Updated Aug 13, 2005

Though, the listed companies are posting better financial results and also announcing attractive dividend payout, the KSE-100 continues to plunge.

The ongoing confrontation between the Governing Board of Directors of the Karachi Stock Exchange (KSE) and the Securities and Exchange Commission is adding to the confusion, which is keeping the market in the grip of bearish sentiments. Even the attractive results fail in changing the sentiments. Most of the analysts have reached the conclusion that neither the Badla nor the margin financing is an issue. The total margin financing requirement is not even one percent of total bank deposits. Even if one assumes that the amount extended by banks under margin financing becomes zero due to market movement, which is impossible, it will be of no consequence for them. Therefore, the perception that banks are not interested in extending margin facility is totally incorrect. Some analysts say, "Brokers are resisting the switchover from Badla to margin financing. Badla is the biggest source of capital gains as well as very substantial income for the brokers. It is not rocket science but simple arithmetic; brokers virtually control supply of shares (being the investor, sponsor and asset manager). As regards Badla being the biggest source of fund, it is suffice to say that when average lending was around 5 percent the average official Badla rate was around 18 percent and unofficial rate much higher than that. The other main reason is that margin financing requires complete documentation for which the speculators and day traders are not ready. Only time will tell whether the brokers win or the regulators succeed, it is test of nerves. However, the probability of brokers succumbing to SECP pressure is high because, their commission income has gone down to very low level due to shrinking trading volume. As a make shift arrangement there are efforts to deal in future contracts, which is evident from rising volume of future contracts. The situation demands immediate attention of the regulators before it becomes a bubble or the bubble bursts.

MCB Bank has announced its half yearly results. The bank has posted Rs 3,040 million (EPS: Rs 8.2) profit compared to Rs 1,289 million (EPS: Rs 3.47) in the corresponding period last year. According to a report from AKD securities this extra-ordinary growth of 136% YoY in MCB's bottom line comes on the back of improving spreads and advance/deposit ratio. Due to extensive click franchise and ability to generate zero cost transactional deposits, MCB appears to have been able to maintain a low cost of funds despite rising interest rates. This should have led to a sharp rise in spreads, which appears to be the case looking at the growth in net markup. MCB also appears to have been able to maintain sharp growth in its loan book, after relative underperformance in 2004. Given the sector's 75% Advance/Deposit ratio, MCB remains one of the few banks with the ability to continue to grow this and consequently the profitability outlook looks good.

Over the last two quarters, the automobile industry in general and Indus Motor in particular has received a severe dent through Yen/Dollar appreciation and an increase in the international steel prices. With the above two factors moving in reverse direction since February this year, the automobile companies are expected to post improved quarterly results and better results for the full year. The company's gross margin is expected to improve, which should act a precursor to improved margins next year. The company is expected to post a bottom line growth of 26.6%. However, the company is likely to witness a decline in its gross margin in full year 2005 because input costs are still higher than last year. Lately the company has posted growth in its overall sales volume, which includes 13% growth in Corolla sales, 33% growth in Curoe sales and 41% growth in sale of Hilux. Thus the overall growth in car sales along with improvement in car prices since late November 2004 will improve company's top Engro Chemical Pakistan has recently announced that it is considering expanding its urea business, subject to gas allocation from the government. The expansion will be through addition of a new unit of approximately 900,000 tons per annum capacity, which will double its existing capacity. The 930,000 tons per annum current capacity is in itself an increase from the previous rated capacity of 850,000 prior to the plant's turnaround in April 2005. The addition of a new urea production line will raise the future earnings profile of the company. Rising gas costs and capacity constraints had till now meant limited earnings growth from urea manufacturing for Engro. The decision to expand is not yet final, and will ultimately be subject to allocation of gas, the primary raw material and fuel source, in sufficient quantity and at a price that will make the investment feasible. Both Engro and FFC currently receive gas from the Mari (Shallow) field, which is dedicated solely to the fertilizer manufacturers. An increased in gas allocation for a new line at Engro would likely come from another field (possibly Mari Deep or another source, yet to be decided by the government). Engro will most likely try to get more favorable gas pricing terms for its new unit than it currently has for its existing plant, which are subject to the 2001 Fertilizer Policy. It is important to note that previous expansions were allowed very favorable gas terms. The Fertilizer Policy 2001 did not provide incentives for new entrants and as a result domestic urea production capacity failed to keep up with demand growth. The current situation is that the country has to import urea to fill the supply gap. Imported urea prices are almost double the prices of locally produced urea. The differential has to be borne by the government. To avoid this burden and to reduce the foreign exchange outflow the government must make necessary changes in the policy.