960409

MARKET BEHAVIOUR AND ANALYSIS

The market remained subdued on the first day of trading week, as the index closed further down by 19 points with the investors still in two minds about the future direction of the market. With the volume on the higher side, most of the leading scrips were marginally down with PTC and Hub, as usual, leading the high volume league. Technically, the market is likely to remain sideways with alternate bouts of small ups and downs, as long as it is in the range of 1520 and 1595. The breach of any level will indicate further movement in that direction.

IN THE LIMELIGHT

ICI - THE FALL OF THE INVESTOR'S IDOL

WHY THE SCRIP IS TRADING AT A DISCOUNT TO ITS DILUTED PRICE?

Well, presumably nobodys needs to be updated on what ICI is. So, let's get on with the business straightaway as to why the scrip is trading at a historic discount in terms of the market price. Though the giant has given an alround performance in every sphere of its activity - in fact it has earned a record operating profit of Rs 1 billion and the 220 percent increase in the paid-up capital for expansion in its polyester capacity has been fully absorbed - there are fears of another round of massive rights and bonuses to finance the ambitious $450 million PTA project with a total production capacity of 400,000 tons.

The diluted book-value after adjusting the 220 R, it has fallen to just 16.45 rupees against the unadjusted BV of 52:64 whereas the diluted EPS after such a mega fund raising comes to just 3.17 as against the EPS of 10.16 in case of no right issue. While ICI appears to be in no real danger of contraction in its profits due to a well-diversified cash generation base, pay-outs may see a squeeze on cash flows due to excess liquidity of shares.

ICI will utilise 30 percent of its PTA generation and expansion in polyester plant which will provide the real competitive advantage over other PSF producers. However, as the PTA plant is expected to come on-line somewhere in 1997 and as such no profit prospects until 1998, any real boost in the earnings during this term may remain a far cry. In fact, there is an even possibility of a subtle drift towards the lower teams. The ROE and ROI should also see less improvements while the debt raising for the PTA project will also result in increased financial charges.

But, as the case has been traditionally ICI has seen the consistent profits growth. So, we safely assume the same pattern during the next couple of years. Polyester sales may see a depression but this can be offset by further improvements in the pharmaceutical, pesticides and consumer products divisions.

There is nothing fundamentally wrong with the company which shall always remain a blue-chip. In fact, it's destined to see improved performance in the years to come. But the market price may see some sharp discounts supplemented by activity depression over the next two to three years. Yet, on the flip side, increased liquidity may result in making it the speculator's idol resulting in sharp price movements for the short-term strategy players - a new volume leader in the making?

Right now, the whole market is concentrating on the PTA issue and there are various suggestions. Among the hottest is the rumour of another 400 percent right offering at par. Out of the total project cost of $450 million, ICI has successfully completed the foreign debt element of financing by raising nearly $210 million through a consortium of foreign banks, whereas the rest will be met through increase in the equity and short-term debt.

If we convert the remaining $200 at the current market rate of dollar - exclusive of 50 million dollar which shall be treated as working finance and as such can be met through internal cash generation - ICI would need another some 7.2 billion rupees. Part of it will be met through the profits at the discretion of the management whether to transfer the whole amount to reserves or issue bonus shares.

The expected profits over the next two years come to around Rs 1.6 billion and if the ICI decides to keep up its reputation as a cash provider, investors can look forward to 50 percent dividend over the next two years which leaves the shortfall of nearly Rs 6 billion for which the company will have to issue right shares and acquire short-term debt.

We expect the company to come out with the right offering of at least 250 to 275 percent and at the current market price the diluted Ex-Right price comes to around Rs 21.42, though there seems to be a remote possibility for the scrip to fall to its fully diluted value. For the long-term holders of ICI, we recommend: keep holding. For a new entrant we suggest to buy the scrip at further weakness at around Rs 45.

TRADING MAJOR MAJOR MARKET 10 DAYS 35 DAYS NET

SHARE TREND RANGE SUPPORT RESISTANCE SITUATION M.AVG M.AVG CLOSE CHANGE

KSE INDEX SIDEWAYS 1527-1557 1520.00 1575.00 NEUTRAL 1627.00 1641.00 1544.25 -19.01

PTC SLIGHTLY DOWN 31.00-32.50 30.50 33.50 NEUTRAL 35.30 35.10 31.85 -0.95

HUB CO SLIGHTLY DOWN 28.00-28.80 27.50 30.50 NEUTRAL 28.50 28.70 28.45 -0.55

FAUJI FERT. SIDEWAYS 73.00-75.80 71.50 78.00 NEUTRAL 73.00 75.80 74.45 -2.35

DEWAN SALMAN SIDEWAYS 41.40-43.00 41.40 43.90 NEUTRAL 49.20 55.50 42.50 -0.50

DHAN FIBRE SIDEWAYS 7.30-7.60 7.20 7.75 NEUTRAL 8.60 8.60 7.50 0.00