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Updated on May 24, 2002

The heading says it (for the time being) with a sharp climb of over 135 points on Friday with the KSE Index closing at 1663 level. But how far can we go into believing it? Well we guess we must backtrack a little to see what the Index did during the whole week and see where it's heading.

The very first day of trading saw the Index experience a drastic fall of over 132 points and the market close down to 1647 from a weekend close of 1780. The drop in Index was actually the highest since May 1998 when Pakistan tested its nuclear weapons. Trading activity for the day mainly focused on the political activity in India and Pakistan over the last week when the tensions reached a new high between the two nuclear rivals after a suicide bomb attack in Indian occupied Jammu and Kashmir during the last week. The heightened war fears thus led to this panic selling from all counters as Indian Prime Minister Atal Behari Vajpayee announced that they are contemplating a suitable response in light of the attack.

The Index lost 49 points on the second day to close at 1598 level as the war fear grips the market. The Pakistani leadership, on the other hand, hoped for continued talks between the two rivals and the diplomatic efforts by the foreign diplomats visiting Pakistan and India to ease tension continues. The trading volume for the day, however, touched 172mn shares - a jump of over 143% over the last trading day.

Even though the market opened on a firmer note on Wednesday, the negative sentiments were further heightened as the international and domestic media reported the overnight murder of Abdul Ghani Lone, a moderate leader of the All Party Hurriyat Conference in Indian Controlled Kashmir. The day saw a drop of over 70 points with the trading volume touching 141mn shares and the market closed at 1528 level. With the heightened war rumors circulating the market, the dollar rates in the inter-bank and the kerb market and gold prices all rose sharply higher indicating a flight of capital towards other investment alternatives.

The Board of KSE decided to keep the market shut on Thursday as the backlog of the Carryover Transactions (CoT) hampered the operational activity of the stock exchange. KSE has since announced new rules for CoT to clear the backlog of the last few trading days.

Friday experienced a different day altogether as the Index rose 135 points, covering almost half the losses for the week and closed at 1663 level. This was the result of an announcement made by the Indian Prime Minister late Thursday afternoon that he foresees no threat of an immediate war between India and Pakistan. The close on Friday was still 116 points lower as compared to the last week's close of 1780. But history indicates that after a COT panic the jump in the Index is hard to sustain. This is easy to understand given that investors who were stuck would unwind positions, and badla financiers seeing the fait accompli attitude of the KSE would be more wary of investing funds. We recommend investors to raise cash, and wait for a decisive market direction to emerge.


Signs of a turnaround in FY02 for cement sector earnings have now been confirmed with all 3Q02 results having been announced. After three years of losses, a rebound in FY00 and again bottoming out in FY01, the sector as a whole has posted profitability in their nine-month performance as of March 02. We would like to update our readers with some sectors dynamics that support our view:

On the basis of the World Bank's recommended occupancy rates of 6 persons per house and Pakistan's population of 140 million, the total number of required housing units in the country are estimated at 23.4mn. The growing emphasis of the government on the social sector development and development of new water reservoirs, a turnaround is discernable for the cement industry in the FY02, especially since 60-70% demand comes from the construction and housing industry.

With the availability of limestone and gypsum domestically, Pakistan can potentially become one of the major producers of cement in South Asia. Despite this, it has the lowest capacity utilization within the region at around 70%-75%. Furthermore, domestic per capita consumption is only about 71kg/head versus the average regional consumption of 242kg/head.

According to industry sources, the average cost per 50kg bag is around PkR260 versus an average price of PkR225/bag, with the main cash cost elements being fuel and power inputs, which come to about 65% of the production cost. The cost of coal is around 55% of the furnace oil cost and the conversion is likely to reduce it by almost two-thirds. The gradual shift of the sector from furnace oil to coal/gas will drastically improve gross margins.

Although, the procurement process by international agencies in Afghanistan will start in the later part of the fiscal 2001-2002 and the real effect of it will be visible by 2002-2003. At present the entire industry is exporting 250-300 tons daily as against 150-300 tons per day.

However, the 17 cement companies in total were unable to reduce the demand gap of 6mn tonnes/annum as the installed capacity of the industry to produce remained at 16.10mn tons of clinker/cement as against the demand of around 10 million tons.


Our top picks in the cement sector are DGK, Lucky and Cherat Cement, and a quick review in their 9-month performance reveals that, capacity utilization remained flat leading to a flat topline growth. DGK had the highest sales figures at PkR1,949 million, followed by Lucky at PkR1,416 million and Cherat at PkR1,008 million. Cost of Goods Sold ranked in the same order however, the gross margins of DGK's were highest amongst the three at 39% and Cherat managed to efficiently equal Lucky's gross margin at 27% for 3Q02. DGK's gross profits led the pack with a huge difference at an impressive figure of PkR757 million followed by Lucky's gross profit at PkR389 million and Cherat at PkR274 million.

On the operations side, again DGK emerged as a leader and posted the lowest selling and administration expenses at PkR46 million followed by Lucky at PkR50 million and Cherat at PkR58 million. (We were uneasy with Lucky's published third quarterly result's format as the company had not give the comparison of the corresponding 9 month that made it difficult to evaluate the growth trend of their 3Q02 performance) Moving forward, the operating margins fell in the same order with DGK at 36%, Lucky at 24% and lastly, Cherat at 21%.






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.Source: KSE, MSCI, KASB