Equity Brokerage, Research Commodities & Corporate KSE mostly Smiles Post‐Elections 10 ......

Equity Brokerage, Research Commodities & Corporate Finance

Pakistan Strategy 2013

Content2

Pakistan Strategy 2013 ‐ Preamble 4 Sectoral Strategies 254

Pakistan Politics 2013 6

• Still waiting for Democracy’s Dividends 7

• Gov’t sleeps while Economy drowns 8

li i l h ‘ l ’ i i 9

25

• Cement 26

• Power 33

• Fertilizer 40

• Textile 46• Political party= Economy the ‘only’ Priority 9

• KSE mostly Smiles Post‐Elections 10

Pakistan Economy 2013 11

• Economic Growth, a Reality Check! 12

• Textile 46

• Telecom 50

• Oil Marketing 54

• Banks 58

• Economic Outlook 13

• Macroeconomic Indicators 14

• Economy at a Glance… 15

Pakistan Equities 2013 16

• Automobile 64

Valuation Guide 69

Annexure 7316

• Pakistan Equities, a ‘Jewel’ in the Region 17

• ‘Higher’ Return despite ‘Lower’ Macros 18

• ‘Rising’ EGrow despite ‘Lower’ Eco Growth 19

• Growing Regional Charm 20

• Analyst Certification 72

• List of Abbreviation 73

• Information Sources 74

• Contact Details 75

• Index Target 2013 21

• Model Portfolio Strategy 2013 22

• Opportunities to Seize Alpha in 2013 23

• Risk Premium to Neutralize Beta in 2013 24

Closing Prices as of December 31, 2012

3

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Pakistan Strategy 2013

KSE100: Give me a Target, any Target!

Preamble4

With punching in a jaw‐dropping 49% return (38% in USD) in 2012, Pakistan equities are set continue to deliver even better(especially after the first correction of 2013 of 415pts!) with an expected change in country’s overall macroeconomicgovernance ahead, albeit with heightened volatility amid increased noise on the political facade owing to elections. As somequoted earlier bearing in mind equities’ bravura performance, 'the equity fever has yet to be caught on'. The veterans saythat 'there are three stages to a bull market. The first stage nobody notices. The second stage the professionals, the smartg f g y g p f ,guys, notice and start accumulating and, in the third stage, the public notices. When the public notices, it goes off the chartsand it's time for the smart money to get out.' We are not there yet. We think that we are nowhere near the end of this bull‐run despite the fact that we are nowhere near the end of the political troubles, which have been behind the country'scrippling economic progress so far. Equities, aren't rising for no reason for sure! And the reasons we will try and explore inour Investment Strategy 2013.

19%19%22%

38%40%42%

30%

40%

50% Equity Returns

2012A 2011A

80%30%

Pak Eco Growth vs Corporate Fundamentals

EGrow GDP GrowthKSE100 Return (RHS) RoE (RHS)Payout (RHS)

KSE100 Index Target Estimates 2013

Valuation Basis Target Weight Breakup (pts)

Target Price Based 20,952 15% 3,143

Earnings Growth 17,947 15% 2,692

Justified PE 20,904 15% 3,136

5%7% 9%

13%13%13%15%19%19%

‐10%

0%

10%

20%

Fro

nton

esia

Ch

ina

evel

opai

wan

W

orld

Emer

gKo

rea

etna

mIn

dia

kist

an

aila

nd

pine

s ‐20%

0%

20%

40%

60%

10%

15%

20%

25%PEG Ratio 20,434 15% 3,065

Regional DY* 19,940 15% 2,991

Regional PBV* 20,789 10% 2,079

Regional PE* 18,891 5% 945

Regional EV/EBITDA* 19,922 5% 996

Current PE Basis 18,963 5% 948

‐50%

‐40%

‐30%

‐20%

MSC

IIn

do

MSC

I De Ta

MSC

I WM

SCI E S. K

Vie

Pak

Tha

Phili

p

‐80%

‐60%

‐40%

‐5%

0%

5%

2007

2008

2009

2010

2011

2012

2013

‐14F


Average 19,860 100% ‐

Weighted Target 19,994

Index Dec‐12 end 16,905

Expected Total Return 2013 18.3%* On the basis of adjustments to historical discounts

5


Pakistan PoliticsPakistan Politics 20136

Still waiting for Democracy’s Dividends!

Dusting through political records revealed that, the history ofD ti liti l t i P ki t ld h dl b bl t

Civilian Government Terms in Pakistan vs Economic GrowthTerm

7

Democratic political setup in Pakistan could hardly be able todeliver sustainable economic prosperity that could catch up tocountry’s growth potential (vis‐à‐vis India in recent times).

Purely from an economic standpoint, when it comes todelivering economic progress in Pakistan, Autocracy has

(%) From ToTerm (year)

Pak GDP* India GDP*

Liaquat Ali Khan 1947 1951 4 3.90 ‐Khawaja Nazimuddin 1951 1953 2 (0.05) 2.55 Mohammad Ali Bhogra 1953 1955 2 5.62 4.10 Ch. Mohammad Ali 1955 1956 1 2.27 2.35 delivering economic progress in Pakistan, Autocracy has

managed to outshine Democracy down the years. Militaryregimes have delivered above 6% average GDP growth whilethe Democratic setups could hardly make up for over half of it.

However, one argument that goes in the favor of the

‐ ‐Zulfiqar Ali Bhutto 1973 1977 3.8 3.94 3.18 Benazir Bhutto 1988 1990 1.6 4.70 8.15 Mian Nawaz Sharif 1990 1993 2.7 5.18 4.03 Benazir Bhutto 1993 1996 3.0 3.91 5.08 Mian Nawaz Sharif 1997 1999 2 7 3 13 6 33democratic forces of Pakistan is that the slower‐growth years

were primarily due to terminated tenures as no democraticregime under a non‐military head of state has ever been inoffice. Current military leadership’s support to democracy ishowever very encouraging.

Government Regime vs Economic GrowthDecade Regime GDP Growth (%)

50 D 2 93

Mian Nawaz Sharif 1997 1999 2.7 3.13 6.33 S.Y.R. Gillani/Raja P. Ashraf 2008Till Date 4.8 3.98 7.86

*Average GDP growth during specified terms

But with a complete 360‐degree change in domestic politicallandscape with the current setup being very close to its termcompletion for first time since independence, vibrant mediaand an ever‐alert Judiciary along with efforts to make electoralprocess more representing, basics of democracy have finally

50s Democracy 2.93

60s Military 6.80

70s Democracy 3.94

80s Autocracy 6.62

90s Democracy 4.07

00s Autocracy 5 55p p g, y ygained grounds though at the cost of initial economic woes.

Encouragingly, against GDP of it’s twin, India, Pakistan’s GDPgrowth has been on average 10bps higher since 1960’s withIndia also positing negative growth 4 times.

00s Autocracy 5.55

10s Democracy 3.98

Average Growth Democracy 3.73 Average Growth Autocracy 6.32

Gov’t sleeps while Economy drowns

Pakistan politics enters 2013 carrying with it a lot of excessb i t f d i i i th

Current Gov't (Coalition) Economic DeliveranceEconomic Indicator FY07 FY08‐13Avg* ChangeGDP G th 7% 3% N ti

8

baggage in terms of macro and socio‐economic issues as thelatest economic fallout during the last five years speaks foritself.

The high drama in Pakistan’s politics is expected to hype upinto 2013 as the current democratic setup stands out to

GDP Growth 7% 3% NegativePer Capita (USD) 904 1,179 Positive CPI Inflation 8% 13% NegativePolicy Rate 10% 12% NegativePublic Debt (of GDP) 60% 61% NegativeRemittances (USD bn) 5 10 Positive Trade Deficit (USD bn) (14) (16) Positiveinto 2013 as the current democratic setup stands out to

complete its term vis‐à‐vis the entire series of the civiliangov’t regimes since country’s independence, most of whichfell prey to the military dictatorship, while new forcesintensify to make a halt in timely power transition.

Trade Deficit (USD bn) (14) (16) Positive Foreign Direct Investment (USD bn) 5 2 Negative Forex Reserves (USD bn) 16 15 Negative PKR/USD Parity 61 82 Negative KSE100 Index^ 13,772 16,950 Positive Current A/c Deficit (of GDP) ‐5% ‐3% PositiveFiscal Deficit (of GDP) 4% 7% NegativeThe setup in Islamabad at present is perceived to be high on

corruption and lacking in competence, highly unbalancedequation ensuing current economic plight. The perception isfirst strengthened by the findings of TI (Transparency Int’l) –aglobal anti‐corruption watchdog– and the second by theadhocism prevalent in almost all of the current gov’t policies

Fiscal Deficit (of GDP) ‐4% ‐7% NegativeTax‐GDP 10% 9% NegativeInvestment‐GDP 23% 16% NegativeSavings‐GDP 17% 12% NegativeCredit Rating (Moody's) B3 Caa1 Negative

*Including FY13TD Actual/FY13 Forecast, ^Year‐end

1 5%Parliament Structureadhocism prevalent in almost all of the current gov t policies.

Although the current political setup has been mired in political& financial scandals and unable to deliver on its electionpromises, this gov’t however merits the credit of fewinitiations on its behalf i.e. part rationalization of

37.4%14.6%

7.3%

5.0% 3.8%

2.3%1.5%

0.3% 0.3%

0.3%0.6%

PPPPML‐NPMLMQMIndependentsANPp

electricity/gas/petroleum tariff differentials, to correct someof the chronically‐lingering dents on the economy 26.6%

MMAPML‐Func. PPP (Sherpao)BNP (Awami) NPP Vacant Seats

Political Party = Economy the ‘only’ Priority

After increasingly noisy five years, Pakistan’s politics enters ath illi l f l ( l ti ) ith t d h 13%

17%20%

Change in Political Parties' Popularity, 2008‐2012

9

thrillingly suspenseful arena (elections) with expected changein its run‐of‐the‐mill and repeatedly‐tested‐and‐failed politicalparty‐theme as new political alliances flex muscles for power.

If popularity polls were something credible to go by, torepresent people’s will, two Political parties –one relatively

13%

‐1%‐10%

0%

10%

PML (N) PTI PPP Other Coalition

Othersrepresent people s will, two Political parties one relativelyfresh, and the other already a veteran– could be PTI and PML‐N that have emerged as the only‐gaining parties in the last fiveyears while the rest being at the losing end.

Since PML‐N and PTI are believed to be the love‐of‐masses Next 5‐Year Economic Plan

‐10%

‐21%‐30%

‐20%

2008‐2012

given poll results, while neither is expected to either ‘sweep’or even form ‘simple majority’ given their reshapingconstituencies (PML‐N’s stronger), these parties’ should onlybe weighed against their 1) Economic Manifestos tagged withtheir strategic action‐plans, 2) experienced and agileEconomic Team and 3) strong Willingness to enforce

Indicator PTI’s PML‐N’sGDP Growth 6% 6%Industrial Growth 9% 7‐8%Inflation 7% 7‐8%Budget Deficit 5% 4%Tax‐GDP 15% 15%Economic Team, and 3) strong Willingness to enforce

hardcore institutional as well as social reforms for a sustainedeconomic recovery.

In terms of Economic manifesto, PTI and PML‐N are almost onthe same page. The implementation phase coupled with firm

Inv.‐GDP 21% 20%Health‐GDP 3% 2%Education‐GDP 5% 4%

Tax Reforms Yes YesIncrease in Tax Rate No NoL T C Y Y

p g p p pwillingness remains a matter of concern amongst thetwo, should they come in power. Unluckily, given differencesin their political agendas, both are least expected to go hand‐in‐hand, which otherwise be ideal for the country. This mayonce again help less‐competent forces to share power.

Later Tax Cuts Yes YesInterest Rate Cuts Yes YesPSEs Restructuring Yes YesPrivatization Programs Yes YesFinancial Markets Reforms Yes Yes

KSE mostly Smiles Post‐Elections

It is thus contingent on 1) who will form the majority and 2)d ift b t PTI d PML N’ liti l d PML N 15.0%

Market Return before Elections

10

deep rifts between PTI and PML‐N’s political agendas. PML‐Nmight gain grounds, given its greater reach even withinrelatively smaller constituencies, but it would be a toughertask for PTI to gain widespread majority to implement itsmanifesto in letter and spirit.

0 4%

12.0%

2.5%

8.4%

5.0%

10.0%

3M

Though elections are largely expected on time, given Military’shelping hand for the fair and valid electoral process chainedwith ever‐vigilant Judiciary and progressively‐activeMedia, probability of emerging forces to delay elections for anunidentified period, still stands high.

0.4%

‐6.3%‐10 0%

‐5.0%

0.0%

1990

1993

1997

2002

2008

Consensus‐based selection of the Chief Election Commissionwith gradual enforcement of key electoral reforms i.e.detailed identification of eligible voters, development of avariety of information, education and communication materialfor higher voter participation should result in better selection

‐10.0%

69%74%61% 59%

89%

80%

100%

Market Return after Elections

3M 6M 1YR

for higher voter participation, should result in better selectionprocess to ensure greater representation of the people at theParliament.

KSE’s performance record reveals the bourse performedprogressively better both pre and post‐electoral process ‐2% 6%

38%

‐6%

13% 15%

40%61% 59%

2%

20%

0%

20%

40%

60%

90 93 97 02 08p g y p p p(outperformed mostly post elections) with average returnbeing at 3.4% 3M before elections while 19% in 3M, 23% 6Mand 30% 12M following elections, albeit with higher volatility.

‐6%

‐28%

‐60%‐80%

‐60%

‐40%

‐20%19

9

199

199

200

200

PakistanPakistan Economy 201311

Economic Growth, a Reality Check!C ll f i i fCalls for socio‐economic reforms

Pakistan economy has been resilient throughout most of itshistory in the sense that despite being repeatedly hit by a

30%

35%Middle Class (as % of Total Population)

12

history in the sense that, despite being repeatedly hit by amultitude of shocks that tried to influence its underlyinggrowth potential, the overall GDP growth remained in the‘positive’ territory, unlike other comparable economies.

Being consumption‐led, Pakistan economy sailed throughan average 26% growth in consumption spending in past 3 5%

10%

15%

20%

25%

g g p p g pyears compared to 7.7% of Asia (most growing region in theworld), that is 4x higher despite economic slowdown.

This can be attributed to a stunning 36.5% growth in themiddle‐class population which accounts for ~33% of thetotal country’s population, highest amongst regional peers. 80%

100% Private Consumption as % of Total Consumption

0%

5%

Pakistan India China Bangladesh

Another reason boosting our economy is the agriculturalgrowth ~4%) despite devastating floods; with corporatesector showing inclination towards it. Even banks are nowpromoting agri‐financing for this purpose.

Private consumption’s contribution has been rising rapidly20%

40%

60%

80%

Private consumption s contribution has been rising rapidlyin the aggregate demand. Conversely, investment as well assavings have been showing persistent decline, leading towidening demand‐supply gap. Continuing this trend, theeconomy may experience greater uncertainty associatedwith future inflation in the country.

0%

Sri Lanka India China Bangladesh Pakistan

As % age of GDPCountry Investment Savings Tax

Lower GDP growth than the regional average is notnecessarily an sign of resource mismatch. In fact, Pakistancontinues to stay rich in terms of favorable geography anddemographics, indigenous agriculture resources, untappedenergy potential and a strong service sector.

Pakistan 13.7 10.6 10.2 India 34.6 32.2 17.7 Sri Lanka 29.2 21.8 15.3 Bangladesh 25.8 27.3 8.5 China 40.2 53.0 17.0

Economic OutlookA sneak throughA sneak‐through

However, concerns remain towards industrial sector thatfaces energy issues due to over PKR 400bn Circular Debt

FY12AFY11A Interest Payment

Defence Affairs

13

faces energy issues due to over PKR 400bn Circular Debtbarricading industrial growth for quite sometime now. Thegov't flushes power subsidies to bridge gaps, but it onlycaused misallocation of resources and higher fiscal deficit asa result, with current expenditures consistently exceedingbudgetary targets, reaping no fruitful results. Here the role ofgov't comes into play to realize that the need of the hour is

28%

17%

21%

16%30%

25%

11%Defence Affairs and ServicesSubsidies

Others

Developmental Expendituregov t comes into play, to realize that the need of the hour is

to spend more on development, which is barely 16% onaverage of the total expenditures (see pie charts).

But too late to make this gov't ‘realize’ that the upcomingelectorate may bid them a farewell, and welcome the newone next year with a hope that it brings about a much‐

17%

17%18%

16%

Expenditure

31%20%

FY13Bone next year with a hope that it brings about a muchneeded socio‐economic revolution.

Though single‐digit inflation with monetary easing came as abreather, deteriorating fiscal deficit remains one big issue inFY13. Not only CPI and DR, but also slowdown in gov'tborrowing made 1HFY13 worth an applause.

18%7%

20%

However, 2HFY13 remains critical as gov't borrowing takes aU‐turn, which is expected to cap investor excitement. Weexpect CPI around 9%, containing full‐year target of 9.5%.

With the realization of flows under the CSF umbrella, weestimate CAD to be around 1% of GDP in FY13, quite

bl k i th ll fl i ti t b2,000

3,000

4,000USD mn Charges/Interest Principal

manageable keeping other smaller flows in perspective to bematerialized during 2HFY13 while heightened debt servicing(USD 1.7bn more due to IMF in FY13) should keep PKR understress (we estimate 8.5% YoY average depreciation). Inflowsworth USD 1‐1.5bn and outflows worth USD 3bn shouldtherefore keep Forex reserves capped at USD 12.5bn in FY13.

0

1,000

2012 2013 2014 2015

Macroeconomic Indicators

Summary Data FY07A FY08A FY09A FY10A FY11A FY12A FY13E

Real Sector*

14

Real SectorReal GDP Growth 6.8% 3.7% 1.7% 3.1% 3.0% 3.7% 4.0%GDP (PKR bn) MP 8,673 10,243 12,739 14,668 18,063 20,654 23,339Service sector growth rate 7.0% 6.0% 1.6% 4.6% 4.4% 4.0% 4.1%Industrial sector growth 8.8% 1.4% ‐1.9% 4.9% 0.7% 3.1% 2.4%A i lt l t thAgricultural sector growth 4.1% 1.0% 4.0% 2.0% 2.4% 3.4% 3.7%External Sector (USD bn)Exports (FOB) 17.3 20.4 19.1 19.7 24.8 23.6 26.3Imports (FOB) 27.0 35.4 31.7 31.2 40.4 44.9 40.9Trade Deficit (13.9) (21.4) (16.0) (13.2) (12.5) (18.4) (14.6)( ) ( ) ( ) ( ) ( ) ( )Remittances 5.49 6.45 7.81 8.91 11.2 13.2 14.9Foreign Direct Investment 5.1 5.4 3.7 2.2 1.6 0.8 0.8Forex Reserves 15.6 11.4 12.4 16.8 18.2 15.2 12.5Exchange Rate (PKR/USD) 61 63 79 84 86 89 97Current A/c Balance (6 9) (13 9) (9 3) (3 9) 0 2 (4 5) (2 1)Current A/c Balance (6.9) (13.9) (9.3) (3.9) 0.2 (4.5) (2.1)Public Finance and Others (% of GDP)CPI Inflation (YoY) 7.0% 21.5% 13.1% 10.1% 13.7% 11.0% 9.0%Total Tax Revenues 10.2% 10.0% 9.2% 10.0% 9.4% 9.8% 9.5%Expenditure 19.2% 21.7% 19.3% 20.5% 19.1% 15.1% 19.1%Public Debt 60.1% 59.1% 61.6% 62.4% 59.0% 60.5% 66.4%Fiscal Deficit (PKR tr) (0.4) (0.8) (0.7) (0.9) (1.19) (1.37) (1.39)Fiscal Deficit 4.3% 7.4% 5.2% 6.3% 5.9% 6.6% 5.9%

Source: Arif Habib Research, Bloomberg, SBP, PBS, IMF data, ADB, WDI. *At Factor Cost

Economy at a Glance…

20 Trade Deficit(US$bn) Remittances(US$bn)FDI(US$bn) CAB (US$bn)

25% Total Tax Revenue(%GDP) Expenditure (%of GDP)Fiscal Deficit (% GDP)

15

‐5

0

5

10

15

7A

8A

9A

0A

1A

2A

3E

FDI(US$bn) CAB (US$bn)

0%

15%

20%

Fiscal Deficit (% GDP)

‐25

‐20

‐15

‐10 FY07

FY08

FY09

FY10

FY11

FY12

FY13

0%

5%

10%

16 18 20

90

100 FOREX (USD bn) RHS PKR/USD (LHS)

FY07A FY08A FY09A FY10A FY11A FY12A FY13E

20%

25% CPI(YoY) Discount Rate

46 8 10 12 14

50

60

70

80

5%

10%

15%

‐2 4

40

50

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

YTD

0%FY07A FY08A FY09A FY10A FY11A FY12A FY13E

PakistanPakistan Equities ‐ 201316

Pak Equities, a ‘Jewel’ in the Region

While the global economy undergoes economici it b l h bi d t d i 6%

8%30,000

8%

10% Currency vs USD vs FIPI (USD mn) 2012

17

paranoia, its balance hangs biased towards emergingeconomies ‐ bombarded with flush of liquidity flows. Assuch, a tightening spree set earlier across emergingeconomies with restrictions placed on foreign inflows(fearing asset price bubbles) is rather taking the oppositedirection (China and India lifted FI curbs).

‐4% ‐8%

6%

4%3%

1% ‐8%

24,389

15,069 15,000

20,000

25,000

0%

2%

4%

6%

8%

a a s a n d m ndirection (China and India lifted FI curbs).

As such, funds flowing in at a blazing pace once againduring 2012 (USD 51.4bn, with average 25% YoYreturn), against outflows in 2011 (USD14.3bn, withaverage decline of 15% YoY) across the emerging (Asia

1,703 2,548

4,907 2,504

154 125 ‐

5,000

10,000

‐10%

‐8%

‐6%

‐4%

‐2%

Indi

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Indo

nesi

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Phili

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S. K

orea

Taiw

an

Thai

land

Viet

nam

Paki

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Pacific) region, have acted as an unpinning force formarked recovery in the Asian equities in 2012. Funds flewback to the Asia Pacific region due to better fiscals, growthand solvencies than most of the developed markets.

With a few markets busy making new peaks especially 19% 19% 22%

38% 40% 42%

30%

40%

50% Equity Returns (USD)

2012A 2011A

Local Currency vs USD Net Foreign Flows (YoY Chg.)

With a few markets busy making new peaks, especiallyPakistan, Philippines topped the chart with 42% rally in2012 (‐2% in 2011), followed by Thailand yielding 40% (‐3% in 2011) and Pakistan returning 38% (‐15% in 2011).Local currencies’ appreciation also amplified USD returns.

5% 7% 9%13% 13% 13% 15%

19% 19%

20%

‐10%

0%

10%

20%

Fron

t

nesi

a

Chin

a

evel

op

aiw

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Wor

ld

Emer

g

Kore

a

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Indi

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On an eco‐political comparable scale, Pakistan equitiesshown exceptional growth, given political, economic andlaw & order shakeups it survived through during 2008‐12.KSE100’s surge was driven by climbing profits, CGTreforms, rate cuts and better foreign inflows.

‐50%

‐40%

‐30%

‐20%

MSC

I

Indo

MSC

I De Ta

MSC

I W

MSC

I E S. K

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Pak

Tha

Phili

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‘Higher’ Returns despite ‘Lower’ Macros

Regardless of a host of negatives i.e. political setup gainingl d i ti i i l & d d 25

9%

9%

300% Market Cap‐to‐GDP

18

accolades in corruption, corrosion in law & order, andslowdown in economic growth with persistently highinflation, Pakistan equities showed unprecedentedresilience and, only performed. As such, Pakistan'scorporate earnings growth, ROEs and average payoutsrather improved so far despite economic slowdown.

229

183%

149%

134%

99%

94%

87%

86%

86%

79%

69%

68%

64%

60%

50%

46%

37%

22%

50%

100%

150%

200%

250%

rather improved so far despite economic slowdown.

This is due to the fact that, as few other emerging/frontiermarkets, Pakistan equities are not a perfect reflection ofthe economy. In fact, KSE represents only 22% of the totalGDP (lowest amongst key emerging as well as developed

0%

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apor

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equity markets), a blessing in disguise during hard times!

Many a peer i.e. India, China, Brazil, Thailand andIndonesia stands above average with respect to marketcapitalization (some even over 100%), as compared totheir GDP size and growth (as equities incorporate future

Economic Indicators vs Earnings GrowthCountry RGDP CPI DR EGrow RoE

Indonesia 6.6 5% 5.8 17% 28%India 7.3 10% 8.0 14% 24%Vietnam 6.3 6% 9.0 17% 23%

their GDP size and growth (as equities incorporate futureeconomic growth as well). Pakistan equities being lowestamongst others hint at a room for a massive growth of themarket capitalization with regards to its economy (mainlydue to muted growth in IPOs, unlike emerging markets

Philippines 4.7 5% 3.5 11% 17%Sri Lanka 7.0 7% 7.5 18% 46%Thailand 7.5 3% 2.8 20% 25%China 8.8 3% 6.0 16% 17%Taiwan 2.7 2% 1.9 29% 15%

This is expected to significantly improve IPOs in 2013onwards, as lower interest rates with markedimprovement in market liquidity should provide a reasonfor companies to raise funds through equities with lowerliquidity premium.

S. Korea 3.1 3% 2.8 26% 14%Peer Avg 6.0 5% 5.2 19% 23%Pakistan 4.3 9% 9.5 18% 29%Difference ‐1.7 4% 4.3 ‐1% 6%Relative Value Low Low Low ~Parallel High

‘Rising’ EGrow despite ‘Lower’ Eco Growth

Interestingly, during last 5yrs of economicl d t i th h t ll

Economic Growth vs Corporate Fundamentals GrowthEGrow GDP GrowthKSE100 Return (RHS) RoE (RHS)

19

slowdown, corporate earnings growth has actuallyimproved sequentially (kept up momentum at 12%average run rate in last 6yrs) while economy could notcatch up with its underlying potential amid scaling energyissues, stubbornly high CPI and double‐digit interest rates.

20%0%20%40%60%80%

10%

15%

20%

25%

30%KSE100 Return (RHS) RoE (RHS)Payout (RHS)

Entering 2013‐14, we expect Egrow to stay solid, evenbetter than the last 6‐year avg (18% cumulative in 2013‐14versus 6Y’s avg 12%), which is expected to be largelytriggered by key sectors i.e. Cements, Textiles, Oil&Gas(OMCs, E&Ps), Telecom, and Banking sectors.

‐80%‐60%‐40%‐20%

‐5%

0%

5%

2007

2008

2009

2010

2011

2012

2013

‐14F

Stable‐to‐improved oil prices should benefit Oil&Gassector beside better volumes while improving offtakeshould support Fertilizers earnings‐payouts. Cement sectorshould reap benefits from firm product prices, soft coalprices and decline in interest rates and relatively higher

Corporate Sector Earnings Growth (EGrow)Years*

Sector 2007 2008 2009 2010 2011 20125‐Y

Avg.2013‐14F

E&P 4% 14% 19% ‐3% 18% 41% 16% 8%prices and decline in interest rates and relatively higheramount of PSDP expected amid elections, while Textilesshould benefit from incremental exports due to PTAs andupcoming GSP‐1 status alongside decline in interest rates

Some part resolution on Circular Debt is expected through

Banks 13% ‐11% 6% 10% 25% 0% 7% 14%Fertilizer 11% 27% 20% 47% 71% 0% 29% ‐5%Cement ‐23% ‐29% 103% ‐30% 83% 82% 31% 23%Oil Marketing ‐27% 156% ‐122% ‐450% 51% ‐31% ‐70% 24%Autos ‐8% ‐47% ‐44% 123% ‐3% 44% 11% ‐6%Power ‐5% 38% ‐11% 13% 45% 19% 16% 7%p p g

another issue of TFC, which should translate into bettercash payouts from the gov’t‐owned entities i.e.PPL, PSO, OGDC, alongside PTC, NBP and few others tobridge rising fiscal deficit. This should attract the largeportion of the dividend‐loving investors to equities. *Fiscal Year (Jul‐Jun) except for Banks, Fertilizer/Chemicals. Calendar Year (Jan‐Dec) for Others

Power 5% 38% 11% 13% 45% 19% 16% 7%Texties ‐41% 250% ‐78% 130% 66% ‐27% 50% 21%Chemicals ‐401% ‐488% ‐337% 11% ‐7% 0% ‐204% ‐237%Telecom ‐25% ‐118% ‐424% 2% ‐31% 79% ‐86% 46%AHR Sample ‐1% 0% 6% 17% 27% 20% 12% 18%

Growing Regional Charm!

While global equities are on the rise, KSE100’s deepdi t t i l i (47% PE 48%

Forward Estimates

Country EGrow DY RoE PE PBV PEG EV/EBITDA

20

discount to regional peers remains (47% on PE, 48% onEv/EBITDA, 49% on PEG, 29% on PBV, while a fat 66% onDY and a substantial 19% on RoE). We believe, this ismore‐than‐enough to counterbalance perceived risks of i)reversal in inflation and thus interest rates (alreadyhigher), ii) one of the lowest GDP growth rates, and iii)

Country EGrow DY RoE PE PBV PEG EV/EBITDA

Indonesia 16.7% 2.3% 28% 13.6 2.6 81 8.9

India 14.2% 1.8% 24% 13.5 2.2 95 8.6

Vietnam 16.7% 4.6% 23% 9.0 1.6 54 7.4

Philippines 11.2% 2.5% 17% 16.5 2.4 147 10.1

Sri Lanka 18 5% 2 7% 46% 9 7 1 8 53 7 6higher), ii) one of the lowest GDP growth rates, and iii)soaring currency and political risks, along with othereconomic risk-associated premiums required by investor.

Bear in mind that higher risk also entails greater returnopportunities, KSE100 offers a great deal compensating

Sri Lanka 18.5% 2.7% 46% 9.7 1.8 53 7.6

Thailand 20.4% 3.6% 25% 12.8 2.1 63 9.0

China 16.4% 2.2% 16% 10.4 1.5 63 7.8

Taiwan 27.9% 3.2% 15% 14.5 1.7 52 9.7

S. Korea 22.6% 1.3% 15% 9.1 1.1 40 7.6

Peer Average 18.3% 2.7% 23% 12.1 1.9 72 8.5 potential risks. We expect a cumulative 18% YoY earningsgrowth in 2013‐14 (based on Arif Habib Universe). This isbesides the fact that KSE100 already provides one of thehighest RoEs and offers deepest discount at DY (read: purecash) multiple compared to regional peers.

35 0%Regional ROE vs Dividend Yield(ROE)

g

Pakistan 17.6% 7.9% 29% 6.5 1.3 37 4.4

Prem/(Disc) 0.7% ‐66% ‐19% ‐47% ‐29% ‐49% ‐48%

Since earnings growth is the prime factor to account for byinvestors above all as it is an integral part of the emergingmarkets’ fundamentals, KSE100’s earnings growth isexpected to sustain despite high‐base, competing most ofthe peers with better economic growth i.e. China, India, Sri 20.0%

25.0%

30.0%

35.0%Pakistan

h il dPhilipines

Indonesia

IndiaSri Lanka

p g , ,Lanka, Taiwan and South Korea. Therefore, we expectKSE100’s re‐rating whereby prevailing market discountsmay substantially narrow to their historical averages.

10.0%

15.0%

20.0%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

TaiwanThailand

S. Korea

China

(DY)

Index Target 2013

Pakistan equities are yet to re‐rate given their grosslyd di l ti H i 2013 i t d

KSE100 Index Target Estimates 2013

21

undemanding valuations. Hence, in 2013, investors needto stay close to where valuations reside and should notrepeat the same oversight made by those who missed rallyin 2012 (KSE100 returned 49%!), when investors remainedfocused only, and exclusively, on bad eco‐political newsand eventually lost sight of the compelling valuations!

Valuation Basis Target Weight Breakup (pts)

Target Price Based 20,952 15% 3,143

Earnings Growth 17,947 15% 2,692

Justified PE 20,904 15% 3,136

PEG Ratio 20,434 15% 3,065

R i l DY* 19 940 15% 2 991and eventually lost sight of the compelling valuations!

If we adjust prevailing regional discounts to historicallevels (average disc. 5%‐48%), laced with justifiedPE/PEG, Earnings Growth and the Target Price models, aweighted average index target of 19,991 appears, a solid

Regional DY* 19,940 15% 2,991

Regional PBV* 20,789 10% 2,079

Regional PE* 18,891 5% 945

Regional EV/EBITDA* 19,922 5% 996


Average 19 860 100%3,089pts jump by 2013‐end, with a decent total return of18% YoY!

Since higher volatility is expected to encircle KSE100'sexpected double‐digit growth in 2013 amid greaterpolitical yell (elections) we reiterate KSE100 should

*On the basis of adjustments to historical discounts

Average 19,860 100% ‐

Weighted Target 19,994

Index Dec‐12 end 16,905

Expected Total Return 2013 18.3%

political yell (elections), we reiterate, KSE100 shouldprovide at least 18% YoY returns in 2013, based on ArifHabib Research Universe performance with a select of risk‐adjusted fundamentally‐stronger and potentiallyoutperforming portfolio of stocks (mentioned ahead).

Arif Habib Research Valuation Snapshot 2008 2009 2010 2011 2012 2013‐14F

Earnings growth 0.2% 6.4% 17.0% 27.0% 19.7% 17.6%

PER 9.3 8.5 7.6 7.1 6.1 6.6

Dividend Yield 5.9% 6.8% 7.0% 6.9% 8.4% 7.5%

However, should the reversal in interest rates take placeamid increased currency risk leading to a U‐turn ininflation with other political‐side risks playing out morethan the positives, as stated ahead, index couldunderperform its underlying potential target in 2013.

Earnings Yield 10.7% 11.7% 13.1% 14.1% 16.3% 15%

ROE 23% 22% 23% 25% 26% 24%

PBV 2.1 1.8 1.6 1.7 1.5 1.5

Payout Ratio 55% 58% 53% 49% 51% 49%

Model Portfolio Strategy 2013

Timely portfolio reshuffling should yield Alphas (above market average return) while a search for grossly undemandingl ti b d t k (b k d b t / t i bl f d t l ) ith ti l tf li hift h ld i i t t l

22

valuation‐based stocks (backed by strong/sustainable fundamentals) with timely portfolio shift should maximize totalactive return in 2013. Investors are recommended to hold stocks that are grossly undervalued, or at least relatively cheapat key multiples, with respect to their long‐term fundamentals. On the contrary, investors need to have limited exposure toscrips that have become relatively overvalued and risky for the short term. As usual, investors should focus on twostrategies at different timeframes in 2013. For 1H2013, we recommend a mix of high‐beta, seasonal and defensive playsi.e. Cement, IPPs, Textiles, Oil (OMCs), Fertilizer (Faujis only), so that expected volatility (given elections) could bei.e. Cement, IPPs, Textiles, Oil (OMCs), Fertilizer (Faujis only), so that expected volatility (given elections) could beneutralized to an extent, with a steady tilt towards few more pro‐interest rate sectors like Banks in the 2H2013 (asmonetary tightening may be expected from 2H2013 with availability of lower multiples post‐budget) to outshine overallaverage market returns expected in 2013. We have the following portfolio mix to bank a strategy shift on:

Symbol Last Closing Target Price UpsidePE DY

Symbol Last Closing Target Price UpsidePE DY

Symbol Last Closing Target Price Upside Symbol Last Closing Target Price Upside2012‐2013 Average 2012‐2013 Average

FCCL 6.5 12.4 90% 3.60 0.0% DGKC 54.6 69.5 27% 4.89 5.5%

KOHC 70.6 125.0 77% 3.64 8.5% NPL 19.5 24.0 23% 2.93 17.9%

BAFL 16.8 27.6 64% 4.02 11.1% PSO 232.2 284.8 23% 3.34 3.9%

PTC 17.4 28.3 63% 7.16 10.8% KAPCO 49.4 60.3 22% 5.99 15.3%

LUCK 151.5 212.7 40% 5.12 4.0% NCPL 21.0 25.3 20% 3.06 20.2%

NBP 49.4 68.5 39% 4.03 15.2% INDU 270.0 319.2 18% 6.12 9.8%

HUBC 45.2 62.5 38% 6.27 15.5% FFBL 38.6 45.0 17% 7.66 11.9%

UBL 83.7 113.3 35% 5.33 9.6% FFC 117.1 135.6 16% 7.32 13.1%

NML 63.9 86.1 35% 4.69 6.0% ENGRO 92.0 158.0 72% 13.27 3.8%

Opportunities to Seize Alpha in 2013

KSE100 may keep its historical pattern of providing best oft i 1Q l id hi h i th d l

KSE Quarterly Avg VolumeKSE Quarterly Avg Return

23

returns in 1Q alongside high earnings growth and volumesat their best. KSE100 posted an average 15.7% return in 1Qin last decade (23% in 1Q12) – due to bigger result reason,followed by 5.4% and 5.3% during 3Q and 4Q, respectively.KSE100 is mostly lower in 4Q with average 1.1% return,owing to investors' choosing to be sidelined amid country's 60%

80%

100%

1Q 2Q 3Q 4Q

10%

20%

30%

40%

50%

60% 1Q 2Q 3Q 4Q

owing to investors choosing to be sidelined amid country sbudget uncertainties. Fresh allocation of foreign funds(local also) takes place in 1Q.

Better foreign flows are expected to the Asia Pacific regionfor three reasons: 1) US/EU's plans to continue pumping in

0%

20%

40%

Y02

Y03

Y04

Y05

Y06

Y07

Y08

Y09

Y10

Y11

Y12‐40%

‐30%

‐20%

‐10%

0%

10%

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

liquidity to stimulate their deficit‐ridden economies, 2)declining regional restrictions on foreign inflows (Chinaand India already done it), and 3) higher investment taxesin the US following resolution on ‘Fiscal Cliff’. KeepingKSE’s share constant, this should result in higher absoluteinflows for Pakistan equities where better EGrow resides

15%

Quarterly Earnings Growth*1Q 2Q 3Q 4Q

CY CY CY CY CY CY CY CY CY CY CY‐50%

16

18

500600 700

Cumulative FIPIKSE100

USD mn ‘000 pts

inflows for Pakistan equities where better EGrow resides.

MSCI review of Pak market is expected in May‐13, whichmay possibly upgrade Pakistan to Emerging Market Indexafter it put Pakistan on sustainability gauge. If perceivedpositively, would provide a physiological boost to the KSE..

0%

5%

10%

6

8

10

12

14

(100)‐

100 200 300 400 500

9 9 0 0 1 1 2p y, p p y g

Any development on Privatization and Banking M&As (forMCR) should attract investor interest to equities while anypositive development on talks with IMF beside improvedflows from the US should provide more impetus to KSE.

-10%

-5%

1Q 2Q 3Q 4Q

0

2

4

(400)(300)(200)(100)

Jan‐

09

Aug

‐09

Mar‐1

0

Oct‐1

0

May‐1

1

Dec‐1

1

Jul‐1

2

*Based 6‐year average earnings growth

Risk Premiums to Neutralize Beta in 2013

Increased uncertainty on country’s political canvas / onl ti k i t t b d iti d 30%140%

Pak Equity Returns vs Currency Depreciation

KSE Returns PKR/USD (RHS)

24

elections may keep investors at bay and equities understiff grip from going north. Further, longer‐than‐expectedtenure of the care‐taker setup may put a halt on possiblerepayment deferment / new loans talks with the IMF.

Any foreign outflows from Pakistan (owing to political

112%

66%

39%54%

44%

68%

33%

49%

28%

15%

20%

25%

30%

60%

80%

100%

120%

140% KSE Returns PKR/USD (RHS)

Any foreign outflows from Pakistan (owing to politicaluncertainty) and regional markets (amid continuedcurrency depreciation vs USD), may increase investoranxiety on local front too, however, any downward drift inequities will remain restricted given low level of leverage.

10%

33%

0%

4%

1%2% 1%

7%

2%

5%

8%

0%

5%

10%

15%

‐40%

‐20%

0%

20%

40%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Looks possible in 2H2013 on reversal in the CPI due to PKRweakness, any reversal in interest rate will raise corporatefinancial cost and scale down equities values whilecontinuity of the same will pull investor from equities.

Any immediate PKR depreciation against the greenback on

‐55%‐3%‐2%

1%

‐5%

0%

‐80%

‐60%

12.8%14.0%

Regional (Local) Currency Dep. vs USD 2012

Any immediate PKR depreciation against the greenback onaccount of country’s higher debt‐servicing in FY13(USD1.7bn left for FY13) and any downward shift insovereign ratings as a result of further economicdeterioration, will drag equities lower in 2013 while noresolution on the notorious Circular Debt issue will affect

8.0%

4.6%3.6%

1.8% 1.8%4.0%

6.0%

8.0%

10.0%

12.0%

Energy/Oil%Gas sector companies’ payout in 2013.

Although any upgrade to Emerging Markets should unwindmore funds to KSE, having paltry weight, in EM against4.4% in Frontier Markets, may not attract huge inflows.

1.8% 1.8%

‐2.9% ‐1.8%‐4.0%

‐2.0%

0.0%

2.0%

JPY PKR GBP INR Euro Aus CAD Yuan

SectoralStrategies ‐ 201325

Cement Sector ‐ C ti R t !Cement Sector 2013 Cementing Returns!26

Cement

Key Drivers Diverging Cement and Coal Price to widen Margins

27

After recording a rise of 18% YoY in FY12, cement price have jumpedby another 7% in FY13TD to PKR 449/bag, despite an oversupply ofaround 13mn tons. We believe cement prices to remain firm duringthe rest of FY13 as well, keeping margins of the industry buoyant.

90100 110 120 130 140

360380 400 420 440 460

Cement (RHS) Coal(LHS) PKR/bagUSD/ton

Coal prices after trenching a 3‐year low of USD 79/ton havestabilized around USD 86/ton. We expect coal prices to averagearound USD 90/ton in FY13, down 15% YoY to keep marginswidened going forward.

Domestic demand, after remaining weak in FY11 gained by 9% YoY

70 80 90

320 340 360

Jan‐

11

Mar‐1

1

May‐1

1

Jul‐1

1

Sep‐

11

Nov‐1

1

Jan‐

12

Mar‐1

2

May‐1

2

Jul‐1

2

Sep‐

12

Nov‐1

2

, g g yin FY12, as construction activities started to picking up. We expectcement dispatches to improve by a further 7% in FY13 on account ofincreased infrastructure development as we enter election year.Export demand is however expected to drop by 5% YoY to 8mntons, resulting in total cement demand to settle at ~4.0% YoY in 82%

84%3540

Exports Domestic

Utilisation

mn tons

Election Effect; to keep Demand buoyant

FY13.

Declining interest rate environment to reduce financial burden fromdebt‐laden sector while PKR depreciation to increase exports.

Risks70%72%74%76%78%80%

51015202530

Higher coal and electricity prices

Lower‐than‐expected spending by the government through PSDP.

Reversal in interest rates and higher‐than‐expected attrition in PKRto affect both financial charges and coal import cost, respectively.

68%70%

05

FY08A FY09A FY10A FY11A FY12A FY13F

Lucky Cement Limited (LUCK PA)Target Price (Dec‐13): PKR 212/share – Upside 40%Target Price (Dec‐13): PKR 212/share – Upside 40%

Closing: PKR 151.54, Total Shares: 323mn, Market Cap: USD 504.2mn, Free Float: 40%, Avg. Daily Turnover: 2.45mn shares

Investment Case

B i h l d (15% l h EPS DPSStrong Margins and Profitability

28

Being the lowest cost‐producer (15% lower than our cement sector

sample average), strong pricing outlook to benefit LUCK the

most, improving its gross margins to historic highs of around 44% in

FY13 onwards.30%35%40%45%50%

20

25

30

35

EPS DPSGross Margins Net Margins

PKR

Acquisition of ICI along with expansion plans in D.R. Congo and Iraq to

add diversification flavor to the company’s business portfolio.

Healthy cash flows and strong balance sheet will enable the company

to keep its dividend paying history, despite cash outflow of PKR 11bn 0%5%10%15%20%25%

‐

5

10

15

20

in FY13 on account of expansion as well as acquisition as mentioned.

We expect LUCK to achieve a 44% YoY earnings growth in

FY13, translating into a attractive forward PER of 4.9x.

Risks

FY11 FY12 FY13 FY14

Financial Highlights (PKR mn) FY12A FY13E FY14FNet Sales 33,323 37,051 38,129

Gross Profit 12,721 16,654 15,806

Other Income 5 428 598Risks

Decline in cement prices, every PKR 5/bag drop drags LUCK’s earnings

by PKR 0.78/share.

Rise in coal prices as every USD 5/ton increase cuts company’s

Other Income 5 428 598

Finance Cost 253 146 46

Profit after tax 8,324 12,704 12,190

EPS (PKR) 20.97 30.25 29.03

DPS (PKR) 6.00 6.00 8.00

P/E (x) 7.2 5.0 5.2

P/B(x) 1 5 1 2 1 0p y / p y

earnings by PKR 0.83/share.P/B(x) 1.5 1.2 1.0

Div. Yield 4% 4% 5%

ROE 26% 21% 19%

ROA 22% 18% 17%

Sources; Company accounts and Arif Habib Research

D.G. Khan Cement Limited (DGKC PA)Target Price (Dec‐13): PKR 75/share – Upside 39%Target Price (Dec‐13): PKR 75/share – Upside 39%

Closing: PKR 54.58, Total Shares: 438.1mn, Market Cap: USD 246.01mn, Free Float: 55%, Avg. Daily Turnover: 9.09mn shares

Investment Case

S lidi f i h i d i h f lli l i k EPS DPSImproving Margins leading to Strong Earnings

29

Solidity of cement prices chained with falling coal prices to mark yet

another strong year in terms of profitability with 25% YoY earnings

growth expected in FY13.

Waste Heat Recovery (8.6MW) is expected to yield fuel savings to the20%25%30%35%40%45%

6

8

10

12

EPS DPSGross Margins Net Margins

PKR

tune of PKR 0.4/share after tax on annualized basis.

Falling interest rates (2.5% drop in FY13TD) coupled with deleveraging

to bring finance cost down by 32% YoY.

Th t k i t di t tt ti FY13 PER f 4 6 d ff i

0%5%10%15%20%

0

2

4

FY11 FY12 FY13 FY14

The stock is trading at attractive FY13 PER of 4.6x and offering a

dividend yield of 6%!

Risks

Decline in cement prices, every PKR 5/bag drop, drags DGKC’s

Financial Highlights (PKRmn) FY12A FY13E FY14FNet Sales 22,950 24,367 25,113

Gross Profit 7,507 9,637 8,349

Other Income 1,187.94 1,135 1,357

Finance Cost 1 670 78 14 730 16 764p y g p g

earnings by PKR 0.78/share.

Rise in coal prices where every USD 5/ton increase slashes earnings

by PKR 0.83/share.

Finance Cost 1,670.78 14,730 16,764

Profit after tax 4,108 5,135 4,462

EPS (PKR) 9.38 11.72 10.18

DPS (PKR) 1.5 3.00 3.00

P/E (x) 5.82 4.66 5.13

P/B (x) 0.72 0.64 0.59

Div. Yield 3% 6% 6%

ROE 13% 15% 11%

ROA 8% 10% 9%


Kohat Cement Company Limited (KOHC PA)Target Price (Dec‐13): PKR 125/share – Upside 77%Target Price (Dec‐13): PKR 125/share – Upside 77%


Investment Case

Di i b d l i i dAggressive Deleveraging to reduce Financial Burden

30

Diverging movement between cement and coal prices is expected to

expand company’s gross margins to the highest ever levels of 35% in

FY13, up 500bps from 30% in FY12.

Aggressive deleveraging has massively reduced company’s Debt‐to‐ 500

600

700

800

3,000

4,000

5,000 Short Term LoansLong Term LoansFinance Cost (LHS)

PKR mn PKR mn

Asset to around 26% (FY11: 72%), which is expected to scale down

finance cost over half (53% YoY) in FY13 thereby providing boost to

company’s bottomline.

Strong cashflow generation (PKR 21/share) in FY13 is expected to ‐

100

200

300

400

‐

1,000

2,000

translate into healthy payouts. We expect KOHC to pay a cash

dividend of PKR 6/share, translating into an enticing dividend yield of

9%, highest amongst Cement sector sample.

Risks

FY11 FY12 FY13 FY14 FY15

Financial Highlights (PKRmn) FY12A FY13E FY14F

Net Sales 9,316 10,528 10,881

Gross Profit 2,852 3,723 3,451


Decline in cement prices, every PKR 5/bag drop, undercut earnings by

PKR 0.79/share.

Rise in coal prices, as every USD 5/ton increase impacts earnings by

PKR 0 76/ h



EPS (PKR) 12.90 20.15 18.70

DPS (PKR) 3.00 6.00 6.00

P/E (x) 5.5 3.5 3.8

P/B (x) 2 4 1 5 1 2PKR 0.76/share. P/B (x) 2.4 1.5 1.2

Div. Yield 4% 9% 9%

ROE 57% 53% 36%

ROA 18% 27% 24%


Fauji Cement Company Limited (FCCL PA)Target Price (Dec 13): PKR 11 5/share Upside 96%Target Price (Dec‐13): PKR 11.5/share – Upside 96%

Investment Case

M i f 7 200 d h b i l i hi i 83%

Closing: PKR 6.54, Total Shares: 1,331mn, Market Cap: USD 89.6mn, Free Float: 35%, Avg. Daily Turnover: 9.6mn shares

Strong Volumetric Growth to drive Profitability

31

Mega expansion of 7,200 tpd has been pivotal in achieving an 83%

YoY volumetric growth in FY12. The momentum is expected to

continue in FY13 as well with a furthr 19% YoY volumetric growth to

2.5mn.

l d h d l l d 1012 14 16 18

2

3 Total Volumes Net Revenuesmn tons PKR bn

Improving sectoral dynamics with declining coal prices and strong

product pricing, is expected to take gross margins to 34% in FY13

(FY12: 27%)

Finance cost is expected to drop by a significant 25% in FY13 mainly ‐2 4 6 8 10

‐

1

FY10A FY11A FY12E FY13F FY14Fon account of declining overall interest rates.

These favorable dynamics are expected to translate into a massive 6x

YoY earnings growth in FY13.

Risks

FY10A FY11A FY12E FY13F FY14F

Financial Highlights (PKRmn) FY12A FY13E FY14FNet Sales 11,523 15,648 16,572

Gross Profit 3,068 5,361 5,271

Other Income 27 28 30 Risks

Exchange loss on its LIBOR based USD loan amid PKR depreciation

Decline in cement prices as every PKR 5/bag drop in cement prices

reduces company earnings by PKR 0.08/share.

Finance Cost 1,825 1,368 1,032

Profit after tax 377 2,354 2,489

EPS (PKR) 0.28 1.77 1.87

DPS (PKR) ‐ ‐ ‐

P/E (x) 0.04 0.3 0.3

P/B (x) 0 63 0 53 0 45

Every USD 5/ton increase in coal prices corrects earnings by PKR

0.08/share.

P/B (x) 0.63 0.53 0.45

Div. Yield 0% 0% 0%

ROE 3% 16% 14%

ROA 1% 7% 8%


Regional Charm (Cement)g ( )

16 00

Price to Earning

1 80

Price to Book

32

8.00

10.00

12.00

14.00

16.00

0 80

1.00

1.20

1.40

1.60

1.80

0.00

2.00

4.00

6.00

FCCL PA KOHC DGKC LUCK ACPL PATKYO SL STCM JKCE IN 002030

0.00

0.20

0.40

0.60

0.80

002030 FCCL PA STCM DGKC TKYO SL LUCK PAACPL PA KOHC JKCE INFCCL PA KOHC PA

DGKC PA

LUCK PA

ACPL PA TKYO SL STCM LN

JKCE IN 002030 KS

002030 KS

FCCL PA STCM LN

DGKC PA

TKYO SL LUCK PA ACPL PA KOHC PA

JKCE IN

50%

60%

Return on Equity

10%

12%

Dividend Yield

20%

30%

40%

4%

6%

8%

0%

10%

KOHC PA

ACPL PA LUCK PA FCCL PA DGKC PA

JKCE IN TKYO SL STCM LN

002030 KS

0%

2%

ACPL PA KOHC PA

DGKC PA

TKYO SL LUCK PA JKCE IN 002030 KS

FCCL PA STCM LN

Power Sector ‐ L t th b Li ht!Power Sector 2013 Let there be Light!33

Power

Key Drivers'000 GWh

Generation by Source

Others IPPs and KESC

34

Pakistan faces electricity shortfall as high as 8,500MW duringpeak demand. With generation from hydro sources on adecline, IPPs’ share in the total power generation of the country issteadily increasing.

The gov’t will specifically be focusing on power generation 43%45%

47%47%

48%

42%

46%

50%

80

100

120

000 GWhThermal Wapda Hydel WapdaIPP share

The gov t will specifically be focusing on power generationbecause of the upcoming general elections. Thermal generationbeing the only short‐term solution for power generation shouldwitness an increase leading to improved load factor of the IPPs.

The tariff for IPPs has built in immunity against PKR depreciationand inflation (both local and US) Therefore depreciating 30%

34%

38%

0

20

40

60

and inflation (both local and US). Therefore, depreciatingPKR/USD parity should increase the ROE component andultimately the return to equity investors.

Our likeness towards the sector is derived from the factthat, yields on gov’t securities (10‐yr PIB 11.4%) have beenslapping down while IPPs’ DYs stay much higher (14 19%)

30%0

2006‐07 2007‐08 2008‐09 2009‐10 2010‐11

19%

IPP Universe and OthersKAPCO

HUBC

NCPLslapping down, while IPPs DYs stay much higher (14‐19%).

Expected positive development on the Circular Debt issue willimprove power sectors cash flows.

Risks

Th i h d d h b id f

17%

NCPL

NPL

Others

The sector is somehow dependent upon the subsidy for powerutility by the gov’t. Lower subsidy increases the CircularDebt, thereby negatively affecting IPPs’ cashflows.

2%2%

59%

Hub Power Company Limited (HUBC PA)Target Price (Dec‐13): PKR 63/share – Upside 38%Target Price (Dec 13): PKR 63/share Upside 38%

Investment CaseWe anticipate HUBC’s profitability to register a modest growth of 2%

Closing: PKR 45.24, Total Shares: 1,157.2mn, Market Cap: USD 539mn, Free Float: 70%, Avg. Daily Turnover: 2.2mn shares

Liquidity Position

Trade receivables

35

We anticipate HUBC s profitability to register a modest growth of 2%

YoY in FY13 to a level of PKR 7.19/share. The reason behind the

expected flattish bottomline growth in FY13 is the high base‐effect of

Narowal plant’s full contribution made during FY12.

The dividend in FY13 is expected to increase by a decent 16% to PKR 15%

20%

25%

120

160

PKR bn Trade payablesNet receivables as a %age of total assets

p y

7/share. We believe income from Narowal project will be the major

contributor towards increase in company dividend.

Hub Power Company operates under the 1994 Power Policy. One of

the salient features of 1994 power policy is that, the fuel supply is 0%

5%

10%

‐

40

80

guaranteed by the gov’t unlike the newer power plants.

After the Narowal plant COD, HUBC’s subsidiary Laraib Energy Limited

is also developing 84MW hydro power project. Thus, the company

can rightly be called as a growth‐oriented company.


Gross Profit 18,310 17,334 16,912



RisksSlow recoveries from sole customer, rise in furnace oil prices andsubsequently high electricity cost give rise to Circular Debt problem.

Circular debt creates liquidity risk for the company and forces it to

Finance Cost 7,083 5,991 5,501


EPS (PKR) 7.08 7.19 7.24

DPS (PKR) 6.00 7.00 7.00

P/E (x) 6.39 6.29 6.25

P/B (x) 1.70 1.64 1.63Circular debt creates liquidity risk for the company and forces it toobtain high‐cost short‐term borrowings, resulting in high finance cost.

P/B (x) 1.70 1.64 1.63

Div. Yield 13% 15% 15%

ROE 28% 28% 27%

ROA 4% 4% 5%


Kot Addu Power Company Limited (KAPCO PA)Target Price (Dec‐13): PKR 60/share – Upside 22%Target Price (Dec 13): PKR 60/share Upside 22%

Investment CaseWe expect KAPCO to register a striking growth of 15% YoY in FY13 in

Closing: PKR 49.39, Total Shares: 880.3mn, Market Cap: USD 447mn, Free Float: 20%, Avg. Daily Turnover: 0.4mn shares

Liquidity Position

Trade debts

36

We expect KAPCO to register a striking growth of 15% YoY in FY13 in

its bottomline, where higher indexation adjustments would help the

company achieve higher YoY growth.

KAPCO achieved a high load‐factor of 62.4% in 1QFY13, primarily

because of better availability of gas. However, we have 30%

40%

50%

60

80

PKR bn Trade payablesNet receivables as a %age of total assets

y g ,

conservatively assumed a load‐factor of 55% for FY13 as generation

from gas is least expected to continue during winter.

KAPCO has always maintained a healthy payout, even over 100% for

some years. On such basis, we are looking forward to a dividend of 0%

10%

20%

%

‐

20

40

PKR 7.2/share in FY13, culminating into a attractive dividend yield of

15%!

Like HUBC, KAPCO is also operating under the 1994 Power

Policy, so, guaranteed fuel supply by the gov’t is the key factor for


Gross Profit 11,252 13,581 14,656

Other Income 7,662 6,783 6,182


KAPCO as well distinguishing it from other smaller IPPs’ operating in

the country.

RisksRise in furnace oil prices and subsequently high electricity cost give

Finance Cost 9,782 9,404 9,083


EPS 6.90 7.95 8.55

DPS 6.90 7.20 7.90

P/E 7.16 6.21 5.78

P/B 1 84 1 79 1 74Rise in furnace oil prices and subsequently high electricity cost give

rise to Circular Debt problem, like other IPPs.

Gas curtailment particularly in winters leads to lower load‐factor and

thus impacts adversely on company financials.

P/B 1.84 1.79 1.74

Div. Yield 14% 15% 16%

ROE 26% 29% 31%

ROA 6% 7% 9%


Nishat Chunian Power Limited (NCPL PA)Target Price (Dec‐13): PKR 25/share – Upside 20%Target Price (Dec 13): PKR 25/share Upside 20%

Investment CaseNCPL’s profitability is expected to grow by a massive 21% to PKR

Closing: PKR 21.01, Total Shares: 367mn, Market Cap: USD 79mn, Free Float: 41%, Avg. Daily Turnover: 0.8mn shares

Liquidity Position

Trade debts

37

NCPL s profitability is expected to grow by a massive 21% to PKR

6.69/share in FY13. Like other IPPs, improved load‐factor (75% in

FY13) and indexation adjustments will propel earnings to a better

side. In addition, operations and maintenance (O&M) savings and

gains from fuel efficiency should help the company achieve the15%

20%

25%

10

12

14

PKR bn

Trade debtsShort term borrowings (STB)STB as a %age of total assets

stated growth figure.

We anticipate NCPL to lure investors with ever‐enticing dividend

yield (19% in FY13 and 21% in FY14).

Circular Debt has been a major problem for the 0%

5%

10%

15%

‐

2

4

6

8

company, notwithstanding, NCPL has always maintained its cash

dividend stream.

As the plant is newer, NCPL is currently saving operations and

maintenance (O&M) cost, which it receives as part of the


Gross Profit 5,189 5,327 5,324


FY11A FY12A FY13E FY14F

tariff, providing further support to the bottomline.

RisksBeing a smaller IPP, slow recovery from NTDC is a big problem for

NCPL’s cash flow perspective.

Finance Cost 3,081 2,810 2,650


EPS (PKR) 5.51 6.69 7.07

DPS (PKR 3.50 4.00 4.50

P/E (x) 3.81 3.14 2.97

P/B ( ) 1 29 1 10 0 98NCPL s cash flow perspective.

Piling up of Circular receivables leads not only to heavy short‐term

borrowings (subsequently higher finance cost) but also hampers the

company’s ability to carry out operations in an efficient manner.

P/B (x) 1.29 1.10 0.98

Div. Yield 17% 19% 21%

ROE 37% 38% 35%

ROA 8% 9% 10%


Nishat Power Limited (NPL PA)Target Price (Dec‐13): PKR 24/share – Upside 23%Target Price (Dec 13): PKR 24/share Upside 23%

Investment CaseNCL’s earning per share is also expected to post an 8% YoY growth


Liquidity Position

Trade debts

38

NCL s earning per share is also expected to post an 8% YoY growth

to PKR 6.21/share in FY13. In line with peers, improved load‐factor

(75% in FY13) alongside indexation adjustments will boost NPL’s net

profitability. Similarly, operations and maintenance (O&M) savings

and gains from fuel efficiency will also contribute towards a20%

25%

8

10

12

PKR bnShort term borrowings (STB)STB as a %age of total assets

healthier profitability during the period.

Despite higher cumulative earnings than that of its comparable peer

NCPL’s, NPL has distributed lower dividend (PKR 2/share against

NCPL’s PKR 5.5/share), which should increase the prospects of 0%

5%

10%

15%

‐

2

4

6

dividend increase in the near term.

Like NCPL, NPL is also subject to operations and maintenance (O&M)

savings, and gains from fuel efficiency of the newer plant.

Risks


Gross Profit 4,938 4,828 4,950


FY11A FY12A FY13E FY14F

RisksPiling up of Circular Debt may interrupt company’s ability to procure

fuel and thus raises an operational risk.

Heavy short‐term borrowings increase finance cost, pushing down

the company earnings.

Finance Cost 2,880 2,589 2,372


EPS (PKR) 5.75 6.21 7.17

DPS (PKR) 2.00 3.00 4.00

P/E (x) 3.39 3.14 2.72

P/B ( ) 0 96 0 83 0 73the company earnings. P/B (x) 0.96 0.83 0.73

Div. Yield 10% 15% 21%

ROE 32% 28% 29%

ROA 8% 8% 9%


Regional Charm (IPPs)Regional Charm (IPPs)

25 %age Dividend Yield 35 (x) Price to Earning

39

10

15

20

15

20

25

30

‐

5

NCPL PA HUBC PA NPL PA KAPCO 1798 HK EGCO TB 600021 RPWR IN

‐

5

10

NPL PA NCPL PA KAPCO PA

HUBC PA

EGCO TB

600021 CH

1798 HK Equity

RPWR IN

Equity Equity CH Equity EquityPA PA TB

EquityCH

EquityEquity IN

Equity

30

35

40

45%age

Return on Equity

1.6

1.8

2 (x)Price to Book

10

15

20

25

30

0 4

0.6

0.8

1

1.2

1.4

0

5

10

NCPL PA NPL PA KAPCO PA HUBC PA EGCO TB Equity

600021 CH Equity

RPWR IN Equity

1798 HK Equity

0

0.2

0.4

1798 HK Equity

NPL PA NCPL PA EGCO TB

Equity

RPWR IN

Equity

600021 CH

Equity

HUBC PA

KAPCO PA

Fertilizer Sector B tt hit th G !Fertilizer Sector Better hit the Gas, now!40

Fertilizer

Key DriversTotal Capacity

41

The Economic Co‐ordination Committee (ECC) has in principalapproved the long term plan regarding the gas availability to theFertilizer sector. Upon approval, it is expected to take 12-18 monthsfor implementation, which will bring new hope for the plants operatingon the SNGPL network.

60.87%

39.13%

Utilized capacity

Unutilized

Meanwhile, the gov’t is working on a short‐term solution of providing103mmcfd of gas from different fields to the fertilizer plants onSNGPL network on rotational basis. If implemented, this could be amajor trigger for ENGRO, DHFL, AGRI and PAF.

capacity

101214mn tons Offtakes

Imported

With inventory levels being at sufficient levels, we see least possibilityurea imports (high‐price urea imports is sold with a higher subsidy).Currently, NFML is carrying approximately 430k tons ofinventory, that is adequate for the on‐going Rabi season. 0

2468

10

06 07 08 09 10 11 12

Local

Industry

As no imports of urea is expected, the pricing power of the localmanufacturers should remain intact whereby the industry wouldeasily pass on the impact of gas price increase.

Risks

200

200

200

200

201

201

201

Short Term Gas Availability Plan

Fields mmcfd

Reti Maru 13

Sara West 8Failure to implement long‐term / short term gas allocation plans.

Increase in gas prices in addition to the GIDC.

Implementation of District Development Surcharge (DDS) and failureof any pass‐on of the same.

Sara West 8

Mari New Discovery 22

Guddu Thermal Power (kandkot) 60

Total 103

Source;:Arif Habib Research

Fauji Fertilizer Company Ltd (FFC PA)Target Price (Dec‐13 ): PKR 136/share – Upside 16%

Investment Case

FFC h b h j b fi i f h il i


6 07.0

mn tons Market Share ComparisonFFC Industry

Target Price (Dec‐13 ): PKR 136/share – Upside 16%42

FFC has been the major beneficiary of the gas curtailment issue on a

relative basis as the company has suffered lowest gas outage (8‐

12%) as compared to its peers, while simultaneously benefiting on

the pricing gains (61% since CY11).

b l l ( )0.01.02.03.04.05.06.0

Ability to operate plant at 120% capacity (average 3 years), owing to

continuous supply of gas from Mari Gas fields.

FFC has diversified its investment base, with investments in Fauji

Fertilizer Bin Qasim Limited, Maroc Phosphore S.A (PMP), Fauji

2006 2007 2008 2009 2010 2011

300400500600

1000

1500

2000

Urea and Gas prices

Urea Feed stock Fuel stock

PKR/bag PKR/mmbtu

Cement Company Limited (FCCL) and Wind Power Project. The

company is also exploring coal gasification projects to supplement

depleting gas reserves.

High dividend payout ratio of 90‐95% (average for 3 years)

0100200300

0

500

1000

2004

2005

2006

2007

2008

2009

2010

2011

2012

translating into attractive dividend yield of 13% for CY13 and CY14.

Risks

Subsidized imported urea to hurting sales. Non‐resolution of this

issue could impact our base‐case earnings estimates.

Financial Highlights (PKR mn) CY11A CY12E CY13FNet Sales 55,221 73,631 75,150Gross Profit 34,349 35,885 34,205Other Income 6,630 4,229 3,988Finance Cost 786 976 1,159Profit after tax 22,492 20,822 19,952EPS (PKR) 17.68 16.37 15.69issue could impact our base case earnings estimates.

Reduction in price of urea by PKR 50/bag will hurt EPS by PKR1.1.

Provision of the committed quantity of gas to ENGRO could lead to

fall in urea prices and thus will affect earnings negatively.

DPS (PKR) 13.30 15.80 14.90P/E (x) 6.6 7.2 7.5P/B (x) 6.9 6.6 6.3Div. Yield 11% 13% 13%ROE 104% 92% 84%ROA 41% 38% 35%Sources: Company accounts and Arif Habib Research

Fauji Fertilizer Bin Qasim Ltd (FFBL PA)Target Price (Dec‐13 ): PKR 45/share – Upside 17%

Investment Case

Focus would remain on DAP as a primary product for the company

Closing: PKR 38.6, Total Shares: 934.11mn, Market Cap: USD 370.86mn, Free Float: 35%, Avg. Daily Turnover: 2.2mn shares

USD/tons CY11 CY12E CY13F CY14F CY15


Focus would remain on DAP as a primary product for the companysales due to its lower gas requirement in comparison to urea. Evenin the scenario of low gas‐pressure from SSGC, FFBL continues tooperate its DAP plant.

DAP’s primary margins are expected to flourish as Phosphoric acid

Phosphoric Acid 698 934 859 885 912

Conversion 321 430 395 407 419

Local DAP 440 635 654 674 694prices are projecting downward trajectory in the int’l markets.

Phosphoric acid contract price was settled at USD 855/ton in the

4QCY12, which is down ~5% QoQ.

With Phosphoric prices decreasing, FFBL increased local DAP retail

b /b h ( l d

Local DAP 440 635 654 674 694

Primary Margins 119 205 259 267 275

Source: Arif Habib Research

prices by PKR 100/bag in the 4QCY12 (neutralizing PKR depreciation

impact as well), translating into a solid 700bps higher gross margins

expected in 4QCY12.

DAP (primary product) is always sold on import parity, premium

i i i ith i t’l DAP i

Financial Highlights (PKR mn) CY11A CY12E CY13F

Net Sales 55,869 45,152 50,939

Gross Profit 20,116 11,045 12,329

Other Income 1,650 800 589

Finance Cost 1 088 1 783 929price in comparison with int’l DAP prices.

Lesser gas curtailment on SSGC network in comparison with SNGP’s

to benefit the company in relation to other peers.

Risks

Finance Cost 1,088 1,783 929


EPS (PKR) 11.53 4.33 6.20

DPS (PKR) 10.00 4.20 5.60

P/E (x) 3.3 8.9 6.2

Total gas supply shut down, as we have already observed in 1QCY12.

For every PKR 100/bag reduction in DAP prices Citrus

Paribas, primary margins would be hit, translating into an annualized

negative impact on bottomline of 0.78/share.

P/B (x) 0.1 0.1 0.1

Div. Yield 26% 11% 15%

ROE 79% 29% 40%

ROA 27% 10% 14%

Sources: Company accounts and Arif Habib Research

Engro Corporation (ENGRO PA)Target Price (Dec‐13 ): PKR 158/share – Upside 72%

Investment Case

Gas supplies to company’s old plant are being curtailed by 12%

Closing: PKR 92, Total Shares: 511.27mn, Market Cap: USD 484mn, Free Float: 50%, Avg. Daily Turnover: 3.9mn shares

Target Prices (PKR/share) Dec‐13 Corp Stake

Engro Fertilizer 39.0 100%


Gas supplies to company’s old plant are being curtailed by 12%while the new plant (EnVen) is facing as high as 80% curtailment.

Company’s new plant of 1.3mn tons capacity requires at least80mmncfd gas supply to sustainably operate whereby the short‐term gas allocation plan, as discussed in the sector part earlier,f l f t th t i l di E ’ l t

g

Engro Foods 71.0 88.5%

Engro Polymer 10.4 56.2%

Eximp 8.5 100%

Power Gen 24.0 100%

Vopak 5.0 50%focuses on supply of gas to the sector including Engro’s new plant.

On a conservative note, we have assumed that EnVen would receive20% of the committed gas till 2014 and 25% in 2015, and from 2015onwards, the plan is expected to receive EnVen 50% of thecommitted gas supply. 15

20 25 PAT Finance cost PKR bn

Target Price Dec‐13 158 ‐

Source; Arif Habib Research

Engro Fertilizer is projected to contribute only 13% to company’sprofitability in CY13. In this regard, the growing food and energybusiness would support company’s bottomline with expectedlyincrease bottomline contribution of 42% and 24%, respectively, inCY13. Financial Highlights (PKR mn) CY11A CY12E CY13F

‐5

10

CY10A CY11A CY12E CY13F

RisksGas supply remains a threat. No resolution of this issue may further

impact company financials negatively.

Net Sales 114,612 120,270 123,467 Gross Profit 32,081 31,730 7,538 Other Income 2,057 1,453 1,605 Finance Cost 12,315 13,814 8,396 Profit after tax 7,811 2,279 7,538 EPS 20.5 4.5 14.7 DPS 6.0 ‐ 7.0 P/E 4 4 20 4 6 2While debt rescheduling is assumingly underway, biggest concern for

the company remains due to high leveraging (PKR 111bn total debt),

translating into a DE ratio of 2.7x as of Sep ‐12.

P/E 4.4 20.4 6.2 P/B 1.1 1.1 1.0 Div. Yield 6.6% 0.0% 7.7%ROE 18.6% 5.5% 15.6%ROA 4.3% 1.3% 4.2%Sources; Company accounts and Arif Habib Research

Regional Charm (Fertilizer)

35.0 Price to Earning 7 Price to Book(x) (x)

45

15.0

20.0

25.0

30.0

3

4

5

6

0.0

5.0

10.0

ENGRO FFBL FFC PA Equity

3983 HK Equity

TTCH IN Equity

SAFCO AB Equity

1722 TT Equity

0

1

2

ENGRO TTCH IN Equity

1722 TT Equity

3983 HK Equity

FFBL FFC PA Equity

SAFCO AB Equity

12%

14% Dividend Yield

Equity Equity Equity Equity Equity

70%

80%

90% Return on Equity

Equity Equity Equity Equity Equity

%age%age

4%

6%

8%

10%

20%

30%

40%

50%

60%

0%

2%

FFC PA Equity

FFBL ENGRO SAFCO AB Equity

3983 HK Equity

1722 TT Equity

TTCH IN Equity

0%

10%

20%

FFC PA Equity

SAFCO AB Equity

FFBL ENGRO 3983 HK Equity

TTCH IN Equity

1722 TT Equity

Textile Sector A stitch in time savesTextile Sector A stitch in time saves nine

46

Textile

Key drivers PKR Depreciation and Textile Exports

47

The recent commencement of the trade under the AutonomousTrade Preference (ATP) programs, and an upcoming GSP‐Plusstatus, is going to provide Pakistan products, mainly Textiles, moreaccess to EU, American and other high‐potential markets, which willincrease country’s exports sequentially. As per estimates, only ATP

27%

18%

39%

20%

30%

40%

50% PKR depreciation

Growth in textile exportsprogram would add an additional USD 540mn to country’s exports in

2013.

The depreciation in PKR/USD parity proves to be a blessing in disguisefor the Textile industry as it increases the revenue in local currency.We believe that 3.7% PKR devaluation so far in current fiscal year

6%2% 4%

10%

‐10%‐10%

0%

10%

20%

FY09 FY10 FY11 FY12

exports

against the greenback will be reflected positively in export statistics.

We believe raw cotton prices to remain in favor of the Textilemanufacturers in coming year. Global cotton prices remained in therange of US cents 79‐86 FY13TD, while China with massiveprocurement is contributing to maintain the floor.

‐20%

92%

80%

100%

Raw cotton prices and textile exports

Growth in

Risks

The sector is vulnerable to increasing energy crisis in the country.Increased power outages force manufactures to rely upon expensivealternates, making it difficult for them to compete in global markets.

18%10%

39%

10%

35%

20%

40%

60% textile exports

Growth in cotton prices

Hike in cotton prices is another risk for Textile companies asmanufacturers generally avoid taking int’l orders during such periods.As seen in graphs, an abnormal hike in cotton prices during FY11contributed towards 10% lower Textile exports during FY12.

‐10%

‐35%

‐60%

‐40%

‐20%

0%

FY09 FY10 FY11 FY12

Nishat Mills Limited (NML PA)Target Price (Dec‐13): PKR 86/share – Upside 35%Target Price (Dec 13): PKR 86/share Upside 35%

Investment CaseWe expect NML’s profit to jump by hefty 27% YoY to PKR


7%

Segment Information*

48

We expect NML s profit to jump by hefty 27% YoY to PKR

12.74/share in FY13, translating into an attractive P/E of 5x. Dividend

is also expected to continue the increasing trend and the scrip is

expected to yield 6% in FY13.

Steady demand from int’l markets coupled with favorable cotton

23%7%7%

Spinning

Weaving

Processing

Garmentsprices and depreciating PKR against USD will be the driving factors

behind 27% YoY expected increase in net profit after tax in FY13.

Activation of additional exports under the Autonomous Trade

Preference (ATP) programs can boost NML’s exports to lucrative US

and EU markets

28%

34%

Garments

*Including inter segment salesand EU markets.

Being a composite unit is another plus for NML as it can procure raw

material, like yarn and cloth (inter ‐segmental sales) on a timely

basis as well as at attractive prices.

Steady dividend income from Nishat Power Limited, D. G. Khan

*Including inter‐segment sales

Financial Highlights (PKR mn) FY12A FY13E FY14F

Net Sales 44,924 52,118 57,463

Gross Profit 6,789 8,516 9,125

Other Income 2,684 2,018 2,666

Cement Limited and MCB Bank Limited, will provide further support

to bottomline and cash‐flows of the Textile giant.

RisksRise in cotton prices can put pressure on company margins and

Finance Cost 1,761 1,728 1,785


EPS (PKR) 10.04 12.74 14.63

DPS (PKR) 3.5 3.7 4.0

P/E (x) 6.36 5.01 4.36

P/B (x) 0 59 0 51 0 47lower price competitiveness in the int’l markets.

Pakistan’s ineligibility to qualify for GSP‐Plus status can reduce

exports and thus will negatively impact our estimates for NML’s

valuation and profitability.

P/B (x) 0.59 0.51 0.47

Div. Yield 5% 6% 6%

ROE 10% 11% 11%

ROA 6% 7% 8%


Regional Charm (Textile)Regional Charm (Textile)

6

7%age Dividend Yield 12

(x) Price to Earning

49

3

4

5

6

8

10

0

1

2

0

2

4

NML PA INT TAIFENG HOLDING HK

SAHA UNION CORP TB

KOMATSU SEIREN CO JP

VARDHMAN TEXTILES IN


INT TAIFENG HOLDING HK

NML PA SAHA UNION CORP TB


20

25

30 %ageReturn on Equity

0.8

1(x)

Price to Book

10

15

20

0.4

0.6

0

5


NML PA SAHA UNION CORP TB



0

0.2

NML PA KOMATSU SEIREN CO JP


SAHA UNION CORP TB


Telecom Sector Anchoring theTelecom Sector Anchoring the connectivity revolution!

50

Telecom

Key Drivers Broadband Operators Markat Share

51

The continued trend of depreciation in PKR/USD parity entails a

positive impact on the revenues of the 9 Long Distance

International (LDI) operators in the country (PTCL holding a 50% of

the market share), who receive payments for incoming international

call traffic from foreign operators in USD

9%

4% 11%PTCL

Wateen

WorlCallcall traffic from foreign operators in USD.

The number of broadband internet subscribers has astonishingly

risen by 21% from December 2011 to August 2012, with a noted

increase in the EvDO wireless internet segment mostly.

h ( d ) d ll

58%

14%

10% WiTribe

Qubee

Others

The 3G (3rd Generation) spectrum auction expected next year, will

yield massive benefits to the telecom industry in terms of new

service lines with greater speeds & efficiency. The first market

movers in acquiring this spectrum are expected to benefit the most.132

161

140

160

MillionSubscriber's Forecast

Mobile

Source: PTA report Dec ‐11

RisksMarket players operating in the telecom and broadband Industry

must lure customers with lower prices & more exciting services, this

tends to drive industry profitability down.

120

40

60

80

100

120

140

WLL & FLL

Broadband

Political instability (due to the upcoming elections & a temporary

caretaker government setup) and disagreements amongst different

government institutions are threatening to derail and further delay

the highly anticipated 3G spectrum auction process.

5.97 3.96 5.362.1712

19.5

0

20

40

2012 2015 2020

Pak Telecom Company Limited (PTC PA)Target Price (Dec‐13): PKR 28/share – Upside 63%Target Price (Dec 13): PKR 28/share Upside 63%

Investment Case

I l ti ti t h d th i t’l i i

Closing: PKR 17.35, Total Shares: 5,100mn, Market Cap: USD 910mn, Free Float: 16%, Avg. Daily Turnover: 6.7mn

PTC Sensitivity to LDI Margins PKR

52

In our valuation estimates, we have assumed the int’l incomingminutes to decline by a massive 50% in FY13 on account of boostedmargins for the telecom operators amid massively increased rates.

Going forward, we have assumed 30% decline in LDI inflows becauseof deformation of the ICH arrangement that will attract competition

PTC Sensitivity to LDI Margins PKR

Margins in US cents/min 5.8 4.8 3.8 2.8

FY13 EPS 1.78 1.46 1.13 0.80

FY14 EPS 3.80 3.45 3.10 2.88

Target Price 28.3 25.8 23.3 20.7 Source: Company accounts and Arif Habib Research estimatesg p

for LDI operators.

Despite dissolution of the ICH, PTCL will remain the main beneficiaryof this new int’l incoming calls’ setup as it is expected to hold 50% ofLDI market share, which also constitutes 15% of its total revenues.

Financial Highlights (PKR mn) FY12A FY13E FY14F

Net Sales 110,793 124,419 134,568

The overall EVDO subscriber‐base (a product offered by PTC andWorldcall Telecom only) has shown massive growth of 38% fromDec‐11 to Aug‐12, making further room for new PTC subscribers.

We expect PTC dividends to improve with gradual rise inprofitability

Gross Profit 38,589 47,873 52,737

GP Margin 35% 38% 39%

Other Income 4,619 5,880 6,894

Finance Cost 3,305 3,429 3,508

Profit after tax 11,438 9,081 19,373 profitability.

Risks

Continued competition by other operators in the broadband andwireless telephone segment poses a threat to PTCL’s customer base

h h i h b h

EPS (PKR) 2.24 1.78 3.80

DPS (PKR) ‐ 1.50 2.25

P/E (x) 7.74 9.74 4.57

P/B (x) 0.74 0.73 0.69

Div. Yield 0% 9% 13%even though it has a better coverage across the country.

Greater than expected competition will force the LDI operators tobring down int’l call termination rates in coming years, which willnegatively reflect on PTC’s financials.

ROE 10% 8% 16%

ROA 5% 4% 8%


Regional Charm (Telecom)g ( )

30(x) Price to Earning

8(x)

Price to Book

53

15

20

25

30

4

5

6

7

8

0

5

10

PTC PA EXCL IJ 728 HK SLTL SL MAXIS MK TPM AU BHARTI IN 0

1

2

3

4

PTC PA EXCL IJ 728 HK SLTL SL MAXIS MK TPM AU BHARTI IN PTC PA 728 HK SLTL SL BHARTI IN EXCL IJ TPM AU MAXIS MK

30%

35%

%ageReturn on Equity

8%9%

10%%age Dividend Yield

10%

15%

20%

25%

3%4%5%6%7%8%

0%

5%

MAXIS MK EXCL IJ TPM AU PTC PA BHARTI IN SLTL SL 728 HK

0%1%2%

PTC PA MAXIS MK TPM AU EXCL IJ 728 HK SLTL SL BHARTI IN

OMC Sector Rush at the Pump!OMC Sector Rush at the Pump!54

Oil Marketing

Key Drivers Pakistan Oil Consumption; FO and MS Leading the Waymnton

55

Oil consumption (excluding non‐energy) is expected to post a 4% YoYvolumetric growth to 19.4mn tons in FY13, mainly on account ofstrong Motor Spirit (MS) and Furnace Oil (FO) volumes, while Dieselsale is anticipated to remain a dragger for overall oil consumption.

Frequent suspension of CNG coupled with import restrictions on CNG15

20

25 FO LDOHSD JPKERO MS

mnton

q p p pcylinders and kits have created a strong substitution effect for MS.We expect MS sales to jump by a bulky 18% YoY to 3.2mn tons inFY13.

With elections around the corner, the gov’t is expected to improve on ‐

5

10

FY11 FY12 FY13 FY14power cuts in the country leading to a 3% YoY growth in FO demand.

Increased use of CNG in public transport has dropped HSDconsumption by 6% in 5MFY13. However, we expect demand torecover to some extend with full‐year consumption to stand at 6.6mntons restricting decline to only 3% YoY.

FY11 FY12 FY13 FY14

Crude Oil Price and Margins Sensitivity Crude Oil

Margins up PKR 0 5/ltrg y

Strong oil pricing is anticipated to keep deregulated products’margins buoyant.

As demanded by OMCs, any margin increase in retail fuel segmentwould improve the profitability of OMCs to a great extent.

Sensitivity Crude Oil 0.5/ltr

PKR per share On USD +‐5/bbl HSD MS

PSO 3.0 7.4 3.6

APL 1.4 4.1 1.4

RisksDrop in oil prices would curtail margins on deregulated products aswell as result in massive inventory losses.Intensity of Circular Debt would pose a liquidity risk for the OMCs.

Source; Arif Habib Research

Pakistan State Oil Company Limited(PSO PA)Target Price (Dec‐13): PKR 285/share – BuyTarget Price (Dec‐13): PKR 285/share – Buy


Investment Case

D d i k il i h l h il d d d f lli fiDeclining Receivables and Payables pushing Penal Interest down

56

Downwards sticky oil prices, healthy oil demand and falling finance

cost are all expected to yield a massive 53% YoY earnings growth in

PSO’s bottomline in FY13.

Being the largest player in FO and MS (Petro) segments, having 52% 8

10

12

14

150

200

250

300Receivables (LHS) Payables (LHS)

Finance Cost (RHS) Other income (RHS)

PKR bn PKR bn

and ~80% market share, respectively, PSO will benefit the most out

of demand revival in these two segments.

Finance cost of the company is expected to drop by a substantial

42% YoY in FY13 mainly on account of declining payables to0

2

4

6

0

50

100

150

FY11 FY12 FY13 FY14refineries alongside interest rate cuts.

To tackle the chronicle issue of Circular Debt, the gov’t is planning to

raise PKR 320bn, which will positive for the entire energy chain in

general, and PSO in particular.

Financial Highlights (PKRmn) FY12A FY13E FY14FNet Sales 1,024,424 1,285,880 1,370,449Gross Profit 34,323 38,749 38,791Oth I 9 685 6 239 6 167

FY11 FY12 FY13 FY14

g , p

Risks

Decline/increase in oil prices as every USD5/bbl change impacts 4%

on the bottomline of the company either way.

Other Income 9,685 6,239 6,167 Finance Cost 11,659 6,783 4,821 Profit after tax 9,056 13,842 14,786EPS (PKR) 44.01 67.26 71.85 DPS (PKR) 5.50 8.00 10.00 P/E (x) 5.3 3.4 3.2 P/B ( ) 1 0 0 8 0 6

Political pressures to supply FO on credit to the Power sector may

intensify Circular Debt of which PSO has been the main victim so far.

P/B (x) 1.0 0.8 0.6 Div. Yield 2% 3% 4%ROE 20% 25% 21%ROA 3% 5% 6%Sources; Company accounts and Arif Habib Research

Regional Charm (OMCs)g ( )

25 00

Price to Earning

10 00

Price to Book

57

15.00

20.00

25.00

5.00

6.00

7.00

8.00

9.00

10.00

0.00

5.00

10.00

0.00

1.00

2.00

3.00

4.00

5.00

PSO PA 018670 KS 8097 JP APL PA PNX PM BCP TB SOMS OM 8097 JP PSO PA 018670 KS BCP TB PNX PM APL PA SOMS OM

40%

45%

Return on Equity

10%

12%

Dividend Yield

15%

20%

25%

30%

35%

4%

6%

8%

10%

0%

5%

10%

SOMS OM APL PA PSO PA PNX PM 018670 KS BCP TB 8097 JP

0%

2%

APL PA SOMS OM BCP TB 8097 JP PSO PA 018670 KS PNX PM

Banking Sector Y ‘b k’ it!Banking Sector You can ‘bank’ on it!58

Banks

Key Drivers

k ’ b h d b h7,000 00

0 Deposits Advances Investments

59

Banks’ Deposit base in CY12TD has augmented by 10.9%. WithPLS rate unlikely to be reduced from 6% in the nearfuture, deposits in CY13 are expected to grow by an average14.5% YoY.

With possible reversal in the policy rate during 2HFY13, banks’declining spreads will take a breather and will support margins 2 000

3,000

4,000

5,000

6,000

PKR

declining spreads will take a breather and will support margins.

Advances have grown by 8.6% to PKR 3.8tr mainly due to loans topower sector. And, if policy rate is further remains between 9‐9.5% in CY13, we project advances to grow by average 6.7% YoY.

ADR stood around 58.2% by end of Nov‐12 compared to 62% in

‐

1,000

2,000

Jan'

12

Feb'

12

Mar

'12

Apr

'12

May

'12

Jun'

12

Jul'1

2

Aug

'12

Sep'

12

Oct

'12

Nov

'12

the same period last year. IDR on the other hand, has jumpedfrom approximately to 58.1% from 54.7%. In CY13, the focus isagain expected towards investing rather than lending out due tohigher PLS and lower lending rates, respectively.

A spree of M&As in the sector still cannot be ruled out amid risingb d f i i i l i (MCR) 4%

5%

6%

7%

8% Banking Spreads in Asian Region

burden of minimum capital requirement (MCR) .

Risks

Banking spreads shrank to 6.67% amid back‐to‐back policy ratecuts while continuity of the same will reduce spreads further. 0%

1%

2%

3%

4%

n a a h a d s a

Continuity of the minimum rate requirement on PLS a/c of 6%irrespective of policy rate cuts will further reduce banks NIMs.

SBP’s revised minimum capital requirement of PKR10bn in aphased manner up till CY13 (CY12 limited is PKR 8bn), banks notmeeting this requirement will be subject to penalty by the SBP.

Paki

stan

Indi

a

Chin

a

Bang

lade

sh

Sri L

anka

Thai

land

Phili

ppin

e

Indo

nesi

a

Bank Alfalah Limited (BAFL PA)Target Price (Dec‐13): PKR 27 6/share – Upside 64%Target Price (Dec 13): PKR 27.6/share Upside 64%

Investment Case

BAFL i d i ifi i h f 18%


5.5%7 PKREPS(LHS) NIMs(RHS)

60

BAFL is expected to post a significant net earnings growth of 18%

YoY in CY12 and a massive 42% YoY in CY14. We expect the bank

to announce a dividend of PKR 1.75/share and PKR 2.0/share in

CY13 and CY14, respectively.

M i d i f th b k’ b tt li th ld b t d

4.5%

5.0%

4

5

6

Main driver of the bank’s bottomline growth would be expectedincrease in bank’s net interest income by 15.8% YoY.

Total provisioning against NPLs is expected to increase by 12%YoY, to improve bank’s coverage ratio and thus asset quality.

Advances and Investments to grow 13% YoY (due to lower 3 0%

3.5%

4.0%

0

1

2

3

Advances and Investments to grow 13% YoY (due to lowerdiscount rate) and 9.4% YoY, respectively.

Intends to introduce more higher‐yielding branchlessproducts, going forward.

Ri k

Financial Highlights (PKR bn) CY11A CY12F CY13F

Net Interest Margins (%) 5 09% 4 61% 4 65%

3.0%0

CY09 CY10 CY11 CY12F CY13F CY14F

Risks

Any faster‐than expected deterioration in the overall economywill increase sector NPLs, while BAFL’s coverage ratio is alsoexpected to take effect of 0.5% YoY (CY13E: 68.82%).

S d d h b k’ NIM h i k f h h b k f

Net Interest Margins (%) 5.09% 4.61% 4.65%

Net Profit 3.50 4.97 6.52

ROE (%) 14.6% 18.3% 21.4%

EPS (PKR) 2.60 3.68 4.84

P/E (x) 6.48 4.57 3.48

P/B (x) 0.88 0.80 0.70 Spreads and thus bank’s NIMs may shrink further on the back ofany further cut in discount rate by the central bank.

P/ (x) 0.88 0.80 0.70

DPS (PKR) 1.75 1.75 2.00

Div Yield (%) 10.4% 10.4% 11.9%

Source: Company account, Arif Habib Research

National Bank of Pakistan (NBP PA)Target Price (Dec‐13): PKR 68 5/share – Upside 39%Target Price (Dec 13): PKR 68.5/share Upside 39%

Investment Case

With 75% government holding in NBP the bank acts as the


5 7%

5.8%

16

18 PKR EPS(LHS) NIMs(RHS)

61

With 75% government holding in NBP, the bank acts as thegovernment’s Treasurer and holds most of the liquidity and low‐cost Current Account‐Savings Account (CASA) category containinghuge salaried accounts of the gov’t employees (mostly on thezero‐rate current account side), which continues to support bank’smargins to a great extent despite interest rate cuts. 5.3%

5.4%

5.5%

5.6%

5.7%

8

10

12

14

16

margins to a great extent despite interest rate cuts.

Largest deposit holder in the country with PKR 1,242bn depositsas of Dec‐13 and second largest branch network of 1,300branches (CY11) to provide more leverage against peers.

Extensive focus towards improving non‐funded income which is 4.9%

5.0%

5.1%

5.2%

0

2

4

6

p gexpected to be PKR 8bn in CY13E to drive earnings growth.

NBP maintains sizeable investments in capital market, which isexpected to result in substantial gains in CY12 as equity markethas returned 49% in CY12, thereby providing boost to otherincome of the bank


Net Interest Income 5.59% 5.38% 5.18%


income of the bank.

One of the highest dividend‐yielding banks (CY12E: 15.1%).

Risks

Any faster‐than expected deterioration in the overall economy

Net Profit 17.60 20.97 24.70

ROE (%) 13.6% 14.4% 15.5%

EPS (PKR) 9.52 11.34 13.35

P/E (x) 5.19 4.36 3.70

P/B (x) 0.69 0.62 0.58 Any faster than expected deterioration in the overall economywill increase sector NPLs, and for Public banks in particular, whereNBP may contribute significant amount to the category.

Continuity in interest rate cut will impact NIMs to certain extentfor the bank.

P/ (x) 0.69 0.6 0.58

DPS (PKR) 7.50 7.50 7.50

Div Yield (%) 15.1% 15.1% 15.1%

Source: Company accounts, Arif Habib Research

United Bank Limited (UBL PA)Target Price (Dec‐13): PKR 114/share – Upside 36%Target Price (Dec 13): PKR 114/share Upside 36%

Investment Case

B k’ CASA i d i 68 1% f CY11’ 67 93%

Closing: PKR 83.67, Total Shares: 1349mn, Market Cap: USD 1,054mn, Free Float: 25%, Avg. Daily Turnover: 0.97mn shares

6%25

PKREPS(LHS) NIMs(RHS)

62

Bank’s CASA is expected to improve to 68.1% from CY11’s 67.93%

on account of high portion of low cost of deposits (to neutralize

implications of high mandatory deposit rates)

The net interest income is expected to increase 8.3% YoY during

h h l h l d h b k

5%

5%

6%

6%

15

20

the year while other income is also expected to grow on the back

of massive gains on equity market portfolio during CY12.

Advances (due to lower discount rate) and investments to grow13% YoY and 12% YoY, respectively.

4%

4%

5%

5%

5%

0

5

10

Profitability, through other income, to go up next year due to

growing remittances business due to ever‐going branchless

banking (via branchless product like Omni).

UBL is expected to post net earnings growth of 22% YoY in CY12


Net Interest Margins 5.81% 5.05% 4.85%

Net Profit 15.50 18.91 20.30


(EPS: PKR 15.45). We expect the bank to declare a cash dividend

of PKR 8/share in CY12.

Risks

A f h d d i i i h ll

ROE (%) 21.0% 22.5% 21.4%

EPS (PKR) 12.66 15.45 16.58

P/E (x) 6.61 5.42 5.25

P/B (x) 1.29 1.16 1.01

DPS (PKR) 7.50 8.00 8.00 Any faster‐than expected deterioration in the overall economyshould increase sector NPLs.

Spreads and thus bank’s NIMs may shrink further should thecentral bank continue with its easing stance going forward.

Div Yield (%) 8.9% 9.5% 9.5%

Source: Company, Arif Habib Research

Regional Charm (Banks)g ( )

3%

Return on Assets

4

Price to Book

63

2%

2%

3%

2

3

3

4

4

0%

1%

1%

0

1

1

2

2

KMB IN NBP PA UBL PA NBAD UH BAFL PA BAC US 8604 JP BAC US NBP PA BAFL PA 8604 JP UBL PA NBAD UH KMB IN

20%

25%Return on Equity

14%

16%Dividend Yield

10%

15%

20%

6%

8%

10%

12%

0%

5%

BAFL PA UBL PA NBP PA KMB IN NBAD UH 8604 JP BAC US

0%

2%

4%

NBP PA BAFL PA UBL PA NBAD UH 8604 JP BAC US KMB IN

Auto Sector Few speed‐breakersAuto Sector Few speed breakers ahead!

64

Automobile

Key Drivers Imports HCAR PSMC INDU

Car Sales; Dropping at 10% CAGR (FY12‐14)

000' units

65

After witnessing a massive decline of 15% in FY13TD, sales from localAuto assemblers is expected to improve by 5% in FY14, as influx ofimported cars is anticipated to slowdown after government’s recentdecision of reducing age limit of imported cars to three years. 150

200

250 p C SMC N U

Local industry’s pricing power has once again restored with theplacement of the mandatory limits on imported cars (3 years old only).

With ever‐rising remittances in the country, up 14.2% YoY in 5MFY13(a total of USD14.9bn expected by FY13 end) declining interest rates

-

50

100

FY11A FY12A FY13E FY14F( p y ) g(rising car financing) and increase in Wheat support price by thegov’t, should all translate into higher demand for Autos going forward.

Both the currencies i.e. PKR and JPY depreciated against USD by 8.3%and 8.9% respectively, in 2012, that would nullify the impact of PKRd h b l h l l h b 160

180200

Industry Sales

Cars

000' units

depreciation against the USD by a slightly larger portion, therebyrelatively benefiting the local Auto assemblers.

Risks

Competition from imported cars not only hurts local Auto industry’sl b t l k i i f th d ti

6080

100120140160

Jeeps

Pick ups

sales but also weakens pricing power of the domesticAssemblers, which squeezes industry margins.

PKR depreciation against USD and JPY’s appreciation against USDsimultaneously may hurt local industry’s margins.

02040


Total

Indus Motors Ltd (INDU PA)Target Price (Dec‐13 ): PKR 319/share – Upside 18%

Investment Case

I i i li i f J ld b i i

Closing: PKR 270, Total Shares: 78.6mn, Market Cap: USD 218mn, Free Float: 25%, Avg. Daily Turnover: 0.01mn shares

Target Price (Dec‐13 ): PKR 319/share – Upside 18%

Sales volume break‐up (k units)

66

Import restriction on age‐limit of Japanese cars would be positive

and would help in lifting company volumetric sales ahead.

Strong pricing power of the company due to having well‐recognized

brands in its portfolio with strong brand equity (66% and 28%

h f ll d l30

40

50 Corolla

Coure

increase in the prices of Corolla and Hilux

variants, respectively, since 2007, mainly on account of PKR

depreciation).

Growing demand of rebranded Hilux, and expected boost in its0

10

20Hilux

Total

sales in the upcoming elections should provide support to

company’s bottomline. High customization in Corolla (add‐ons e.g.

Navigation, DVD and back view camera) to fetch more volumes.

SUV ‘Toyota Fortuner’, a new product, is expected to be launched

FY06 FY07 FY08 FY09 FY10 FY11 FY12


Gross Profit 6,562 5,926 6,362

Other Income 1,773 1,097 1,059 in March‐13, providing further impetus to the company bottomline.

Risks

Influx of imported cars (around 47% of total imported cars in FY12were 1,300cc and above, directly affected Corolla sales).



EPS 54.74 43.15 45.09

DPS 32.00 21.88 24.61

P/E 4.9 6.3 6.0

P/B 1 2 1 1 1 0

After discontinuation of Coure, no economy class product tocapture lower and middle class segment.

Other income (comprises about 41% of FY12 earnings) to remaindepressed due to lower advances and returns on bank deposits.

P/B 1.2 1.1 1.0

Div. Yield 11.9% 8.1% 9.1%

ROE 25% 18% 16%

ROA 16% 12% 11%

Sources: Company accounts and Arif Habib Research

Regional Charm (Autos)Regional Charm (Autos)

12Price to Earning

3 00Price to Book

(x) (x)

67

6

8

10

12

1.50

2.00

2.50

3.00

‐

2

4

693 HK PSMC PA INDU PA STC SP NHF MK 600335 IMPL IN‐

0.50

1.00

7%

8%

9%Dividend Yield

693 HK Equity

PSMC PA Equity

INDU PA Equity

STC SP Equity

NHF MK Equity

600335 CH Equity

IMPL IN Equity

PSMC PA Equity

NHF MK Equity

693 HK Equity

STC SP Equity

INDU PA Equity

IMPL IN Equity

600335 CH Equity

30%

35%Return on Equity

%age %age

2%

3%

4%

5%

6%

10%

15%

20%

25%

0%

1%

2%

INDU PA Equity

NHF MK Equity

STC SP Equity

693 HK Equity

PSMC PA Equity

IMPL IN Equity

600335 CH Equity

0%

5%

600335 CH Equity

IMPL IN Equity

INDU PA Equity

693 HK Equity

STC SP Equity

NHF MK Equity

PSMC PA Equity

68


Arif Habib Research Valuation Guide

Symbol Closing

PriceTP Upside Stance

OS (mn)

EPS DPS P/E Div. Yield P/B ROE2011‐12 2012‐13 2013‐14 2011‐12 2012‐13 2013‐14 2012‐13 2013‐14 2012‐13 2013‐14 2012‐13 2013‐14 2011‐12 2012‐13

ACPL 100 104 4% Hold 100 14.43 19.53 16.85 8.50 10.00 10.00 5.11 5.92 10.0% 10.0% 1.50 1.31 23.1% 27.3%

69

APL 512 559 9% Hold 69 59.61 68.69 71.89 45.00 50.00 55.00 7.45 7.12 9.8% 10.7% 2.86 2.58 34.4% 36.4%BAFL 16.8 28 64% Buy 1349 2.60 3.68 4.84 1.75 1.75 2.00 4.57 3.48 10.4% 11.9% 0.73 0.63 17.4% 19.4%DGKC 55 75 37% Buy 438 9.38 11.74 10.64 1.50 3.00 3.00 4.65 5.13 5.5% 5.5% 0.73 0.64 13.0% 14.6%ENGRO** 92 158 72% Buy 511 15.28 4.46 15.57 6.00 ‐ 7.00 20.64 5.91 0.0% 7.6% 1.13 0.98 5.5% 17.7%EPCL** 10.1 10.4 2% Hold 663 (1.06) 0.15 0.24 ‐ ‐ ‐ ‐ 42.24 0.0% 0.0% 1.06 1.03 ‐10.7% 1.6%FCCL 6.5 11.5 76% Buy 1331 0.28 1.77 1.87 ‐ ‐ ‐ 3.70 3.50 0.0% 0.0% 0.63 0.53 3.0% 15.5%FFBL 39 45 17% Buy 934 11.53 4.28 6.13 10.00 3.70 5.50 9.02 6.30 9.6% 14.3% 2.57 2.47 28.9% 40.0%FFC 117 136 16% Buy 1272 17.68 16.38 15.66 20.00 15.80 14.90 7.15 7.48 13.5% 12.7% 6.59 6.31 91.2% 86.1%HUBC 45 63 38% Buy 1157 7.08 7.19 7.24 6.00 7.00 7.00 6.29 6.25 15.5% 15.5% 1.70 1.64 27.2% 26.5%INDU 270 319 18% Buy 79 54.74 43.15 45.09 15.00 32.00 21.00 6.26 5.99 11.9% 7.8% 1.25 1.10 27.6% 18.7%KAPCO 49 60 22% Buy 880 6.90 7.95 8.55 6.90 7.20 7.90 6.21 5.78 14.6% 16.0% 1.84 1.79 25.5% 29.2%KOHC 70.6 125 77% Buy 129 12.90 20.15 18.70 3.00 6.00 6.00 3.50 3.78 8.5% 8.5% 2.42 1.52 56.7% 53.4%LOTPTA** 7.4 8.6 17% Buy 1514 2.76 (0.28) 0.46 0.50 ‐ 0.50 ‐ 15.93 0.0% 6.8% 0.88 0.86 36.8% ‐3.3%LUCK 152 213 40% Buy 323 20.97 30.25 29.03 4.00 6.00 6.00 5.01 5.22 4.0% 4.0% 1.47 1.19 22.2% 26.3%MCB 210 238 14% Hold 920 21.12 23.81 23.89 12.00 13.00 14.00 8.81 8.78 6.2% 6.7% 1.88 1.71 22.9% 20.4%MEBL 30 31 4% Hold 903 3.75 4.23 4.71 1.00 1.50 2.00 7.11 6.38 5.0% 6.7% 1.52 1.31 24.2% 22.1%NBP 49 68 39% Buy 1850 9.52 11.34 13.35 7.50 7.50 7.50 4.36 3.70 15.2% 15.2% 0.60 0.58 14.7% 15.9%NCPL 21 25 20% Buy 367 5.51 6.69 7.07 3.50 4.00 4.50 3.14 2.97 19.0% 21.4% 1.29 1.10 37.2% 37.8%NML 64 86 35% Buy 352 10.03 12.74 14.63 3.50 3.70 4.00 5.01 4.36 5.8% 6.3% 0.59 0.51 9.6% 10.9%NPL 20 24 23% Buy 354 5.75 6.21 7.17 2.00 3.00 4.00 3.14 2.72 15.4% 20.5% 0.96 0.83 32.1% 28.4%OGDC 193 210 9% Hold 4301 22.53 23.10 24.30 7.25 7.50 7.50 8.34 7.93 3.9% 3.9% 2.72 2.20 41.2% 34.7%POL 438 499 14% Hold 237 50.11 61.44 69.80 52.50 55.00 60.00 7.12 6.27 12.6% 13.7% 2.56 2.42 34.5% 38.4%PPL Coverage RestrictedPSMC 88 101 16% Buy 82 9.65 16.09 11.71 2.00 4.00 2.00 5.45 7.48 4.6% 2.3% 0.42 0.40 5.3% 8.2%PSO 232 285 23% Buy 206 44 00 67 24 71 79 5 50 8 00 10 00 3 45 3 23 3 4% 4 3% 0 96 0 76 19 7% 24 6%PSO 232 285 23% Buy 206 44.00 67.24 71.79 5.50 8.00 10.00 3.45 3.23 3.4% 4.3% 0.96 0.76 19.7% 24.6%PTC 17.4 28.3 63% Buy 5100 2.24 1.78 3.80 ‐ 1.50 2.25 9.74 4.57 8.6% 13.0% 0.74 0.73 10.1% 7.6%SNGP 23 27 17% Buy 576 1.95 2.53 2.70 1.00 1.50 1.50 9.21 8.61 6.5% 6.5% 0.70 0.67 5.9% 7.4%UBL 84 113 35% Buy 1224 12.66 15.45 15.93 7.50 8.00 8.00 5.42 5.25 9.6% 9.6% 1.16 1.04 22.5% 20.8%

*Closing price as of Dec 31 , 2012, **Earnings on consolidated basis

Notes70

Notes71

Disclaimer

Analyst certification: The analysts for this report certify that all of the views expressed in this report accurately reflect their personal views about the subjectcompanies and their securities, and no part of the analysts’ compensation was, is or will be, directly or indirectly related to specific recommendations or viewsexpressed in this report

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expressed in this report.

Disclosures and disclaimer : This document has been prepared by investment analysts at Arif Habib Limited (AHL). AHL investment analysts occasionally provideresearch input to the company’s Corporate Finance and Advisory Department.

This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for distribution to current andpotential clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities. Theinformation contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy andp p y y yobjectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In particular, the report takes no account of theinvestment objectives, financial situation and particular needs of investors. The information given in this document is as of the date of this report and there can beno assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves theright to make modifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or keep theinformation current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information inresponse to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not

d d b d l b k h b f d h h k f d f h f hintended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Eachrecipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities ofcompanies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks ofsuch investment. AHL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent errorin the information contained in this report. We and our affiliates, officers, directors, and employees may: (a) from time to time, have long or short positions in, andbuy or sell the securities thereof, company (is) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or othercompensation or act as advisor to such company (is) or have other potential conflict or interest with respect to any recommendation and related information andcompensation or act as advisor to such company (is) or have other potential conflict or interest with respect to any recommendation and related information andopinions. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated asendorsement of the views expressed in the report. AHL generally prohibits it analysis, persons reporting to analysts and their family members from maintaining afinancial interest in the securities that the analyst covers.

Arif Habib Research’s coverage excludes Fatima Fertilizer Company Limited (FATIMA), an Arif Habib Group company, while Pakistan Petroleum Limited’s (PPL)coverage has been put on the restricted list due to Corporate Financial Advisory Mandate.

© 2013 Arif Habib Limited: Corporate Member of the Karachi, Lahore and Islamabad Stock Exchanges and Pakistan Mercantile Exchange Limited. No part of thispublication may be copied, reproduced, stored or disseminated in any form or by any means without the prior written consent of Arif Habib Limited.

AnnexureList of Abbreviation

3G 3rd Generation FSV Forced Sale Value MPS Monetary Policy Statement PTI Pakistan Tehreek‐e‐Insaf4G 4th Generation FX/Forex Foreign Exchange MQM Muttahida Quami Movement QoQ Quarter on QuarterA/C Account FY Fiscal Year MS Motor Spirit RDF Refused Derive FuelADB Asian Development Bank G2P Government to Person MSCI Morgan Stanley Composite Index RGST Reformed General Sales Tax

73

ADB Asian Development Bank G2P Government to Person MSCI Morgan Stanley Composite Index RGST Reformed General Sales TaxADR Advance to Deposit Ratio GDC Gas Distribution Companies MT Metric Ton ROA Return on AssetsAL Arab Light GDP Gross Domestic Product MTS Margin Trading System ROE Return on EquityANP Awami National Party GDS Gas Development Surcharge MW Mega Watt RPPs Rental Power ProjectsAPMDA All Pakistan Motors Dealer Association GENCO Generation Companies NDA Net Domestic Assets SBA Standby AgreementBN Billion GM Gross Margin NFA Net Foreign Assets SBP State Bank of PakistanBOP Balance of Payments GoP Government of Pakistan NFC National Finance Commission SCRA Special Convertible Rupee AccountBPD Barrel per day Gov't Government NFDC National Fertilizer Development Centre SECP Securities Exchange Commission of PakistanBPS Basis Points GRM Gross Refinery Margin NFML National Fertilizer Marketing Limited SLR Statuary Liquidity RequirementBTU British Thermal Unit HOBC High Octane Blended Component NII Net Interest Income SME Small Medium EnterprisesBV Book Value HoH Half on Half NIMs Net Interest Margins SR Sharpe RatioCAD Current Account Deficit HSD High Speed Diesel NPL Non Performing Loan STA Single Treasury AccountCAGR Compound Average Growth Rate IDR Investment to Deposit Ratio NSS National Saving Scheme TBILL Treasury BillCAR Capital Adequacy Ratio IFEM Inland Freight Equalization Margin NTB Non‐Tariff Barriers TDF Tyre Derived FuelCFY Cashflow Yield IFI International Financial Institutions NTDC National Transmission and Dispatch Company TI Transparency InternationalCNG Compressed Natural Gas IMF International Monetary Fund OCAC Oil Companies Advisory Committee TRN TrillionCPI Consumer Price Index Int'l International OGRA Oil and Gas Regulatory Authority USD United States DollarCRR Cash Reserve Requirement IPI Iran Pakistan India OMC Oil Marketing Company WAPDA Water and Power Development AuthorityCRR Cash Reserve Requirement IPI Iran‐Pakistan‐India OMC Oil Marketing Company WAPDA Water and Power Development AuthorityCSF Collation Support Fund IPO Initial Public Offering PAAPAM Pakistan Association of Automotive Parts Accessories Manufacturers WHR Waste Heat RecoveryCY Calendar Year IPP Independent Power Producer PAMA Pakistan Automotive Manufacturers Association WTI West Texas IntermediariesCYTD Calendar Year to date IPS Investor Portfolio Securities PAT Profit After Tax YoY Year on YearDAP Di‐ammonium Phosphate JUI Jamiat Ulema Islam PB Price to Book YR YearDEP Depreciation Kero Kerosene Oil PCF Price to Cash Flow YTD Year to dateDHDS Diesel Hydro Desulphurization KIBOR Karachi Interbank Offered Rate PEG Price‐Earnings to GrowthDPS Dividend per share KPD Kunnar Pasaki Deep PEPCO Pakistan Electric Power CompanyDR Discount rate KSE Karachi Stock Exchange PER Price to Earning Ratiog gDSC Defence Savings Certificates LDI Long Distance International PIB Pakistan Investment BondDY Dividend Yield LDO Light Diesel Oil PKR Pakistan RupeesE&P Exploration & Production LIBOR London Interbank Offered Rate PL Petroleum LevyEBIT Earning before interests & taxes LIPI Local Investor Portfolio Investment PLS Profit and Loss SharingEBITDA Earning before interest, taxes, depreciation & amortization LPG Liquified Petroleum Gas PML Pakistan Muslim LeagueEGrow Earnings Growth LSM Large Scale Manufacturing PML‐N Pakistan Muslim League (Nawaz)EM Emerging Market LTE Long Term Evolution POL Petroleum Oil LubricantsEPS Earning per share M&A Merger & Acquisition PP Petroleum PolicyEV Enterpise Value MCR Minimum Capital Requirement PPIB Private Power Infrastructure BoardEY Earning Yield MEG Ethylene Glycole PPIS Pakistan Petroleum Information ServiceFC Factor cost MFN Most Favoured Nation PPP Pakistan People PartyFIPI Foreign Investor Portfolio Investment MMCFD Millions of cubic feet per day PPS Percentage PointsFM Frontier Market MN Million PSDP Public Sector Development ProgramFMCG Fast Moving Consumer Goods MOGAS Motor Gasoline PSE Public Sector EnterpriseFO Furnace Oil MoU Memorandum of Understanding PSF Polyester Staple FibreFOB Freight on Board MP Market Price PTA Purified Terephtalic Acid

AnnexureKey Data Source

74

APCMA All Pakistan Cement Manufacturing AssociationAPMDA All Pakistan Motor Dealers AssociationAPTMA All Pakistan Textile Manufacturers Association

Annual planADB Asian Development Bank Report

BloombergBudget DocumentsEconomic SurveyGallup PakistanGovernment of Punjab Agricultural DepartmentGovernment of Sindh Agricultural Department

IMF International Monetary FundIFS International Financial StatisticsKCA Karachi Cotton AssociationNEPRA National Eletric Regulatory AuthorityNFDC National Fertilizer Development CentreOECD Organization of Economic Committee Development ReportOGRA Oil and Gas Regulatory Authority

l dOCAC Oil Companies Advisory CommitteePAAPAM Pakistan Association of Automotive Parts Accessories ManufacturersPAMA Pakistan Automotive Manufacturers AssociationPBS Pakistan Beareu of StatisticsPTA Pakistan Telecommunication AuthoritySBP State Bank of Pakistan

W ld B k D t bWorld Bank DatabaseWDI World Development Indicators

Contact

Equities Research Designation Email Telephone

Khurram Schehzad Head of Research k shehzad@arifhabibltd com +92 21 3246 0742

75

Khurram Schehzad Head of Research [email protected] +92‐21‐3246‐0742

Syed Abid Ali Assistant Vice President [email protected] +92‐2132460717‐19 Ext : 211

Sana Tawfik Investment Analyst [email protected] +92‐2132460717‐19 Ext : 248

Tahir Abbas Investment Analyst [email protected] +92‐2132460717‐19 Ext : 248

Taseer Abbas Investment Analyst [email protected] +92‐2132460717‐19 Ext : 248

Ovais Shakir Database Officer ovais shakir@arifhabibltd com +92‐2132460717‐19 Ext : 211Ovais Shakir Database Officer [email protected] +92 2132460717 19 Ext : 211

Domestic sales Designation Email Telephone

Mohammed Imran, CFA, ACCA Head of Equity Sales [email protected] +92‐21‐3246‐2596

M. Yousuf Ahmed Senior Vice President [email protected] +92‐21‐3242‐7050

Farhan Mansoori Vice President [email protected] +92‐21‐3242‐9644

Syed Farhan Karim Vice President [email protected] +92‐21‐3244‐6255y @

Afshan Aamir Vice President [email protected] +92‐21‐3244‐6256

Faraz Naqvi Assistant Vice President [email protected] +92‐21‐3244‐6254

Furqan Aslam Assistant Vice President [email protected] +92‐21‐3240‐1932

Azhar Javaid Manager Corporate Sale [email protected] +92‐21‐3246‐8312

International Sales Designation Email Telephone

Adnan Katchi Head of International Sales [email protected] +92‐21‐3246‐0743

Money Market & FX Designation Email Telephone

Zilley Askari Head of Treasury [email protected] +92‐21‐3240‐0223

Corporate finance and advisory Designation Email Telephone

M. Rafique Bhundi Head of Corporate Finance [email protected] +92‐21‐3246‐0741

Usman Saeed Assistant Vice President [email protected] +92‐21‐3246‐2597

Muhammad Zeeshan, CFA Assistant Vice President [email protected] +92‐21‐3246‐0741

Ahmad Zeeshan Senior Analyst [email protected] +92‐21‐3246‐2597

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