Common Stock

Adullah Ishtiaq Badar Ejaz Raja Hassan Sikander Malik shehroze

Instructor: Maha Ejaz

Executive Summary

The report analyzes the common stocks traded through the primary stock exchange. The primary market is that segment of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue through this market. The Common characteristics of a primary exchange include a long history, primary listings of the country's top companies, and listings of many important foreign corporations, large total market capitalization and a large trade value. A country may have other important stock exchanges in addition to its primary exchange, in case of Pakistan the primary stock market is the Karachi Stock Exchange.

In terms of common stocks listings on KSE, a total of 654 companies were mentioned on December 8, 2009 with a market capitalization of Rs.8.561 trillion, having listed capital of Rs.2805.873 billion. The KSE-100 Index closed at 11,967 on May 16, 2011. Total market capitalization of the KSE reached Rs2.95 trillion on July 30, 2011. Over a period of time, variables such as economic growth rate, inflation, central banks monetary policy, gold and oil prices outlook, and the past and present dynamics have made a significant impact on the common stocks, this fact is more evident by the continuous change of prices in stock exchange. The stocks of various companies have been analyzed through ratio analysis and other key indicators in the FY of 2007 to 2012.

The general trend observed is an overall decrease in GDP; this decrease can be attributed to several factors such as increase in inflation which has also offset the prices of oil and gold commodities within our economy.

Despite the dire condition of the economy, it is evident that top companies listed on the primary stock market have managed to increase their profits as well as earning per share, for example Attock oil refinery, ICI Pakistan, Unilever etc. The analysis done through different ratios and indicator reflect the performances of various stocks that are varying, the values are as more prominently reflected through earning per share, price to earnings ratio, earning yield, dividend yield ratio, dividend payout ratio, gross profit margin, and profit before tax margin.

Introduction When an investor buys a share of common stock, it is reasonable to expect that what an investor is willing to pay for the share reflects, what he expects to receive from it, these expectations come in the form of future cash flows such as dividends and the value of common stock when they are sold. In the case of common stocks they do not have any maturity date, todays value is the present value of an indefinite stream of cash flows, moreover common stocks dividends are not fixed as in the case of preferred stocks, the dividends cannot be determined in any point of time, as payment of dividend is entirely companies own policy.

Economic growth

The Gross Domestic Product (GDP) in Pakistan expanded 3.67 percent in the 2011/12 fiscal year.

Taking into account the GDP of 2007-2012, it is very prominent that the GDP of Pakistan began to decrease from 2007 onwards. The general trend is a decrease in over all countries GDP; this decrease can be attributed to several factors such as increase in inflation which has also offset the process of oil and gold commodities within our economy. Real GDP growth for 2011-12 has been estimated at 3.7 percent as compared to 3.0 percent in the previous fiscal years. The commodity producing sector has performed much better in outgoing fiscal year as compared to last year; its growth rate is 3.28 percent against 1.47 percent last year. More over the, economy recorded an increase in private consumption expenditure to 75 percent of GDP; whereas public consumption expenditures is 13 percent of GDP. Total consumption has reached 88.35 percent of GDP in fiscal year 2011-12 as compared to 83 percent in the last fiscal year.

However, total investment declined from 13.1 percent to 12.5 percent of GDP in 2011- 12 as compared to last year. Public investment as a percent of GDP increased to 3.0 percent in 2011-12 against the 2.9 percent last year. The GDP growth rate of Pakistan has shown a general n-shaped trend for the past ten years, starting from 2000 to 2010. Economic Growth chart
10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

The greatest economic growth was seen in the periods of 2004-2005, with the growth rates goin as high as 7.4% to 7.8%.The decrease in the growth rate was substantial, falling as low as 1.6% to 1.8% in 2008, this fall is not caused by one single factor but the overall global financial crisis, which also affected Pakistans economy. Despite the negative repercussions, the country stood up and managed to increase its growth rate from under 2% in 2008 to a marked increase of 3.8% to 4.4% in 2009-2010. As with rest of the world, the Global Financial Crisis with high inflation rate in 2008 made a huge impact on Pakistans economy, with inflation rate of 25% in 2008, economic growth suffered tremendously, issues like circular debt and Balance of Payment Crisis caused increased loans from IMF. Lastly the war on terror was the major game changer, which made a huge loss to the economy and made the economy suffer a lot; foreign direct investment fell by $3.5-$8 million, instability and unfavorable conditions made the local and foreign investors less reluctant to invest.

A paved road without any hurdles is what Pakistan requires at the moment, but unfortunately power shortages is a very big setback for the economy as the production is falling well below what could be achieved otherwise.

Inflation Inflation is caused by general increase in price of goods and services that are used by individuals, within an economy. As a consequence each unit of currency will be able to buys lesser amount of goods than it would have previously. Inflation over a time period can be measured by different indexes such as Consumer Price Index (CPI), Wholesale Price Index (WPI), GDP deflator, etc.; the inflation rate determines the growth opportunities, savings and investments, economic growth of a country. Inflation effects on an economy can have its advantages and disadvantages, but generally a sudden increase or hyper inflation rate can make an economy suffer a lot. In order to control the inflation rate the government makes an effort to control the money supply, hence the monetary policy is continuously updated with respect to the inflation rate with in an economy. According to economic survey of Pakistan, the inflation rate measured by the changes in Consumer Price Index (CPI) stood at 10.8 percent during (July-April) during current fiscal year 2011-12, against 13.8 percent in the preceding years. Core inflation is estimated at 10.4 percent during July-April 2011-12. The Wholesale Price Index (WPI) during July-April, 2011-12 on annual average basis has recorded at 11.2 percent against 21.0 percent last year. The significant increase in inflation is caused by the rise in world commodity and fuel prices, disruption in domestic supply chain by the floods in the recent years. However, inflation has been contained during current fiscal year as compared to last year due to tight monetary policy, better supply management and regular monitoring of prices and supply chain by the Cabinet and National Price Monitoring Committee.

The inflation rate in Pakistan was recorded at 7.70 percent in October of 2012, the decrease was a result of the adjusting the monetary policy and as well as the decreasing trend in international prices of sugar, wheat, tea, palm oil and crude oil. State Bank of Pakistan is the main institute that controls the money supply by setting relevant interest rates and implementing the monetary policy. In the recent years an upsurge in the inflation rate measured by CPI, has made the consumer commodities more expensive. Moreover, this increase in inflation over the time period has also reduced the investments; the government is making an effort to curb this problem by enhancing supplies and easing demand pressures. Although the government is having a very watchful eye to reduce the inflation rate, but with numerous other problems, it seems that it may take some time before the situation improves.

Central Banks Expected Monetary Policy Pakistan: Some considerable measure have been taken place to control the fiscal deficit of FY 2011-2012, some expected reforms will need to be put in place to reduce the deficit, such expected changes will be the tax reforms, transparent rationalization of subsidies, and the development of a forward-looking debt management strategy. These measures would help check the level of government borrowings from the banking system, creating space for the private sector and lowering their borrowing costs. The decline in year-on-year inflation from 15.5 percent in December 2010 to 12.9 percent in February 2011 can be attributed to three factors. First, a gradual dissipation of the effect of the flood on food prices; second, an incomplete pass-through of high international oil prices to the domestic market and some adjustments made in the electricity prices and, third, a reduction and thereafter containment of the stock of government borrowings from SBP to around Rs1290 billion on cash basis. State bank of Pakistan lowered the discount rate by cumulative 200bps (basis point), to 12 % during the first half of FY 2011-2012, to help improve the private sector and investment, on the other hand net foreign assets of the banking system seemed to have increased to 14.89% over the last year. Most importantly the credit to the private sector made a huge leap of a net increase of RS.234.8 billion during the period of 2011-2012. Pakistan is considered to be a third world country. The main reason behind this fact is that Pakistan has faced every possible economic problem there is in the books. There are many economic objective that are yet to be achieved and with time passing by this margin seems to be increasing, problems such as unemployment, Price stability, Economic growth, income disparity and wealth have created a huge budget deficit in Pakistan has. According to the recent surveys, Pakistan has resorted more to fiscal policy than to monetary policy, which further explains the trends in inflation rate. The government has tried to reduce the deficit but the rise in interest rate seems to be a bad decision made on governments part, the interest rate has risen after 2008 and is currently projected at 13.5%. Expansionary fiscal policy will not alone help Pakistan to achieve a better state and curb high inflation rate, in order to increase the foreign investment effort has to be made in decreasing the interest rate.

U.S: In the United States, the Federal Reserve is in charge of monetary policy, and implements it primarily by performing operations that influence short term interest rates.

From the representation above it is evident that the money supply has increased compared to the previous years, in the recent years i.e. 2007 onwards there has been decrease in the true money supply and this is caused by the adjustments made by the reserve bank of U.S.

The above table refers to the inflation rate prevailing in the economy in the recent years, the sudden changes can be easily accounted to the fact the decisions made by the reserve bank, there

has been a sharp fall in the later months of 2012, whereas the early months of 2011 saw high inflation rates. US will expect to use the expansionary monetary policy, in which an increase in the money supply and a reduction in interest will expect to correct the problems of a businesscycle contraction. In a broader perspective, expansionary monetary policy can include buying U.S. Treasury securities through open market. Putting things into perspective open market operations are the primary tool of expansionary monetary policy. For a quite a time now it has been observed that US has been in a state of recession. The country has seen high inflation rates and high unemployment rates which are the basic reasons for its prolonged recession. The inflation rate currently stands at 8.6%. Even if the interest rates decline, the recession is far from over. The recent trend of an increase in the unemployment rate has also hampered the proper functioning of the economy; the government is in need of a desperate change to improve the situation. Another important factor to be considered is the war on terror that has been going on for few years; it has contributed significantly to the global financial crunch, but the US economy has also suffered a lot, so far the economy is unable to focus on the real internal problems such as the high unemployment rates, To conclude US, would have to make drastic changes and this can be done through the expansionary monetary policy and through usage of right tools, such as lowering the interest rate and borrowing through discount window.

Gold and Oil outlook

Gold and oil are considered to be very important commodities for an economy or financial markets. Over the years the trends are keep on changing, any investor would like want to have a fair few of the risks involved and the expected rate of return. Gold and dollar usually have an inverse relationship, with an increase in one of these products, the other product decreases in value. However this is not always the case, there has been an inverse correlation between gold and dollar.

Oil and gold outlook representation:

The investment in such commodities are influenced largely by the trends in the inflation rates, even with high interest rates some investors were able to earn very high rate of return when they invested in gold and oil worldwide. Another very interesting phenomenon observed was when the price of stock went up, the price of oil went down, and this was specific to US market. The sanctions imposed on the major oil producing countries hampered the supply of oil worldwide, with ever increasing demands and limited supply, oil prices began to shoot up.

Forward view on Stocks and Bonds

For any individual or investor it is the rate of return that will determine the relative interest in investing in a security. Likewise the higher the return the greater the probability of investing in a bond or stock, if we take in consideration the stock exchange of entire world, we will notice that the stock market of Pakistan is very small, however the economy of Pakistan is emerging and within some time it is expected that the stock market will evolve and gain some maturity, another important aspect worth considering is the economic instability. Pakistans economy is circled with numerous other problems, these problems are causing the economy to sway in such a way that at times proper attention is not given to improve the stock markets, this way the investors also become less reluctant to invest. Decrease in foreign investments are also the cause these factors. Usually, investors will prefer those securities that possess a higher rate of return; in this case stocks offer a higher rate as compared bonds. The fact here is that with higher risks, there are higher rate of return. With the wide array of options to invest, it is not surprising that Pakistan is looked upon as a gold mine. With numerous options to invest such as availability raw material and minerals, it seems that in the near future situation could improve if there is stability and the government performs more seriously. Many foreign companies would come and invest which would boost up the stock markets. Stocks are comprised of two types: Preferred and Common. Preferred stocks guarantee the investors a fixed dividend. In Pakistans scenario it is obvious that preferred stocks are given more attention, investors are interested in getting fixed returns than no returns at all, all in all with this situation investors might forgo the higher rate of return and get a nominal fixed rate instead. The overall credit rating in Pakistan is B-, with such a rating possible investors look at other places to invest, that would promise them a certain amount of return.

Distribution of Listed companies on KSE:

Technology Hardware and Equipment, 1 Software and Computer Services, 1 Equity Investment Instruments, 26 Financial Services, 25 Forestry (Paper and Board), 3 Chemicals, 3.2 Industrial metals and Mining, 8 Construction and Materials (Cement), 27

Oil and Gas, 11

Real Estate Investment Multiutilities and Services, 2 (Gas and Life Insurance, 4 water), 2

Genera Industrial

Electronic Electrical Go

Industr Engineerin Transporta Non Life Insurance, 18 Automobil e and Parts, 14 Commercial Banks, 23 Food Producers, 29 Electricity, 13 Fixed Line Telecommunication ,5 Travel and Leisure, 1 Media, 3 Pharma and Bio Tech, 6 FUTURE CONTRACTS, 24 Personal Goods (Textile), 94 Tobacco, 2

Sup Serv

Bevera

Househ Goods

Lesiure Goods (Miscellaneous), 1

PAST AND PRESENT DYNAMICS OF KSE (KARACHI STOCK EXCHANGE): Figure 1:

Overview of Last six years (KSE): In January, 2006, KSE index was around 10,000 . Shortly after that market performed well and the index rose to around 11,000 and after that it fell for a short time and then again rose above 12,000. Then the market fell down and the index dropped to 9000 and then it kept on rising and falling by very little differences maximum level achieved in 2006 was 12,000 and few above. The start of 2007 was again at 10,000 and after that it kept on rising on average and reached a maximum level of almost 14,000. This year's market performed very well and achieved well as compared to 2006. After a short fall in the index at the start of 2008 , market performed very well and achieved a very high point in these five to six years i.e. 16,000 and showed that the market has performed well and is doing great but this change for good was not sustainable , economy reached a maximum point and suddenly started to decline and worst performance was recorded. At the end of 2008 economy tried to stabilize itself and the market showed a straight line in 9000 but not for long and it kept on dropping.

Start of 2009 was around 7,000 and the market was not performing well at all and in the mid of 2009 worst performance was recorded at 5,000 and this level was last recorded in the mid of 2004. The market literally moved back to 5 years. This low level was not for a long period and the market started to perform better and at the start of 2010 it was again at 10,000. After 2010 market kept on rising on average, it showed little drops at times but overall the trend was rising and it has reached to a level of 16,500. This was recorded on the 3rd of December 2012. YEAR WISE ANALYSIS: YEAR 2006:

In the year 2006 , KSE (100) index showed an average dividend yield of 4.2 % which was the lowest in the past five years. Some analyst said that the worst performance of the market in the past five years. This year the Karachi Stock Exchange index managed to increase by merely 3.71% whereas in the past years it used to be around 70%. Most of the blue chip companies failed to perform on a high note during the year, which resulted in disappointing capital gains for the full year. People who opted scrips with high dividend yields were better off than the people who opted for capital gains. The market closed at 9,000 and some points on December 29 2006. It was a low performing year with OGDC being the main player in the economy. The market was being controlled by OGDC as its shares were drastically being sold in the market and prices were going up. The closing of the market on a steady note helped overall market capitalization to move slightly up by Rs9 billion to conclude at Rs2.771 trillion by Friday. But the low participation of market players resulted in lowering the average daily turnover of 127 million shares of previous week to 94 million shares in the ready market with total turnover of 376.605 million shares changed hands during the week. (The News, 2006) Year 2007:

After the worst 2006 year economy and the market started to perform well and the market capitalization started to increase. By the june of 2007 15 billion rupees fresh were already in the market and it was recorded as all time highest from 4,004 billion rupees to 4,019 billion rupees.

Trading of shares also flourished this year. In the previous year 430 million shares were traded and by the June of 2007 there were 447 million share traded, reportedly. Value obviously also increased but slightly from 34.8 to 34.9 billion Banking sector leads the bazaar and fresh credit rating of BOP cleared its position in respect of financial scam news which impacted market positively on last session of the outgoing fiscal whereas market depicted 38 percent gain, said Mohammad Sohail, Director Equity Broking at JS Securities. Another analyst was of the view that speculation about high payouts by listing banks to the shareholders worked very well in the first two sessions and that was why the majority of the banking stocks ranked among the top volume generators.

Telecom and second tier banks performed well which acquired support at low levels due to recent favorable developments including a better credit rating of BOP, lucrative valuation of Warid by SingTell and expected selling of Ufone by PTCL, mainly inspired investors to make fresh buying in PTCL, Bank Al-Falah and BoP, Ahsan Mehanti CEO Shehzad Chamedia Securities said and added that the rising flow of foreign portfolio investment also boosted the market sentiments. Contrary to this Pakistan Oilfields and National Refinery was among top loser with loss of Rs8 and Rs7, as Pakistan Oilfields closed at Rs317 and National Refinery at Rs341. Shares of 59 companies were traded at future counter and total share volume at future counter rose to 128 million shares which was recorded 74 million a day before. OGDCL remained under selling pressure this year and this year was going quite well despite the emergency imposed and other political instabilities. Overall market capitalization surged by Rs33.8 billion to Rs4.543 trillion. After the death of Benazir Bhutto, the market remained closed and people were out of control and political and economic conditions of the country became very unstable. Some analysts predicted that if the situation didnt stable in a few weeks, the market can fall below average.

The graph above explains the end of the bullish run at the end of 2007 in merely a week. On a single day market was around 700 points down from 14843 points to 14143 points. It is a 40% increase as compared to previous years but still it could have been better. Some analyst predicted 18K index at the end of 2007 but they had to change their view after the assassination of Bhutto. YEAR 2008: 2008 started off with an increase in market activity and it kept on rising until march. The last best activity shown was in February 28th 2008 and its facts are given below: The KSE-100 index closed at a new record high at 15,079. FFBL was the flavor of the day with 32.7 million shares traded. PSO closed at its peak in 499.80 along with Engro Chemical which also closed at its peak at 323. Upward resistance is 15,155. This data is on February 28th 2008 and is taken from the KSE official blog. At the end of march 2008, stock market was closed down 15,125 after recovering from15, 125. The reason behind the sluggish activity was the Reinvestigation of the march crisis 2005. This reinvestigation appeal threatened the investors but few politicians were in the favor as they lost some serious amount in that crisis. The market came 143.22 points down.

In May of 2008 situation started to get worse as electricity problems hit the country with the political instability and judges issue. Restoration of judges played a role but lack of food and electricity was the main issue along with the high prices of oil.

By the end of June 2008. The economy was very unstable and the market closed at 12,289 and the lowest number of shares got traded in a day ( 7.3 million shares). Oil prices kept on rising and the future seemed dark.

At the end of 2008 the market closed at 6,294.67 points, the lowest in four years. The overall market capitalization declined by two trillion rupees. In 2005 market surpassed the two trillion mark and now it has gone down that mark, these were the words of a dealer in the market. The market lost 52 billion rupees in the last session of 2008 June. Fawad Khan at KASB Securities said: We believe the likely settlement of CFS leverage financing issue this week removes the possibility of system wide default, one of the key risks at the KSE. After 59 per cent drop in KSE-100 index from its peak (30 per cent since removal of four month long price floor), current market P/E multiple has been just 17 per cent higher than trough multiple of 4.3x. While we still expect the market to lose some more weight given expected foreign sell off and broader macro risks. Ahsan Mehanti at Shahzad Chamdia Securities said that selling activity continued as deal signed for Rs20 billion Market Opportunity Fund (MOF) to bail out the capital market failed to improve investors sentiment. Kashif Mustafa at ECL Research said that the positive response towards CFS settlement and the Rs20 billion NIT managed fund may provide some stability to the market for the time being. However, fragile liquidity issues and law and order tensions may make the move of the index lackluster. Sentiments are expected to gradually regain momentum, but in longer than. Attractive values of blue-chip and dividend yields would make the buying imminent for the long term investors and institutions, he added.

YEAR 2009:

The market resisted 9,400 points despite the serious law and order situations in the country and especially in Karachi where numerous people got killed and people faced losses of millions of rupees . The heavy weight index mover i.e. Oil & Gas Development Company alone contributed 17 points in plus on the key benchmark 100-Index. Among other notable stocks, which closed on positive note are included Pakistan Oilfields, Pakistan State Oil, Habib Bank, Fauji Fertilizer Bin Qasim, DG Khan Cement and United Bank. Rise in international oil prices over $78 per barrel led to a positive performance in oil sector despite of limited activity observed on across the board, said Ahsan Mehanti, CEO-Shahzad Chamdia Securities.

YEARS 2010 Present:

It can be seen in the graph above that after 2009 the economy has got a little better and the market has flourished with little ups and downs and is rising.

FORWARD EXPECTATIONS:

FIGURE 2 & 3:

Figure 2 shows that the trend is increasing every day and long trend from 2009 to 2012 is also increasing on average. Now the trend greatly relies on the upcoming the monetary policy statement. Investors hopes are that the new monetary policy would give them 25-50 bps rate cut given the low inflation numbers last month. This would continue to be a dampener for banking stocks whose rally seems to be a short lived phenomenon.

Moreover, an increase in coal prices, followed by a subsequent pass-through in terms of cement prices, increased investor interest in these stocks during the week; a trend that may be expected to continue going forward. Stock prices are also likely to increase as profits are increasing and companies are doing well. As figure 3 above shows market is facing buying pressure because the anticipated prices are higher than the existing ones. Given the political scenario remains good , the market will flourish.

Regionally Pakistan is performing well and it will continue to perform well as it is indicated in trend graph and text above.

Recommendations:

OGDCL is a great company to invest in right now. Banks are not performing well and their time is up for now, investment should be avoided in them.

Pakistans market is flourishing and is safer than foreign investment. Blue chips shouldnt be ignored at the moment. Scrips are the most volatile securities right now and one should invest in with great care.