Updated October 25, 2003



The index declined by 0.6% WOW with volumes remaining very low throughout the week, indicating lack of interest amongst investors, especially institutional investors. The week started off positively with the market expecting good announcements from the results to be released during the week. On Tuesday, the announcement that Moody's had upgraded Pakistan's debt rating boosted the market temporarily, after which it started falling on the back of below expectation results and rumors of a member defaulting. There were also indications that small investors had begun to square their positions.





Wednesday brought the market back to the usual PSO story, wherein the Privatization Minister once again announced that PSO's date would be released during the current month. However, subsequent rumors regarding a delay in the bidding date announcement caused the market to fall. This declining trend continued into Thursday and the first half of Friday and wasn't even disturbed by the surprise Indian peace overtures. However, during the Friday afternoon session, the market was boosted by rumors that KPC had received approval from the Kuwaiti Parliament to invest in PSO and by the Hubco Chairman's announcement that the company had received permission to sell power directly to KESC.


As usual the main factor that will determine the market's performance next week will be news regarding PSO. If the rumors regarding KPC turn out to be false, we can expect the floor to fall out of the market, however, if it turns out to be true, the market may begin its long awaited rebound. Furthermore, PTCL and Fauji are also expected to announce their results during the week and may provide the market with the extra excitement that has been lacking this last week. The most important factor in determining market direction however, will be volumes. This week institutional investors remained mostly out of the market, their entry may be expected to affect the market positively as we seen during Friday afternoon session when some smart investors started accumulation at 3800 levels.


The major developments this week were:

•The auto sector Task Force submitted its report to the Cabinet along with its recommendations, which include reducing duties on new cars, continuing the ban on reconditioned/used cars, requiring full payment on bookings, ensuring that vehicles are registered in the name of the person making the booking, enforcing a 6-month registration transfer ban and encouraging the Assemblers to expand their dealer network.

•Indus Motors announced 1st quarter results on Friday, with PAT of PkR451mn, EPS=PkR5.73. Revenues jumped by 77% YOY to PkR5.73bn from PkR3.24bn, whilst PAT jumped by 95% YOY to PkR451mn (EPS:PkR5.73), from PkR231mn (EPS: PkR2.93), earned during the same period last year.

•Mill owners asked the Government for financial assistance equal to the freight charges incurred on importing cotton in light of the situation prevalent in the cotton market. APTMA has also demanded the abolition of sales tax on local and imported cotton along with a reduction in sales tax on PSF from 20 to 15 percent.

•Further progress has been made on the much awaited gas pipeline to Pakistan from Turkmenistan. The Asian Development Bank submitted a feasibility study for a US$3.2bn pipeline, from Turkmenistan to Pakistan. The representatives of all the three countries involved, that is Pakistan, Afghanistan and Turkmenistan are expected to meet in the beginning of December to finalize the proposal. Pakistan is currently also considering proposals to import gas through pipelines from Iran and Qatar and a final decision is to be taken by end of Feb-04.




The Board of Directors of Nestle Milkpak Limited at its board meeting held on October 21, 2003 at 3.30pm approved the company's results for the 9 months ending September 30, 2003. The board also declared a second interim dividend of 40%. Previously, the company had declared an interim dividend of 60% with its half-year results. The company declared profits of PkR545mn (2002: PkR539mn) against revenues of PkR8.2bn (2002:PkR7.2bn) for the nine months ending September 30, 2003. Though the stock appears expensive if we compare its PER with market PER. However, the investment case for Nestle lies in its above average growth in the medium to long term. Our target price for Nestle is PkR281 per share and the stock is trading at a slight premium to this level.


Nestle's results came in slightly below expectations, with the 14% jump in sales over the 9 months getting offset to a certain extent by the 24% YOY jump in operating expenses. The result was that the company's Operating Margin fell to 12% from 13% the year before, even though Gross Margins remained around the 30% mark. Sales were to an extent driven by the introduction of new Yogurt variants, new SKUs for Nido and Butter and the introduction of Toffo.

The fall in Operating Margins was however offset by the 0.6% (2002: 92%) increase in Other Expenses and the 35% (2002: 25%) fall in Financial Charges, which resulted in a relatively small fall in the company's Net Margin from 7.5% to 6.7%. Thus PAT increased by a mere 1% to PkR545mn as compared to the 40% jump to PkR539mn during the same period last year.

Most of the increase in operating expenses occurred in the 3rd quarter wherein Operating Margins fell to 9% from the 14% attained during the first half of the year because of the increase in advertising and promotion expenses. This coupled with the 26% increase in Other Income, the 6% fall in Other Expenses and the 34% decrease in Financing Charges when compared with the same period last year, caused Net Margins for the quarter to fall to 5% from the 7% attained during the same period last year.

The result was that the company attained an EPS of PkR2.9 (2002: PkR3.6) during the quarter, and an EPS of PkR12.0 (2002: PkR11.9) for the first nine months of the year. As may be evident, the company's performance during the first two quarters were substantially better, EPS 1Q03: PkR4.7 and 2Q03: PkR4.4, thus ensuring that the company's 9 month EPS of PkR12.0 remained higher than the EPS of PkR11.9 attained during the same period last year.

Even though profits at PkR131mn (2002: PkR161mn) were down this quarter, the sales growth achieved and the performance of the company over the first two quarters (PAT 1Q03: PkR212 and 2Q03: PkR201) of the year encourages us to be optimistic about the company's annual performance. We therefore expect the company to attain a 4th quarter EPS of at least PkR3, taking yearly EPS over PkR15. Results for the last quarter may however be substantially better if advertising expenses are controlled. Though the stock appears expensive if we compare its PER with market PER. However, the investment case for Nestle lies in its above average growth in the medium to long term. Our target price for Nestle is PkR281 per share and the stock is trading at a slight premium to this level. 








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