Updated Sept 20, 2003


The index grew slowly but consistently over the entire week. However, the slow growth did not prevent it from closing above the 4600 barrier on Friday. Furthermore, the market also broke its capitalization record when it touched PkR1.016tn. The market has been driven primarily by expectations with regards to the increased profitability of Pakistan Oilfields, DG Khan Cement, NBP and PTCL, whose results are expected to be announced next week, and the IMF's decision to release two installments worth $240mn together to Pakistan in December. However, rumors of a delay in announcing the bidding date for PSO, which was slated to take place in October, followed by a new Osama Bin Laden tape released on Sept. 11 created some concern for market participants.Market activity also increased during the week as indicated by average daily trade volumes which increased by nearly 4% WoW to 550mn shares.




The index reflected incredible levels of volatility during the week, from the 206.5 points drop on Tuesday to the 182 point rise on Thursday. The Tuesday drop was the largest fall in a day in the KSE 's history. The week's negativity was the result of a collection of events and rumors. These rumors, later proved untrue, related to the SBP with regards to its supposed plans to restrict banks from operating in capital markets and to extend its control over Badla financing. Added to these rumors was the news that International Power had applied to have 58mn Hubco shares dematerialized, COT and 6-month T-Bill rates rose, mass profit-taking on Pakistan Oilfields, once results were announced on Monday, and the negative political developments with regards to the government-MMA talks. The only positive close for the index occurred on Thursday when International Power reaffirmed its commitment to Pakistan and the market temporarily believed that the continuing MMA-government talks seemed to be heading towards resolution.Market activity decreased sharply during the week as indicated by average daily trade volumes which decreased by nearly 22% WoW to 430mn shares.


With PTCL results expected next week, we can expect increased activity in the market, which is currently undergoing a correction. However, there may be some pressure on the market in the beginning of the week as a result of the bomb blast that took place on Friday in Karachi. A lot will also depend on the government-MMA negotiations that are continuing and the President's trip to the USA where he will address the UN and meet the American President.



•ICI Pakistan lowered its soda ash prices by around PkR500 per ton to PkR12,600 per ton.

•NBP announced is 1Hfy03 results, posting over 70% growth in its earnings. The decline in returns to the deposit holders is the single largest contributory in this exceptional performance.

•Cherat Cement announced a net profit of PkR9.7mn for FY03, 92% down from PkR128.9mn in FY02.

•The Managing Director of Shell Pakistan, in a press briefing, stated that the company is in the process of reassessing its strategy in Balochistan.

•Prices of domestic POL prices were revised in line with international trend. Apart from High Speed Diesel and Light Diesel Oil, prices of other petroleum products witnessed a marginal decline. HSD prices were revised upward by 1.97% to PkR21.74/litre while LDO prices were raised by 0.65% to PkR17.10/litre.

•International Power has announced that it plans to dematerialize 5% of its shareholding, amounting to 58mn shares, in to the Central Depository Company.

•Workers remittances during Jul-Aug 2003 stood at US$588.1mn. A 34% decline in remittances was witnessed from the two main sources of US and the UAE.

•The 10-year bond is currently trading at a yield of 5.50% against the revised coupon rate of 8.0%. Similar gaps between secondary market yields and coupon rates exist on the other two bonds.


The market is unfolding its first corrective move since its rise from 2339 in February. Immediate declines are seen making headway towards 4100, and is the 23.6% retracement of move from 2339 to 4643. Besides 4100, the market also faces test of its medium-term rising trend-line that is currently just above 4000. Thus, keeping this trend-line intact maintains the medium-term bullish trend. Resistance is currently placed around 4460-4577.


The market was quick to discount the turnaround in the cement sector that started taking place in 2002. Two factors namely (I) higher capacity utilization on the back of improving demand situation in the local market and higher exports to Afghanistan, and (II) massive cost savings via sector's conversion to coal were the major triggers for this out performance. However, we feel that most of the positives have already been discounted in the stock prices due to which this out performance is unlikely to continue in future. At best, the cement sector will perform in line with the KSE 100 Index. With the start of the results season, here we have discussed performance of the cement sector along with separate analysis of four major cement companies namely DGK Cement, Cherat Cement, Lucky Cement and Maple Leaf Cement.




Cement sector witnessed quite ups and downs during FY03. Major events during the year were:

1. Conversion of most of the industry from furnace oil to coal firing system

2. Breakup and then revival of the Cartel

3. More than 11% growth in local cement demand

4. More than 300% growth in cement exports to Afghanistan

5. Restructuring of financial loans

Beginning of the year was quite encouraging where due to improved demand situation in the local market, as well as tremendous growth in cement exports to Afghanistan improved the revenue base of the sector. Further, conversion of most of the cement units from furnace oil to coal provided major boost to the sector earnings. However, cartel violation in the second quarter deteriorated the situation for the industry.

In early November 2002, two major cement manufacturers violated the cartel due to which cement prices dropped by almost 26% to PkR165/bag from PkR225/bag. This triggered growth in cement demand in the local market where cement dealers piled up cement stocks in anticipation of revival of the cartel. Some genuine demand was also generated through reviving construction activities within the country. Introduction of new house-financing schemes by commercial banks was one of the main reasons for the revival of the construction industry during the year. Cartel was again revived in April 2003 and cement prices came back to their previous level of PkR225/bag.Meanwhile, cement dispatches witnessed a growth of 14.6% YoY to 11.4mn tones from 9.9mnt in FY02, where cement industry exported around 428,602t to Afghanistan during the year.


We expect the cement sector to witness significant growth in its profitability during FY04 on the back of 1) improved demand situation in the local market, 2) stable cement price structure, 3) more than 10% growth in exports, 4) improvement in operating efficiency due to complete coal conversion, and 5) drop in financial cost for the sector due to loan restructuring. However, this is mostly been discounted in the cement sector stocks prices. At present we are in process of revising our valuations for the cement sector and will come with an indepth report on the sector in the near term. Till than we maintain our Underweight stance for the sector as a whole.






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