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 weekend.

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.

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 company.

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.

• 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 before l994.

•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 cars.

•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 manufacturer's sales.

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 period.

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.