investments ars report

8/2/2019 Investments Ars Report

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INVESTMENTS FINAL PROJECT

BSC IV

SECTION A

SUBMITTED TO: ASSISTANT PROFESSOR SALAAR FAROOQ

SUBMITTED BY :

HAROON M JANJUA


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Analysis of GDP of Pakistan

Pakistan went through four severe shocks during the last two years. The first negative shock that it

faced emerged from severe macroeconomic crisis. This was a result of the imbalances of the past

several years induced by policies. This was followed by a second shock that involved a largedeterioration in Pakistans net external terms of trade. This was the consequence of the increment

in the world commodity prices during 2007 and large part of 2008. This resulted in a severe supply

shock in the economy, especially in the case of the provision of energy. The third shock emanated

from adverse effects of the turmoil in global financial markets, whose external demand for exports

had been collapsed. Also, there was a sudden decline in the availability of external capital which

was needed to finance its fiscal and current account deficits. The market was affected adversely by

the global financial crisis. The investors in developing countries, including Pakistan came under

great periods of stress. And finally, in the period of 2008-09 Pakistan witnessed a sever security

challenge both in terms of the fight against extremism and in terms of knock-on effect on

investment inflows and market confidence. The effect of all these challenges has resulted in the

loss of growth momentum. The real GDP growth has fallen down from 4.1% to 2% as compared to

the last fiscal year. The country is expected to maintain this average growth rate of 2-3% in the

near future, keeping in view the world economic recovery.


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Inflation Rate in Pakistan

Pakistan had been witnessing a soaring inflation rate in the recent past to as high as 25% but with

the economic recession setting in the implementation of a tight monetary policy by the SBP it has

been brought down significantly to around 8- 9%. However, with an expectation of recovery in theworld market as well as in the domestic economy, it might not be reasonable to expect that

inflation levels would fall to much lower levels. In fact it might start to rise again as the SBP eases

its monetary policy to expand economic recovery.

State Bank of Pakistans Expected Monetary Policy

In view of inflationary pressures in the past, the SBP had been following tight monetary policy.

The central bank raised interest rates by 2 percent back in November, which was the fourth

consecutive increase since the global economic outlook receded in 2008. However, since the

economy has been growing at its slowest rate for eight years, interest rates have been cut. At

present the interest rates have been reduced to 12.5%. The overall level of risk and uncertainty in

the economy has increased considerably, given the present law and order situation. As a

consequence, the pressure on the fiscal position, especially from the financing side, has escalated

and growth in the real economy was limited. The monetary policy is not expected to ease down

significantly as inflationary pressures are still looming around the economy

The stock market in Pakistan


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The present turmoil being witnessed in this market and the world markets is nothing unusual and is

the part of the game in the world of high finance. This has been around for centuries nowfrom

lower levels, the markets begin to show positive signs of improvement, hope rises and people

begin to buy but then the euphoria crosses the limits of rationality.

It is the leverage or the borrowed money that is the root cause of financial chaos and havocbe it

the great crash of 1929 or the sub prime episode of the 21st century. They have led to the most

unusual and unprecedented step that has ever been taken by KSE to handle a situation: freezing of

share prices at 27 August levels. Psychological effects of this freeze on the thought processes of

the market participants have been more devastating than the misery that falling share prices cause.

Optimistically, the situation is likely to improve at KSE. This means that the opportunity to make

money shall continue to be there in this market. But the problem is that for the people, generally,

the definition of coming back of good times at KSE is only that the index should be at 15600 levels

again and the stock that someone bought at 319.70 must hit those levels again. Yes, that or nothing

else. Unless the possibility of seeing those same old high numbers flashing on the screens again

becomes a reality, majority of the people refuse to turn optimistic about the market. This is a very

misleading and unreal yardstick to gauge the future of the market. The levels that the market has

seen (index 15600, size 4.8 trillion rupees) were actually overdone, overstretched number. Those

levels may be seen again in four months but also we may not see those levels again in four years

even. In the meantime, the market will ultimately find its new range and stock prices will stabilize

at levels that are in line with this new regime of higher cost of production and slumping sales.

Investors will not be able to see the opportunity to make money in the stock market in the time


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ahead until and unless they consciously accept the new environment in which the share prices will

have gone through after an intense phase of downward adjustment.

Another reality that must be accepted is that the days of making easy money or making money

easily in the stock market are over now for the time being. In the bull run witnessed during past

some years, even casual participation in the market would prove fruitful. It would not even fall in a

straight line thereby making the option of going short as fatal as the decision to hurriedly pick up

stocks at apparently discounted prices. On the other hand, staying completely away from the

market till things are clear will not be viable either because, as they say, we miss 100% of the shots

that we never take. Peter Lynch said about working in the stock market, It is important to be able

to make decisions without complete or perfect information. Things are almost never clear on the

Wall Street or when they are, it is too late to profit from them"

So since times are difficult now, in order to survive and grow in the market there must be some

business plan to which must be adhered to with great discipline. The main goal should be

preserving capital by preventing it from being wiped out. Such a plan requires strict profit and loss

targets to be observed with extreme exactness.

Outlook of Oil

The price of oil has been at a record high since the last few years. The simple explanationbeing that the demand for oil is increasing rapidly whereas the production is near capacity for

several producers and the ever increasing demand for oil threatens to surpass the worlds oil

production. New oil fields and technologies being used have not given any satisfactory results and

have failed not only to provide the expected supply growth but have also failed in relaxing the

pressure on the oil industry.

The domestic oil value assessed in Pakistan is on the international value basis. About 85

percent of the oil required for domestic uses in Pakistan is imported. Back in the year 2004 various

subsidies were given by the government on the oil price as an attempt to protect the citizens from

the prospective record fuel costs and an attempt to reduce the rate of inflation in the country.

Financing these subsidies was a major burden on the economy and as a result the Pakistani


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government was under major financial stress. It is estimated that this subsidy amounted $232

million per month.

When the new government took over the rule of Pakistan in February 2008, it could not

endure the fuel bills. Hence this stress being faced by the government was a significant factor for

the hike in the oil prices. All these factors led to the first ever increase in the price of gasoline and

diesel in Pakistan in almost twenty two months. This increase took place on the 1st of March 2008

against the last increase that was witnessed in 2006 in the month of May. The price at that time

was raised by 4.2 percent and before that implementation of the increment in oil prices the

nationwide price of gasoline was 53.7 rupees per liter whereas the price of diesel was 32.57 rupees

per liter. The new prices of gasoline and diesel were increased by 5 Pakistani rupees per liter and

3.5 Pakistani rupees per liter respectively.

In January 2009 the price of petrol in the international market was around US$36 a barrel

and in Pakistani Rupees this translates into PKR 13.60 per liter in a barrel but Pakistani

Government did not decrease prices instead to cover the debt government was facing, it charged

record high prices of oil to even RS. 80 per liter. This hike in the oil prices was expected, the

reason being that owing to the record prices of crude oil import. For e.g. In February the price of

crude oil in the New York market was around $101.84 per barrel which was close to its record

price of $103.05 in same month. In May 2009, the oil prices were reduced jus a bit. Petrol and

HOBC was reduced by Rs. 1.45 per litre and Rs. 1.80 per litre respectively. The prices of Kerosene

Oil and Light Diesel Oil (LDO) have been kept unchanged at Rs. 51.87 per litre and Rs. 48.00 per

litre respectively. The price of High Speed Diesel (HSD) has also been reduced by Rs. 1.43 per

litre which will be notified In June-September2009 world prices did increase to 60-80 dollar a

barrel and so the prices in Pakistan reached to the level between RS. 60-70 per litre. There was

reduction in tax from Supreme Court in October which resulted in decrease in prices of around RS

10 per litre but government could not bear this as it is the most easy income generating source for

them. And so this prices reduction could not last for long. The prices at that time were RS. 51.7

and it was again increased to around RS. 62 per liter and remained around this level during whole

November

Outlook of Gold


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Comparing it based on global surge of the yellow metal, one tola rate also hit a new peak of

Pak Rs 38,000. One tola is equal to 11.66 grams. Current trading of gold is at Pak Rs 32,271 per

10-gram and Pak Rs 37,650 per tola. Gold price in Pakistan was Pak Rs 200 per tola higher than

Dubai. The international gold rate thereon soared to an all-time high of $1,195 per ounce and it

was expected the rising price trend may continue to persist amid sharp increase in demand by

investors and central banks of some countries. In Pakistan, the ongoing marriage season will pick

up pace after Eidul Azha. Consumers who try to purchase gold jewellery on spot rather going for

advance booking are the worst-hit in view of surging prices. Pakistans gold imports in July-

October 2009 surged to 673 kg ($20 million) as compared to 363kgs ($11 million) in the same

period of 2008, according to Federal Bureau of Statistics (FBS).

The gold price movement would largely depend on the rupees strength against the dollarand trend on international bullion markets. Contrary to the situation in the international market

where people invest heavily in gold, it is not hold any big attraction for investors in Pakistan.

However, in the international market, in light of the rising trend in gold

Analysis of Stock Positions

Active Portfolio

This portfolio was designed with the object of diversification so that adverse changes in

one sector could be compensated by favorable changes in another sector. The objective of this

essentially is to hedge the risk that may be borne by buying securities in the same industry or field

Moreover, a general idea about the performance of the different sectors of the economy during the

past year aided the selection procedure. For example, the fertilizer industry and the cement

industry were among those few industries that registered positive growth amid the economic

recession in Pakistan. Therefore, investment was made in Lucky Cement and D.G.Khan Cement as

well as Fauji Fertiliser Limited.

A hefty buying of Rs 10, 00,000 is done in the first week of the analysis and then buying

and selling decisions have been made in the subsequent 7 weeks. In week two the emphasis is laid

on having some cash in hand for unforeseen opportunities, which explains selling decisions for

stocks of Engro and Lucky Cement. On a market tip the stocks of Shield Corporation are bought


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to be sold in the subsequent week. Week 3 also focuses on selling more than buying. Because of

the declining rate in the Oil sector in the preceding weeks it was decided to buy back the stocks for

Attock Petroleum which according to our analysis was undervalued at 340 Rs but this decision

proved otherwise and we sold it off in week 7 at 331 Rs. In week 5 because of the availability of

excess cash in hand we decided to buy back stocks which had shown an increase in price. And the

market at that time showed some positive trend so it seemed like a good opportunity to invest in

some stocks for Banks and paper firms.

We will conclude our analysis by focusing on week 8 in which we made some buying

decisions based on increase activity and increase index values and after selling the stocks for JS

Global our final balance corrected for profit and loss showed an increase of cash in hand of about

16 %.

Passive Portfolio

The companies chosen to be maintained in this portfolio were those which were expected

to be performing relatively at stable growth rates. An investment of approximately Rs 10, 00,000

was made in these companies with the number of shares being bought depending on their relative

share prices. This portfolio was maintained for the two months of October and November 2008. As

no trading was done for this portfolio, all the shares were just marked to market at the closing price

of the weeks Friday. In the first week, this portfolio lost value by almost 30% but it gained 77% in

value by the end of the second week.

At the end of the last week of November, the value of this portfolio stood at Rs1,012, 209

compared to the portfolios value of Rs 999,984 implying an average weekly compounded growth

rate of 15.2%.

Index Portfolio


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In order to compare the market return with the portfolio return, the KSE 100index was

marked to market at the end of every week. At the start of trading in October, the index stood at

9508.27 points which reduced to 9206.21 points at the end of November 2009 implying that the

market had lost, on average, by 40% in the eight weeks under consideration

Thus comparing the returns from the three portfolios, it is evident that the stock portfolios

performed better than the market in general. Comparatively, the active portfolio performed better

than the passive portfolio even though the difference is not very much. However, it might be stated

that more active trading and a sharper and closer look on the market could have helped to magnify

returns further.

Intrinsic Values

One of the greatest limitations in calculating the intrinsic values of the stocks in the

portfolio has been the unavailability of data at the official site of the Karachi Stock Exchange. The

annual statements provided are of very limited number of listed companies and unfortunately, most

of the companies included in the stock portfolios are not among those very few companies. As a

result, intrinsic values are calculated for ten of those companies whose financial data, primarily

earnings per share (EPS) are available for both the year 2005 and 2009. The intrinsic values are

calculated using the multiple growth models.

The values of EPS have been used to calculate the average historic growth rate of the

company (g) and this g is then adjusted upwards or downwards according to the expected

performance of that company, the expected performance of the industry it operates and the

expected performance of the economy of Pakistan to calculate the expected earnings over the next

years. Beyond ten years, a different g, usually a relatively lower number is used to reflect the

expected long-run growth rate of the company. Another important variable regarding the

calculation of a shares intrinsic value has been the discount rate, also known as the required rate

of return (k). Theoretically, k is calculated as the sum of the risk-free rate and the product of the

companys beta and market risk premium. As beta is unique for every company, k is different for

every company. However, for simplicity of calculation and time constraints, k is kept constant for

all the companies. Also since it is relatively complicated to calculate individual betas, it is also

held constant, implying that the required return is equal to the market return. This makes intuitive


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sense because investors require a return at least equal to the markets rate of return. So the value of

k used to discount future expected earnings is 12.54% which is calculated as the average

compounded rate of return of the KSE-100 in the last five years, from 4473.93 points (Jan 2, 2004)

to 9087.7 points (Dec 2, 2009). Also, firstly, since data for dividends is not readily available for

most of the companies, and secondly, some companies have not been paying dividends lately as

the average financial performance has not been very good in the past two years in particular,

therefore, the value for the most recent EPS is used to calculate future expected earnings. This is

likely to make a logical sense as these earnings are either paid out as dividends or reinvested in the

company, in both cases they benefit the shareholder, directly in the former case and indirectly, in

the latter case. Thus the intrinsic value of each share is calculated as the present value of future

earnings compounded at a rate of g1 for the first ten years and g2 for the eleventh year onwards,

discounted at the rate of k.

RsRs

(12/03/09)

Company Name Symbol Intrinsic ValueMarketPrice over/ under valued Buy/Sel

1 Attock Petroleum APL 119 332.78 over valued sell

2 Shell LPG SGLLR 1312 60 under valued buy

3 Engro Chemicals XD ENGRO 344 179.52 under valued buy

4 Indus Motors INDU 413 205.42 under valued buy

5 Lucky Cement LUCK 2024 63.26 under valued buy

6 Fauji fertilizers Limited FFL 265 25.96 under valued buy

7 D. G. Khan Cement DGKC 17 27.82 over valued sell8 Glaxo smith Kline Pak GLAXO 110 96.12 under valued buy

9 Hub Power Co HUBC 21 30.6 over valued sell

10 Ghani Glass Limited GHGL 57 52.35 under valued buy

.

As shown in the table above, Shell LPG, Engro Chemicals XD, Indus Motors, Lucky Cement,

Fauji Fertilizers Limited, Glaxo smith Kline Pak and Ghani Glass Limited are undervalued and

these shares could be bought as it is likely that their price will rise in the future, allowing for

capital gains. Similarly, Attock Petroleum, D.G. Khan Cement and Hub Power Co. are overvaluedas their current price is above their intrinsic values and therefore they should be sold as their prices

would eventually fall. However, some very odd intrinsic calculations are obtained for SGLLR and

LUCK which are difficult to explain. One possible reason is that SGLLR has had a high EPS of

93.76 while LUCK has had a high average growth rate of 35% accounting for such high intrinsic

values.


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%

Company Name SymbolHistoric growthrate g1 g2

Attock Petroleum APL 0.7 3 1

Shell LPG SGLLR 7.6 6 4

Engro Chemicals XD ENGRO 7.07 10 5

Indus Motors INDU 11.5 7 3

Lucky Cement LUCK 35.2 37.5 10

Fauji fertilizers Limited FFL 7.6 10 5

D. G. Khan Cement DGKC -26.4 1.5 0.5

Glaxo smith Kline Pak GLAXO -8.8 2.5 1

Hub Power Co HUBC -16.6 2 1

Ghani Glass Limited GHGL -4.5 1 0.5

ACTIVE PORTFOLIO


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WEEK 1

WEEK 2


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WEEK 3

WEEK 4


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WEEK 5

WEEK 6


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WEEK 7

WEEK 8

PASSIVE PORTFOLIO


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WEEK 1

WEEK2

WEEK 3


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WEEK 4

WEEK 5


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WEEK 6

WEEK 7


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WEEK 8

KSE 100 INDEX


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