THE KSE OVERVIEW: BEAR STEEPENING NEXT

For the week ending March 29, 2002, the KSE 100 Index closed 26 points down from last week at 1,868 level with a 10% increase in average daily volume (ADV). The trading days were limited to 4 during the week on account of holiday on the 10th of Moharim falling on Monday.

The market on Tuesday opened on a lower note with stocks undergoing a technical correction as a result of sporadic profit taking from various counters. Institution of the "Ultra Trading System" by the KSE to initiate on-line trading, caused the investors to shy away from active participation, for the day. The market closed 28 points down to 1865 levels.

On Wednesday, the market opened with the news that Adamjee Insurance Co. and some of its shareholders had filed a suit in the Sindh High Court against MCB and others sought remedy against what it said a possible hostile takeover attempt. The marked was poised for lower levels and the sell side impetus directed the market 37 points downwards to 1,828 levels, with volumes slightly improving as the investors were overcoming their shyness towards the new trading system. Adamjee's price decreased from PkR38.95 per share to PkR36.50, reflecting a decline of 6.2%.

On Thursday, it was a different story altogether where the KSE-100 Index gained 23 points to close at 1,852. Even though there was some sporadic selling in the market, the index staged a smart rally mainly led by scrips like PTCL and Hubco. The upbeat sentiment continued on Friday, where the market notched up 16 points to close at 1,868 levels. Hubco remained the most active stock of the week with a turnover of almost 200mn shares, on the back of news regarding WAPDA paying their dues to Hubco on the coming Monday.

COMPANY REVIEW

IBRAHIM FIBERS COMPANY LIMITED

The Ibrahim group continues to demonstrate its leadership skills in the country's corporate sector in terms of superior management quality, vision and forward planning, besides being one of the very few local sponsor groups who take along their minority shareholders with them in a fair and transparent manner. Recently, we visited the company to discuss the impact of recent developments and further updates on the PSF sector. Following is the information, which we received from the company along with our company analysis, which might be of some interest to investors.

FINDINGS

1. Ibrahim Fiber Company Limited, with a production capacity of 70ktpa is the second largest Polyester Staple Fiber producer in Pakistan. With the recent merger company also possesses 134,170 spindles, which mainly produce Polyester Viscose Yarn. These spinning units utilize almost 25-26% of the PSF produced in IFL, and the remaining is sold in the domestic market. Lurgi Zimmer AG in 1997 constructed the PSF plant for IFL. Zimmer is the global leader in manufacturing systems for polymer and synthetic. This gives IFL an advantage in operating efficiency over other domestic PSF manufacturers and reduces the wastage ratio of the plant to 0.5% against an average sector ratio of 2%.

2. Ibrahim Fibers imports raw materials, PTA and MEG, on 100% contract basis from Mitsui Chemicals and Dow Chemicals to maintain the quality of the product they produce and ensure regular supply. The company maintains the lowest average stock levels compared with the rest of the industry domestically. Currently the company is producing three types of polyester namely, Bright, Semi Dull and Clear.

3. According to the company they had started working on the amalgamation of the four companies before undertaking the legal requirements. They believe that it will help them save on general sales tax on intra-company sales and purchase, along with management synergies.

4. Ibrahim Fibers is currently in the process of enhancing its production capacity after which it will become the largest PSF producer in Pakistan with a total production capacity of 208.6ktpa. The expansion project comprises a continuous poly-condensation plant with a capacity of 138.6ktpa polymer, three staple fiber lines as well as all ancillary facilities. Lurgi Zimmer has supplied the technology, complete engineering and equipment. The value of this contract was around Euro71mn. This expansion is likely to commence production at the end of April 2002.

5. With this expansion coming online, IFL will introduce two new PSF products, hollow fiber and dyed fiber. The company is planning to export these products in the international market, where they are in demand and usually enjoy relatively higher margins. Also, the company is quite optimistic regarding the additional production of PSF, which is likely to create an oversupply situation in the domestic market. According to the company, due to the better quality of their product there is high demand for their yarn and PSF and so they should easily be able to sell their additional production.

6. Future prospect of the company: they are also planning to increase their yarn producing capacity for the export market and they may increase it by 50,000 spindles in coming years.

FINANCIAL HIGHLIGHT

IFL is the lowest cost producer of PSF in Pakistan. A state-of-the-art plant, ISO-9002 certified management practices and a strong bottom line orientation have all contributed to this. Additionally, a low debt to equity ratio of IFL as compared to the sector means relatively lower financial charges. The IFL's financing structure for the PkR5.6bn expansion project neutralizes both risks, currency devaluation risk and capital control risk, allowing investors to assess value addition in local currency terms.

The company recently released its detailed accounts for FY01 where the merged accounts of the four companies were also given. We have find that the consolidated sales of the combined entity, increased by 3% from PkR7.71bn in FY00 to PkR7.97bn in FY01. The PSF production increased marginally by 1% to 70.429kt in FY01, while the capacity utilization of textile units remained as high as 120% during the year in review. The consolidated gross margins declined to 16% in FY01 from 21% in FY00. According to the half yearly results of the companies, IFL's stand-alone gross margin was of 22.2% in 1H01 versus 25.9% in 1H00. Superficially, this indicates that the non-synthetic units had taken a bigger hit this year at gross margin levels then IFL itself. The real drag on earnings of the consolidated entity, in our opinion, would have been Ibrahim Energy where gross margins fell from 31.9% in 1H00 to 6.4% in 1H01. A massive jump in international petroleum price and hence domestic furnace oil price was likely to be the cause for it.

Looking at consolidated operating margin, it declined from 20% in FY00 to 14% in FY01. The reason appears to be the same as above. The combined total assets for FY01 were PkRPkR11.2bn out of which approximately PkR8.7bn or 78% are related to IFL. Going forward, of course IFL's share would increase substantially next year, as Capex for the expanded capacity will come on line.

INVESTMENT PERSPECTIVE AND RECOMMENDATION

With the additional PSF capacity coming on line, the future profitability of the PSF sector looks to be in doldrums. However, an upturn for the sector in the international market is likely to take place in FY03, where the demand is likely to be drived mainly by the Chinese textile industry boom and also from the global economic recovery. But this may take some time to reflect on Pakistan's synthetic industry. We maintain our Overweight stance for the sector at the moment.

Compared to the sector, Ibrahim Fibers is likely to outshine other PSF manufacturers. Profitability growth after expansion is likely increase drastically. As we are in process of rebuilding our financial model for the company, it is too early to give estimated growth rates along with numerical forecasts for the years to come. However, we are very positive regarding IFL's earning growth during FY02 and are changing our Intermediate -Long term stance of BUY to Strong BUY.