THE KASB REVIEW

STOCK MARKET AT A GLANCE

 

 

By SHABBIR H. KAZMI
Updated March 20, 2004

 

The index this week attained levels never before seen, closing for the first time in its history above 5000 points on Friday after growing by 1.7% on a WoW basis. The week started off on a positive note, buoyed by the successful hosting of the first Pakistan-India ODI in Karachi. Share prices were further boosted by institutional activity especially in telecom and energy stocks, however, news of an explosives laden vehicle 

 

 

 

 

being found near the American Consulate served to offset part of this positive sentiment. Tuesday brought growth in the index on the back of institutional buying, whilst a large number of traders remained distracted by the 2nd ODI in Rawalpindi. Wednesday remained very flat. Whilst institutional support remained in the market, there was some caution on the back of rumors about the ongoing military operations in the tribal areas. Thursday saw the index temporarily breach 5000, boosted by rumors regarding the cement sector. However, gains were offset by profit booking. Friday saw history being made with the index closing above 5000 points. The index was boosted by positive news flow regarding oil prices, which caused volumes and prices of the petroleum and gas companies to shoot up.

OUTLOOK FOR THE FUTURE

With the index closing at the 5000 mark, excitement and a generally positive sentiment among investors should have a positive impact on next week's trading sessions. Moreover, various encouraging opinions expressed by Mr. Collin Powell and the U.S. delegation should further help in supporting the index. Last, but not least, rumors have it that Indian Prime Minister Vajpayee is planning on visiting Pakistan to witness one of the cricket matches next week. If this rumor turns out to be true, the market should receive another pleasant upward jolt. With the lack of any major expectations from the corporate front, these should prove to be the most important factors driving the market next week.

COMPANY REVIEW: ICI PAKISTAN LIMITED

Established in 1944, ICI Pakistan is one of the oldest chemical-manufacturing units in Pakistan. The company has a diverse set of business segments. ICI Pakistan's recent entry into the Furnace Oil business was a good initiative by the management, as it did not require any major investment.

However, with FO consumption in the country declining, we see ICI's prospects in this business being marginalized. We do not expect any major surprise performance by the other major divisions of ICI, while we expect the Paints division to continue exhibiting strong growth. We recommend a Neutral stance on ICI Pakistan with our 12-month price objective of PkR75.4.

One of the Oldest Chemicals Manufacturing Units in Pakistan ICI (Pak) was established in 1944 as a manufacturer and marketer of soda ash. Over the past 5 years it has expanded its operations to manufacture and market polyester staple fiber, paints, specialty chemicals, calcium carbonate agrochemicals and pharmaceuticals. ICI (Pak) Omicron, a wholly owned subsidiary of ICI plc UK, remains the largest shareholder in ICI (Pak). After facing continuous losses in the PTA business, ICI carried out a restructuring exercise in FY2001. Through this exercise, ICI Pakistan de-merged the PTA business, which was formed into a separate company with the name of Pakistan PTA.

BUSINESS SEGMENTS

Historically, ICI has positioned itself as either a dominant player in its chosen line of business or as a high-end participant in segments where margins are high and product quality is a key competitive advantage. The soda ash and PTA business lines are examples of its market dominance strategy while paints and chemicals are high-margin segment examples. The company has been marginalized in the PSF business ever since local entrepreneurs entered the industry in a big way over the last six years. However, in order to maintain its presence, ICI has increased its PSF capacity and remains the third largest PSF producer in the country.

*The Capacity is indeterminable, because these are multiproduct plants involving varying processes of manufacturing.

 

 

ENTRY IN FURNACE OIL BUSINESS

Towards the end of FY02, ICI Pakistan ventured into the Furnace Oil trading business with the government announcing the deregulation of the downstream oil sector. ICI capitalized on the dispute between PSO and Water and Power Development Authority (state owned electric utility) by capturing some portion of WAPDA's FO business. With the necessary infrastructure in place and no major capex required, ICI started importing Furnace Oil and sold it to WAPDA, maintaining margins lower than other oil marketing companies. This did the trick for ICI, which posted good earnings growth on the back of the FO business. However, with the decline in FO consumption in the country, we believe that ICI's role in the FO market has been marginalized. There have been virtually no imports of Furnace Oil in the current fiscal year. With major Independent Power Producers having Fuel Supply Agreements with PSO making it the sole supplier, ICI will be primarily banking on WAPDA for its FO business. On the other hand, increased availability of gas to WAPDA is likely to keep ICI's FO business limited.

A MARGINAL PLAYER IN PSF

With Dewan Salman Fibre's acquisition of Dhan Fibres and Ibrahim Fibre's capacity expansion, ICI Pakistan ranks a distant third overall in the sector. We believe that a relatively smaller size in terms of production capacity puts ICI at a disadvantage, and thus has to follow the market leaders. With Ibrahim Fibre still working to fully utilize its expansion plant, we expect price wars within the industry to continue, a phenomenon which has been seen in the past.

SODA ASH STRUGGLING WITH INCREASING GAS PRICES AND DECLINING TARIFFS

The Soda Ash division is the main contributor to ICI's profitability. However, the division has been struggling to cope with rising gas prices. In addition, the government reduced the import tariffs on Soda Ash to 10% in the FY04 budget, which previously were at 20%. While we believe that import tariffs on Soda Ash are likely to remain at these levels, we are of the opinion that ICI is still likely to face tough competition from imports. Coupled with rising costs and declining protection, the demand growth in the sector has also stagnated over the past couple of years.

PAINTS STRONG RECOVERY

The Paints division of ICI has recovered very strongly on the back of auto sector growth. The major recovery has been in the auto/industrial segment. ICI is still facing tough competition in the decorative/household segment mainly by inexpensive local brands as well as smuggled products. We feel that this growth momentum in the paints business is likely to continue with auto sales maintaining their robust trend.

VALUATIONS & RECOMMENDATION

With the declining tariff protection and reduced margins in Soda Ash, stiff competition in PSF, and a decline in FO business, we find operating environment tough for ICI. The Paints division is the only area where ICI is likely to continue seeing growth, however, its contribution to the overall company's profitability is relatively small. We recommend a Neutral stance on ICI with our 12-month target price objective of PkR75.4/share.

MARKET ROUNDUP

..

LAST WEEK

THIS WEEK

% CHANGE

Mkt. Cap (US $ bn)

22.49

22.86

1.65%

Avg. Dly T/O (mn. shares)

264.43

370.05

39.94%

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

178.50

270.70

51.65%

No. of Trading Sessions

5

5

 

KSE 100 Index

4915.14

5000.83

1.74%

KSE ALL Share Index

3128.60

3192.47

2.04%