THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated July 05, 2003

 

MARKET THIS WEEK

The KSE-100 Index maintained its upward trend this week too with the index posting another 77 points during the last five days. On a WoW basis, the market was up 2.2% to 3477.86. Average daily trading volume decreased. However, 2nd & 3rd tier stocks remained the most active issues at the KSE.

 

 

 

The week started with the positive note coming out of the PIB auction held last Saturday where though the central bank has been able to inflate the yields, the quantum of bids clearly indicated that market is still in the grip of excess liquidity. Later on, the government's reduction in the rates on National Saving Scheme, though well short of market expectations, brought a positive impact for the stock market as the alternate investments for the retail investors are becoming less attractive. While retailers were fairly active throughout the week, some interest was also seen from the institutions on the buying side. The positive outcomes from the President's visit to the Europe have also helped the market in sustaining its upward momentum. The investors' exuberance about the market can be gauged from the continuous increase in the quantity of the shares currently being financed under badla.

OUTLOOK FOR THE FOLLOWING WEEK

As we have been advocating, the last leg of any bull run usually appears irrational to most of the fundamentalists as they tend to confine themselves to fundamentals only while the punters keep looking for those stocks that are yet to move irrespective of their fundamentals. Probably our market is also going through a similar phase where the market looks fairly valued for the short term from a "fundamental's perspective" while most of the traders/punters are still hoping that stocks will touch their highs of 1994 or 2000. Though fundamentalists have valid reasons to justify their cautious stance, market performance clearly indicates that punters' aggression has been successful in taking the market to 3500. However, will this aggression continue in the future too? We, being fundamentalists, have doubts. Relatively bad political situation, normalized valuations of key stocks, excessive valuations for the second and third tier stocks and high quantity of shares in badla are all indicating that market is set for a correction. Whether this correction comes next week or after next, the correction is must, though "when will it come" will remain a question.

SECTOR REVIEW: CEMENT SECTOR UPDATE

This week we are presenting a brief update on the cement sector. This update covers the recent downward revision in the capacity utilization by the cartel, cement demand outlook and the fate of the cartel in the medium term. Our investment strategy for the sector is fairly simple. Cement sector has become an over-rated sector. We are not denying the positives for the sector in recent times, but market has discounted all these positives to their fullest extent. Thus a profit booking is a must strategy at the moment in the industry. However, those who want to retain an exposure in the cement sector, romancing with every cement company is a dangerous strategy. Such investors should only consider large and efficient players. DG Khan qualifies for this. We maintain our underweight stance on the sector.

DOWNWARD REVISION OF CAPACITY UTILIZATION RATE: FURTHER DECLINE IS ANTICIPATED

The temporary surge in the cement capacity utilization came to an end. The cartel lowered the average rate to 63% from an average of 76% for the month of June. Reportedly lower demand in the industry and adequate levels of inventories with the dealers are the causative factors behind this. While we are assuming a 65% capacity utilization for the industry for FY04 to avoid any undue conservatism on the industry, logically the capacity utilizations should come down even from existing levels of 63% owing to:

1. Unit II of Askari Nizampur with a production capacity of 630 ktpa has commenced its trial production. This according to our estimates, is likely to reduce the capacity utilization rate by another 160 bps for the entire industry, in the near term. The industry sources are claiming that this unit will start its commercial production within next month.

2. Another plant, Zaman Cement, with a production capacity of 1.386 mtpa is expected to come online during the next 2-3 months. This may reduce the capacity utilization rate of the industry by another 450 bps, in our opinion.

3. On the other hand, the cement demand is unlikely to see any exceptional jump in the near term as majority of the banks are still in the process of refining their housing schemes. Moreover, federal government has yet to fulfill its earlier promise of allocating lands to its employees for the recently announced housing scheme in the budget.

CEMENT DEMAND HYPE: MISLEADING PERCEPTION

First of all we want to rectify the current perception of the market about cement demand. The surge in local cement demand from 9.8 mtpa to 11 mtpa was partly a temporary phenomenon and it has more to do with the price reduction in the recent past which forced the dealers to build up huge inventories. Partly it was caused by the ongoing boom in the real estate. Though we are not saying that cement demand will not see any growth, but, we believe that the growth pattern in the cement industry will be very much in line with the overall growth in the economy.

According to the data released by All Pakistan Cement Manufacturers Association (APCMA), it is evident that the most of the hype in the cement demand was witnessed due to fluctuation in the cement prices during the period under review.

The cartel revival in April caused a demand decline in May while dealers restarted building up their inventories in June. The 76% capacity utilization for June was an aftermath of the low inventory positions of the dealers. Going forward, we expect cement demand to normalize at around 10.7 mtpa during FY04, which also includes expected export of 436,000 tonnes. As far average capacity utilizations for next few months are concerned, Monsoon season is likely to be good on the back of high repairs & maintenance in the domestic sector. Winter will be a slow month owing to short days.

 

 

TALKING ABOUT PRICES.....

To reduce the cost of construction industry government reduced its CED charges for cement by 25% in the budget FY04. The net impact of this was of around PkR 14.3/bag. Cement industry claims that it has passed this reduction completely to the consumer base. However, this is not evident in the cement prices at present, which are still hovering at PkR 225/bag. According to our industry sources, this is due to the reason that before the budget announcement cement manufacturers increased the prices to PkR 240/bag and after the announcement they reduced it again to the previous level of PkR 225/bag. So nothing has changed in reality. In our opinion, the cement prices are unlikely to sustain long at current levels. The continuous violations of the state run cement plants of these price levels and the government pressure to reduce prices will eventually force the cement cartel to pass on some of the CED reduction to the end consumers.

CUTTHROAT COMPETITION MAY TRIGGER CARTEL VIOLATION:

New capacities will take operating capacity of the industry to 18.8 mn tpa in FY04. Few of the existing units are also expected to de-bottleneck their plants over the period of next 1-2 years, which may increase the effective cement capacity by another 1 mtpa approximately. On the other hand, we are not very bullish on the demand side where we expect cement demand to be normalized at around 10.7-11.0mn tonnes during FY04. This would imply a reduction in utilization rate of the industry to below 60%, which in our opinion is unlikely to be acceptable by the larger cement units. This can unfold a scenario where more efficient units may start violating the capacity constraints imposed by the cartel. By sharing some of the cost savings with their customers via reducing prices, these cement units can easily eat into the cement sales of those units (wet & RFO based), which are still struggling with high-energy costs. This means lower cement prices; lower margins but high volumes for the large and efficient units.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

13.05

13.40

2.66

Total Turnover (mn shares)

2334.42

1762.41

-24.50

Value Traded (US$ mn.)

1554.38

1258.46

-19.04

No. of Trading Sessions

5

5

 

Avg. Dly T/O (mn. Shares)

466.88

352.48

-24.50

Avg. Dly T/O (US$ mn)

310.88

251.69

-19.04

KSE 100 Index

3400.08

3477.86

2.29

KSE All Shares Index

2166.50

2224.92

2.69

 

 

Source: KSE, MSCI, KASB