Updated July 02, 2005



The local stock market went through a highly turbulent 2004-05, whereby records all across the board were broken. From the first-ever closing in five-digits (above 10,000 points) to the 2nd-highest ever trading volume (1,086 million shares on Feb 23, 2005) and intra-day gain and loss records in terms of points, the KSE-100 Index was literally a rollercoaster ride closing the year at 7450 level.

According to a report from InvestCap, the KSE-100 Index ended the fiscal year with a gain of 41.1%, which translates into 2171 points. This compares well with that of 55.2% during 2003-04, despite a larger base. Even though the stock market saw its worst-ever crash with a decline of 26.2% in equity values (using the KSE-100 Index as benchmark) during a short span of 2 weeks in March 2005, the fiscal year ended with yet another excellent return for stock market investors. It is necessary to remind the readers once again, that being a total return index, the KSE-100's 41.1% gain during the year is inclusive of dividends.

More often than not, it has been the high possibility of manipulation in badla, which has caused various stock market crises. However, this mantle of destruction was taken over with consummate ease by yet another leveraging tool, i.e. stock futures. The March settlement crisis caused the three stock exchanges and regulatory authorities to shift to overdrive to try and resolve the situation. This resulted in a more stringent set of regulations for stock futures and higher requirements for deposits against exposures in the stock futures market. The death knell has been sounded out for badla, as it will be completely phased out by August 26, 2005. This date was also arrived at following a spate of never-ending deliberations between the stock exchange members and regulatory authorities.

The year has also been unique in terms of privatizations, both via strategic sales and via capital market transactions. Year 2004-05 saw the largest single strategic sale in the history of the country with PTCL being privatized after a long wait of over a decade. Both PTCL and NRL generated higher than expected revenues for the government. The rally up to 10,000 points also had its roots in the government's privatization progress with stocks like PTCL, PPL, PSO, and OGDCL rising far beyond their fair values in February and March 2005. As far as the capital market transactions are concerned, subscriptions worth over Rs 40 billion for PPL and KAPCO were received. KAPCO also saw the highest ever number of applicants, with 1.4 million applications received. However, enthusiasm in government IPOs fizzled out a bit with United Bank, owing to the shattered investor confidence and the small lot size.

It is believed that the KSE-100 index currently has room for improvement. Investcap had stated in its report dated June 17th that the Index could improve to around 8000 points by December end 2005. It has once again reiterated that it is not the KSE-100 Index one should look at, rather it is the individual stocks and discounts to fair values that should be considered.

According to Alfalah Securities, the exploration and production giant, OGDCL, has to make some big discoveries in coming years in order to enhance its portfolio of reserves. With completion of development activities, resulting in increase in its production to reserve ratio (3.6% from 2.97% for gas and 9.41% from 5.74% for oil respectively) and failure to find big discoveries, the company needs to enhance its reserve replacement ratio going forward. Among the last 10 appraised discoveries in the last three years, the E&P giant have been able to maintain a reserve replacement ratio of 37% for gas and 17% for oil. The earning growth momentum of OGDCL is expected to decline substantially in FY06 (from 50% in FY05 to 6%) owing to expected higher exploration cost and absence of production growth. The stock is not expected to outperform the index in short to medium term on fundamental basis. On comparative multiple basis, OGDCL looks expensive, trading at PER of 13.5x and offering a dividend yield of 5.6%.



Chenab Limited, a well-established name in the textile industry is being provisionally listed on the KSE today with the IPO scheduled for 13th and 14th July. Chenab is a sizeable vertically integrated textile producer with an export driven focus, its primary areas of production being home textile products and woven garments. With 24 million shares at Rs 18/share on offer, there is an opportunity to gain exposure to the growing textile sector. The story started in 1975 with the Chenab Group owning several companies in the textile arena, Chenab itself being the flagship company. Since 2003 however, the various associated group companies have been merged into Chenab Limitd, making it a sizeable vertically integrated textile producer. Chenab's primary areas of focus are home textile products and woven garments. Amongst other operations, it boasts ownership of the popular 'Chen One' lifestyle stores. However the company is basically export oriented with exports historically making up 94-95% of sales. While exporting to about 30 countries, its biggest target markets remain the US and Europe. With the end of export quotas, one can expect Chenab to capitalize on the situation. It is necessary to understand the rosy picture with the potential threats the WTO era carries in terms of price competition from other textile producing countries like India and China and the increased marketing costs the company will most likely face in the future.