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DSE in a fix over sector classification

Gazi Towhid Ahmed
The Dhaka Stock Exchange has wrongly classified some sectors as the bourse does not follow any international methodology for sector or industry classification.
The existing methodology of the premier bourse has led to some misclassifications and errors.
Officials of the bourse also admitted the faults and said they are taking steps to fix those.
For example, Beximco Synthetics Ltd has been classified in the pharmaceuticals and chemicals sector.
The company manufactures polyester filament yarns such as partially oriented yarn (POY) and draw texturised filament yarn (DTFY) and sells those, according to its website.
The DTFY is mainly used in weaving and knitting fabrics for making clothes, home furnishings, seat covers and bags, while POY is used in shirting and suiting, saris, ladies dress materials and knitwear.
Beximco Synthetics should either belong to the textile sector, according to the DSE's industry classification, or to the materials sector under the Global Industry Classification Standard.
Similarly, Imam Button is an export
oriented company, which has a composite knit plant.
Though the company was supposed to be in the textile category, the DSE has put it in the pharmaceuticals and chemicals sector.
The business model of Imam Button has nothing to do with pharmaceuticals and chemicals.
BD Welding Electrodes manufactures and sells welding electrodes, industrial gases and other allied items, but the company has been put in the power and fuel category instead of engineering.
Another example is Marico Bangladesh Ltd, which makes and markets fast moving consumer goods but the company is in the pharmaceuticals and chemicals category.
“We should reshuffle some sectors based on international practices," said Ahmed Rashid, senior vice president of the DSE.
He agreed that the Dhaka bourse does not follow any international standard for categorising the companies.
“Pharmaceuticals and chemicals, textile, engineering, miscellaneous, and fuel and power sectors need immediate revision,” said Md Ashaduzaman Riadh, head of research at LankaBangla Securities.
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Global Industry Classification Standard, Industry Classification Benchmark, Standard Industry Classification and Bloomberg Industry Classification Standard are some widely used methodologies to establish a global standard for categorising companies into sectors and industries, said Riadh.
He said proper classification would provide more transparency in the entire mechanism of IPO pricing, index calculation and relative valuation.
Industry misclassification has created some fundamental anomalies in the DSE, he said.
If price earnings (PE) ratio or price to book value (PBV) ratio of pharmaceuticals and chemicals, engineering and textile sectors are taken into account for relative valuation in initial public offerings (IPO) pricing, the ratios will be misleading and the IPOs will be grossly mis-priced, he said.
Riadh said portfolio managers of merchant banks, asset management companies and foreign institutions are usually mandated for tactical asset allocation in different sectors or industries.
Percentage of portfolio allocation in different sectors is not only required by the laws but also followed for investment diversification purpose, said Riadh.
He said relative comparison and stock picking relying on the existing industry PE ratio or PBV ratio are generating misleading valuation.