. .





Updated on Jan 19, 2002

The KSE - Overview: Politics is the theme

The KSE-100 Index jumped 53 points after the President's call on Sunday for an immediate ban on all the extremist elements within Pakistan and the aim to make Pakistan a progressive nation state. This, as we can see, was never attempted in the past for the fear of a serious religious backlash from various parties in Pakistan. But the current regional situation allowed the present government to initiate some bold steps to reign in the elements, which have caused severe distress to other politically elected governments in the past. The announcement resulted in a very positive response in not only from world community but also from the market which saw a 4% jump and a whopping 140% rise in volumes over the last week's close of 1428 of KSE 100 Index.

The market, for the next two days, hovered around similar levels with one or two spikes within the trading day to gauge market direction. Trading volume on Tuesday rose by over 30% to close at 203mn shares for the day with the market slightly edging downward by 1.75 points only. Wednesday saw a rise of only 1.89 points, on the back of development awaited from US Secretary of State's, Colin Powell, visit to India, and hence closed at 1428 level.

On Thursday, the market rose 21 points to close at 1449 level. This, in our opinion, was a direct consequence of major institutional and individual demand in blue chip stocks, due in part to the reforms introduced by the federal government for national elections in 2002. We believe that the international exposure and acclaim that Pakistan has received internationally under the current crisis situation with India, especially after the President's immaculate dealing of the regional crises and internal unrest, has changed the investor tone from being wary and cautious to more trusting and positive for investing in the market in general.

The last day of the week was the day of buoyant/upbeat investors which pushed the market up by almost 30 points with 100% jump in trading volumes to close at 1479 level. The news of US pressure on India to hold talks with Pakistan on all issues led to a reduction in fear of any major conflict and thus resulted in optimism going forward. In our opinion, the market was guided by politics more than anything else and has perfectly reflected the majority investor sentiments prevailing at different intervals during the current week.

Cement Sector:

Touched by magic ...

Were it not for the striking (not literally!) changes on the political front of the world in 4Q01, we would simply be sympathizing with the doom and gloom of most of the sectors. Our country's suave diplomatic maneuvering that transcended into economic recovery is making the 'analyst community' rerate their recommendations, as Pakistan now offers attractive investment opportunities.

For the same reason, we have been drumming in the recent dailies, our overweight outlook on the cement sector. Centering around the anticipated developments like; the expected increase in demand due to the increase in public sector expenditure, potential export opportunity in the Afghanistan; foreseeable decline in manufacturing costs due to the successive decline in the international oil prices and switch to coal and gas from furnace oil.

To gauge the FY01 performance of the sector, we took a sample of five largest capitalized cement stocks (Cherat, Chakwal, D.G.K, Lucky & Maple Leaf) and analyzed their full year results. For the five stock universe, the topline declined by 8% - demand has been a harsh mistress of the cement industry for a long time now. Vulnerability of the sector gets further accentuated by the continued slump in demand primarily from the agricultural side where agri-output is estimated to have fallen 2.5% YoY in FY01, compared to a growth of 6.2% in FY00.

Gross margins declined to 11% in FY01 from 19% in FY00, mainly because the production costs remained high. The cement industry is highly capital-intensive with the main cash cost elements being fuel and power inputs, forming about 65% of the production cost. In FY01, the furnace oil price were at a staggering average of PkR11,144/tonne, reflecting a 42% increase, as compared to PkR7,870/tonne in FY00.

Except for D.G.K and Maple Leaf all the companies reflected a minor decline in the financial charges, which added up to a 1% decline for our stock universe. This was mainly attributable to the successive decline in the discount rate, followed by loan restructuring in 2H01. However, the unstable and incoherent policies like the exemption of sales tax and extension of gas connections to a few players, led to a price war amongst the cement manufacturers. With capacity utilization in abyss and the 'extra push' of 30% decline from the pricing side, the full year results were a no surprise. The bottomline failed to sustain the profitability figures it had achieved in FY00 and hence, the net margins fell by almost 5% in FY01.


We expect a 10% recovery in the topline based on the anticipated increase in demand coming from the construction industry. With PkR480bn allocated for public sector development and an additional PkR12bn by ADB for the road development scheme. Not to forget the GoP's incentive of duty draw back incentives given to export cement to Afghanistan, should auger well for the sales volumes.

We also forecast a decline of around 4% based on the decline in furnace oil prices to PkR10,096/tonne in FY02 and the shift from furnace oil to coal will reduce production charges by almost 55%. Companies like DGK and Lucky have already started reverting to coal for energy purposes and a 100% shift is expected by1Q02 for DGK and 4Q02 for Lucky. Further, the GoP has cut duty on the import of plant and equipment for coal-fuelled units from between 15-25% to a minimal 5%.

The annual credit expansion target for the agricultural sector has been almost doubled from just over PkR20bn in FY01 to PkR65bn in FY02. We expect a sharp enhancement in the profitability of the sector on the above given reasons in FY02.

Investment Perspective

The market appears to have factored in the positive outlook of the sector into cement stock prices. Many cement stocks have outperformed the market on a one to six month horizon. Further, with prices at almost rock bottom in recent weeks the relative performance has improved.

This indicates two things to us. First, the market expects 1H02 results to be relatively healthier and has already priced for it. Second, the fact that most weeks have seen relative performance improve suggests that further downside is limited. We feel that the sector will trigger active market participation from a trading perspective, while the underlying fundamentals are likely to further improve gradually during calendar year 2002.






Mkt. Cap (US $ bn)




Total Turnover (mn shares)




Value Traded (US$ mn.)




No. of Trading Sessions




Avg. Dly T/O (mn. shares)




Avg. Dly T/O (US$ mn)




KSE 100 Index




KSE All Shares Index




.Source: KSE, MSCI, KASB