June 16 - 22, 2003



MURAD ANSARI is currently working as an investment analyst in KASB Securities (Pvt) Ltd one of the oldest brokerage house in Pakistan, and the only house to have collaboration with a foreign-based research firm, Merill Lynch. He graduated from the Institute of Business Administration of Karachi after completing his MBA in December 1999. He has been actively covering the fuel and energy sector for the past two years.

PAGE: KSE-100 Index has created new highs lately, what will be the future direction?

MURAD: The reason behind the strong performance of the KSE-100 has been the high liquidity. In the wake of dropping interest rates, and surplus liquidity, investors have found themselves short of investment opportunities. In such a scenario, the KSE is the only place, which still offers prospects of good return for investors. With the bank deposits offering 3-4% return, and yield on government papers ranging between 1-5%, both institutional and individual investors have turned towards the KSE where dividend yields even after the bull run is ranging between 8-12%. I think that as long as the low interest rates and surplus liquidity environment persists, the KSE-100 is likely to maintain its rising trend.

PAGE: Prices of volume leaders have gone up due to the gap in demand and supply of quality scrips, how can this be bridged?

MURAD: There have been certain instance where due to the low free float in certain scrips, prices have moved up very sharply. This is a typical demand and supply situation due to low float (supply) of scrips and high demand from investors, investors are willing to purchase more and more of the quality scrips. I think this issue has to be looked from the perspective of the breadth and depth of the market. With the increased participation of investors in the stock markets, stocks, which were hardly able to attract investor attention, are now actively traded in the stock market. This, to some extent has increased the breadth of the market. However, the Karachi Stock Exchange has seen only a handful of listings in the past couple of years. Addition of quality scrips to the tradable universe is a very important factor for increasing the breadth of the stock market. As far as depth of the stock market is concerned, we still see that in certain companies, the sponsors hold majority of the shares, through which they maintain their right of management control of the company. While the breadth of the stock market can be resolved by adding new scrips, the depth of the stock market is something where not much can be done.

PAGE: Lately investors have been talking about dividend yield, but do not give much attention to cash flow statement. Does cash flow has any relevance?

MURAD: Dividends are paid out of cash available to the company after meeting its obligations. Thus, cash flow statement is the basic tool to determine the cash available to the company for dividend payout. Dividend expectations are built open the cash flow statement and hence are very important for any investing decision-making using dividend yield as a benchmark.



PAGE: Can the prospects of privatization of KESC be improved by dividing it into five entitities?

MURAD: This option can definitely be looked in to. However, I believe that the government would prefer to privatize KESC as a single entity. The likely issue is that every company has certain weak areas and certain strong areas. Supposing that KESC is split in to distribution and generation, there might be a segment, which is very profitable, while the other might be loss-making. In such a situation, while the government would be able to find a lot of interest in the profit-making segment, it might not find a buyer for the loss-making unit. So, the government might be left to either accept a low price for the loss-making unit or eventually end up continuing to manage the loss-making units itself. So the government would prefer to privatize KESC as a single entity. A similar strategy has been adopted in the case of WAPDA, which has been split up in to three generation and 8 distribution companies. How far the government is successful in privatizing the corporate entities of WAPDA remains to be seen.

PAGE: How KESC's shortfall of electricity can be met?

MURAD: There has been no substantial addition in the public power sector enterprises for quite some time now. KESC, due to lack of resources, has been unable to invest in to increasing its generation capacity. However, it is being supplied electricity from two Independent Power Producers, namely Tapal and Gul Ahmed Energy, are currently dedicated to supply power to KESC. The only other IPP in the vicinity of Karachi is Hub Power Company, which has a contract to supply power to WADPA only. There have been indications of linking KESC with Hub Power to meet the shortfall in power generation at KESC. But this project is still on papers. Currently, any shortfall in KESC's system is met from WAPDA, if there is excess capacity available.