THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Dec 21, 2002

 

TEXTILE SECTOR: UNCERTAIN FUTURE

Being the single largest sector in the economy, the textile sector drives our economy. The sector comprises of three sub-sectors, i.e., Spinning, 

 

Weaving and Made-ups. After going through a period of turmoil in the 1990s, the sector has turned around during the last few years. In spite of being such an important sector in the economy, the textile sector has been unable to demonstrate its weight in the stock market largely because of: I) small size and lack of proper management; II) poor disclosure of information which makes most investors wary, and III) poor dividend payout history. For this reason we prefer only the larger textile companies, and Nishat Mills is our top and currently the only pick in the sector.

Textile is the single biggest sector in Pakistan accounting for nearly 60% of total exports, 46% of manufacturing and 38% of employment. As the spinal chord of the national economy, textile sector offers not only significant investment opportunities in itself, but also has an impact on other sectors such as financial, energy and fertilizers. However, owing to a number of issues faced by the sector in the late 1990's, investor interest in the sector has considerably declined in the stock market. At the Karachi Stock Exchange, the textile sector comprises 30% of total listed companies (234 companies) and accounts 5.32% of total market capitalization. At the end of FY2002, there were a total of 354 textile companies in the country with 8.8mn spindles, 145,000 rotors and 10,000 looms.

THE HISTORY

The textile sector has evolved through numerous stages over the last six decades. During the 1960's before the green revolution, the spinning sector grew at only a modest rate. Political uncertainties in the 1970's and the nationalization of most large industries resulted in the stagnation of industrial growth in Pakistan and the growth of the textile sector slowed down during this period. The textile sector entered its boom period from 1984 to 1992, when a global textile boom and rising international cotton and yarn prices coupled with comparatively lower local prices due to bumper cotton crops, led the local textile to grow at a CAGR of 17% during this period. Successive governments also placed considerable emphasis on the growth of the textile sector especially in the value added areas.

From 1992-1998, the textile sector faced considerable problems due to over capacity, lower cotton and yarn prices in the international markets and consecutive bad cotton crops, which led to the escalation of local prices. At the same time competition from India and China increased considerably as a result of devaluations of their currencies and the opening up of their markets. Thus, not only were margins being squeezed but export share was also eroding.

Since 1998 to 2001, considerable improvement in the cotton crop and some growth in the international textile demand brought some turnaround in the sector. At the same time, massive devaluation in the Pak Rupee by nearly 40% during this period, resulted in significant improvements in margins and the sector as a whole was considerably profitable.

MARKET REVIEW: 100% YEAR TO DATE GAIN AT THE KSE

High liquidity and successive decline in interest rates have made the KSE the most attractive investment avenue. The Index recorded almost 100% gain on a year to date basis on Thursday, however, profit booking towards the end of the week clipped the gains to a little extent. Cut in coupon rates of 3, 5 and 10 year PIBs was the major economic event whereas formation of the Sindh Government, which completed the second leg of the political process, was the major event as far as the political front is concerned. Sentiments remain bullish as the market remains driven by high liquidity and attractive dividend yields. However, with calendar year coming up close, we expect some profit booking to take place.

MARKET THIS WEEK

Political and economic factors both came in to play during the current week, which boosted the already prevalent bullish sentiment in the market. The cut in fixed income securities has further increased institutional interest in the stock market, where dividend yields are irresistible. Both institutional and retail investors participated actively in the market as average daily volumes during the week rose by 29% to 378mn shares.

OUTLOOK FOR THE FOLLOWING WEEK

Although the Index has risen by almost 3% during the last week, the market is likely to remain range bound between 2475-2550. . With the year-end up ahead, we do expect some profit booking by institutional investors, and a little squeeze in liquidity, as banks are likely to adjust their balance sheets due to year-end factor.

DAILY DRAMA

The Index soared by 36.24 points to close on 2,488 on Monday as the formation of the Sindh government completed the second leg of the political process. However, the basic thrust came as a result of reduction in coupon rates of 5, 7 and 10 year PIBs, which were reduced by 200bps each. In view of the declining return on fixed income papers, the KSE attracted substantial interest from the institutions, owing to high dividend yields prevalent in the market. Volumes grew by 5% to 355mn shares as against volumes of 337mn shares on Friday. Hubco was the pick of the market as volumes rose to 155mn shares.

The bullish sentiment continued on Tuesday and the Index managed to create an 8 year high level of 2519. However, profit booking prevented the Index to close above the 2500 marks and the Index closed at 2,497. Volumes rose further by 1.4% to 360mn shares.

The bullish sentiment subdued to an extent as profit booking continued to be the order of the day on Wednesday as the Index recorded a low of 2,461. However, institutional buying towards the end of the trading hours pushed the Index up 3.85 points as the Index closed at 2,501. Hubco, NBP and SNGPL were the top picks. Volumes however, shrank by almost 3% to 350mn shares.

Thursday was a historical day as gains enabled the Index to record a historic 100% year to date increase. The Index, which at one point had risen by as much as 71 points, closed the day at 2535 levels, up by 34 points. PTCL, which got ex dividend on Thursday, attracted substantial interest as the stock rose by PkR1.15/share on volumes of 115mn shares. Engro and Sui North were the other top performers as both the stocks rose by over a rupee a share. The volumes rose to a high of 505mn shares, up by 44%.

Finally, the much anticipated technical correction took place as the Index lost 10 points on Friday to close at 2,525. Hubco and PTCL remained the most active issues of the day, attracting volumes of 108mn and 56mn shares respectively. However, it was Engro, ICI and Fauji that turned out to be the major gainers with all three stocks gaining over a rupee a share. Volumes declined by 37% to 318mn shares.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

9.50

9.58

0.84

Total Turnover (mn shares)

1461.91

1891.00

29.35

Value Traded (US$ mn.)

890.78

1366.00

53.35

No. of Trading Sessions

5

5

Avg. Dly T/O (mn. Shares)

292.38

378.20

29.35

Avg. Dly T/O (US$ mn)

178.16

273.20

53.35

KSE 100 Index

2452.24

2525.00

2.97

KSE All Shares Index

1528.58

1571.16

2.81

Source: KSE, MSCI, KASB