interim dividend by HUBCO, this could affect the market negatively. Further, any large profit taking in PSO would likely bring it down to 145 levels for consolidation. And finally, it remains to be seen how Fauji behaves after book closure and where it settles. On the whole, however, the near term outlook appears to have more of a positive tilt than negative.

Sector outlook

Textile How the 'top-dogs' are doing

With textile FY00 results expected to start coming out by mid February, we expect many 'sleepy' textile stocks to awaken with trading volumes rising. To gauge performance of the sector, we took a sample of the nine largest capitalized textile stocks (spinning, weaving and composite) and analyzed their comparative performance for the half year ended March 2000. This would provide some clues to full year performance that may be expected from the sector.

For the nine stock universe, total sales in HY00 were up by 21% to PkR 15,950mn against PkR13,158mn in the corresponding period last year. Nishat Mills, carrying the most weight in terms of market capitalization, also reported the highest sales at PkR4,965mn, with the next closest sales figure, reported at PkR2012mn by Sapphire. Dewan, however, showed massive enhancement in sales from the 1H99 at a whopping 36.5%, while Nishat Mills and Gadoon registered sales growth of 20.2% and 17.7%, respectively.

Overall gross and operating margins traced an expanding pattern. Average gross margins increased from 18% in 1H99 to 21% in 1H00, and average operating margins increased from 14% to 16%. While lower cotton prices and higher sales volumes helped margins at the gross and operating level, lower financial charges in FY00 were the key driver in the net margin expansion. Net margin almost doubled to 11% in 1H00 compared to 6% in 1H99, as financial charges (as a % of sales) fell to 6.7% from 7.2% during this period.

The consolidated numbers highlighted above need further elaboration however, as there is a large dispersion between the top performers and laggards in our selected universe. We have noted some examples in the sales figures.

As far as gross margins are concerned, Dewan Textile leads the group with 26% in 1H00, followed by Nishat Chunian at 25% and Kohinoor Raiwind at 24% Fateh, Gadoon, and Kohinoor Weaving were the laggards with 17% and 18% each respectively In operating margins terms, Nishat Chunian and Sapphire were the leaders with 22% each followed by 20% for Kohinoor Weaving. Most of the group was bunched closely together at between 15% and 16% with Crescent and Fateh lagging behind at 11% and 12% respectively. Kohinoor Raiwind had undisputed lead in net margins with 23% but this was largely due to extra ordinary level of other income (PkR71mn), which was more than the operating profit of PkR 70mn. If Kohinoor Raiwind is therefore excluded, in net margin terms Kohinoor Weaving leads with 17%, followed by Sapphire at 15% and Nishat Chunian at 14%.

Valuations: As we were looking at half year results, PER valuations would not be meaningful in terms of comparative valuations. Instead we looked at price to book value and price to HY00 sales to assess comparative Valuations.

P/BV basis: The average P/BV ratio for the group is 1.14x. However, this includes 1.86x for Fateh, which is very high. Excluding Fateh, the average P/BV ratio is 0 74x. At current prices, Sapphire has the lowest valuation at 0.47x, followed by Crescent at 0.59x and Nishat Mills at 0.60x. Fateh and Dewan stand out as the only two companies where P/BV is greater than 1, with Fateh at 1.88x and Dewan at 1.40x.

Price/Sales Basis: It also provides an interesting valuation comparison The average price to 1H00 sales ratio for the group is 0.52x. Kohinoor Raiwind and Dewan are the most expensive with P/Sales ratios of 0.78x and 0.72x respectively with Fateh following closely at 0.66x. At the other extreme, Sapphire and Nishat Chunian are most attractive with 0.22x and 0.28x with the rest bunched together between 0.43x and 0.55x.

Investment perspective

The above nine companies have a combined market capitalization of PkR 9.63bn, or 33.6% of the entire textile sector (spinning, weaving, composite) capitalization of PkR28.64bn. Thus, they should be fairly good representative of sector dynamics. At the same time, lack of free float, very high sponsor equity stakes make some of these stocks unattractive from a minority investor perspective. In view of this, in our opinion, investors looking at large caps should focus on a smaller sample such as the Nishat Group of companies, Crescent and Gadoon with Sapphire also a potential candidate with a steady earnings and payout potential.

Stock Market Synopsis:

MARKET ROUNDUP
..	LAST WEEK	THIS WEEK	% CHANGE
Mkt. Cap (US $ bn)	6.12	6.25	2.1 2
KSE 100 Index	1417.54	1478.97	4.33
Total Turnover (mn shares)	747.10	711.87	-4.72
Value Traded (US$ mn.)	380.92	513.35	34.77
No. of Trading Sessions	5	5
Avg. DlyT/O (mn. shares)	149.42	142.37	-4.72
Avg. Dly T/O (US$ mn)	76.18	102.67	34.77
MSCI Pakistan Index:
Pak Rs.	93.19	96.30	3.34
US $	40.60	41.87	3.13

.Source: KSE, MSCI, KASB

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