THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated July 19, 2003

 

MARKET THIS WEEK

The bull rally continued for another week with the index posting a gain of another 168 points during the last five days. The magnitude of the positive momentum is significant. On a WoW basis, the market was up 4.8% to end the week at 3645.89. Average daily trading volumes during the week also increased by 24% to 437mn shares. The biggest feature of the week was the shifting of the some the speculative interest from the second-tier stocks into first tiers.

 

 

 

What an event full week this was. Only the day traders can tell the actual story mere charts do not show the real drama. Though the bull rally continued this week too with the index making its new life high of 3765, the KSE saw the extremes of both the worlds, i.e., bullish as well as bearish. The "in-fashion" bullish fever saw a sudden death on Tuesday when the KSE announced to implement the new formula for determination of the prices of the stocks which the market players use for their exposure requirements. This one factor pushed the market down by over 3.5% in just one trading session. The crash continued for the second day. However, aggressive buying from a few of the institutions caused a reversal in trend towards the end of the second day. The recovery was so sharp that market showed a 178 points rebound on that particular day. For remaining two days of the week, the bulls were dominating. Institutional investors were seen among the aggressive buyers while retailers were confused for most of the time. On a WoW basis, the market was up 2.9% to end the week at 3751. Average daily trading volumes during the week also increased by 30% to 568mn shares. The second tiers and third tiers, which were not in fashion last week, gained interest of the investors again.

OUTLOOK FOR THE FOLLOWING WEEK

Well next week is a very critical week from market's perspective. Three factors which can have a significant impact over the market direction:

1. The implementation of revised prices for major stocks is due on the 28th of this month. Thus, any investor who wants to fill the gap on his exposure limits with the KSE, will have to act upon quickly. In our view the second & third tiers will eventually come under pressure. A shifting of interest is very likely from these stocks to Hubco, which has relatively higher 52 weeks average price.

2. Some of the corporate results will start pouring in next week. Though the real results are still 2-3 weeks away, the announcement of even 2-3 main results can have an impact over the market direction in the short-term.

3. Our understanding is that the regulator in Islamabad has started developing a feeling where it wants to cool down the current bullish sentiment at the stock exchange. Though it is against the market spirit, the regulator can always come into action to safeguard the interests of the small investors, which may be the most affected in case of any major crash at the KSE.

Our advice to the long-term investors is that they should keep increasing their cash ratios at the moment. An exit from the 2nd tiers is recommended whereas the strategy for the 1st tiers needs some due diligence. The investors need to go back to the basic working of their desired rate of returns where they should be incorporating a higher risk premium for equity investments at this point in time, in line with the rising price volatility of the market. We suggest a gradual exit from the market at current levels.

 

 

PSF INDUSTRY DEJA VU

With the commissioning of Ibrahim Fibres, the domestic PSF industry has once again entered in to a supply overhang phase. Unlike the previous time when the increased supply as a result of commissioning of Dhan Fibre and Ibrahim Fibre was quickly absorbed by the local market, we are of the opinion that the recent 42% expansion is likely to take some time to be absorbed. Our calculations suggest that even with a 7% annual growth in PSF demand, which is 200 basis points higher than the last 5 year CAGR of 5%, the demand supply equation will reach a balance in FY2007. Faced with this situation, the industry players are adopting different strategies to remain competitive which ranges from refinancing of debt, tapping export markets, and price competition. We are of the opinion that while fluctuations in the regional market might provide some brief breathing space to the domestic players in terms of margins, the local industry dynamics will be the key determinants of the profitability of the domestic PSF industry in the near to medium term. We recommend an underweight on the sector as this time around, the supply overhang is likely to last for some time.

COMPETITIVE STRUCTURE OF THE INDUSTRY

After going through a difficult phase of price wars during 1996-97 when two major capacity addition of Ibrahim (70ktpa) and Dhan (91ktpa), PSF producers had been collectively approving prices for their products after monitoring international price movements. Increase in international PSF prices were immediately translated into local prices whereas fall in international prices where translated only when the threat of imports increased.

Dewan Salman's acquisition of Dhan Fibres in FY2000 and the expansions in the PSF sector have brought about a complete change in the dynamics of the PSF industry.

DEMAND SUPPLY IMBALANCE TO PERSIST FOR SOME TIME

The increasing investment in the textile sector is likely to be a source of comfort for PSF manufacturers as far as demand growth is concerned. However, we are of the opinion that the impact of increased capacity of textile units will take some time to have an impact on the PSF industry. We believe that the 42% capacity increase will take some time to be absorbed by the local textile industry.

DEWAN SALMAN FIBRE FOCUSING ON CUTTING COSTS & EXPORT MARKETS

DSFL has been very aggressive in trying to capitalize on the declining interest rate environment in Pakistan. With high leverage, DSFL's bottom line was depressed primarily on account of high financial charges. High financial leverage is a desirable when the industry is on uptrend. However, it has an exactly opposite impact should the industry be on a down trend. DSFL's dilemma has been solved to quite an extent by the rescheduling and refinancing of debt. The company has been able to reduce its average cost of borrowing considerably, which was at a high level of 16-18% during FY2001. Our sources indicate that DSFL is in making efforts to further reduce this cost to a range of 7-8%.

 

 

ICI PAKISTAN - DIVERSIFYING

ICI Pakistan has gone one step forward by diversifying its operations. In addition to cutting fixed costs through refinancing of loans, and tapping export markets, ICI has entered in to the trading of Furnace Oil. Among the big three PSF manufacturers, ICI has a comparatively inefficient PSF operation. With high conversion costs, ICI's profitability in the past also remained depressed on account of high financial charges. We are of the opinion that ICI's expansion in its PSF capacity through arrangement with Fayzan Modaraba was primarily a survival effort. Without this increased capacity, ICI would have been completely written off as a serious competitor to DSFL and IFL. Though ICI's total PSF production capacity is still almost half of its competitors, ICI has able to maintain its market share.

IFL - Sticking to the basics

With the 138,000tons per annum expansion plant commissioned, we are of the opinion that IFL has assumed the market leadership position in the industry. IFL's conversion cost are approximately PkR2-3/kg less than the industry conversion cost, and thus the company enjoys significant cost advantage over its peers. The expansion plant of the company also has the capability of high value varieties of PSF, which are able to fetch better prices in the export markets. According to our sources, the company is currently focusing on increasing its market share in the local market, which without any doubt, is more profitable compared to the export markets.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

14.02

14.44

2.97%

Avg. Dly T/O (mn. shares)

437.07

567.69

29.88%

Avg. Dly T/O (US$ mn.)

251.69

422.57

67.89%

No of Trading Sessions

5

5

 

KSE 100 Index

3645.89

3751.71

2.90%

KSE ALL Share Index

2331.51

2398.31

2.87%

 

 

Source: KSE, MSCI, KASB