THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Nov 09, 2002

 

MARKET REVIEW: FACTORING IN THE POLITICAL UNCERTAINTY

For almost a month after the general elections, the stock market continued to ignore the issues on the political front and gained over 300 points due to high

 

levels of liquidity and results of most of the pivotal stocks. However, this week political uncertainty was finally discounted, triggered by news of a coalition between ARD and MMA. Consequently the market remained very volatile during first half of the week. Since the last two days of trading were the beginning of the holy month of Ramazan, the stock market remained slow and lackluster.

MARKET THIS WEEK

The market was very volatile this week with both bulls and bears flexing their muscles. The KSE100 Index ('Index') declined by 68 points from 2,295 points at the end of last week to 2,227 points at the end of this week. Panic due to political uncertainty caused market to swing considerably during the first half of the week and volumes remained high. However, the last two days of trading were very slow and volumes declined considerably. The average daily volume this week was 231mn shares, as compared to 318mn shares last week.

PTCL remained strong throughout the week and the traders are hoping to see some performance from the stock in the future. OMC stocks remained volatile and PSO and Shell closed the week PkR10 and PkR29 lighter, respectively.

The badla market remained active and rates remained high especially during the first three days of trading, as badla providers took advantage of the volatile market.

OUTLOOK FOR THE FOLLOWING WEEK

We believe that the market will continue to remain volatile until the new government sets in. After the formation of the new government the direction of the market will largely depend on which party comes into power. We believe that investors should refrain from any long-term positions until the political scenario gets more settled.

DAILY DRAMA

Rumors about a possible ARD and MMA government, along with the market finally discounting the prevailing political uncertainty, prompted panic selling. The Index declined by 91 points on Monday and closed the day at 2,204 points. Shares lost value across the board and PSO and Shell touched their circuit breakers. Volumes remained high at 253mn shares, indicating that, unlike other corrections in the recent past, sellers were plentiful.

With the ARD-MMA deal being delayed, optimism prevailed again on Tuesday and the Index regained over half of the previous day's losses and rose by 54 points to close at 2,258 points. There was heavy buying in all key stocks and most of them closed sharply higher. Trading volumes rose by 55% to 393mn shares largely due to massive buying in PTCL and Hubco.

Political uncertainty, delays in formation of a new government and the MMA factor made the investors restless on Wednesday. Consequently, the bears came to the forefront for the second time during the week and the Index dropped 35 points to close at 2,223 points. Most stocks remained in pressure as there was considerable profit selling.

Thursday being the first day of fasting, trading activity predictably remained slow. In addition, the political stand-off dissuaded any fresh positions by investors and punters alike, and volumes declined significantly to 147mn shares. Due to marginal rise in a few key stocks namely PTCL, Engro and FJFC, the Index closed 5 points higher at 2,228 points.

Trading was extremely lackluster on Friday and the trading volumes plummeted to 65mn shares. Most shares declined marginally and as a consequence, the Index declined by 1 point to close the week at 2,227 points.

CEMENT SECTOR: TURNING AROUND

The market was quick to discount the turnaround in the sector that started taking place in 2002. Two factors namely (I) higher capacity utilization on the back of higher exports towards Afghanistan, and (II) massive cost savings via sector's conversion to coal are responsible for this out performance. However we feel that this out performance is unlikely to continue in future. At best, the cement sector will perform in line with the KSE 100 index. However, a few of the companies are likely to out perform the sector, which are recommended viable for investment at current prices. Our top buys are DG Khan and Lucky Cement.

First quarter of FY03 marked a complete turnaround for the overall cement sector as evident from the reported results of the companies. For group analysis we picked five companies randomly, which includes Cherat, DGK, Lucky and Pioneer Cement. The consolidated revenue of these companies, witnessed a boost of 20% during the period under review while the gross margins improved from 15.5% in 1Q02 to 19.8% in 1Q03. This is due to demand flow from Afghanistan, which however, was not as much as expected but improved the capacity utilization of these companies. Also shift of plant operations from furnace oil to coal helped these companies to improve their gross margins.

With significant top line growth, the companies were able to reduce their debt burden, which resulted in a sharp decline of 22% in the financial charges leading to a net profit of PkR138.6mn in 1Q02 from a loss of PkR11.1mn in 1Q01.

CEMENT SECTOR PERFORMANCE IN FY02

FY02 was a year of change where the cement sector started making profits from the second half of the year. The over all demand from domestic market declined by 1% during the year while the capacity utilization increased from 57.6% to 65.0% due to the export of cement to Afghanistan. Local prices remained with in the range of PkR210-220/bag, which were at the same level as the year before. On the other hand, the sector's margins improved significantly in the second half due to the shift of focus of the cement manufacturers from fuel oil to the cheaper alternative of coal, which according to an estimate, reduced the cost of fuel utilized in the production process by 60-65%.

The exports to Afghanistan remained the main attraction as far as investors are concerned due to which the cement stocks also performed well during the year on the stock exchange. However, with Iran providing cheaper cement to the country, the demand for Pakistani cement declined. As a result of this the cement sector not able to boost capacity utilization more than 60-65%. According to a news report, the prices offered by Pakistani exporters are within the range of US$27-32/tonne against a cost of approximately US$30/tonne, while prices offered by Iran are much lower due to their economies of scale and better cost efficiencies. Due to the reason only 140,000 tonnes of cement was exported to Afghanistan during January-August.

Due to the above factors, the financial performance of the sector improved dramatically from the third quarter of FY02 marking a complete turnaround, where 21 companies posted a consolidated profit of PkR6.7mn against losses of PkR266mn till second half of the year. Shift of plants to coal also improved sector margins, which supported the sector to reduce its debt burden and hence the financial charges also witnessed a decline. This resulted in a substantial growth in the bottom line of the sector.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

9.41

8.64

-8.81

Total Turnover (mn shares)

1591.77

11152.25

-27.61

Value Traded (US$ mn.)

1066.15

848.98

-20.37

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. Shares)

318.35

230.45

-27.61

Avg. Dly T/O (US$ mn)

213.23

169.80

-20.37

KSE 100 Index

2294.63

2227.34

-2.93

KSE All Shares Index

1429.10

1390.27

-2.71

Source: KSE, MSCI, KASB