THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated Jan 11, 2003

 

MARKET REVIEW: FLYING HIGH

After breaching the all time high of 2,661 points two week ago, the KSE-100 Index has shown no signs of stopping. The Index rose up by a phenomenal

 

 

 

4.53% this week from 2,745 points to close the week at 2,869 points. What is encouraging about this rally is that the volumes traded do not seem to be declining. Although the average daily volume amounting to 417.8mn shares was slightly lower than 501.8mn shares last week, they are still high, indicating that the bull rally is retaining its strength.

Stocks of interest this week were Fauji Fertilizer, Shell and PSO, which rose by PkR12 and PkR73 and PkR16 respectively. The main trigger for Fauji's rise was the fact that the investors realized that, as compared to most other large cap stocks, Fauji is still providing a good dividend yield as well an upside potential. The movement in PSO was triggered by the announcement of its pre-bid meeting.

OUTLOOK FOR THE FOLLOWING WEEK

With the Index rising to these never seen before levels, and with rallies being very sharp, we believe that the risk element in the market is very high. However, at the same time the strength of the bull rallies as indicated by the volumes at these levels, causes us to believe that the Index could reach 3,000 level within the next week or so. We advice our investors to refrain from taking a long term view on the market as dividend yields on most stocks are low and the capital loss risk is high. A large number of stocks have reached or are near their fair price values and we believe that speculation rather than fundamentals is currently ruling the market. Our picks are Fauji Fertilizer (still upside potential), PSO (in anticipation of privatization) and SNGPL (considerable growth potential going forward)

FUNDAMENTAL CHANGES

The only major fundamental factor that influenced the market this was another 50bps cut in 6-month T-bill rates to a low of 3.9%. This rendered greater liquidity in the stock market boosting the KSE-100 Index beyond 2,800 levels. Other minor fundamental factors, which effected are:

•A 5 paisa per unit cut in KESC tariff is likely to have a minor negative impact in the revenues of the utility.

•The ADB reduced lending rates on US Dollar and multi-currency loans by 4bps and 117bps respectively. This is likely to have a marginal positive influence on Pakistan's debt servicing for next six months,

•Suspension of gas supply by SNGPL and SSGC to fertilizer factories supplied by their networks.

 

 

SECTOR REVIEW

PSF INDUSTRY — A REVIEW

Pakistan's PSF Industry has grown tremendously over the last decade. The industry took its root in Pakistan in 1981, when National Fibre Ltd was set up with an installed capacity of 10,000 tons per annum. Since then, there has been no looking back and one after another, huge capacity additions were made in the sector. Major expansions in the sector came during the 1990s when Dewan Salman Fibre's established its first unit, having a capacity of 52,500 tpa. Realizing the demand potential in the country, DSFL set up another unit having an installed capacity of 56,000 tpa, raising the total installed capacity of the company to 108,500 tpa. Subsequent to DSFL, IFL and Dhan Fibres came in to operations in 1997, almost doubling the installed capacity of the sector at that time. Towards the end of 1990s, IFL announced its plan of an expansion project through which the company has increased its installed capacity by 138,000 tpa. In an effort to maintain its market leadership position, DSFL acquired Dhan Fibres towards the mid of 2000, which doubled the installed capacity of the company, without disturbing the demand supply balance in the country.

While the PSF producers are trying to come to terms with the falling producer margins and the wrath of appreciating rupee, the expansion projects are reminding us of 1996 when the commissioning of Dhan Fibres and Ibrahim Fibres almost doubled the total installed PSF capacity in Pakistan, leading the sector temporarily in to a supply overhang. Though this time, the expansions are not as huge in percentage terms as they were in 1996, the current PSF expansions have increased the installed capacity by 184,000 tpa, or 43% in the last one year. This is in addition to the capacity increase of approximately 45ktpa achieved by Dewan through its bottlenecking initiative taken in early 2001.

EXCESS SUPPLY TO KEEP MARGINS UNDER PRESSURE

The commissioning of ICI's 45 ktpa expansion commissioned in early 2Q02 and 138.6 ktpa expansion of Ibrahim Fibres are likely to drive the industry in to a supply surplus phase. The total installed PSF capacity in the country as a result of these expansions, has reached 616 ktpa from the last year's 430,000 tpa, a 43% increase.

DSFL, IFL and ICI have emerged as the three major players in the market, with the rest of the market remaining followers. However, we believe that IFL and DSFL will be the strategy makers in the industry as both are almost twice the size of ICI post expansion and can leverage their leadership position to their advantage. ICI's recent expansion has basically two motives in our opinion: i) To increase raw material consumption of Pakistan PTA Limited, its demergerd PTA producing arm, ii) A survival effort to protect itself from being eliminated from competition by DSFL and IFL.

THREAT FROM CHEAPER IMPORTS

On an average, around 20ktpa of PSF has been imported in to the country. However, these mainly include value added varieties of PSF, which are not currently being produced within the country. The 138.6ktpa expansion of IFL, however, does have provisions of producing these value added varieties not currently being produced in the country. However, imported PSF always act as a check on maintaining the domestic PSF prices at par or below the international price. Whenever domestic producers have not reduced domestic PSF prices in line with international prices, textile consumers start importing PSF, which ultimately forces domestic producers to lower their prices.

HISTORICAL DEMAND TO TAPER OFF

After a record high growth averaging at 26% during 1997-2000, PSF demand growth has come down to a mere 5% during the past two years. The fall in demand growth was mainly due to the recessionary economic conditions, availability of cheap cotton, high devaluation, narrowing of the PSF-Cotton blending ratio differentials and a higher demand base. With the current cotton production estimated at 11 million bales, cheap cotton availability will put pressure on PSF prices and demand. With the current world economic conditions being threatened by recessionary trends, we expect PSF demand to taper off and hover around 4-5% during the next three years. Also, with no new apparent major expansion in the textile sector, the major consumer of PSF, coming online in the next three years, we do not expect the demand growth levels to exhibit the 1997-2000 growth trends.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

10.37

10.79

4.05

Total Turnover (mn shares)

2509.00

2089.00

-16.74

Value Traded (US$ mn.)

2121.00

2189.00

3.21

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. Shares)

501.80

417.80

-16.74

Avg. Dly T/O (US$ mn)

424.20

437.80

3.21

KSE 100 Index

2744.82

2869.24

4.53

KSE All Shares Index

1693.00

1763.45

4.13

 

 

Source: KSE, MSCI, KASB