THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Aug 10, 2002

 

MARKET REVIEW: BREAKING OUT OF A PROLONGED BEARISH SPELL

The major factors triggering the KSE-100 this week were not political or international in nature, in spite  

 

of a terrorist attacks in Murree & Taxila and Hindu killings in occupied Kashmir. Instead, interest in major shares coupled with dividend payout by companies like Dawood Hercules, and improvement in ICI's lH02 results, helped to renew investor interest and bring the positive upswing in the KSE-100.

THIS WEEK'S PERFORMANCE

The KSE-100 commenced the week with the continuation of the previous week's dull performance and the volumes of the first two days of trading remained low with the KSE-100 index reflecting marginal declines. However, during the latter half of the week, the KSE-100 broke the narrow range in which it was trading for over a month, to cross the psychological barrier of 1800 points and close the week at 1815.76 points.

Volumes picked up during the latter half of the week with the ADV increasing from 32.65mn shares during the previous week to 52.89 shares this week. Although volumes have increased, they are still very low when compared to normal trading patterns at the KSE. We believe that volumes are likely to increase further in the following weeks.

The average daily volume in carry over transactions increased marginally this week to 122mn shares as against the previous week. The COT volumes have been low for the last few weeks indicating that there are fewer speculative buyers in the market.

OUTLOOK OF THE COMING WEEK

We believe that there may be some price sensitive news in important shares next week, like possible book closure announcements by PTCL and PSO or a higher than expected dividend announcement by PTCL which would trigger a rally and push the market to 1850 point levels. We therefore expect the market to continue its current positive trend in the following week.

THE DAILY DRAMA

Although the market opened the week on Monday with an increase in volumes traded from 16.893mn shares on Friday to 28.842mn shares, institutional investors failed to show interest. The attacks on the missionary school in Murree caused some panic in the market, but due to short covering at lower levels, the KSE-100 declined by 3.16 points to 1,782.56 points.

The stock market remained lackluster on Tuesday, as institutional investors continued to remain uninterested in the market. Although there was no major impact of the terrorist attacks the day before, it made the investors wary indicated by the decline in trading volumes to 26.792mn shares. The KSE-100 closed a fraction lower at 1,780.69 points.

In spite of negative news of Hindu killings in Kashmir, the trading session of Wednesday was upbeat. After a month of low levels of trading and lack of institutional interest, volumes increased to 70.51lmn shares with investors covering positions at lower levels. Some institutional interest broke the market's prolonged bearish spell and the KSE-100 closed the day at 1,793.20 points, an increase of 12.51 points. Adamjee Insurance was the stock of the day, the volumes of which increased to 4mn shares as against the previous three months ADV of 1.11mn shares.

Following the previous day's sentiments, Thursday trading continued to be upbeat. Heavy buying in PTCL coupled with dividend announcements by Dawood Hercules and a few textile companies along with ICI showing high YoY lH02 earnings growth, all resulted in pushing the KSE-100 index to beyond 1800 levels to 1801.47 points with volumes increasing to 73.80mn shares.

Friday was again a good trading day with volumes rising further to 94.72mn shares and the KSE-100 increased by 14.29 points to close at 1,815.76 points. One of the major gainers was PSO which gained nearlv 2% on expectation of book closure announcement next week.

SECTOR REVIEW:

GILLETTE PAKISTAN

Gillette Pakistan is a subsidiary of the Gillette Company, U.S.A. It is involved in the sale of a diversified range of products including alkaline batteries, household appliances, toiletries for men, toothbrushes, and other personal care products. The company enjoys a market leader position in the shaving systems and disposable razors markets in the country.

Gillette was previously involved in the manufacturing of 7 o'clock razor blades in Pakistan, however, it closed its operations at Hub in F`Y98. This was part of the global restructuring program of the parent company.

FINANCIAL RESULTS

Gillette Pakistan is the only Trans-National Corporation listed on the KSE since 1988, which had not been able to declare dividends until FY99. In fact the company had been posting losses during the first six years of its operations, which had resulted in huge accumulated losses that were wiped out only in FY00.

•The steady growth in YoY earnings flows from top line growth for the company. Sales increased by 14% in FY00 and 23% in FY01. However, a notable change in sales is that Gillette Pakistan has stopped exporting since FY00, as a result of the management's decision to stop manufacturing in Pakistan.

• We believe that in general historic revenue growth has been an offshoot of new product introduction in the Pakistani market. However, in our opinion, the fact that Pak-Afghan and Pak-Indian borders were effectively sealed off in 4Q01 would have resulted in a reduction in smuggled products manufactured in India and brought in from Pakistan's borders. Smuggling of cheaper Indian made blades and even Gillette's own products from Dubai are a cause of real concern for the company. In fact this year's 1Q results show that, with the resumption of Afghan Transit Trade, the problem of smuggling has again become serious and had an adverse affect on sales.

•Gillette's cash gross margins improved in FY00 but then declined the following year. This may be attributed to the depreciation of the Rupee (following SBP's decision to float the rupee in June 2000) and increase in customs duty and central excise duty on some of the imported items. In the Federal Budget for FY02, the GoP increased the import duty applicable on purchases for Gillette to 30% from 25%. As a result, cash gross margin declined to about 40% in FY01.

•Gillette has been increasingly focusing on its marketing and sales strategies and through aggressive marketing has been able to improve sales, where over the last two years it has spent over PkR80mn in advertising and sales promotion.

•Even though marketing costs remain high for Gillette, SG&A expenses have declined in proportion to sales. This is primarily due to the fact that the company had been concentrating on internal restructuring so as to reduce costs. As a result, EBITDA increased by 4.2% in FY00 and 21.4% in FY01

•Financial expenses have declined noticeably over the period. Since the company does not report long- term finances on its balance sheets, this indicates a decline in reliance on external short-term debt.

•Gillette's tax rate last year was 27%. Our talks with the company lead us to believe that the tax rate is calculated based on 6% of imported value. We believe that the provision for taxation is likely to be calculated at near the above rate over the next few years.

EARNING DRIVERS

From the above analysis, we note that Gillette has focused not just on top line growth but also made efforts to expand margins by reducing costs. In our opinion, the following factors are earnings drivers for the company:

Increase in sales follows from:

•Launching of new diversified products as well as improvements in older products.

•Setting up an effective distribution network and monitoring the market.

•Emphasis on advertising and sales promotion campaigns.

Reduction in costs achieved through

• Monitoring of costs, which has led to lower selling and administrative expenses in FY01 as compared to FY00.

• Gillette stopped local manufacturing in FY99 as part of a global restructuring plan. Manufacturing locally was expensive relative to importing finished products. Hence the closedown of operations at Hub has had a positive impact on margins.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

6.96

7.10

2.01

Total Turnover (mn shares)

163.23

294.46

80.40

Value Traded (US$ mn.)

115.13

187.49

62.85

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. Shares)

32.65

58.89

80.40

Avg. DlyT/O (US$ mn)

23.03

37.50

62.85

KSE 100 Index

1779.40

1815.76

2.04

KSE All Shares Index

1123.33

1145.14

1.90

Source: KSE, MSCI, KASB