Pakistan Strategy 2013: Equity Brokerage, Research Commodities & Corporate Finance

Equity Brokerage, Research Commodities & Corporate Finance
Pakistan Strategy 2013
Content
2
Pakistan Strategy 2013 Preamble Pakistan Politics 2013 Still waiting for Democracys Dividends Govt sleeps while Economy drowns Political li i l party= Economy the h only l Priority i i KSE mostly Smiles PostElections Sectoral Strategies Cement Power Fertilizer Textile Telecom Oil Marketing Banks Automobile 4 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Closing Prices as of December 31, 2012
25 26 33 40 46 50 54 58 64 69 73
Pakistan Economy 2013 Economic Growth, a Reality Check! Economic Outlook Macroeconomic Indicators Economy at a Glance
Valuation Guide Annexure Analyst Certification List of Abbreviation Information Sources Contact Details
Pakistan Equities 2013 Pakistan Equities, a Jewel in the Region

Higher Rising
72 73 74 75
Return despite Lower Macros
EGrow despite Lower Eco Growth
Growing Regional Charm Index Target 2013 Model Portfolio Strategy 2013 Opportunities to Seize Alpha in 2013 Risk Premium to Neutralize Beta in 2013
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Pakistan Strategy 2013

Preamble
4
KSE100: Give me a Target, any Target!

With punching in a jawdropping 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 countrys overall macroeconomic governance ahead, albeit with heightened volatility amid increased noise on the political facade owing to elections. As some quoted earlier bearing in mind equities bravura performance, 'the equity fever has yet to be caught on'. The veterans say that 'there are three stages g to a bull market. The f first stage g nobody y notices. The second stage g the p professionals, f , the smart guys, notice and start accumulating and, in the third stage, the public notices. When the public notices, it goes off the charts and 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's crippling economic progress so far. Equities, aren't rising for no reason for sure! And the reasons we will try and explore in our Investment Strategy 2013.
KSE100 Index Target Estimates 2013
Pak Eco Growth vs Corporate Fundamentals

EGrow KSE100 Return (RHS) Payout (RHS) GDP Growth RoE (RHS)
50% 40% 80% 60% 40% 20% 0% 20% 40% 60% 201314F 30% 20% 10% 0%
5% 7% 9%
Equity Returns
2012A 2011A
40% 38% 42%
Valuation Basis Target Price Based Earnings Growth Justified PE PEG Ratio Regional DY* Regional PBV* Regional PE* Regional EV/EBITDA* Current PE Basis Average Weighted Target Index Dec12 end
Target
Weight Breakup (pts) 3,143 2,692 3,136 3,065 2,991 2,079 945 996 948 19,994 16,905 18.3%
20,952 15% 17,947 15% 20,904 15% 20,434 15% 19,940 15% 20,789 10% 18,891 19,922 18,963 5% 5% 5%
30% 25% 20% 15% 10% 5% 0% 2007
13%13%13%
15%
19% 19%
22%
10% 20% 30% 40% 50%
MSCI Front Indo onesia China MSCI De evelop Ta aiwan MSCI W World MSCI E Emerg S. K Korea Vie etnam India Pak kistan Tha ailand Philippines
19,860 100%
2008
2009
2010
2011
5%
2012
80%
Expected Total Return 2013

* On the basis of adjustments to historical discounts
Pakistan Politics 2013
Still waiting for Democracys Dividends!

7
Dusting through political records revealed that, the history of D Democratic ti political liti l setup t in i Pakistan P ki t could ld hardly h dl be b able bl to t deliver sustainable economic prosperity that could catch up to countrys growth potential (visvis India in recent times). Purely from an economic standpoint, when it comes to delivering economic progress in Pakistan, Autocracy has managed to outshine Democracy down the years. Military regimes have delivered above 6% average GDP growth while the Democratic setups could hardly make up for over half of it. However, one argument that goes in the favor of the democratic forces of Pakistan is that the slowergrowth years were primarily due to terminated tenures as no democratic regime under a nonmilitary head of state has ever been in office. Current military leaderships support to democracy is however very encouraging. But with a complete 360degree change in domestic political landscape with the current setup being very close to its term completion for first time since independence, vibrant media and an everalert Judiciary along with efforts to make electoral process more representing, p p g, basics of democracy y have finally y gained grounds though at the cost of initial economic woes. Encouragingly, against GDP of its twin, India, Pakistans GDP growth has been on average 10bps higher since 1960s with India also positing negative growth 4 times.
Civilian Government Terms in Pakistan vs Economic Growth Term Pak GDP* (%) From To (year) Liaquat Ali Khan 1947 1951 4 3.90 Khawaja Nazimuddin 1951 1953 2 (0.05) Mohammad Ali Bhogra 1953 1955 2 5.62 Ch. Mohammad Ali 1955 1956 1 2.27 Zulfiqar Ali Bhutto 1973 1977 3.8 3.94 Benazir Bhutto 1988 1990 1.6 4.70 Mian Nawaz Sharif 1990 1993 2.7 5.18 Benazir Bhutto 1993 1996 3.0 3.91 Mian Nawaz Sharif 1997 1999 2.7 27 3 13 3.13 S.Y.R. Gillani/Raja P. Ashraf 2008Till Date 4.8 3.98
India GDP* 2.55 4.10 2.35 3.18 8.15 4.03 5.08 6 33 6.33 7.86
*Average GDP growth during specified terms
Government Regime vs Economic Growth

Decade 50 50s 60s 70s 80s 90s 00s 10s Average Growth Average Growth Regime D Democracy Military Democracy Autocracy Democracy Autocracy Democracy Democracy Autocracy GDP Growth (%) 2 93 2.93 6.80 3.94 6.62 4.07 5 55 5.55 3.98 3.73 6.32
Govt sleeps while Economy drowns

8
Pakistan politics enters 2013 carrying with it a lot of excess b baggage i terms in t of f macro and d socio i economic i issues i as the th latest economic fallout during the last five years speaks for itself. The high drama in Pakistans politics is expected to hype up into 2013 as the current democratic setup stands out to complete its term visvis the entire series of the civilian govt regimes since countrys independence, most of which fell prey to the military dictatorship, while new forces intensify to make a halt in timely power transition. The setup in Islamabad at present is perceived to be high on corruption and lacking in competence, highly unbalanced equation ensuing current economic plight. The perception is first strengthened by the findings of TI (Transparency Intl) a global anticorruption watchdog and the second by the adhocism prevalent in almost all of the current gov govt t policies. policies Although the current political setup has been mired in political & financial scandals and unable to deliver on its election promises, this govt however merits the credit of few part rationalization of initiations on its behalf i.e. p electricity/gas/petroleum tariff differentials, to correct some of the chronicallylingering dents on the economy
Current Gov't (Coalition) Economic Deliverance Economic Indicator FY07 FY0813Avg* GDP Growth G th 7% 3% Per Capita (USD) 904 1,179 CPI Inflation 8% 13% Policy Rate 10% 12% Public Debt (of GDP) 60% 61% Remittances (USD bn) 5 10 Trade Deficit (USD bn) (14) (16) Foreign Direct Investment (USD bn) 5 2 Forex Reserves (USD bn) 16 15 PKR/USD Parity 61 82 KSE100 Index^ 13,772 16,950 Current A/c Deficit (of GDP) 5% 3% Fiscal Deficit (of GDP) 4% 7% TaxGDP 10% 9% InvestmentGDP 23% 16% SavingsGDP 17% 12% Credit Rating (Moody's) B3 Caa1
Change Negative N ti Positive Negative Negative Negative Positive Positive Negative Negative Negative Positive Positive Negative Negative Negative Negative Negative
*Including FY13TD Actual/FY13 Forecast, ^Yearend
Parliament Structure 1.5% 1 5%

2.3% 5.0% 7.3% 3.8%
0.3%
0.3% 0.3% 0.6% PPP PMLN PML MQM Independents ANP MMA PMLFunc. PPP (Sherpao) BNP (Awami) NPP Vacant Seats
37.4% 14.6%
26.6%
Political Party = Economy the only Priority

9
Change in Political Parties' Popularity, 20082012
After increasingly noisy five years, Pakistans politics enters a th illi l suspenseful thrillingly f l arena (elections) ( l ti ) with ith expected t d change h in its runofthemill and repeatedlytestedandfailed political partytheme as new political alliances flex muscles for power. If popularity polls were something credible to go by, to represent people peoples s will, two Political parties one one relatively fresh, and the other already a veteran could be PTI and PML N that have emerged as the onlygaining parties in the last five years while the rest being at the losing end. Since PMLN and PTI are believed to be the loveofmasses given poll results, while neither is expected to either sweep or even form simple majority given their reshaping constituencies (PMLNs stronger), these parties should only be weighed against their 1) Economic Manifestos tagged with their strategic actionplans, 2) experienced and agile Economic Team, Team and 3) strong Willingness to enforce hardcore institutional as well as social reforms for a sustained economic recovery. In terms of Economic manifesto, PTI and PMLN are almost on the same p page. g The implementation p phase coupled p p with firm willingness remains a matter of concern amongst the two, should they come in power. Unluckily, given differences in their political agendas, both are least expected to go hand inhand, which otherwise be ideal for the country. This may once again help lesscompetent forces to share power.
20% 10% 0%
13%
17%
10% 20% 30%
PML (N)
PTI
PPP 10% 20082012
Other Coalition 21%
Others 1%
Indicator GDP Growth Industrial Growth Inflation Budget Deficit TaxGDP Inv.GDP HealthGDP EducationGDP
Next 5Year Economic Plan PTIs 6% 9% 7% 5% 15% 21% 3% 5% Yes No Y Yes Yes Yes Yes Yes
PMLNs 6% 78% 78% 4% 15% 20% 2% 4% Yes No Y Yes Yes Yes Yes Yes
Tax Reforms Increase in Tax Rate L Later T Tax C Cuts Interest Rate Cuts PSEs Restructuring Privatization Programs Financial Markets Reforms
KSE mostly Smiles PostElections

10
It is thus contingent on 1) who will form the majority and 2) d deep rifts ift between b t PTI and d PMLNs N political liti l agendas. d PMLN might gain grounds, given its greater reach even within relatively smaller constituencies, but it would be a tougher task for PTI to gain widespread majority to implement its manifesto in letter and spirit. Though elections are largely expected on time, given Militarys helping hand for the fair and valid electoral process chained with evervigilant Judiciary and progressivelyactive Media, probability of emerging forces to delay elections for an unidentified period, still stands high. Consensusbased selection of the Chief Election Commission with gradual enforcement of key electoral reforms i.e. detailed identification of eligible voters, development of a variety of information, education and communication material for higher voter participation, participation should result in better selection process to ensure greater representation of the people at the Parliament. KSEs performance record reveals the bourse performed progressively p g y better both p pre and p postelectoral p process (outperformed mostly post elections) with average return being at 3.4% 3M before elections while 19% in 3M, 23% 6M and 30% 12M following elections, albeit with higher volatility.
15.0% 10.0% 5.0%
Market Return before Elections

12.0%
3M
8.4%
2.5% 0 4% 0.4%
0.0% 1990 1993 1997 2002 5.0% 10.0% 10 0% 2008

89%
6.3%
Market Return after Elections

100% 80% 60% 40% 20% 13% 2% 15%
2% 61%
3M 69%74%
59%
6M
1YR
40% 38%
0% 199 90 199 93 199 97 200 02 20% 40% 60% 80%

60%
6%
28%
200 08
6%
11
Pakistan Economy 2013
Economic Growth, a Reality Check!

C ll f Calls for socio i economic i reforms f
12
35%
Pakistan economy has been resilient throughout most of its history in the sense that, that despite being repeatedly hit by a multitude of shocks that tried to influence its underlying growth potential, the overall GDP growth remained in the positive territory, unlike other comparable economies. Being consumptionled, Pakistan economy sailed through an average g 26% g growth in consumption p spending p g in p past 3 years compared to 7.7% of Asia (most growing region in the world), that is 4x higher despite economic slowdown. This can be attributed to a stunning 36.5% growth in the middleclass population which accounts for ~33% of the total countrys population, highest amongst regional peers. Another reason boosting our economy is the agricultural growth ~4%) despite devastating floods; with corporate sector showing inclination towards it. Even banks are now promoting agrifinancing for this purpose. Private consumption consumptions s contribution has been rising rapidly in the aggregate demand. Conversely, investment as well as savings have been showing persistent decline, leading to widening demandsupply gap. Continuing this trend, the economy may experience greater uncertainty associated with future inflation in the country. Lower GDP growth than the regional average is not necessarily an sign of resource mismatch. In fact, Pakistan continues to stay rich in terms of favorable geography and demographics, indigenous agriculture resources, untapped energy potential and a strong service sector.
30% 25% 20% 15% 10% 5% 0% Pakistan 100% 80% 60% 40% 20% 0% Sri Lanka
Middle Class (as % of Total Population)
India
China
Bangladesh
Private Consumption as % of Total Consumption
India
China
Bangladesh
Pakistan
As % age of GDP
Country Pakistan India Sri Lanka Bangladesh China Investment 13.7 34.6 29.2 25.8 40.2 Savings 10.6 32.2 21.8 27.3 53.0 Tax 10.2 17.7 15.3 8.5 17.0
Economic Outlook
A sneakthrough
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However, concerns remain towards industrial sector that faces energy issues due to over PKR 400bn Circular Debt barricading industrial growth for quite sometime now. The gov't flushes power subsidies to bridge gaps, but it only caused misallocation of resources and higher fiscal deficit as a result, with current expenditures consistently exceeding budgetary targets, reaping no fruitful results. Here the role of gov't gov t comes into play, play to realize that the need of the hour is to spend more on development, which is barely 16% on average of the total expenditures (see pie charts). But too late to make this gov't realize that the upcoming electorate may bid them a farewell, and welcome the new one next year with a hope that it brings about a much needed socioeconomic revolution. Though singledigit inflation with monetary easing came as a breather, deteriorating fiscal deficit remains one big issue in FY13. Not only CPI and DR, but also slowdown in gov't borrowing made 1HFY13 worth an applause. However, 2HFY13 remains critical as gov't borrowing takes a Uturn, which is expected to cap investor excitement. We expect CPI around 9%, containing fullyear target of 9.5%. With the realization of flows under the CSF umbrella, we estimate CAD to be around 1% of GDP in FY13, quite manageable bl keeping k i other th smaller ll flows fl i perspective in ti to t be b materialized during 2HFY13 while heightened debt servicing (USD 1.7bn more due to IMF in FY13) should keep PKR under stress (we estimate 8.5% YoY average depreciation). Inflows worth USD 11.5bn and outflows worth USD 3bn should therefore keep Forex reserves capped at USD 12.5bn in FY13.
FY11A
11% 30% 25%
Interest Payment Defence Affairs and Services Subsidies Others 21% 18% Developmental Expenditure 17% 20% 31% 17%
FY12A
16% 28%
16%
FY13B
20% 7% 18%
USD mn 4,000 3,000 2,000 1,000 0

2012
Charges/Interest
Principal
2013
2014
2015
Macroeconomic Indicators
14
Summary Data FY07A FY08A FY09A FY10A FY11A FY12A FY13E
Real Sector Sector* Real GDP Growth GDP (PKR bn) MP Service sector growth rate Industrial sector growth A i lt l sector Agricultural t growth th External Sector (USD bn) Exports (FOB) Imports (FOB) Trade Deficit Remittances Foreign Direct Investment Forex Reserves Exchange Rate (PKR/USD) Current A/c Balance Public Finance and Others (% of GDP) CPI Inflation (YoY) Total Tax Revenues Expenditure Public Debt Fiscal Deficit (PKR tr) Fiscal Deficit
6.8% 8,673 7.0% 8.8% 4.1% 17.3 27.0 (13.9) ( ) 5.49 5.1 15.6 61 (6 9) (6.9) 7.0% 10.2% 19.2% 60.1% (0.4) 4.3%
3.7% 10,243 6.0% 1.4% 1.0% 20.4 35.4 (21.4) ( ) 6.45 5.4 11.4 63 (13 9) (13.9) 21.5% 10.0% 21.7% 59.1% (0.8) 7.4%
1.7% 12,739 1.6% 1.9% 4.0% 19.1 31.7 (16.0) ( ) 7.81 3.7 12.4 79 (9 3) (9.3) 13.1% 9.2% 19.3% 61.6% (0.7) 5.2%
3.1% 14,668 4.6% 4.9% 2.0% 19.7 31.2 (13.2) ( ) 8.91 2.2 16.8 84 (3 9) (3.9) 10.1% 10.0% 20.5% 62.4% (0.9) 6.3%
3.0% 18,063 4.4% 0.7% 2.4% 24.8 40.4 (12.5) ( ) 11.2 1.6 18.2 86 02 0.2 13.7% 9.4% 19.1% 59.0% (1.19) 5.9%
3.7% 20,654 4.0% 3.1% 3.4% 23.6 44.9 (18.4) ( ) 13.2 0.8 15.2 89 (4 5) (4.5) 11.0% 9.8% 15.1% 60.5% (1.37) 6.6%
4.0% 23,339 4.1% 2.4% 3.7% 26.3 40.9 (14.6) 14.9 0.8 12.5 97 (2 1) (2.1) 9.0% 9.5% 19.1% 66.4% (1.39) 5.9%
Source: Arif Habib Research, Bloomberg, SBP, PBS, IMF data, ADB, WDI. *At Factor Cost
Economy at a Glance
15
25% 20% 15% 0% 10% 5% 0% FY07A 100 90 80 70 60 50 40 FY13YTD FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY08A FY09A FY10A FY11A FY12A FY13E 20 18 16 14 12 10 8 6 4 2 25% 20% 15% 10% 5% 0% FY07A FY08A FY09A FY10A FY11A FY12A FY13E CPI(YoY) Discount Rate Total Tax Revenue(%GDP) Fiscal Deficit (% GDP) Expenditure (%of GDP) 20 15 10 5 0 FY07 7A FY08 8A FY09 9A FY10 0A FY11 1A FY12 2A 5 10 15 20 25 FY13 3E Trade Deficit(US$bn) FDI(US$bn) Remittances(US$bn) CAB (US$bn)
FOREX (USD bn) RHS
PKR/USD (LHS)
16
Pakistan Equities 2013
Pak Equities, a Jewel in the Region

17
Philippines s
Indonesia a
Thailand d
Vietnam m
India a
S. Korea a
Taiwan n
2% 4% 6% 8% 10%
Pakistan n 125
42%
While the global economy undergoes economic paranoia, i its it balance b l h hangs bi d towards biased t d emerging i economies bombarded with flush of liquidity flows. As such, a tightening spree set earlier across emerging economies with restrictions placed on foreign inflows (fearing asset price bubbles) is rather taking the opposite direction (China and India lifted FI curbs). As such, funds flowing in at a blazing pace once again during 2012 (USD 51.4bn, with average 25% YoY return), against outflows in 2011 (USD14.3bn, with average decline of 15% YoY) across the emerging (Asia Pacific) region, have acted as an unpinning force for marked recovery in the Asian equities in 2012. Funds flew back to the Asia Pacific region due to better fiscals, growth and solvencies than most of the developed markets. With a few markets busy making new peaks, peaks especially Pakistan, Philippines topped the chart with 42% rally in 2012 (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. On an ecopolitical comparable scale, Pakistan equities shown exceptional growth, given political, economic and law & order shakeups it survived through during 200812. KSE100s surge was driven by climbing profits, CGT reforms, rate cuts and better foreign inflows.
10% 8% 6% 4% 2% 0% 4% 24,389
Currency vs USD vs FIPI (USD mn) 2012

6% 8% 4% 8% 15,069
30,000 25,000
3% 1% 8%
20,000 15,000 10,000 5,000
4,907
1,703 2,548 Local Currency vs USD
2,504 154
Net Foreign Flows (YoY Chg.)
50% 40% 30% 20% 10% 0% 10% 20% 30% 40% 50%
9% 5% 7%
Equity Returns (USD)

2012A 2011A
19% 19% 22% 38% 40%
13% 13% 13% 15%
evelop MSCI De
MSCI E Emerg
MSCI Front
MSCI W World
Indonesia
Vie etnam
China
Ta aiwan
India
Tha ailand
Pak kistan
Philippines
S. K Korea
Higher Returns despite Lower Macros

18
229 9%
Regardless of a host of negatives i.e. political setup gaining accolades l d in i corruption, ti corrosion i i law in l & order, d and d slowdown in economic growth with persistently high inflation, Pakistan equities showed unprecedented resilience and, only performed. As such, Pakistan's corporate earnings growth, ROEs and average payouts rather improved so far despite economic slowdown. This is due to the fact that, as few other emerging/frontier markets, Pakistan equities are not a perfect reflection of the economy. In fact, KSE represents only 22% of the total GDP (lowest amongst key emerging as well as developed equity markets), a blessing in disguise during hard times! Many a peer i.e. India, China, Brazil, Thailand and Indonesia stands above average with respect to market capitalization (some even over 100%), as compared to their GDP size and growth (as equities incorporate future economic growth as well). Pakistan equities being lowest amongst others hint at a room for a massive growth of the market capitalization with regards to its economy (mainly due to muted growth in IPOs, unlike emerging markets This is expected to significantly improve IPOs in 2013 onwards, as lower interest rates with marked improvement in market liquidity should provide a reason for companies to raise funds through equities with lower liquidity premium.
300% 250% 200% 150% 100% 50% 0%
259%
Market CaptoGDP
183% 149%
134%
99%
94%
87%
86%
86%
79%
69%
68%
64%
60%
50%
46%
37%
Economic Indicators vs Earnings Growth Country RGDP CPI DR EGrow Indonesia 6.6 5% 5.8 17% India 7.3 10% 8.0 14% Vietnam 6.3 6% 9.0 17% Philippines 4.7 5% 3.5 11% Sri Lanka 7.0 7% 7.5 18% Thailand 7.5 3% 2.8 20% China 8.8 3% 6.0 16% Taiwan 2.7 2% 1.9 29% S. Korea 3.1 3% 2.8 26% Peer Avg 6.0 5% 5.2 19% Pakistan 4.3 9% 9.5 18% Difference 1.7 4% 4.3 1% Relative Value Low Low Low ~Parallel
Singapore Switzerl Taiwan UK Canada US India S. Korea Australia Thailand Philippin Brazil Russia China Japan Indonesia EU Vietnam Pakistan
RoE 28% 24% 23% 17% 46% 25% 17% 15% 14% 23% 29% 6% High
22%
Rising EGrow despite Lower Eco Growth

19
Economic Growth vs Corporate Fundamentals Growth
Interestingly, during last 5yrs of economic slowdown, l d corporate t earnings i growth th has h actually t ll improved sequentially (kept up momentum at 12% average run rate in last 6yrs) while economy could not catch up with its underlying potential amid scaling energy issues, stubbornly high CPI and doubledigit interest rates. Entering 201314, we expect Egrow to stay solid, even better than the last 6year avg (18% cumulative in 201314 versus 6Ys avg 12%), which is expected to be largely triggered by key sectors i.e. Cements, Textiles, Oil&Gas (OMCs, E&Ps), Telecom, and Banking sectors. Stabletoimproved oil prices should benefit Oil&Gas sector beside better volumes while improving offtake should support Fertilizers earningspayouts. Cement sector should reap benefits from firm product prices, soft coal prices and decline in interest rates and relatively higher amount of PSDP expected amid elections, while Textiles should benefit from incremental exports due to PTAs and upcoming GSP1 status alongside decline in interest rates Some p part resolution on Circular Debt is expected p through g another issue of TFC, which should translate into better cash payouts from the govtowned entities i.e. PPL, PSO, OGDC, alongside PTC, NBP and few others to bridge rising fiscal deficit. This should attract the large portion of the dividendloving investors to equities.
Corporate Sector Earnings Growth (EGrow)

Years* Sector E&P Banks Fertilizer Cement Oil Marketing Autos Power Texties Chemicals Telecom AHR Sample 5Y 2007 2008 2009 2010 2011 2012 Avg.
4% 13% 11% 23% 27% 8% 5% 41% 401% 25% 14% 11% 27% 29% 156% 47% 38% 250% 488% 118% 19% 6% 20% 103% 122% 44% 11% 78% 337% 424% 3% 10% 47% 30% 450% 123% 13% 130% 11% 2% 18% 25% 71% 83% 51% 3% 45% 66% 7% 31% 41% 16% 0% 7% 0% 29% 82% 31% 31% 70% 44% 11% 19% 16% 27% 50% 0% 204% 79% 86%
201314F 12%
2007
2008
2009
2010
2011
2012
30% 25% 20% 15% 10% 5% 0% 5%
EGrow KSE100 Return (RHS) Payout (RHS)
GDP Growth RoE (RHS) 80% 60% 40% 20% 0% 20% 40% 60% 80%
2013 14F
8% 14% 5% 23% 24% 6% 7% 21% 237% 46%
1%
0%
6%
17% 27% 20%
18%
*Fiscal Year (JulJun) except for Banks, Fertilizer/Chemicals. Calendar Year (JanDec) for Others
Growing Regional Charm!

20
While global equities are on the rise, KSE100s deep di discount t to t regional i l peers remains i (47% on PE, PE 48% on Ev/EBITDA, 49% on PEG, 29% on PBV, while a fat 66% on DY and a substantial 19% on RoE). We believe, this is morethanenough to counterbalance perceived risks of i) reversal in inflation and thus interest rates (already higher), ii) one of the lowest GDP growth rates, and iii) soaring currency and political risks, along with other economic risk-associated premiums required by investor. Bear in mind that higher risk also entails greater return opportunities, KSE100 offers a great deal compensating potential risks. We expect a cumulative 18% YoY earnings growth in 201314 (based on Arif Habib Universe). This is besides the fact that KSE100 already provides one of the highest RoEs and offers deepest discount at DY (read: pure cash) multiple compared to regional peers. Since earnings growth is the prime factor to account for by investors above all as it is an integral part of the emerging markets fundamentals, KSE100s earnings growth is expected to sustain despite highbase, competing most of the p peers with better economic g growth i.e. China, , India, , Sri Lanka, Taiwan and South Korea. Therefore, we expect KSE100s rerating whereby prevailing market discounts may substantially narrow to their historical averages.
Country Indonesia India Vietnam Philippines Sri Lanka Thailand China Taiwan S. Korea Peer Average g Pakistan Prem/(Disc)
(ROE)
EGrow 16.7% 14.2% 16.7% 11.2% 18 5% 18.5% 20.4% 16.4% 27.9% 22.6% 18.3% 17.6% 0.7%
Forward Estimates DY RoE PE 2.3% 28% 13.6 1.8% 24% 13.5 4.6% 23% 9.0 2.5% 17% 16.5 2 7% 46% 9.7 2.7% 97 3.6% 25% 12.8 2.2% 16% 10.4 3.2% 15% 14.5 1.3% 15% 9.1 2.7% 23% 12.1 7.9% 29% 6.5 66% 19% 47%
PBV PEG EV/EBITDA 2.6 81 8.9 2.2 95 8.6 1.6 54 7.4 2.4 147 10.1 18 1.8 53 76 7.6 2.1 63 9.0 1.5 63 7.8 1.7 52 9.7 1.1 40 7.6 1.9 72 8.5 1.3 37 4.4 29% 49% 48%
Regional ROE vs Dividend Yield

Pakistan
35 0% 35.0%
30.0% 25.0% 20.0%

India
Indonesia
Sri Lanka Philipines Thailand h il d Taiwan (DY)
China
15.0% 10.0% 0.0%
S. Korea
2.0%
4.0%
6.0%
8.0%
10.0%
Index Target 2013

21
Pakistan equities are yet to rerate given their grossly undemanding d di valuations. l ti H Hence, i 2013, in 2013 investors i t need d to stay close to where valuations reside and should not repeat the same oversight made by those who missed rally in 2012 (KSE100 returned 49%!), when investors remained focused only, and exclusively, on bad ecopolitical news and eventually lost sight of the compelling valuations! If we adjust prevailing regional discounts to historical levels (average disc. 5%48%), laced with justified PE/PEG, Earnings Growth and the Target Price models, a weighted average index target of 19,991 appears, a solid 3,089pts jump by 2013end, with a decent total return of 18% YoY! Since higher volatility is expected to encircle KSE100's expected doubledigit growth in 2013 amid greater political yell (elections), (elections) we reiterate, reiterate KSE100 should provide at least 18% YoY returns in 2013, based on Arif Habib Research Universe performance with a select of risk adjusted fundamentallystronger and potentially outperforming portfolio of stocks (mentioned ahead). However, should the reversal in interest rates take place amid increased currency risk leading to a Uturn in inflation with other politicalside risks playing out more than the positives, as stated ahead, index could underperform its underlying potential target in 2013.
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 PEG Ratio 20,434 15% 3,065 R i Regional l DY* 19 940 15% 19,940 2 991 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 Average 19 860 100% 19,860 Weighted Target 19,994 Index Dec12 end 16,905 Expected Total Return 2013 18.3%
*On the basis of adjustments to historical discounts
Arif Habib Research Valuation Snapshot

Earnings growth PER Dividend Yield Earnings Yield ROE PBV Payout Ratio 2008 0.2% 9.3 5.9% 10.7% 23% 2.1 55% 2009 6.4% 8.5 6.8% 11.7% 22% 1.8 58% 2010 17.0% 7.6 7.0% 13.1% 23% 1.6 53% 2011 27.0% 7.1 6.9% 14.1% 25% 1.7 49% 2012 201314F 19.7% 17.6% 6.1 6.6 8.4% 7.5% 16.3% 15% 26% 24% 1.5 1.5 51% 49%
Model Portfolio Strategy 2013

22
Timely portfolio reshuffling should yield Alphas (above market average return) while a search for grossly undemanding valuation l ti based b d stocks t k (backed (b k d by b strong/sustainable t / t i bl fundamentals) f d t l ) with ith timely ti l portfolio tf li shift hift should h ld maximize i i total t t l active return in 2013. Investors are recommended to hold stocks that are grossly undervalued, or at least relatively cheap at key multiples, with respect to their longterm fundamentals. On the contrary, investors need to have limited exposure to scrips that have become relatively overvalued and risky for the short term. As usual, investors should focus on two strategies at different timeframes in 2013. For 1H2013, we recommend a mix of highbeta, seasonal and defensive plays i.e. Cement, IPPs, Textiles, Oil (OMCs), Fertilizer (Faujis only), so that expected volatility (given elections) could be neutralized to an extent, with a steady tilt towards few more prointerest rate sectors like Banks in the 2H2013 (as monetary tightening may be expected from 2H2013 with availability of lower multiples postbudget) to outshine overall average market returns expected in 2013. We have the following portfolio mix to bank a strategy shift on:
Symbol Last Closing Target Price Upside
FCCL KOHC BAFL PTC LUCK NBP HUBC UBL NML 6.5 70.6 16.8 17.4 151.5 49.4 45.2 83.7 63.9 12.4 125.0 27.6 28.3 212.7 68.5 62.5 113.3 86.1 90% 77% 64% 63% 40% 39% 38% 35% 35%
PE DY 20122013 Average
3.60 3.64 4.02 7.16 5.12 4.03 6.27 5.33 4.69 0.0% 8.5% 11.1% 10.8% 4.0% 15.2% 15.5% 9.6% 6.0%
Symbol Last Closing Target Price Upside

DGKC NPL PSO KAPCO NCPL INDU FFBL FFC ENGRO 54.6 19.5 232.2 49.4 21.0 270.0 38.6 117.1 92.0 69.5 24.0 284.8 60.3 25.3 319.2 45.0 135.6 158.0 27% 23% 23% 22% 20% 18% 17% 16% 72%
PE DY 20122013 Average
4.89 2.93 3.34 5.99 3.06 6.12 7.66 7.32 13.27 5.5% 17.9% 3.9% 15.3% 20.2% 9.8% 11.9% 13.1% 3.8%
Opportunities to Seize Alpha in 2013

23
KSE100 may keep its historical pattern of providing best of returns t i 1Q alongside in l id high hi h earnings i growth th and d volumes l at their best. KSE100 posted an average 15.7% return in 1Q in 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 investors' choosing to be sidelined amid country country's s budget uncertainties. Fresh allocation of foreign funds (local also) takes place in 1Q. Better foreign flows are expected to the Asia Pacific region for three reasons: 1) US/EU's plans to continue pumping in liquidity to stimulate their deficitridden economies, 2) declining regional restrictions on foreign inflows (China and India already done it), and 3) higher investment taxes in the US following resolution on Fiscal Cliff. Keeping KSEs share constant, this should result in higher absolute inflows for Pakistan equities where better EGrow resides. resides MSCI review of Pak market is expected in May13, which may possibly upgrade Pakistan to Emerging Market Index after it put Pakistan on sustainability gauge. If perceived positively, p y, would p provide a p physiological y g boost to the KSE.. Any development on Privatization and Banking M&As (for MCR) should attract investor interest to equities while any positive development on talks with IMF beside improved flows from the US should provide more impetus to KSE.
KSE Quarterly Avg Return

60% 50% 40% 30% 20% 10% 0% 10% 20% 30% 40% 50%
USD mn
KSE Quarterly Avg Volume

1Q 100% 80% 60% 40% 2Q 3Q 4Q
1Q
2Q
3Q
4Q
CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12
20% 0% CY Y02 CY Y03 CY Y04 CY Y05 CY Y06 CY Y07 CY Y08 CY Y09 CY Y10 CY Y11 CY Y12
000 pts
Quarterly Earnings Growth*

15% 10% 5% 0% 1Q -5% -10%
*Based 6year average earnings growth
1Q
2Q
3Q
4Q
2Q
3Q
4Q
700 600 500 400 300 200 100 (100) (200) (300) (400)
Cumulative FIPI 18 KSE100

16 14 12 10 8 Jan09 9 Aug09 9 Mar10 0 Oct10 0 May11 1 Dec11 1 Jul12 2 6 4 2 0
Risk Premiums to Neutralize Beta in 2013

24
Increased uncertainty on countrys political canvas / on elections l ti may keep k i investors t at t bay b and d equities iti under d stiff grip from going north. Further, longerthanexpected tenure of the caretaker setup may put a halt on possible repayment deferment / new loans talks with the IMF. Any foreign outflows from Pakistan (owing to political uncertainty) and regional markets (amid continued currency depreciation vs USD), may increase investor anxiety on local front too, however, any downward drift in equities will remain restricted given low level of leverage. Looks possible in 2H2013 on reversal in the CPI due to PKR weakness, any reversal in interest rate will raise corporate financial cost and scale down equities values while continuity of the same will pull investor from equities. Any immediate PKR depreciation against the greenback on account of countrys higher debtservicing in FY13 (USD1.7bn left for FY13) and any downward shift in sovereign ratings as a result of further economic deterioration, will drag equities lower in 2013 while no resolution on the notorious Circular Debt issue will affect Energy/Oil%Gas sector companies payout in 2013. Although any upgrade to Emerging Markets should unwind more funds to KSE, having paltry weight, in EM against 4.4% in Frontier Markets, may not attract huge inflows.
Pak Equity Returns vs Currency Depreciation

140% 120% 112% 100% 80% 60% 40% 20% 0% 2002 2003 2004 2005 2006 2007 2008 2009 20% 40% 60% 80%
4% 2% 1% 66% 54% 39% 10% 44% 33% 0% 68% 49%
KSE Returns
PKR/USD (RHS)
28%
30% 25% 20% 15% 10%

8%
2010
2011
2012
7%
5%
5% 0% 5%
1% 3% 2%
2%
55%
Regional (Local) Currency Dep. vs USD 2012

14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2.0% 4.0% JPY PKR GBP INR Euro Aus CAD Yuan 2.9% 1.8% 8.0% 4.6% 3.6% 1.8% 1.8% 12.8%
25
Sectoral Strategies 2013
26
Cement Sector Cementing C ti R Returns! t ! 2013
Cement
27
Key Drivers
After recording a rise of 18% YoY in FY12, cement price have jumped by another 7% in FY13TD to PKR 449/bag, despite an oversupply of around 13mn tons. We believe cement prices to remain firm during the rest of FY13 as well, keeping margins of the industry buoyant. Coal prices after trenching a 3year low of USD 79/ton have stabilized around USD 86/ton. We expect coal prices to average around USD 90/ton in FY13, down 15% YoY to keep margins widened going forward. Domestic demand, , after remaining g weak in FY11 g gained by y 9% YoY in FY12, as construction activities started to picking up. We expect cement dispatches to improve by a further 7% in FY13 on account of increased infrastructure development as we enter election year. Export demand is however expected to drop by 5% YoY to 8mn tons, resulting in total cement demand to settle at ~4.0% YoY in FY13. Declining interest rate environment to reduce financial burden from debtladen sector while PKR depreciation to increase exports. Higher coal and electricity prices Lowerthanexpected spending by the government through PSDP. Reversal in interest rates and higherthanexpected attrition in PKR to affect both financial charges and coal import cost, respectively.
Diverging Cement and Coal Price to widen Margins USD/ton PKR/bag Cement (RHS) Coal(LHS) 460 140 440 130 420 120 400 110 380 100 360 90 340 80 320 70 May11 May12 Mar11 Mar12 Nov11 Nov12 84% 82% 80% 78% 76% 74% 72% 70% 68% Sep11 Sep12 Jan11 Jan12 Jul11 Jul12
Election Effect; to keep Demand buoyant

mn tons
Risks

40 35 30 25 20 15 10 5 0
Exports Utilisation
Domestic
FY08A FY09A FY10A FY11A FY12A FY13F
Lucky Cement Limited (LUCK PA)

Target Price (Dec13): PKR 212/share Upside 40%
28 Closing: PKR 151.54, Total Shares: 323mn, Market Cap: USD 504.2mn, Free Float: 40%, Avg. Daily Turnover: 2.45mn shares
Investment Case
Being B i the h lowest l costproducer d (15% lower l than h 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. Acquisition of ICI along with expansion plans in D.R. Congo and Iraq to add diversification flavor to the companys 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 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.
PKR
35 30 25 20 15 10 5 FY11
Strong Margins and Profitability EPS DPS Gross Margins Net Margins
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
FY12
FY13 FY12A
33,323 12,721 5 253 8,324 20.97 6.00 7.2 15 1.5 4% 26% 22%
FY14 FY13E
37,051 16,654 428 146 12,704 30.25 6.00 5.0 12 1.2 4% 21% 18%
Financial Highlights (PKR mn)

Net Sales Gross Profit Other Income Finance Cost Profit after tax EPS (PKR) DPS (PKR) P/E (x) P/B(x) Div. Yield ROE ROA
FY14F
38,129 15,806 598 46 12,190 29.03 8.00 5.2 10 1.0 5% 19% 17%
Risks
Decline in cement prices, every PKR 5/bag drop drags LUCKs earnings by PKR 0.78/share. Rise in coal p prices as every y USD 5/ton / increase cuts companys p y earnings by PKR 0.83/share.
Sources; Company accounts and Arif Habib Research
D.G. Khan Cement Limited (DGKC PA)

29 Closing: PKR 54.58, Total Shares: 438.1mn, Market Cap: USD 246.01mn, Free Float: 55%, Avg. Daily Turnover: 9.09mn shares
Investment Case
Solidity S lidi of f cement prices i chained h i d with i h falling f lli coal l prices i to mark k 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 the 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. The stock Th t k is i trading t di at t attractive tt ti FY13 PER of f 4.6x 4 6 and d offering ff i a dividend yield of 6%!
PKR
12 10 8
Improving Margins leading to Strong Earnings EPS DPS Gross Margins Net Margins
6 4 2 0 FY11 FY12 FY13 FY12A

22,950 7,507 1,187.94 1 670 78 1,670.78 4,108 9.38 1.5 5.82 0.72 3% 13% 8%
45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
FY14 FY13E
24,367 9,637 1,135 14 730 14,730 5,135 11.72 3.00 4.66 0.64 6% 15% 10%
Financial Highlights (PKRmn)

Net Sales Gross Profit Other Income Finance Cost Profit after tax EPS (PKR) DPS (PKR) P/E (x) P/B (x) Div. Yield ROE ROA
FY14F
25,113 8,349 1,357 16 764 16,764 4,462 10.18 3.00 5.13 0.59 6% 11% 9%
Risks
Decline in cement p prices, every y PKR 5/bag g drop, p drags g DGKCs earnings by PKR 0.78/share. Rise in coal prices where every USD 5/ton increase slashes earnings by PKR 0.83/share.
Kohat Cement Company Limited (KOHC PA)

Investment Case
Aggressive Deleveraging to reduce Financial Burden PKR mn 5,000 4,000 3,000 2,000 1,000 FY11 FY12 FY13 FY14
FY12A 9,316 2,852 108 626 1,661 12.90 3.00 5.5 24 2.4 4% 57% 18%
Diverging Di i movement between b cement and d coal l prices i i expected is d to expand companys gross margins to the highest ever levels of 35% in FY13, up 500bps from 30% in FY12. Aggressive deleveraging has massively reduced companys Debtto Asset to around 26% (FY11: 72%), which is expected to scale down finance cost over half (53% YoY) in FY13 thereby providing boost to companys bottomline. Strong cashflow generation (PKR 21/share) in FY13 is expected to 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.
Short Term Loans Long Term Loans Finance Cost (LHS)
PKR mn 800 700 600 500 400 300 200 100
FY15
FY13E 10,528 3,723 105 295 2,595 20.15 6.00 3.5 15 1.5 9% 53% 27% FY14F 10,881 3,451 136 122 2,408 18.70 6.00 3.8 12 1.2 9% 36% 24%
Financial Highlights (PKRmn) Net Sales Gross Profit Other Income Finance Cost Profit after tax EPS (PKR) DPS (PKR) P/E (x) P/B (x) Div. Yield ROE ROA
Risks
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/share. 0 76/ h
Fauji Cement Company Limited (FCCL PA)

Target Price (Dec13): PKR 11.5/share 11 5/share Upside 96%
31 Closing: PKR 6.54, Total Shares: 1,331mn, Market Cap: USD 89.6mn, Free Float: 35%, Avg. Daily Turnover: 9.6mn shares
Investment Case
Mega expansion M i of f 7,200 7 200 tpd d has h been b pivotal i l in i achieving hi i 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. Improving sectoral l dynamics d with h declining d l coal l prices and d 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 on account of declining overall interest rates. These favorable dynamics are expected to translate into a massive 6x YoY earnings growth in FY13.
Strong Volumetric Growth to drive Profitability

mn tons
Total Volumes
Net Revenues
PKR bn
FY10A FY11A FY12E FY13F FY12A

11,523 3,068 27 1,825 377 0.28 0.04 0 63 0.63 0% 3% 1%
18 16 14 12 10 8 6 4 2
FY14F FY13E FY14F

15,648 5,361 28 1,368 2,354 1.77 0.3 0 53 0.53 0% 16% 7% 16,572 5,271 30 1,032 2,489 1.87 0.3 0 45 0.45 0% 14% 8%

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. Every USD 5/ton increase in coal prices corrects earnings by PKR 0.08/share.
Regional g Charm ( (Cement) )

32 Price to Earning
16 00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 FCCL PA KOHC PA DGKC PA LUCK ACPL PATKYO PA TKYO SL STCM JKCE IN 002030 PA LN KS 1 80 1.80 1.60 1.40 1.20 1.00 0 80 0.80 0.60 0.40 0.20 0.00 002030 FCCL PA STCM KS LN DGKC TKYO SL LUCK PAACPL PA ACPL PA KOHC JKCE IN PA PA
Price to Book
Return on Equity
60% 50% 40% 30% 20% 10% 0% KOHC ACPL PA LUCK PA FCCL PA DGKC JKCE IN TKYO SL STCM 002030 PA PA LN KS 12% 10% 8% 6% 4% 2% 0% ACPL PA KOHC PA
Dividend Yield
DGKC TKYO SL LUCK PA JKCE IN 002030 FCCL PA STCM PA KS LN
33
Power Sector 2013
L t th Let there b be Li Light! ht!
Power
34
Generation by Source
Key Drivers
'000 000 GWh 120 100 80 60 40 20 0 200607 KAPCO HUBC NCPL NPL Others
Pakistan faces electricity shortfall as high as 8,500MW during peak demand. With generation from hydro sources on a decline, IPPs share in the total power generation of the country is steadily increasing. The gov govt t will specifically be focusing on power generation because of the upcoming general elections. Thermal generation being the only shortterm solution for power generation should witness an increase leading to improved load factor of the IPPs. The tariff for IPPs has built in immunity against PKR depreciation and inflation (both local and US). US) Therefore, Therefore depreciating PKR/USD parity should increase the ROE component and ultimately the return to equity investors. Our likeness towards the sector is derived from the fact that, yields on govt securities (10yr PIB 11.4%) have been slapping down, down while IPPs IPPs DYs stay much higher (1419%). 19%) Expected positive development on the Circular Debt issue will improve power sectors cash flows.
Others Thermal Wapda IPP share 47%
IPPs and KESC Hydel Wapda 48% 47%
50% 46% 42% 38% 34% 30%
45% 43%
200708
200809
200910
201011
IPP Universe and Others 19%
17%
Risks
The sector is Th i somehow h d dependent d upon the h subsidy b id for f power utility by the govt. Lower subsidy increases the Circular Debt, thereby negatively affecting IPPs cashflows.
59% 2% 2%
Hub Power Company Limited (HUBC PA)

35 Closing: PKR 45.24, Total Shares: 1,157.2mn, Market Cap: USD 539mn, Free Float: 70%, Avg. Daily Turnover: 2.2mn shares
Investment Case
Liquidity Position Trade receivables Trade payables Net receivables as a %age of total assets
We anticipate HUBC HUBCs s profitability to register a modest growth of 2% PKR bn YoY in FY13 to a level of PKR 7.19/share. The reason behind the 160 expected flattish bottomline growth in FY13 is the high baseeffect of Narowal plants full contribution made during FY12. 120 The dividend in FY13 is expected p to increase by y a decent 16% to PKR 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 guaranteed by the govt unlike the newer power plants. After the Narowal plant COD, HUBCs subsidiary Laraib Energy Limited is also developing 84MW hydro power project. Thus, the company can rightly be called as a growthoriented company.
80
25% 20% 15% 10%
40 FY08 FY09 FY10 FY12A

174,712 18,310 35 7,083 8,190 7.08 6.00 6.39 1.70 13% 28% 4%
5% 0% FY11 FY13E
172,360 17,334 38 5,991 8,319 7.19 7.00 6.29 1.64 15% 28% 4%
FY12 FY14F
171,035 16,912 36 5,501 8,380 7.24 7.00 6.25 1.63 15% 27% 5%

Risks
Slow recoveries from sole customer, rise in furnace oil prices and subsequently high electricity cost give rise to Circular Debt problem. Circular debt creates liquidity risk for the company and forces it to obtain highcost shortterm borrowings, resulting in high finance cost.
Kot Addu Power Company Limited (KAPCO PA)

36 Closing: PKR 49.39, Total Shares: 880.3mn, Market Cap: USD 447mn, Free Float: 20%, Avg. Daily Turnover: 0.4mn shares
Investment Case
Liquidity Position PKR bn 80 60 40 20% 20 FY08 FY09 FY10 FY11 FY12A

100,504 11,252 7,662 9,782 6,071 6.90 6.90 7.16 1 84 1.84 14% 26% 6%
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 loadfactor of 62.4% in 1QFY13, primarily because of better availability y of g gas. However, , we have conservatively assumed a loadfactor 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 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 govt is the key factor for KAPCO as well distinguishing it from other smaller IPPs operating in the country.
Trade debts Trade payables Net receivables as a %age of total assets
50% 40% 30% %
10% 0% FY12 FY13E

117,195 13,581 6,783 9,404 7,001 7.95 7.20 6.21 1 79 1.79 15% 29% 7%

Net Sales Gross Profit Other Income Finance Cost Profit after tax EPS DPS P/E P/B Div. Yield ROE ROA
FY14F
115,515 14,656 6,182 9,083 7,527 8.55 7.90 5.78 1 74 1.74 16% 31% 9%
Risks
Rise 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 loadfactor and thus impacts adversely on company financials.
Nishat Chunian Power Limited (NCPL PA)

37 Closing: PKR 21.01, Total Shares: 367mn, Market Cap: USD 79mn, Free Float: 41%, Avg. Daily Turnover: 0.8mn shares
Investment Case
Liquidity Position Trade debts Short term borrowings (STB) STB as a %age of total assets
NCPL s profitability is expected to grow by a massive 21% to PKR NCPLs 6.69/share in FY13. Like other IPPs, improved loadfactor (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 the stated growth figure. We anticipate NCPL to lure investors with everenticing dividend yield (19% in FY13 and 21% in FY14). Circular Debt has been a major problem for the 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 tariff, providing further support to the bottomline.
PKR bn 14 12 10 8 6 4 2 FY11A
25% 20% 15% 10% 5% 0%
FY12A
FY13E FY12A
21,585 5,189 34 3,081 2,025 5.51 3.50 3.81 1 29 1.29 17% 37% 8%
FY14F FY13E
24,809 5,327 78 2,810 2,456 6.69 4.00 3.14 1 10 1.10 19% 38% 9%

Net Sales Gross Profit Other Income Finance Cost Profit after tax EPS (PKR) DPS (PKR P/E (x) P/B (x) ( ) Div. Yield ROE ROA
FY14F
27,761 5,324 78 2,650 2,598 7.07 4.50 2.97 0 98 0.98 21% 35% 10%
Risks
Being a smaller IPP, slow recovery from NTDC is a big problem for NCPLs NCPL s cash flow perspective. Piling up of Circular receivables leads not only to heavy shortterm borrowings (subsequently higher finance cost) but also hampers the companys ability to carry out operations in an efficient manner.
Nishat Power Limited (NPL PA)

Investment Case
Liquidity Position Trade debts Short term borrowings (STB) STB as a %age of total assets 25% 20% 15% 10% 5% 0% FY11A FY12A FY13E FY12A
21,090 4,938 67 2,880 2,037 5.75 2.00 3.39 0 96 0.96 10% 32% 8%
NCL s earning per share is also expected to post an 8% YoY growth NCLs to PKR 6.21/share in FY13. In line with peers, improved loadfactor (75% in FY13) alongside indexation adjustments will boost NPLs net profitability. Similarly, operations and maintenance (O&M) savings and gains from fuel efficiency will also contribute towards a healthier profitability during the period. Despite higher cumulative earnings than that of its comparable peer NCPLs, NPL has distributed lower dividend (PKR 2/share against NCPLs PKR 5.5/share), which should increase the prospects of 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.
PKR bn 12 10 8 6 4 2
FY14F FY13E
24,292 4,828 75 2,589 2,200 6.21 3.00 3.14 0 83 0.83 15% 28% 8%

Net Sales Gross Profit Other Income Finance Cost Profit after tax EPS (PKR) DPS (PKR) P/E (x) P/B (x) ( ) Div. Yield ROE ROA
FY14F
27,236 4,950 88 2,372 2,537 7.17 4.00 2.72 0 73 0.73 21% 29% 9%
Risks
Piling up of Circular Debt may interrupt companys ability to procure fuel and thus raises an operational risk. Heavy shortterm borrowings increase finance cost, pushing down the company earnings.
Regional Charm (IPPs)

39
25 20 15 10 5 NCPL PA HUBC PA NPL PA 45 40 35 30 25 20 15 10 5 0 NCPL PA NPL PA KAPCO PA HUBC PA EGCO TB 600021 RPWR IN 1798 HK Equity CH Equity Equity Equity %age KAPCO 1798 HK EGCO TB 600021 RPWR IN Equity Equity CH Equity Equity 2 1.8 1.6 1.4 1.2 1 0.8 0.6 04 0.4 0.2 0 1798 HK NPL PA NCPL PA EGCO RPWR 600021 HUBC KAPCO Equity TB IN CH PA PA Equity Equity Equity %age
Dividend Yield
35 30 25 20 15 10 5
(x)
Price to Earning
NPL PA NCPL PA KAPCO HUBC PA PA
EGCO 600021 1798 HK RPWR TB CH Equity IN Equity Equity Equity
Return on Equity
Price to Book
(x)
40
Fertilizer Sector Better B tt hit th the G Gas, now! !
Fertilizer
41 Total Capacity
Key Drivers
The Economic Coordination Committee (ECC) has in principal approved the long term plan regarding the gas availability to the Fertilizer sector. Upon approval, it is expected to take 12-18 months for implementation, which will bring new hope for the plants operating on the SNGPL network. Meanwhile, the govt is working on a shortterm solution of providing 103mmcfd of gas from different fields to the fertilizer plants on SNGPL network on rotational basis. If implemented, this could be a major trigger for ENGRO, DHFL, AGRI and PAF. With inventory levels being at sufficient levels, we see least possibility urea imports (highprice urea imports is sold with a higher subsidy). Currently, NFML is carrying approximately 430k tons of inventory, that is adequate for the ongoing Rabi season. As no imports of urea is expected, the pricing power of the local manufacturers should remain intact whereby the industry would easily pass on the impact of gas price increase.
Utilized capacity 39.13% 60.87% Unutilized capacity mn tons 14 12 10 8 6 4 2 0 200 06 200 07
Offtakes
Imported Local Industry 200 08 200 09 201 10 201 11 201 12 mmcfd 13 8 22 60 103
Risks

Failure to implement longterm / short term gas allocation plans. Increase in gas prices in addition to the GIDC. Implementation of District Development Surcharge (DDS) and failure of any passon of the same.
Short Term Gas Availability Plan Fields Reti Maru Sara West Mari New Discovery Guddu Thermal Power (kandkot) Total
Source;:Arif Habib Research
Fauji Fertilizer Company Ltd (FFC PA)

Target Price (Dec13 ): PKR 136/share Upside 16%
Investment Case
mn tons
FFC has h been b the h major j beneficiary b fi i of f the h gas curtailment il i 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). Ability b l to operate plant l 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 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 9095% (average for 3 years) translating into attractive dividend yield of 13% for CY13 and CY14.
7.0 60 6.0 5.0 4.0 3.0 2.0 1.0 0.0 2006

PKR/bag
Market Share Comparison FFC Industry
2007
2008
2009
2010
2011
PKR/mmbtu
Urea and Gas prices Urea Feed stock Fuel stock
2000 1500 1000 500 0 2004
600 500 400 300 200 100 0 2012 CY13F

75,150 34,205 3,988 1,159 19,952 15.69 14.90 7.5 6.3 13% 84% 35%
2005
2006
2007
2008
2009
2010
CY11A
CY12E
Risks
Subsidized imported urea to hurting sales. Nonresolution of this issue could impact our basecase 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.
Net Sales 55,221 73,631 Gross Profit 34,349 35,885 Other Income 6,630 4,229 Finance Cost 786 976 Profit after tax 22,492 20,822 EPS (PKR) 17.68 16.37 DPS (PKR) 13.30 15.80 P/E (x) 6.6 7.2 P/B (x) 6.9 6.6 Div. Yield 11% 13% ROE 104% 92% ROA 41% 38% Sources: Company accounts and Arif Habib Research
2011
Fauji Fertilizer Bin Qasim Ltd (FFBL PA)

43 Closing: PKR 38.6, Total Shares: 934.11mn, Market Cap: USD 370.86mn, Free Float: 35%, Avg. Daily Turnover: 2.2mn shares
Investment Case
Focus would remain on DAP as a primary product for the company sales due to its lower gas requirement in comparison to urea. Even in the scenario of low gaspressure from SSGC, FFBL continues to operate its DAP plant. DAPs primary margins are expected to flourish as Phosphoric acid prices are projecting downward trajectory in the intl 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 prices by b PKR 100/bag /b in the h 4QCY12 (neutralizing ( l PKR depreciation d impact as well), translating into a solid 700bps higher gross margins expected in 4QCY12. DAP (primary product) is always sold on import parity, premium price i in i comparison i with ith intl i tl DAP prices. i Lesser gas curtailment on SSGC network in comparison with SNGPs to benefit the company in relation to other peers. 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.
USD/tons Phosphoric Acid Conversion Local DAP Primary Margins
CY11 698 321 440 119
CY12E 934 430 635 205
CY13F 859 395 654 259
CY14F 885 407 674 267
CY15 912 419 694 275
Source: Arif Habib Research

CY11A
55,869 20,116 1,650 1 088 1,088 10,767 11.53 10.00 3.3 0.1 26% 79% 27%
CY12E
45,152 11,045 800 1 783 1,783 4,044 4.33 4.20 8.9 0.1 11% 29% 10%
CY13F
50,939 12,329 589 929 5,792 6.20 5.60 6.2 0.1 15% 40% 14%
Risks

Sources: Company accounts and Arif Habib Research
Engro Corporation (ENGRO PA)

44 Closing: PKR 92, Total Shares: 511.27mn, Market Cap: USD 484mn, Free Float: 50%, Avg. Daily Turnover: 3.9mn shares
Investment Case
Gas supplies to companys old plant are being curtailed by 12% while the new plant (EnVen) is facing as high as 80% curtailment. Companys new plant of 1.3mn tons capacity requires at least 80mmncfd gas supply to sustainably operate whereby the short term gas allocation plan, as discussed in the sector part earlier, f focuses on supply l of f gas to t the th sector t including i l di Engros E new plant. l t On a conservative note, we have assumed that EnVen would receive 20% of the committed gas till 2014 and 25% in 2015, and from 2015 onwards, the plan is expected to receive EnVen 50% of the committed gas supply. Engro Fertilizer is projected to contribute only 13% to companys profitability in CY13. In this regard, the growing food and energy business would support companys bottomline with expectedly increase bottomline contribution of 42% and 24%, respectively, in CY13. Gas supply remains a threat. No resolution of this issue may further impact company financials negatively. While 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.
25 20 15 10 5
Target Prices (PKR/share) g Fertilizer Engro Engro Foods Engro Polymer Eximp Power Gen Vopak Target Price Dec13
Source; Arif Habib Research
Dec13 39.0 71.0 10.4 8.5 24.0 5.0 158 Finance cost
Corp Stake 100% 88.5% 56.2% 100% 100% 50%

PKR bn
PAT
CY10A
CY11A
CY12E CY11A
114,612 32,081 2,057 12,315 7,811 20.5 6.0 44 4.4 1.1 6.6% 18.6% 4.3%
CY13F CY12E
120,270 31,730 1,453 13,814 2,279 4.5 20 4 20.4 1.1 0.0% 5.5% 1.3%
CY13F
123,467 7,538 1,605 8,396 7,538 14.7 7.0 62 6.2 1.0 7.7% 15.6% 4.2%
Risks
Regional Charm (Fertilizer)

45
(x) 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 ENGRO
%age
Price to Earning
(x) 7 6 5 4 3 2 1 0
Price to Book
FFBL
FFC PA Equity
3983 HK Equity
TTCH IN SAFCO AB 1722 TT Equity Equity Equity

%age
ENGRO
TTCH IN Equity
1722 TT Equity
3983 HK Equity
FFBL
FFC PA Equity
SAFCO AB Equity
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FFC PA Equity SAFCO AB Equity
Return on Equity
14% 12% 10% 8% 6% 4% 2% 0%
Dividend Yield
FFBL
ENGRO
3983 HK Equity
TTCH IN Equity
1722 TT Equity
FFC PA Equity
FFBL
ENGRO SAFCO AB 3983 HK Equity Equity
1722 TT Equity
TTCH IN Equity
46
Textile Sector
A stitch in time saves nine
Textile
47
Key drivers
PKR Depreciation and Textile Exports 50% 40% 30% 20% 10% 0% 10% 20% Raw cotton prices and textile exports 100% 80% 60% 40% 20% 0% 20% 40% 60% FY09 FY10 FY11 FY12 10% 35% 18% 10% 35% 10% 39% Growth in cotton prices 92% Growth in textile exports FY09 FY10 FY11 FY12 10% 27% 18% 10% 6% 39% PKR depreciation Growth in textile exports 2% 4%
The recent commencement of the trade under the Autonomous Trade Preference (ATP) programs, and an upcoming GSPPlus status, is going to provide Pakistan products, mainly Textiles, more access to EU, American and other highpotential markets, which will increase countrys exports sequentially. As per estimates, only ATP program would add an additional USD 540mn to countrys exports in 2013. The depreciation in PKR/USD parity proves to be a blessing in disguise for the Textile industry as it increases the revenue in local currency. We believe that 3.7% PKR devaluation so far in current fiscal year against the greenback will be reflected positively in export statistics. We believe raw cotton prices to remain in favor of the Textile manufacturers in coming year. Global cotton prices remained in the range of US cents 7986 FY13TD, while China with massive procurement is contributing to maintain the floor.
Risks
The sector is vulnerable to increasing energy crisis in the country. Increased power outages force manufactures to rely upon expensive alternates, making it difficult for them to compete in global markets. Hike in cotton prices is another risk for Textile companies as manufacturers generally avoid taking intl orders during such periods. As seen in graphs, an abnormal hike in cotton prices during FY11 contributed towards 10% lower Textile exports during FY12.
Nishat Mills Limited (NML PA)

Investment Case
Segment Information*
Spinning Weaving Processing Garments
We expect NML NMLs s profit to jump by hefty 27% YoY to PKR 7% 12.74/share in FY13, translating into an attractive P/E of 5x. Dividend 7% 23% is also expected to continue the increasing trend and the scrip is expected to yield 6% in FY13. Steady demand from intl markets coupled with favorable cotton prices and depreciating PKR against USD will be the driving factors 34% behind 27% YoY expected increase in net profit after tax in FY13. 28% Activation of additional exports under the Autonomous Trade Preference (ATP) programs can boost NMLs exports to lucrative US and EU markets. markets *Including intersegment sales Being a composite unit is another plus for NML as it can procure raw Financial Highlights (PKR mn) FY12A material, like yarn and cloth (inter segmental sales) on a timely Net Sales 44,924 basis as well as at attractive prices. Gross Profit 6,789 2,684 Steady dividend income from Nishat Power Limited, D. G. Khan Other Income 1,761 Cement Limited and MCB Bank Limited, will provide further support Finance Cost Profit after tax 3,529 to bottomline and cashflows of the Textile giant.
EPS (PKR) P/E (x) P/B (x) Div. Yield ROE ROA 10.04 3.5 6.36 0 59 0.59 5% 10% 6% DPS (PKR)
FY13E
52,118 8,516 2,018 1,728 4,479 12.74 3.7 5.01 0 51 0.51 6% 11% 7%
FY14F
57,463 9,125 2,666 1,785 5,144 14.63 4.0 4.36 0 47 0.47 6% 11% 8%
Risks
Rise in cotton prices can put pressure on company margins and lower price competitiveness in the intl markets. Pakistans ineligibility to qualify for GSPPlus status can reduce exports and thus will negatively impact our estimates for NMLs valuation and profitability.
Regional Charm (Textile)

49
7 6 5 8 4 3 2 1 0 NML PA 30 25 0.8 20 15 10 5 0 INT TAIFENG HOLDING HK NML PA SAHA UNION CORP TB VARDHMAN TEXTILES IN KOMATSU SEIREN CO JP 0.6 0.4 0.2 0 NML PA KOMATSU VARDHMAN SAHA UNION INT TAIFENG SEIREN CO JP TEXTILES IN CORP TB HOLDING HK %age INT TAIFENG HOLDING HK SAHA UNION CORP TB KOMATSU SEIREN CO JP VARDHMAN TEXTILES IN 1 (x) 6 4 2 0 KOMATSU INT TAIFENG SEIREN CO JP HOLDING HK NML PA SAHA UNION VARDHMAN CORP TB TEXTILES IN %age
Dividend Yield
12 10
(x)
Price to Earning
Return on Equity
Price to Book
50
Telecom Sector
Anchoring the connectivity revolution!
Telecom
51
Key Drivers
Broadband Operators Markat Share 4% 11% PTCL 9% 10% Wateen WorlCall 58% 14% WiTribe Qubee Others
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. 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.
d Generation) The h 3G (3 ( rd ) spectrum auction expected d next year, will ll 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.
Source: PTA report Dec 11
Million 160 140 120 100 80 60 40 20 0 2012 120
Subscriber's Forecast 161 132 WLL & FLL Mobile
Risks
Market players operating in the telecom and broadband Industry must lure customers with lower prices & more exciting services, this tends to drive industry profitability down. 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.
Broadband 12 19.5 5.36 2020
5.97 2.17
3.96 2015
Pak Telecom Company Limited (PTC PA)

52 Closing: PKR 17.35, Total Shares: 5,100mn, Market Cap: USD 910mn, Free Float: 16%, Avg. Daily Turnover: 6.7mn
Investment Case
In our valuation I l ti estimates, ti t we have h assumed d the th intl i tl incoming i i minutes to decline by a massive 50% in FY13 on account of boosted margins for the telecom operators amid massively increased rates. Going forward, we have assumed 30% decline in LDI inflows because of deformation of the ICH arrangement g that will attract competition p for LDI operators. Despite dissolution of the ICH, PTCL will remain the main beneficiary of this new intl incoming calls setup as it is expected to hold 50% of LDI market share, which also constitutes 15% of its total revenues. The overall EVDO subscriberbase (a product offered by PTC and Worldcall Telecom only) has shown massive growth of 38% from Dec11 to Aug12, making further room for new PTC subscribers. We expect PTC dividends to improve with gradual rise in profitability profitability.
PTC Sensitivity to LDI Margins Margins in US cents/min 5.8

FY13 EPS FY14 EPS 1.78 3.80
PKR
4.8
1.46 3.45
3.8
1.13 3.10
2.8
0.80 2.88 20.7
Target Price 28.3 25.8 23.3 Source: Company accounts and Arif Habib Research estimates

Net Sales Gross Profit GP Margin Other Income Finance Cost Profit after tax EPS (PKR) DPS (PKR) P/E (x) P/B (x) Div. Yield ROE ROA
FY12A
110,793 38,589 35% 4,619 3,305 11,438 2.24 7.74 0.74 0% 10% 5%
FY13E
124,419 47,873 38% 5,880 3,429 9,081 1.78 1.50 9.74 0.73 9% 8% 4%
FY14F
134,568 52,737 39% 6,894 3,508 19,373 3.80 2.25 4.57 0.69 13% 16% 8%
Risks
Continued competition by other operators in the broadband and wireless telephone segment poses a threat to PTCLs customer base even though h h it i has h a better b coverage across the h country. Greater than expected competition will force the LDI operators to bring down intl call termination rates in coming years, which will negatively reflect on PTCs financials.
Regional g Charm ( (Telecom) )

53
(x) 30 25 20 15 10 5 0 PTC PA %age 35% 30% 25% 20% 15% 10% 5% 0% MAXIS MK EXCL IJ TPM AU PTC PA BHARTI IN SLTL SL 728 HK EXCL IJ 728 HK SLTL SL MAXIS MK TPM AU BHARTI IN
Price to Earning
8 7 6 5 4 3 2 1 0 PTC PA 728 HK (x)
Price to Book
SLTL SL BHARTI IN EXCL IJ
TPM AU MAXIS MK
Return on Equity
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
%age
Dividend Yield
PTC PA MAXIS MK TPM AU
EXCL IJ
728 HK
SLTL SL BHARTI IN
54
OMC Sector
Rush at the Pump!
Oil Marketing
55
Key Drivers
Oil consumption (excluding nonenergy) is expected to post a 4% YoY volumetric growth to 19.4mn tons in FY13, mainly on account of strong Motor Spirit (MS) and Furnace Oil (FO) volumes, while Diesel sale is anticipated to remain a dragger for overall oil consumption. Frequent q suspension p of CNG coupled p with import p restrictions on CNG cylinders 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 in FY13. With elections around the corner, the govt is expected to improve on power cuts in the country leading to a 3% YoY growth in FO demand. Increased use of CNG in public transport has dropped HSD consumption by 6% in 5MFY13. However, we expect demand to recover to some extend with fullyear consumption to stand at 6.6mn tons restricting g decline to only y 3% YoY. Strong oil pricing is anticipated to keep deregulated products margins buoyant. As demanded by OMCs, any margin increase in retail fuel segment would improve the profitability of OMCs to a great extent.
Pakistan Oil Consumption; FO and MS Leading the Way mnton FO LDO 25 HSD JP 20 15 KERO MS
10 5 FY11 FY12 FY13 FY14
Crude Oil Price and Margins Sensitivity PKR per share PSO APL Source; Arif Habib Research
Crude Oil On USD +5/bbl 3.0 1.4
Margins up PKR 0 5/ltr 0.5/ltr HSD 7.4 4.1 MS 3.6 1.4
Risks
Drop in oil prices would curtail margins on deregulated products as well as result in massive inventory losses. Intensity of Circular Debt would pose a liquidity risk for the OMCs.
Pakistan State Oil Company Limited(PSO PA)

Target Price (Dec13): PKR 285/share Buy
Investment Case
Declining Receivables and Payables pushing Penal Interest down PKR bn 300 250 200 150 100 50 Receivables (LHS) Finance Cost (RHS) PKR bn 14 Other income (RHS) 12 Payables (LHS) 10 8 6 4 2 0 FY11 FY12 FY13 FY14
Downwards D d sticky i k oil il prices, i h l h oil healthy il demand d d and d falling f lli finance fi cost are all expected to yield a massive 53% YoY earnings growth in PSOs bottomline in FY13. Being the largest player in FO and MS (Petro) segments, having 52% 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 to refineries alongside interest rate cuts. To tackle the chronicle issue of Circular Debt, the govt is planning to raise PKR 320bn, which will positive for the entire energy chain in general, g , and PSO in p particular.
FY12A
FY13E
FY14F
1,370,449 38,791 6 167 6,167 4,821 14,786 71.85 10.00 3.2 06 0.6 4% 21% 6%
Risks
Decline/increase in oil prices as every USD5/bbl change impacts 4% on the bottomline of the company either way. 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.
Net Sales 1,024,424 1,285,880 Gross Profit 34,323 38,749 Oth I Other Income 9 685 9,685 6 239 6,239 Finance Cost 11,659 6,783 Profit after tax 9,056 13,842 EPS (PKR) 44.01 67.26 DPS (PKR) 5.50 8.00 P/E (x) 5.3 3.4 P/B (x) ( ) 10 1.0 08 0.8 Div. Yield 2% 3% ROE 20% 25% ROA 3% 5% Sources; Company accounts and Arif Habib Research
Regional g Charm ( (OMCs) )

57 Price to Earning
25 00 25.00 20.00 15.00 10.00 5.00 0.00 PSO PA 018670 KS 8097 JP APL PA PNX PM BCP TB SOMS OM 10.00 10 00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 8097 JP PSO PA 018670 KS BCP TB PNX PM APL PA SOMS OM
Price to Book
Return on Equity
45% 40% 35% 30% 25% 20% 15% 10% 5% 0% SOMS OM APL PA PSO PA PNX PM 018670 KS BCP TB 8097 JP 12% 10% 8% 6% 4% 2% 0%
Dividend Yield
APL PA SOMS OM BCP TB
8097 JP
PSO PA 018670 KS PNX PM
58
Banking Sector
Y can b You bank k on it!
Banks
59
PKR 000
Key Drivers
7,000 6,000 5,000 4,000 3,000 2 000 2,000 1,000
Deposits
Advances
Investments
Banks k Deposit base b in CY12TD has h augmented d by b 10.9%. With h PLS rate unlikely to be reduced from 6% in the near future, deposits in CY13 are expected to grow by an average 14.5% YoY. With possible reversal in the policy rate during 2HFY13, banks declining spreads will take a breather and will support margins. margins Advances have grown by 8.6% to PKR 3.8tr mainly due to loans to power 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 Nov12 compared to 62% in the same period last year. IDR on the other hand, has jumped from approximately to 58.1% from 54.7%. In CY13, the focus is again expected towards investing rather than lending out due to higher PLS and lower lending rates, respectively. A spree of M&As in the sector still cannot be ruled out amid rising b d of burden f minimum i i capital i l requirement i (MCR) .
May'12
Aug'12
Feb'12
Sep'12
Oct'12 Philippines
Mar'12
8% 7% 6% 5% 4% 3% 2% 1% 0%
Banking Spreads in Asian Region
Risks
Banking spreads shrank to 6.67% amid backtoback policy rate cuts while continuity of the same will reduce spreads further. Continuity of the minimum rate requirement on PLS a/c of 6% irrespective of policy rate cuts will further reduce banks NIMs. SBPs revised minimum capital requirement of PKR10bn in a phased manner up till CY13 (CY12 limited is PKR 8bn), banks not meeting this requirement will be subject to penalty by the SBP.
Bangladesh h
Indonesia a
India a
China a
Sri Lanka a
Pakistan n
Thailand d
Nov'12
Apr'12
Jan'12
Jun'12
Jul'12
Bank Alfalah Limited (BAFL PA)

Investment Case
7 6 5 4 3 2
PKR EPS(LHS) NIMs(RHS)
5.5% 5.0% 4.5% 4.0% 3.5% 3 0% 3.0%
BAFL is i expected d to post a significant i ifi net earnings i growth h of f 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. Main M i driver di of f the th banks b k bottomline b tt li growth th would ld be b expected t d increase in banks net interest income by 15.8% YoY. Total provisioning against NPLs is expected to increase by 12% YoY, to improve banks coverage ratio and thus asset quality. Advances and Investments to grow 13% YoY (due to lower discount rate) and 9.4% YoY, respectively. Intends to introduce products, going forward. more higheryielding branchless
1 0 CY09 CY10 CY11 CY12F CY13F CY14F
Financial Highlights (PKR bn)

Net Interest Margins (%) Net Profit ROE (%) EPS (PKR) P/E (x) P/B (x) P/ DPS (PKR) Div Yield (%) Source: Company account, Arif Habib Research
CY11A
5 09% 5.09% 3.50 14.6% 2.60 6.48 0.88 1.75 10.4%
CY12F
4 61% 4.61% 4.97 18.3% 3.68 4.57 0.80 1.75 10.4%
CY13F
4 65% 4.65% 6.52 21.4% 4.84 3.48 0.70 2.00 11.9%
Ri k Risks
Any fasterthan expected deterioration in the overall economy will increase sector NPLs, while BAFLs coverage ratio is also expected to take effect of 0.5% YoY (CY13E: 68.82%). Spreads S d and d thus h banks b k NIMs NIM may shrink h i k further f h on the h back b k of f any further cut in discount rate by the central bank.
National Bank of Pakistan (NBP PA)

Investment Case
18 16 14 12 10 8 6 4 2 0
PKR
EPS(LHS)
NIMs(RHS)
5.8% 5 7% 5.7% 5.6% 5.5% 5.4% 5.3% 5.2% 5.1% 5.0% 4.9%
With 75% government holding in NBP, NBP the bank acts as the governments Treasurer and holds most of the liquidity and low cost Current AccountSavings Account (CASA) category containing huge salaried accounts of the govt employees (mostly on the zerorate current account side), which continues to support banks margins to a great extent despite interest rate cuts. Largest deposit holder in the country with PKR 1,242bn deposits as of Dec13 and second largest branch network of 1,300 branches (CY11) to provide more leverage against peers. Extensive focus towards improving p g nonfunded income which is expected to be PKR 8bn in CY13E to drive earnings growth. NBP maintains sizeable investments in capital market, which is expected to result in substantial gains in CY12 as equity market has returned 49% in CY12, thereby providing boost to other income of the bank. bank One of the highest dividendyielding banks (CY12E: 15.1%).
CY09
CY10
CY11
CY12F
CY13F
CY14F

Net Interest Income Net Profit ROE (%) EPS (PKR) P/E (x) P/B (x) P/ DPS (PKR) Div Yield (%) Source: Company accounts, Arif Habib Research
CY11A
5.59% 17.60 13.6% 9.52 5.19 0.69 7.50 15.1%
CY12F CY13F
5.38% 20.97 14.4% 11.34 4.36 0.62 0.6 7.50 15.1% 5.18% 24.70 15.5% 13.35 3.70 0.58 7.50 15.1%
Risks
Any fasterthan expected deterioration in the overall economy will increase sector NPLs, and for Public banks in particular, where NBP may contribute significant amount to the category. Continuity in interest rate cut will impact NIMs to certain extent for the bank.
United Bank Limited (UBL PA)

62 Closing: PKR 83.67, Total Shares: 1349mn, Market Cap: USD 1,054mn, Free Float: 25%, Avg. Daily Turnover: 0.97mn shares
Investment Case
PKR 25 20 15 10 5 0 EPS(LHS) NIMs(RHS) 6% 6% 6% 5% 5% 5% 5% 5% 4% 4% CY09 CY10 CY11 CY12F CY11A

5.81% 15.50 21.0% 12.66 6.61 1.29 7.50 8.9%
Banks B k CASA is i expected d to improve i to 68.1% 68 1% from f CY11 67.93% CY11s 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 the h year while h l other h income is also l expected d to grow on the h back b k of massive gains on equity market portfolio during CY12. Advances (due to lower discount rate) and investments to grow 13% YoY and 12% YoY, respectively. Profitability, through other income, to go up next year due to growing remittances business due to evergoing branchless banking (via branchless product like Omni). UBL is expected to post net earnings growth of 22% YoY in CY12 (EPS: PKR 15.45). We expect the bank to declare a cash dividend of PKR 8/share in CY12.
CY13F
CY14F CY12F
5.05% 18.91 22.5% 15.45 5.42 1.16 8.00 9.5%

Net Interest Margins Net Profit ROE (%) EPS (PKR) P/E (x) P/B (x) DPS (PKR) Div Yield (%) Source: Company, Arif Habib Research
CY13F
4.85% 20.30 21.4% 16.58 5.25 1.01 8.00 9.5%
Risks
Any faster A f than h expected d deterioration d i i i the in h overall ll economy should increase sector NPLs. Spreads and thus banks NIMs may shrink further should the central bank continue with its easing stance going forward.
Regional g Charm ( (Banks) )

63 Return on Assets
3% 2% 2% 1% 1% 0% KMB IN NBP PA UBL PA NBAD UH BAFL PA BAC US 8604 JP 4 4 3 3 2 2 1 1 0 BAC US NBP PA BAFL PA 8604 JP UBL PA NBAD UH KMB IN
Price to Book
25% 20% 15% 10% 5% 0% BAFL PA UBL PA
Return on Equity
16% 14% 12% 10% 8% 6% 4% 2% 0%
Dividend Yield
NBP PA
KMB IN
NBAD UH
8604 JP
BAC US
NBP PA
BAFL PA
UBL PA
NBAD UH
8604 JP
BAC US
KMB IN
64
Auto Sector
Few speedbreakers ahead!
Automobile
65
Car Sales; Dropping at 10% CAGR (FY1214)
Key Drivers
000' units
Imports p
HCAR C
PSMC SMC
INDU N U
After witnessing a massive decline of 15% in FY13TD, sales from local Auto assemblers is expected to improve by 5% in FY14, as influx of imported cars is anticipated to slowdown after governments recent decision of reducing age limit of imported cars to three years. Local industrys pricing power has once again restored with the placement of the mandatory limits on imported cars (3 years old only). With everrising remittances in the country, up 14.2% YoY in 5MFY13 (a total of USD14.9bn expected ( p by y FY13 end) ) declining g interest rates (rising car financing) and increase in Wheat support price by the govt, 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 PKR d depreciation against the h USD by b a slightly l h l larger l portion, thereby h b relatively benefiting the local Auto assemblers.
250 200 150 100 50 FY11A FY12A FY13E FY14F
000' units
Industry Sales Cars Jeeps Pick ups Total
Risks
Competition from imported cars not only hurts local Auto industrys sales l b t also but l weakens k pricing i i power of f th the domestic d ti Assemblers, which squeezes industry margins. PKR depreciation against USD and JPYs appreciation against USD simultaneously may hurt local industrys margins.
200 180 160 140 120 100 80 60 40 20 0 FY08 FY09 FY10 FY11 FY12
Indus Motors Ltd (INDU PA)

66 Closing: PKR 270, Total Shares: 78.6mn, Market Cap: USD 218mn, Free Float: 25%, Avg. Daily Turnover: 0.01mn shares
Investment Case
Sales volume breakup (k units)

50 40 Coure 30 Hilux 20 10 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Financial Highlights (PKR mn)
I Import restriction i i on ageli limit i of fJ Japanese cars would ld b be positive ii and would help in lifting company volumetric sales ahead. Strong pricing power of the company due to having wellrecognized brands in its portfolio with strong brand equity (66% and 28% increase in the h prices of f Corolla ll and d Hilux l variants, respectively, since 2007, mainly on account of PKR depreciation). Growing demand of rebranded Hilux, and expected boost in its sales in the upcoming elections should provide support to companys bottomline. High customization in Corolla (addons e.g. Navigation, DVD and back view camera) to fetch more volumes. SUV Toyota Fortuner, a new product, is expected to be launched in March13, providing further impetus to the company bottomline.
Corolla
Total
FY12A
76,963 6,562 1,773 59 4,303 54.74 32.00 4.9 12 1.2 11.9% 25% 16%
FY13E
72,038 5,926 1,097 40 3,391 43.15 21.88 6.3 11 1.1 8.1% 18% 12%
FY14F
77,634 6,362 1,059 37 3,544 45.09 24.61 6.0 10 1.0 9.1% 16% 11%
Risks
Influx of imported cars (around 47% of total imported cars in FY12 were 1,300cc and above, directly affected Corolla sales). After discontinuation of Coure, no economy class product to capture lower and middle class segment. Other income (comprises about 41% of FY12 earnings) to remain depressed due to lower advances and returns on bank deposits.
Sources: Company accounts and Arif Habib Research
Regional Charm (Autos)

67
(x) 12 10 8 6 4 2
%age
(x)
Price to Earning
3 00 3.00 2.50 2.00 1.50 1.00 0.50 693 HK Equity PSMC PA INDU PA Equity Equity STC SP Equity NHF MK 600335 IMPL IN Equity CH Equity Equity
%age
Price to Book
PSMC PA NHF MK Equity Equity
693 HK Equity
STC SP Equity
INDU PA Equity
IMPL IN 600335 Equity CH Equity
35% 30% 25% 20% 15% 10% 5% 0% 600335 CH IMPL IN Equity Equity
Return on Equity
9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
Dividend Yield
INDU PA Equity
693 HK Equity
STC SP Equity
NHF MK PSMC PA Equity Equity
INDU PA NHF MK Equity Equity
STC SP Equity
693 HK PSMC PA IMPL IN 600335 Equity Equity Equity CH Equity
68
Arif Habib Research Valuation Guide

69
Closing Price ACPL 100 APL 512 BAFL 16.8 DGKC 55 ENGRO** 92 EPCL** 10.1 FCCL 6.5 FFBL 39 FFC 117 HUBC 45 INDU 270 KAPCO 49 KOHC 70.6 LOTPTA** 7.4 LUCK 152 MCB 210 MEBL 30 NBP 49 NCPL 21 NML 64 NPL 20 OGDC 193 POL 438 PPL PSMC 88 PSO 232 PTC 17.4 SNGP 23 UBL 84 Symbol TP 104 559 28 75 158 10.4 11.5 45 136 63 319 60 125 8.6 213 238 31 68 25 86 24 210 499 101 285 28.3 27 113 Upside Stance 4% 9% 64% 37% 72% 2% 76% 17% 16% 38% 18% 22% 77% 17% 40% 14% 4% 39% 20% 35% 23% 9% 14% 16% 23% 63% 17% 35% Hold Hold Buy Buy Buy Hold Buy Buy Buy Buy Buy Buy Buy Buy Buy Hold Hold Buy Buy Buy Buy Hold Hold Buy Buy Buy Buy Buy EPS DPS P/E OS (mn) 201112 201213 201314 201112 201213 201314 201213 201314 100 14.43 19.53 16.85 8.50 10.00 10.00 5.11 5.92 69 59.61 68.69 71.89 45.00 50.00 55.00 7.45 7.12 1349 2.60 3.68 4.84 1.75 1.75 2.00 4.57 3.48 438 9.38 11.74 10.64 1.50 3.00 3.00 4.65 5.13 511 15.28 4.46 15.57 6.00 7.00 20.64 5.91 663 (1.06) 0.15 0.24 42.24 1331 0.28 1.77 1.87 3.70 3.50 934 11.53 4.28 6.13 10.00 3.70 5.50 9.02 6.30 1272 17.68 16.38 15.66 20.00 15.80 14.90 7.15 7.48 1157 7.08 7.19 7.24 6.00 7.00 7.00 6.29 6.25 79 54.74 43.15 45.09 15.00 32.00 21.00 6.26 5.99 880 6.90 7.95 8.55 6.90 7.20 7.90 6.21 5.78 129 12.90 20.15 18.70 3.00 6.00 6.00 3.50 3.78 1514 2.76 (0.28) 0.46 0.50 0.50 15.93 323 20.97 30.25 29.03 4.00 6.00 6.00 5.01 5.22 920 21.12 23.81 23.89 12.00 13.00 14.00 8.81 8.78 903 3.75 4.23 4.71 1.00 1.50 2.00 7.11 6.38 1850 9.52 11.34 13.35 7.50 7.50 7.50 4.36 3.70 367 5.51 6.69 7.07 3.50 4.00 4.50 3.14 2.97 352 10.03 12.74 14.63 3.50 3.70 4.00 5.01 4.36 354 5.75 6.21 7.17 2.00 3.00 4.00 3.14 2.72 4301 22.53 23.10 24.30 7.25 7.50 7.50 8.34 7.93 237 50.11 61.44 69.80 52.50 55.00 60.00 7.12 6.27 Coverage Restricted 82 9.65 16.09 11.71 2.00 4.00 2.00 5.45 7.48 206 44.00 44 00 67 24 67.24 71 79 71.79 5 50 5.50 8 00 10.00 8.00 10 00 3 45 3.45 3 23 3.23 5100 2.24 1.78 3.80 1.50 2.25 9.74 4.57 576 1.95 2.53 2.70 1.00 1.50 1.50 9.21 8.61 1224 12.66 15.45 15.93 7.50 8.00 8.00 5.42 5.25 Div. Yield P/B ROE 201213 201314 201213 201314 201112 201213 10.0% 10.0% 1.50 1.31 23.1% 27.3% 9.8% 10.7% 2.86 2.58 34.4% 36.4% 10.4% 11.9% 0.73 0.63 17.4% 19.4% 5.5% 5.5% 0.73 0.64 13.0% 14.6% 0.0% 7.6% 1.13 0.98 5.5% 17.7% 0.0% 0.0% 1.06 1.03 10.7% 1.6% 0.0% 0.0% 0.63 0.53 3.0% 15.5% 9.6% 14.3% 2.57 2.47 28.9% 40.0% 13.5% 12.7% 6.59 6.31 91.2% 86.1% 15.5% 15.5% 1.70 1.64 27.2% 26.5% 11.9% 7.8% 1.25 1.10 27.6% 18.7% 14.6% 16.0% 1.84 1.79 25.5% 29.2% 8.5% 8.5% 2.42 1.52 56.7% 53.4% 0.0% 6.8% 0.88 0.86 36.8% 3.3% 4.0% 4.0% 1.47 1.19 22.2% 26.3% 6.2% 6.7% 1.88 1.71 22.9% 20.4% 5.0% 6.7% 1.52 1.31 24.2% 22.1% 15.2% 15.2% 0.60 0.58 14.7% 15.9% 19.0% 21.4% 1.29 1.10 37.2% 37.8% 5.8% 6.3% 0.59 0.51 9.6% 10.9% 15.4% 20.5% 0.96 0.83 32.1% 28.4% 3.9% 3.9% 2.72 2.20 41.2% 34.7% 12.6% 13.7% 2.56 2.42 34.5% 38.4% 4.6% 3 4% 3.4% 8.6% 6.5% 9.6% 2.3% 4 3% 4.3% 13.0% 6.5% 9.6% 0.42 0 96 0.96 0.74 0.70 1.16 0.40 0 76 0.76 0.73 0.67 1.04 5.3% 19.7% 19 7% 10.1% 5.9% 22.5% 8.2% 24.6% 24 6% 7.6% 7.4% 20.8%
*Closing price as of Dec 31 , 2012, **Earnings on consolidated basis
Notes
70
Notes
71
Disclaimer
72
Analyst certification: The analysts for this report certify that all of the views expressed in this report accurately reflect their personal views about the subject companies and their securities, and no part of the analysts compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. report Disclosures and disclaimer : This document has been prepared by investment analysts at Arif Habib Limited (AHL). AHL investment analysts occasionally provide research input to the companys 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 and potential clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities. The information contained herein is based upon p p publicly y available data and sources believed to be reliable. While every y care was taken to ensure accuracy y and objectivity, 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 the investment 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 be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves the right 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 the information current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended d d to be b and d must not alone l b taken be k as the h basis b f any investment decision. for d The h user assumes the h entire risk k of f any use made d of f this h information. f Each h recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies 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 of such 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 error in 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, and buy or sell the securities thereof, company (is) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor to such company (is) or have other potential conflict or interest with respect to any recommendation and related information and opinions. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. AHL generally prohibits it analysis, persons reporting to analysts and their family members from maintaining a financial interest in the securities that the analyst covers. Arif Habib Researchs coverage excludes Fatima Fertilizer Company Limited (FATIMA), an Arif Habib Group company, while Pakistan Petroleum Limiteds (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 this publication may be copied, reproduced, stored or disseminated in any form or by any means without the prior written consent of Arif Habib Limited.
Annexure
List of Abbreviation
73
3G 3rd Generation 4G 4th Generation A/C Account ADB Asian Development Bank ADR Advance to Deposit Ratio AL Arab Light ANP Awami National Party APMDA All Pakistan Motors Dealer Association BN Billion BOP Balance of Payments BPD Barrel per day BPS Basis Points BTU British Thermal Unit BV Book Value CAD Current Account Deficit CAGR Compound Average Growth Rate CAR Capital Adequacy Ratio CFY Cashflow Yield CNG Compressed Natural Gas CPI Consumer Price Index CRR Cash Reserve Requirement CSF Collation Support Fund CY Calendar Year CYTD Calendar Year to date DAP Diammonium Phosphate DEP Depreciation DHDS Diesel Hydro Desulphurization DPS Dividend per share DR Discount rate DSC Defence Savings Certificates DY Dividend Yield E&P Exploration & Production EBIT Earning before interests & taxes EBITDA Earning before interest, taxes, depreciation & amortization EGrow Earnings Growth EM Emerging Market EPS Earning per share EV Enterpise Value EY Earning Yield FC Factor cost FIPI Foreign Investor Portfolio Investment FM Frontier Market FMCG Fast Moving Consumer Goods FO Furnace Oil FOB Freight on Board FSV FX/Forex FY G2P GDC GDP GDS GENCO GM GoP Gov't GRM HOBC HoH HSD IDR IFEM IFI IMF Int'l IPI IPO IPP IPS JUI Kero KIBOR KPD KSE LDI LDO LIBOR LIPI LPG LSM LTE M&A MCR MEG MFN MMCFD MN MOGAS MoU MP Forced Sale Value Foreign Exchange Fiscal Year Government to Person Gas Distribution Companies Gross Domestic Product Gas Development Surcharge Generation Companies Gross Margin Government of Pakistan Government Gross Refinery Margin High Octane Blended Component Half on Half High Speed Diesel Investment to Deposit Ratio Inland Freight Equalization Margin International Financial Institutions International Monetary Fund International IranPakistanIndia Initial Public Offering Independent Power Producer Investor Portfolio Securities Jamiat Ulema Islam Kerosene Oil Karachi Interbank Offered Rate Kunnar Pasaki Deep Karachi Stock Exchange g Long Distance International Light Diesel Oil London Interbank Offered Rate Local Investor Portfolio Investment Liquified Petroleum Gas Large Scale Manufacturing Long Term Evolution Merger & Acquisition Minimum Capital Requirement Ethylene Glycole Most Favoured Nation Millions of cubic feet per day Million Motor Gasoline Memorandum of Understanding Market Price MPS MQM MS MSCI MT MTS MW NDA NFA NFC NFDC NFML NII NIMs NPL NSS NTB NTDC OCAC OGRA OMC PAAPAM PAMA PAT PB PCF PEG PEPCO PER PIB PKR PL PLS PML PMLN POL PP PPIB PPIS PPP PPS PSDP PSE PSF PTA Monetary Policy Statement Muttahida Quami Movement Motor Spirit Morgan Stanley Composite Index Metric Ton Margin Trading System Mega Watt Net Domestic Assets Net Foreign Assets National Finance Commission National Fertilizer Development Centre National Fertilizer Marketing Limited Net Interest Income Net Interest Margins Non Performing Loan National Saving Scheme NonTariff Barriers National Transmission and Dispatch Company Oil Companies Advisory Committee Oil and Gas Regulatory Authority Oil Marketing Company Pakistan Association of Automotive Parts Accessories Manufacturers Pakistan Automotive Manufacturers Association Profit After Tax Price to Book Price to Cash Flow PriceEarnings to Growth Pakistan Electric Power Company Price to Earning g Ratio Pakistan Investment Bond Pakistan Rupees Petroleum Levy Profit and Loss Sharing Pakistan Muslim League Pakistan Muslim League (Nawaz) Petroleum Oil Lubricants Petroleum Policy Private Power Infrastructure Board Pakistan Petroleum Information Service Pakistan People Party Percentage Points Public Sector Development Program Public Sector Enterprise Polyester Staple Fibre Purified Terephtalic Acid PTI Pakistan TehreekeInsaf QoQ Quarter on Quarter RDF Refused Derive Fuel RGST Reformed General Sales Tax ROA Return on Assets ROE Return on Equity RPPs Rental Power Projects SBA Standby Agreement SBP State Bank of Pakistan SCRA Special Convertible Rupee Account SECP Securities Exchange Commission of Pakistan SLR Statuary Liquidity Requirement SME Small Medium Enterprises SR Sharpe Ratio STA Single Treasury Account TBILL Treasury Bill TDF Tyre Derived Fuel TI Transparency International TRN Trillion USD United States Dollar WAPDA Water and Power Development Authority WHR Waste Heat Recovery WTI West Texas Intermediaries YoY Year on Year YR Year YTD Year to date
Annexure
Key Data Source
74
All Pakistan Cement Manufacturing Association All Pakistan Motor Dealers Association All Pakistan Textile Manufacturers Association Annual plan ADB Asian Development Bank Report Bloomberg Budget Documents Economic Survey Gallup Pakistan Government of Punjab Agricultural Department Government of Sindh Agricultural Department IMF International Monetary Fund IFS International Financial Statistics KCA Karachi Cotton Association NEPRA National Eletric Regulatory Authority NFDC National Fertilizer Development Centre OECD Organization of Economic Committee Development Report OGRA Oil and Gas Regulatory Authority OCAC Oil l Companies Advisory d Committee PAAPAM Pakistan Association of Automotive Parts Accessories Manufacturers PAMA Pakistan Automotive Manufacturers Association PBS Pakistan Beareu of Statistics PTA Pakistan Telecommunication Authority SBP State Bank of Pakistan W ld B World Bank kD Database t b WDI World Development Indicators APCMA APMDA APTMA
Contact
75
Equities Research Khurram Schehzad Syed Abid Ali Sana Tawfik Tahir Abbas Taseer Abbas Ovais Shakir Domestic sales Mohammed Imran, CFA, ACCA M. Yousuf Ahmed Farhan Mansoori Syed y Farhan Karim Afshan Aamir Faraz Naqvi Furqan Aslam Azhar Javaid International Sales Adnan Katchi Money Market & FX Zilley Askari Corporate finance and advisory M. Rafique Bhundi Usman Saeed Muhammad Zeeshan, CFA Ahmad Zeeshan Designation Head of Research Assistant Vice President Investment Analyst Investment Analyst Investment Analyst Database Officer Designation Head of Equity Sales Senior Vice President Vice President Vice President Vice President Assistant Vice President Assistant Vice President Manager Corporate Sale Designation Head of International Sales Designation Head of Treasury Designation Head of Corporate Finance Assistant Vice President Assistant Vice President Senior Analyst Email k shehzad@arifhabibltd com k.shehzad@arifhabibltd.com abid.ali@arifhabibltd.com sana.tawfik@arifhabibltd.com tahir.abbas@arifhabibltd.com taseer.abbas@arifhabibltd.com ovais shakir@arifhabibltd com ovais.shakir@arifhabibltd.com Email m.imran@arifhabibltd.com yousuf.ahmed@arifhabibltd.com farhan.mansoori@arifhabibltd.com farhan.karim@arifhabibltd.com @ afshan.aamir@arifhabibltd.com faraz.naqvi@arifhabibltd.com furqan.aslam@arifhabibltd.com azhar.javaid@arifhabibltd.com Email adnan.katchi@arifhabibltd.com Email askari@arifhabibltd.com Email rafique.bhundi@arifhabibltd.com usman.saeed@arifhabibltd.com muhammad.zeeshan@arifhabibltd.com ahmad.zeeshan@arifhabibltd.com Telephone +922132460742 +92213246071719 Ext : 211 +92213246071719 Ext : 248 +92213246071719 Ext : 248 +92213246071719 Ext : 248 +92213246071719 Ext : 211 Telephone +922132462596 +922132427050 +922132429644 +922132446255 +922132446256 +922132446254 +922132401932 +922132468312 Telephone +922132460743 Telephone +922132400223 Telephone +922132460741 +922132462597 +922132460741 +922132462597

Pakistan Strategy 2013: Equity Brokerage, Research Commodities & Corporate Finance

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Pakistan Strategy 2013

Pakistan Equities 2013 Pakistan Equities, a Jewel in the Region

Return despite Lower Macros

EGrow despite Lower Eco Growth

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Pakistan Strategy 2013

KSE100: Give me a Target, any Target!

Pak Eco Growth vs Corporate Fundamentals

30% 25% 20% 15% 10% 5% 0% 2007

10% 20% 30% 40% 50%

Expected Total Return 2013

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Pakistan Politics 2013

Still waiting for Democracys Dividends!

*Average GDP growth during specified terms

Government Regime vs Economic Growth

Govt sleeps while Economy drowns

*Including FY13TD Actual/FY13 Forecast, ^Yearend

Parliament Structure 1.5% 1 5%

Political Party = Economy the only Priority

10% 20% 30%

PPP 10% 20082012

Other Coalition 21%

KSE mostly Smiles PostElections

15.0% 10.0% 5.0%

Market Return before Elections

0.0% 1990 1993 1997 2002 5.0% 10.0% 10 0% 2008

Market Return after Elections

0% 199 90 199 93 199 97 200 02 20% 40% 60% 80%

Pakistan Economy 2013

Economic Growth, a Reality Check!

Middle Class (as % of Total Population)

Private Consumption as % of Total Consumption

USD mn 4,000 3,000 2,000 1,000 0

FOREX (USD bn) RHS

Pakistan Equities 2013

Pak Equities, a Jewel in the Region

Currency vs USD vs FIPI (USD mn) 2012

20,000 15,000 10,000 5,000

1,703 2,548 Local Currency vs USD

Net Foreign Flows (YoY Chg.)

Equity Returns (USD)

13% 13% 13% 15%

Higher Returns despite Lower Macros

300% 250% 200% 150% 100% 50% 0%

Rising EGrow despite Lower Eco Growth

Corporate Sector Earnings Growth (EGrow)

30% 25% 20% 15% 10% 5% 0% 5%

EGrow KSE100 Return (RHS) Payout (RHS)

17% 27% 20%

Growing Regional Charm!

Regional ROE vs Dividend Yield

30.0% 25.0% 20.0%

Sri Lanka Philipines Thailand h il d Taiwan (DY)

15.0% 10.0% 0.0%

Index Target 2013

KSE100 Index Target Estimates 2013

Arif Habib Research Valuation Snapshot

Model Portfolio Strategy 2013

Symbol Last Closing Target Price Upside

Opportunities to Seize Alpha in 2013

KSE Quarterly Avg Return