Updated on June
THE KSE OVERVIEW. TIME TO ENTER OR EXIT?
The trading volumes on the very first day of the
week explained it all. Minimal interest was shown from
investors/buyers in taking up positions before the conclusion of the
Almaty conference on Tuesday. The Index closed down 16 points on
Monday with a 36.9% drop in trading volumes as compared to its last
Friday close. With little hope of a meeting between the leaders of
Pakistan and India in Kazakhstan and the continued evacuation of
foreigners from the two countries, the market players remained
apprehensive on entering the market at low levels thus resulting in a
slide in the Pakistan stock market on Monday.
Tuesday saw an increase of 28 points in Index which
close up at 1676 level with a 172% jump in trading volume for the day.
The market sentiment seemed to tilt toward the positive sentiment that
prevailed the Almaty Conference that the foreign intervention would
scale down the current war hysteria and would bring the two rivals to
negotiating table. The expected visit of the US defence Secretary to
defuse the tensions in the region also played well with the ongoing
optimism in Almaty within the investors ranks, which helped the market
to close higher on the second day.
Wednesday experienced a frenzy of buying activity
on the KSE as the market saw the Indian offer for joint patrolling on
the Line of Control (LoC) as the first sign that could eventually lead
to the resolution of the ongoing conflict. Furthermore, the Russian
premier's offer for talks with the leaders of the two rival nations in
Moscow to agree upon a solution to end the regional uncertainty also
helped raise the Index level, which closed up 48 points at 1724 for
the day. Institutional investors led the rally to take positions at
the lower end of the Index that was closely followed and matched by
numerous smaller investors and traders.
The market on Thursday came under pressure after
Pakistan rejected the Indian call of joint patrolling of the borders
and insisted that the Indian proposal be offered as a part of a
comprehensive dialogue. According to the government sources, the
mechanism of joint patrolling would completely fail with the given
level of confidence between the two countries. The market lost 9
points to close at 1715 with a 7% increase in trading volume over the
last trading day.
The last day of the week saw the Index drop over 23
points to close at 1691 with the 51% decline in trading volumes. We
believe that the uncertainly looming on the issue of joint patrolling
and the rumor of an increase in the downside cap to 5% from 2.5%
previously pushed the investors into squaring their positions before
The market is poised for a sharp move in either
direction on the basis of the outcome of the visit of two key US
officials. We again strongly reiterate that we think that war can be
ruled out to a very large extent. Until there is a substantial
de-escalation on the LoC and border, investors should buy into a
declining market sell into a rising one. Longer-term investors should
slowly build positions into a declining market.
The joint patrolling offer will not be a stepping
stone for de-escalation, as even if a formal offer is made Pakistan
will not accept but it does indicate some movement towards a mutually
face-saving de- escalation.
AUTO SECTOR REVIEW:
HONDA ATLAS CARS PAKISTAN LTD.
The production of automobile sector has risen over
the past few years in Pakistan and the two of the three leading car
producers, Honda and Indus motors, have shown an improvement in
performance over the previous years. The third company, Pak Suzuki has
seen a decline in performance due to lower demand and increased
competition from other car producers like Dewan Farooque. New models
are now being introduced faster and Honda has showed an increase of
68% in its production with 35% of the market share and Indus motors
increased its market share in big car segment to 53%.
The gross margins of the car manufacturers declined
due to the recession in the country and increased competition faced
from the new smaller cars catering to the middle-income groups even
though the production volumes increased. Compared to Honda, the
margins of Indus motors showed an improvement due to the introduction
of the new smaller "Daihatsu Coure" introduced by the
The EPS of most of the companies declined with the
announcement of removal of tax subsidy in 1999 but Honda and Indus
motors showed an improvement from previous low in 2000-2001. The
return on equity of Honda declined with respect to the sector with the
return on assets remaining stable over the year.
Potential car buyers in Pakistan today enjoy a
better choice in terms of car leasing options aimed at meeting
personal budgets. The car leasing companies have seem to become more
accommodation in the recent months by slashing the down-payment to
affordable levels, extending installment payment period, abolishing
the processing fee as well as simplifying the overall procedures. Car
leasing contributes up to 40% of all car sales in the country today
this is why companies have made specific arrangement with at least one
leasing company. Banks are also providing arrangements for car finance
on subsidized basis and launching new loan schemes.
Further the auto industry also enjoys the following
• Government support: The automobile industry
enjoys the status of the most protected industry in Pakistan and it
enjoyed a complete tax exemption before l999.
• Price deregulation by the government: The
companies are now allowed to raise the prices of their products
(recently increased by 20%) without government interference present
•Ban on the import of used cars and used auto
parts: A high tariff rate is imposed on import of cars and spare parts
resulting in support and increase in demand for locally manufactured
•A four-year extension by WTO in the deletion
program: The program introduced to support the local vendor industry
and will help in decreasing the cost of the product by cutting down on
import of cars.
•Potential for export of locally manufactured
cars: Cars manufactured in Pakistan will be cheaper compared to other
Asian regions if the WTO deletion targets are achieved and prospects
for future exports of cars exist.
•During the past year the Pakistani rupee has
appreciated against the yen and dollar and this will help in
decreasing imported raw materials cost.
However, smuggling of spare parts in Pakistan does
affect the profitability, as there are about 800 local vendors that
manufacture spare parts illegally and have an impact on large
HONDA'S PERFORMANCE EVALUATION
The company increased its installed capacity
utilization from 94% to 100% due to increased demand in FY01 as the
sales of units increased by around 28%.
The net sales increased by 37% from FY99-00 and by
28% in the period FY00-01 but due to a 43% increase in cost of goods
sold in FY00 and 30% increase in cost of goods sold in FY01 that was
mainly attributable to the rising raw materials prices, the gross
margin declined by 1.25% from FY00- 01 and 5.1% in the three year
The operating profit of the company showed a net
decline of 1.8% from FY00-0l and 1.5% decline from FY99-00 mainly due
to the increase in selling expenses. The selling and administration
expenses of the company increased by 63% in 2001 mainly because of the
new training unit established by the company to impart technical
skills to its workers and for future cost reduction.
The other income of the company increased by 18.8%
of which the major increase was seen in retum on bank deposits that
the company had earned.
In FY01, Honda Atlas cars posted a net profit of
PkR204mn compared to PkR191mn in FY00, a 7% increase due to a 15-20%
increase in selling prices as well as units sold. The company
financial charges declined by 33.6% mainly due to the decreasing short
term running finance used by the company. Previously the automobile
sector was exempt from paying taxes but the government has reduced
this subsidy from 1999 and thus resulted in a decline of 8% in the net
income from FY99-00 but since then the net income has improved by 7%,
showing a net tax effect of 1%.
The company installed a new training facility for
the painting division and resulted in a reduction in the ending cash
balance due to the increased investment. Because of earlier tax
exemptions, the deferred taxes of the company were written of during
the year resulting in a decline in financing cash flows. Although the
sales and production of the company increased, its operating cash
flows showed a net decline due to the increase in imported raw
material and inventory costs.
Mkt. Cap (US $ bn)
Total Turnover (mn shares)
Value Traded (US$
No. of Trading Sessions
Avg. Dly T/O (mn. Shares)
Avg. Diy T/O (US$
KSE 100 Index
KSE All Shares Index