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Updated on June 22, 2002


With the Pakistan-India war hysteria phasing out investors' focus turned to domestic developments with major interest in the Federal Budget 2001-02. However, the post-budget rally remained lull mainly because of two reasons 1) the terrorist strike in the form of a bomb explosion near the US consulate in Karachi 2) the rumor of additional tax implication on dividend income, which caused a lot of unease amongst the investors as it made equity investment sound unattractive. The market remained relatively flat with a miniscule 0.01% improvement in the KSE-100 Index to close at 1779 level this week as against 1768 level in the last week. The average daily volume (ADV) however, drastically declined by 46% to 77million shares this week to 77mn shares as against 143million shares in the last week.

On Monday the market opened with positive sentiments and in the early session it spiraled up 10% to an intra-day high of 1,794 level in response to the general positive sentiment on the FY02 budget. However, the upward momentum faded towards the ending of the trading session and the market closed 2 points down at 1,766 level. Major loser for the day was Hubco that lost PkR0.30 to close at PkR22.85 from PkR23.15 due to the recent rumors circulating the market related to Hubco's dividend payout going forward. However, the company later clarified by announcing that it had previously made a significant investment in purchasing a Spare Generator Transformer, which is kept at the Hub Site for any such eventuality, which will enable the company to return the unit to service with minimum disruption.

On Tuesday a local audit company followed by a local brokerage house stated that withholding tax deduction on dividend paid to individuals would not be presumptive, which would cause the individual investors to pay the actual tax according to their respective income slabs at the time of assessment. This misinterpretation of the new ordinance caused a lot of confusion and investors decided to stay on the sidelines till the confirmation of the news by the SECP. Resulting in the market movement to remain relatively flat with a fractional decline of 2 points to close the KSE-100 Index at 1,764 level.

On Wednesday the rumor about the new tax ordinance was clarified and it was then stated that the tax will continue to be presumptive and the new law has maintained the status quo as far as the treatment of withholding tax on dividend for individual investors was concerned. Further, it was stated that as per the 1979 tax ordinance the rates of tax on dividend income varied between 5-20%. Whereas, in 2001 ordinance, it has been decided that all dividend income will be taxed at 10%, other than that received by a public or insurance company, which will be liable for tax at 5%. By the time the news was digested by the market the trading session had drawn to an end and therefore, there was no immediate impact on the KSE-100 that closed 4 points down at 1,760 level.

Thursday, the KSE-100 Index was all set for a bull run after the clarification of the tax issue coupled with good news from India in the form of a reassuring statement by their defence minister George Fernendes. The minister was quoted saying that the cross-border infiltration in Kashmir had now almost completely stopped and that the world was largely to be thanked for intervening to prevent a war over this issue with Pakistan. The market recovered 28 points to close at 1,788 level as against 1,760 level a day earlier with a trading volume of 104mn shares for the day. The upward movement was led by PSO, Hubco and PTCL, which elevated the entire market to higher levels. The major gainer was PSO which rose by PkR3.95 at PkR142.90 on the forward counter, followed by Packages and Shell that rose by PkR4.25 and PkR7, respectively.

On Friday following the usual trend - investors kept themselves liquid at the end of the trading week and hence the KSE-100 Index lost 9 points to close at 1,779.


Searle Pakistan Limited was incorporated as a private limited company in 1965. In 1993, the company received permission from the Securities and Exchange Commission of Pakistan (SECP), then the Corporate Law Authority (CLA), to gain listing on the Karachi and Islamabad Stock Exchanges.

Searle and its subsidiary are principally engaged in the manufacture and sale of pharmaceutical and healthcare products as well as the low calorie sweetener. In addition, it is involved in the sale of food and consumer items and the manufacture of pharmaceutical items for other companies. Searle has a strong presence in four therapeutic medicinal areas namely cardiovascular, cough & cold, gastrointestinal and central nervous system (CNS).

Searle's revenue increased at a CAGR of 22% over the period. In FY01, growth declined to 12%, from 33% the year ago. This is in keeping with industry trends, where new product introductions propel sales growth in the year of introduction. However, sales growth normalizes in the following years.


The gross margin has declined steadily over the period from 35% to 30%, which may be attributed to an increase in raw material costs from 36.8% of sales in FY99 to 42.1% in FY00. The increase in cost of raw material for the firm over the period may be explained by four factors: (i) falling exchange rates; this problem was partially compounded by the depreciation of the rupee following the SBP's decision to freely float the rupee in June (ii) high import duties and other taxes (iii) imposition of 15 percent general sales taxes.

Moreover, due to the regulatory restriction upon the industry, Searle could not pass on the higher costs by increasing prices, which resulted in progressively lower margins.

The operating margin and net margin fluctuated over the period. Advertising and promotion expense declined from 3.8% as a proportion of sales in FY99 to 2.5% in FY01. In FY00 the operating and net margin increased but declined again in FY01, in spite of decreasing depreciation (3.2% of sales in FY00 and 3.0% in FY01) and financial charges (7.4% as a proportion of sales in FY00 to 6.5% in FY01).

Lower financial charges may be attributed to a decrease in the long-term debt, specifically lease finance, and taking on of new short term debt at current lower interest rates. Hence, interest cover ratio increased from 0.86x to 1.27x, indicating an improvement in the company's ability to service its debt. However, we will discuss our worries about switching emphasis towards short-term debt in the following section.

Another point of concern is the high tax rate at which the company provides for taxation. The tax rate has fluctuated between 59% and 131%, which has been nibbling away at Searle's profits to the extent that the company recorded negative profits in FY01. According to our discussion with the company, this has arisen due to some disagreement on pending assessment order between the company and the tax department, with regards to previously filed income tax returns. Hence, the company has been making a provision for taxation against this potential liability. However, the company shall not be required to make such provisions in future and will pay tax at a normalized rate in future, as it has provided for sufficient funds for the contingency to the tune of Rs37million.






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.Source: KSE, MSCI, KASB