Feb 02 - 15, 2003



Currently ZAHEERUDDIN KHALID is working at Elixir Securities Pakistan, an InvestFinS S. A. Group Company, as Head of Research. Before joining Elixir he was working as head of Research at first capital Equities. He has also worked as an Investment Analyst in Research Department of Aqeel Karim Dhedhi Securities. Earlier he was associated as Financial Analysts with First Capital Equities. Before joining the fraternity of Research Analysts he has worked as Internee at Jahangir Siddiqui & Co., Jardine Fleming Pakistan Broking and Faysal Bank. He has done his MBA from Institute of Business Administration (IBA), Karachi. He is a candidate for CFA Level III.

PAGE: Since September 2003, the index movement has been rather erratic. What could be the possible reasons for the market behavior?

ZAHEERUDDIN KHALID: The KSE-100 index touched all time high level at 4,604 on September 12, 2003 after which a steep correction was witnessed. On the other hand interest rates had also started to inch up, making equity market less attractive. However once, the market bottomed out at 3,732 on November 6, 2004, investor interest started generating again. Afterward, improving relations with India and expectations of corporate results kept the market buoyant. The resolution of the LFO issue also helped the upward trend of the market.

PAGE: Why investors' preference seems to be shifting from volume leaders to second and third tier scrips?

ZAHEERUDDIN: The main reason for the shift of interest from top tier scrips to second and third tier scrips is fundamental. Most of the top tier scrips are trading close to their respective fair values and fundamental developments are not exciting enough to generate investor interest. On the other hand fundamentals for second tier scrips like cements have improved. This has called for a re-rating of the cement sector and the market has reacted accordingly.

PAGE: When is the next re-composition of KSE-100 due and which of the companies are expected to be included in the index?



ZAHEERUDDIN: Next composition of KSE-100 index is due in March 2004. There are expectations that OGDC may be included in the index at that time. However, by that time OGDC would only have a trading history of 2 months. Minimum requirement for a company to be part of KSE-100 index is to have a trading history of 6 months. Consequently, according to law it should not be made part of the index. Having said that, there are indications that OGDC might be included in the index in March in order to give a boost to the capitalization of the index.

PAGE: After the listing of OGDC which other companies are being listed at the Karachi Stock Exchange?

ZAHEERUDDIN: A number of new companies are in the process of getting themselves listed at the KSE. Public offering by WorldCALL Broadband has just concluded. Other new companies to be listed on the KSE in the next few months include (1) MACPAC Films, (2) Universal Board & Industries, (3) Southern Networks, (4) Kot Addu Power Co (5) Pakistan Petroleum, and (6) Air Blue. Apart from these, government has also mentioned the possibility of listing UBL on the stock exchanges as part of the privatization programme.

PAGE: Can new floatation of TFCs be expected in the backdrop of low interest rates environment?

ZAHEERUDDIN: In the current low interest rate environment, where banks are trying to push credit to the companies, TFC issuance should not be expected. Most of the companies, in need of funds, can get bank credit at a much cheaper rate than TFCs. Generally the difference between bank credit and TFC rate would be in the range of 300-400bps. Companies that have fully utilized their banking lines are the ones that are likely to go for public TFCs in the current environment.

PAGE: What are the result season expectations?

ZAHEERUDDIN: The upcoming result season is likely to be a mixed bag. We expect the oil marketing companies to witness a decline in profits mainly on account lower demand of furnace oil in the country. The decline in furnace oil's demand is on account of (1) conversion of cement plants to alternative fuels and (2) lesser demand from the power sector due higher hydel based generation over the last few months. On the other hand banking sector is likely to witness a phenomenal increase in profits on account of capital gains booked on equity and bond portfolios. With the decline in interest rates in the recent past an upsurge was seen in equity and bond prices. Banks benefited from the situation and booked capital gains on their holdings. Another factor positively contributing to the increase in profits of the banking sector is the declining tax rate. Profits of the fertilizer sector would also be slightly higher than the previous year on account of higher offtake of urea during 2003. The gas distribution sector is likely to witness an increase in profits on account of decline in interest charges.

PAGE: What is outlook for textile sector?

ZAHEERUDDIN: The upcoming results of the textile sector may show some improvement on account of a series of debt restructuring carried out by various companies in light of the declining interest rate environment. However, going forward, we expect the sector to come under pressure on account of declining margin due to higher cotton prices. The main impact would be on the weaving sector in this regard where we expect margins to come down by 15-18%.