STOCK MARKET - IS IT TIME TO BUY?

SHAMSUL GHANI, shams_ghani@hotmail.com
Feb 09 - 15, 2009

The country's stock market has hugely suffered during the last nine months or so. The KSE-100 index has registered a fall of 65 per cent while the total market capitalization has decreased by 64 per cent. In the past, the worst declines have been to the extent of an average of 40 to 45 per cent. The present one is, therefore, unprecedented in the history of our stock exchange. The reasons for this debacle are various and varying, but the uncalled for destabilization triggered by the political developments remains the foremost one. The following table gives a lucid rather a lurid account of the debacle.

TABLE-1
Decrease in market capitalization

Million Rs.

Sector

Market
Capitalization
on April 15, 08
with KSE-100
Index at 15,538
Market
Capitalization
on Feb 03, 09
with KSE-100
Index at 5,385
Absolute
decrease in Market Capitalization
Per cent decrease in Market Capitalization
Finance 2,061,004 541,817 1,519,187 73.7
Textile 117,624 57,913 59,711 50.8
Synthetic & Rayon 31,556 16,487 15,069 47.8
Jute 8,084 2,655 5,429 67.2
Sugar & Allied Industries 19,892 19,138 754 3.8
Cement 161,590 56,768 104,822 64.9
Tobacco 56,912 36,927 19,985 35.1
Oil, Gas, Power & Refinery 1,272,987 493,090 779,897 61.3
Engineering 29,368 13,671 15,697 53.4
Automobile 94,282 39,708 54,574 57.9
Cable & Electronic Goods 27,046 10,738 16,308 60.3
Transport 33,967 12,321 21,646 63.7
Technology & Communication 213,742 67,061 146,681 68.6
Fertilizer 222,101 95,305 126,796 57.1
Pharma & Chemicals 142,925 77,380 65,545 45.9
Paper & Board 41,763 13,242 28,521 68.3
Vanaspati & Allied Industries 584 308 276 47.3
Leather & Tanneries 7,093 6,510 583 8.2
Food & Personal Care Products 155,397 111,970 43,427 27.9
Glass & Ceramics 10,893 7,896 2,997 27.5
Miscellaneous 43,914 23,014 20,900 47.6
Total 4,752,724 1,703,919 3,048,805 64.1

As they say, the time to buy stocks is when there is blood on the streets; even if it is your own blood, many will recommend buying at this stage. Proponents of this idea are of the view that the market has taken whatever beating it was due to take, and from here on it will resume its upward journey. Those bracing to take a plunge, should, however, stick to the basics of this highly volatile and risk prone investment. Prudence warrants phased committing of funds. To start with only 20 t0 30 per cent of the committable funds should be invested. The study-points for any company whose shares are being targeted should include a sound management track record, profitability, payout consistency, the market price graph and price to earning ratio of shares.

The Table-2 below presents a study of comparative price data of a few leading shares on KSE. .The price earning multiple is a standard measure of a share's fair value. Although there is no cut and dried formula, yet a multiple of up to 10 is reasonably acceptable in Pakistan. In US 11 is taken as the normal price/ earning multiple. During the 1987 New York stock market crash, many shares were found trading in the vicinity of 15 to 20 P/E multiple. Judging from the standard of the US, we can easily infer that in the case of our developing economy, the bench mark price/earning multiple should be less than 10. This view is also substantiated from the fact that multinationals like Shell Pakistan and Siemens Engineering and our public sector organization OGDC were trading at a multiple of 6 to 11 and they underwent comparatively low value erosion during the recent stock market debacle. The other scrip that were trading at a multiple of 18 to 24 suffered comparatively higher value losses. Heavily overpriced shares are a constant threat to the stock market development. Bearish spells take a heavy toll on such shares by drastically reducing their prices thereby making heavy dents in KSE indices. To arrive at a more realistic conclusion, other factors such as payouts etc. during the intermittent period are also to be taken into consideration. Yet a lower P/E ratio is a safer bet against unforeseen market disaster. In the present market, a number of yesteryear's star performers can be found trading at a multiple of well below 10.

TABLE-2
Name of Scrip Market Price
Dec-07 (Rs.)
Price/Earning Multiple
Dec -07
Market Price Jan-09 (Rs.) Market Price decline during the period
MCB Bank 429/- 17.6 90/- 79%
Adamjee Insurance 385/- 19.4 43/- 89%
PTCL 45/- 19.0 15/- 67%
D.G Khan Cement 102/- 24.1 14/- 86%
Shell Pakistan 437/- 11.2 164/- 62%
I.C.I 209/- 18.5 57/- 73%
Siemens Engineering 1,737/- 5.8 941/- 46%
Engro Chemicals 279/- 21.3 114/- 59%
OGDC 127/- 11 44/- 65%

Note: The companies have been randomly selected for a generalized P/E analysis. The study and the conclusions drawn, in no way, carry any recommendations to invest or not to invest in any particular scrip.