THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated July 20, 2002

 

MARKET REVIEW: GOOD OPTION

The market movement this week remained relatively flat because of both negative and positive developments. On the negative side two reasons

 

were apparent 1) death penalty awarded to Omar Sheikh for the murder of Daniel Pearl 2) massacre in Indian occupied Kashmir. On the positive front 1) institutional support at low levels as it provided good buying levels 2) United States' decision to ignore India's call for Pakistan to be declared a terrorist state.

THIS WEEK'S PERFORMANCE

As dollar was losing its ground investor focus shifted to the capital market that led the average daily volume for the week to increase by 102% at 82mn shares as against 41mn shares last week. However, the stagnant market behavior of the KSE-100 Index was just a continuation of the last week's momentum. The KSE-100 Index gained marginally by 0.86% to close at 1799, as compared to 1783 last week. Badla volumes remained low within PkR3 - 3.3bn concurrently badla rates remained low between 7-9% for the week.

OUTLOOK OF THE COMING WEEK

Pakistan stock market holds appeal for both foreign and domestic investors at the current levels. With the foreign investors shift of focus from the US market to other yielding markets, we feel Pakistan stock market is likely to attract attention as it is yielding high returns relative to other world markets. Similarly, for domestic investors equity market offers better returns than the return in the other investment avenues. With badla rates already yielding around 6-7% and the upcoming half yearly results of major companies the focus, in our opinion will be on the high yielding stocks.

THE DAILY DRAMA

On Monday, the market opened at a higher note however, during the latter half the index fell by 48 points to 1735 level by the end of the day. This was a result of panic selling triggered by the two reasons mentioned above. Similarly, National Bank announced a net profit of PkR1.15bn for FY01 and proposed a cash dividend of 12.5%, which was lower than the market's expectation of a bonus. This led to a 5% decline in the scrip to close at PkR18.95 as against PkR19.95 in the previous trading day.

On Tuesday, institutional buying put a floor under the KSE-100 Index that gained 27 points to close at 1762; a growth of approximately 2% relative to the day before. Attractive buying levels along with an overdue technical correction conducted the Index to an intra day high of 1764. As a result, trading remained bullish where Hubco and PTCL remained the major contributors to the volumes traded.

Wednesday, the market enthusiasm prevailed and the KSE-100 Index notched another 28 point to close at 1791 level leading to a 17% in the volumes at 74mn shares for the day. Out of the total turnover PTCL's share alone was 43mn shares. The scrip gained around 4% to close at PkR17.85 for the day. Local institutional investors are building up fresh position in the scrips.

Thursday, the market went offbeat and declined by 4 points to close at 1786 level, however, the decline was contained by ready demand at dips. Market indicated the wait-and see attitude of foreign investors with regards to the standoff between Pakistan and India. The dullness in the market contributed to the shrinkage in the trading volumes from 126mn shares to 71mn shares.

With half yearly results of major companies expected to be announced by the end of the current month, the market rebounded 12 points to close at 1799 level on Friday. PSO was the major gainer that rose by PkR5.75 to close at PkR142.30, followed by Lever Brothers that rose by PkR11 to close at PkR899 for the day.

FERTILIZER POLICY: DO WE REALLY NEED ONE?

Why blame fertilizer policy for being unable to attract any new investments in the sector? This is simply a matter of market conditions where neither government can afford to offer similar incentives that it offered to manufacturers in the last policy nor manufacturers are likely to find attractive investment opportunities in the local industry. In our opinion, manufacturers have to alter their business philosophy to survive in the changing business scene in this business. Where they may not need a strict fertilizer policy rather they will be looking for simple market based business model to move ahead.

We believe that managements at both Engro and Fauji are well aware of changing ground realities. And are already planning to combat the future challenges. We like both companies, however, Engro looks pricey at the current levels while Fauji is still attractive, as always.

In this week's sector theme, our focus is why last fertilizer policy was successful and how will current be unable to generate any investors interest. And what fertilizer manufacturers need to do in future to acquire further growth.

WHY WAS LAST POLICY SO SUCCESSFUL?

Following reasons can be cited:

Demand supply situation at that time. If one recalls the demand supply situation of late 80's, a relatively attractive investment policy was desired to encourage the local players in the industry to plan for mega capacities. And that's what we had seen afterwards when the entire capacity expansion of nearly 1 million ton was absorbed in the local market without any pain.

Availability of gas supply. Moreover, the availability of the excess gas was also there. It was the time when the power generating was mainly through hydel resources and Pakistani utilities were out of the debt crisis thus there was no urgency on their part to grab the available gas resources to generate cheaper power.

Less focus of IFIs on the agri subsidies. We believe that IFIs were also responsible for the effectiveness of last policy. This never bothered to stop government to not to offer unrealistic subsidies to the fertilizer manufacturers. In fact a few of the IFIs were themselves involved in financially supporting the key players in the fertilizer industry.

Higher international product prices. Relatively depleted forex reserves and high trade deficits were also responsible as government was in no position to afford imported urea at US$225+ per ton. Thus its policy of reverting back to cheaper domestic resources was understandable.

Capacities of the companies to acquire growth. Owing to early gains of pricing deregulation, both FFC and Engro were in a comfortable situation to embark upon large capex. The opening of the local capital markets to the international investors was also pivotal in earning financial support for these. The availability of supplier credits and other bank loans were primarily a function of a better country standing at that time.

Relatively lower pressures on the revenue side. Despite large budget deficits, the government was under relatively less pressure from the IFIs to improve its revenue collections. The granting of tax exemptions and the duty rebates was made available only under such environments.

WHY WILL THE NEW POLICY BE UNABLE TO SERVE THE PURPOSE?

Here are the justifications that force us to think so:

Lower potential in terms of demand. For last two years, the demand side in the country seems to be slowing down. Though we are not advocating that demand side will remain sluggish, it is unlikely to expand to an extent in the short term where a large-scale project of 500K+ would become feasible. Also we believe that both Engro and Fauji are planning to come with small debottlenecking plans that will lead to add at least 150K+ capacity. Here we are not considering any capacity increase in Pak Saudi which has a potential of producing an extra 100K tons with some minor modifications. With these potential capacities, we do not believe that both players FFC and Engro are interested in any new capacities.

Supply constraints on the gas side. The cheaper gas is definitely a history now. With growing demand from the power producers and cement manufacturers, it is unlikely that government will grant any cheaper gas to the fertilizer manufacturers. The pricing in the new policy for the upcoming capacities has too many ifs and buts. This precisely means that both the players would not even think of any capacity expansion in a scenario where the international urea prices are also struggling within the band of US$100-125/t.

Lower international product prices. Unlike past, the international urea prices are unlikely to come back to over US$200. Given the idle capacities lying around the globe, the units will start producing once the prices start moving above US$150/t. Even if government comes up with some sort of price guarantees to the local players, the fate of US$250/t guarantee for FFC Jordan is likely to irk the fertilizer manufacturers to not to accept any such assurances.

More focus of IFIs on agri subsidies. On the backdrop of WTO conditions and the poor revenue collections, the IFIs have also become cynical about the various subsidies the government has been offering to various sectors. Fertilizer sector being one of the major recipients of such subsidies was their target when finance minister and a few of the agencies opposed any sort of subsidy to the fertilizer manufacturers in the new fertilizer policy.

Lower capacities of the fertilizer manufacturers to take on further capex. One should also not over-look the financial health of the two fertilizer players. If one is struggling with the restructuring FJFC the other is trapped in a relatively inefficient plant and its investments in the unknown businesses. Frankly speaking, both the major companies have very little capacities to venture into any new sizeable capex at the moment.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

6.91

7.04

1.88

Total Turnover (mn shares)

202.66

409.83

102.23

Value Traded (US$ mn.)

96.85

237.75

145.48

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. Shares)

40.53

81.97

102.23

Avg. Dly T/O (US$ mn)

19.37

47.55

145.48

KSE 100 Index

1783.17

1798.57

0.86

KSE All Shares Index

1125.83

1135.30

0.84

Source: KSE, MSCI, KASB