Pakistan Outlook 2010

TAURUS
SECURITIES LIMITED
A Subsidiary of National Bank of Pakistan
Exercising Caution and Prudence

Since undergoing the stabilization plan in November 2008 along
with a decline in international commodity prices, the Pakistani
economy has witnessed gradual improvement in a number of
macroeconomic indicators such as lower current account deficit,
Pakistan Outlook
rebuilding of forex reserves and declining inflation. We expect
consolidation will continue during 2010 leading to a real GDP
2010
growth rate of 3.0% that may continue to rise gradually over the
next 3-4 years. Risks such as security and political uncertainty
remain that might affect the macroeconomic scenario in the me-
dium term.
Pakistan's 12-month forward PEx comes to 7.3 as against the
regional average of 14.0, while the 12-month forward dividend
yield comes to 6.35% as against the regional average of 2.64%. It
is possible that the wide discount in PEx may narrow in 2010, as
long as the Pakistan economy continues to show recovery and the
political situation becomes stable so that liquidity from both local
and foreign investors continue to flow into the bourses.
Albeit some stability has come to the economy and the capital
markets because of the homegrown stabilization program devel-
oped in October 2008 in conjunction with the IMF Standby Ar-
rangement, we would still advocate a cautious approach towards
equity investment and recommend a balanced approach. 2010
could see some turbulence for the market. We would advise inves-
tors to gradually accumulate a combination of dividend and value
stocks from major sectors such as petroleum, power, telecom,
banks and fertilizer.
Some of our top picks are Hubco, PTCL, PPL, BAFL, FFBL,
APL and Kapco.
Taurus Securities Limited Pakistan Outlook: 2010
Table of Contents
Pakistan Market Review & Strategy 4
Sectoral Reviews 15
Banking Sector 16
Cement Sector 28
Independent Power Producers 32
Oil Marketing Companies 35
Oil and Gas Exploration Sector 40
Telecom Sector 44
Fertilizer Sector 46
Ratings Guide 53
KSE-100 Key Indicators 54
KSE-100 Statistics 56
Economic Indicators 58
3
PAKISTAN MARKET REVIEW & STRATEGY

2009 Market Review
The KSE-100 index during the year under review witnessed a recovery and consolidation near the end
of the year. Overall, the KSE-100 Index gained 60.0% or 3,521 points for the year ended December 31,
2009 to 9,386 points on an average daily volume of 170.93m shares as compared to 132.91m during
CY08. The KSE-30 Index improved by 79.6% or 4,364 points to close the year at 9,849. Looking back
at the last 12 months, the market can be segmented into 5 distinct phases: 1) bearish start; 2) sharp
recovery; 3) pre and post budget activity; 4) foreign liquidity driven rally and; 5) dull and lackluster
finish.
Bearish start
The market experienced a moderate rally at the beginning of January due to the launch of the NIT
managed support fund on January 1 that would buy stocks in government owned enterprises such as
OGDC, PPL and NBP. In addition, the SECP on January 10 amended section 95A of the Companies
Ordinance 1984 to allow listed companies to buy back their own shares and hold them as treasury
shares, which may be re-issued under the regulations being prescribed by the Commission. These
events led to renewed buying activity in large cap scrips especially in the energy sectors, and dividend
paying stocks such as FFC. The news of the launch of the NIT state enterprise fund was one of the
major drivers behind this mini-rally as it led to positive sentiments among investors.
Change in Market Capitalization by Sector (December 31, 2008 - December 31, 2009)
Leather
140%
#DIV/0!
Leather & Tanneries
130%
Fertilizer
#DIV/0!
Oil & Gas Marketing.
120%
Refinery
Power Gen.
#DIV/0!
Weaving
110%
Comm. Banks
Mutual Funds
100% #DIV/0!
Auto Parts
90% #DIV/0!
Textile Composite
80%
#DIV/0!
Chemicals
Paper & Board
Auto Assembler
70%
Pharmaceuticals
#DIV/0! Total Market Cap.

Tech & Comm
Cable & Electrical
60% Chg. (45.6%)

Transport
Miscellaneous
50% #DIV/0!
Synthetic
40%
Modarabas
Cement
Jute
Vanaspati
Leasing
30%
Sugar
20%
10%
0%
-10%
Food
Tobacco
Glass & Ceramics

Engineering
-20%
Textile Spinning
Insurance
-30%
-40%
Inv. Banks
-50%
-60%
-70%
Woolen
-80%
Analyst: Salman Rasheed

4
Email: salman@taurus.com.pk
However, the exuberance did not last long as profit taking set in, along with foreign and local
institutional selling activity in major Index stocks led to a steady decline in the Index from January 12
to January 26. From the beginning of the year to January 26, the KSE-100 shed around 1,050 points
or 18% to 4,815 on average daily turnover of 129.38m shares.
Index The Market - January-December 2009

Volume (m)
Turnover Index
10000 600
9000 500
8000 400
7000 300
6000 200
5000 100
4000 0
31-Dec 4-May 27-Aug 31-Dec
Sharp recovery
The market experienced a sharp recovery for the next two-and-a-half months from January 26 to
April 20. The KSE-100 surged by over 3,000 points or about 64% to 7,902 on an average daily volume
during this period of 213.67m shares. The main drivers behind this recovery were related to positive
news flow relating to both macroeconomic and political developments such as the following:
?The Ministry of Finance in consultation with the SECP allowed relief to listed companies from IAS
39 for CY2008. As indicative by the circular, the impairment loss if any recognized as on December 31,
2008 due to valuation of listed equity investments in available-for-sale category to be shown under
equity; this impairment charged in equity would be amortized over 4 quarters in 2009 in the P&L
account;
?The attractive valuations of major blue chip stocks in terms of both PE multiples and dividend
yields;
?Institutional buying in selective large cap stocks;
?The news reports of the possible inclusion of Pakistan in the MSCI Frontier Index, which was
eventually confirmed in the last week of March with effect from May 29.
?The restoration of then deposed Chief Justice of the Supreme Court of Pakistan Iftikhar Muhammad
Chaudhry on March 16 after some considerable struggle and political turbulence;
?The receipt of the second tranche of US$848m from the IMF in the beginning of April;
?Buying activity in banking and second tier stocks as the central bank relaxed the minimum paidup
capital requirements for commercial banks;
?The Friends of Democratic Pakistan Group pledged PKR 5.28bn in aid in Tokyo on April 17 and;
5
?The SBP on April 20 cut the policy rate by 100bps to 14% indicating a gradual shift in tight money
policy stance.
Pre and post budget activity

In the run-up to the budget, the market was slightly volatile with a hue of profit taking and selling
activity from late April to mid-June. The law and order situation in both Karachi and Swat was a
cause of nervousness among most investors in the early part of May.
From the last week of May to the end of June, the market movement can be described as choppy. From
May 21 to May 28, the KSE-100 Index staged a moderate recovery of 318 points or 4.5% to 7,288 on the
back of institutional support in major Index stocks from various sectors such as fuel and energy,
banking and telecom. In addition, the Advisor on Finance to the Prime Minister in an interview to a
foreign newspaper clarified that new tax measures on untaxed sectors would be introduced gradually
and that the equity markets would not see any new measures until next year's budget. The markets
welcomed this clarification.
However, the market experienced another correction from May 28 to June 4 in which the KSE-100
Index shed 409 points to dip below the 7,000-level due to again anxiety over the budget as rumor and
speculation among the investor community was rampant regarding possible new tax measures. Also,
the absence of a leverage product was a key concern among investors in order to spur activity as
volumes had contracted. The Index staged a minor rally to cross the 7,000-mark in the run-up to the
federal budget announced on June 13, but the immediate market reaction was adverse, as there were
no notable incentives for industry to stimulate activity. From April 20 to June 16, the KSE-100 Index
shed 1,029 points or 13% to 6,872.
Foreign liquidity driven rally

From mid-June to mid-October, the KSE-100 Index experienced a huge rally driven mostly by foreign
buying activity. The Index jumped by over 2,900 points or 43% to close at 9,845 on October 15. The
cheap valuations relative to regional peers made the local market attractive to both foreign and local
investors, and were probably one of the key drivers during this time. During this period, the bourse
witnessed a net foreign inflow of US$ 297m.
The significant events during the phase of the market were:
?Reduction in the NSS rates in the major savings products announced on July 1;
?The U.S. House of Representatives approved a US$1.5bn aid package;
?The T-bill auction on July 15 reinforced investors' view that a cut on the cards is coming, as the 6-
month cutoff yield declined by 92 bps to 11.5151%, whereas the 12-month cut-off yield dropped by 70
bps to 11.5392%;
?Despite the poor performance of the equity markets during FY09, NIT still managed to declare a
dividend of PKR3.25 per unit for Non-LOC unitholders and PKR 3.05 per unit for LOC unitholders;
?The IMF approved the third tranche and additional funds of US$3.2bn as insurance cover for the
expected funds from the Friends of Democratic Pakistan group;
?On August 15, the SBP in its Monetary Policy Statement cut the discount rate by 100 bps to 13%
6
and;
?The U.S. Senate passed Kerry-Lugar Bill committing US$ 7.5bn in civilian aid over a 5-year period
in late September.
Dull and lackluster finish

From mid-October to the end of the calendar year, the market was dull and lackluster as the daily
turnover became thin, showing a lack of interest by most investors as the focus had been diverted
from large cap scrips to lower tier stocks. The uncertain security situation, as evident by the number
of bomb blasts targeting both civilian and military/security targets led to apprehension among
investors. Also, on the domestic political front, the controversy regarding the National Reconciliation
Ordinance led to political uncertainty over the current dispensation with pressure being applied on
the President to return some of his powers that were bestowed in the 17th Amendment, when Pervez
Musharraf was President back in 2003, back to the Prime Minister and parliament. For most of
December, the Index was trading in a narrow band due to the lack of interest among investors in the
large cap stocks with preference given to lower tier scrips. Despite the Supreme Court decision on
December 16 to rule the NRO unconstitutional, the political situation remained uncertain due to the
negative reaction of some of the major PPP leaders to the verdict that could foreshadow some sort of
confrontation with the judiciary. The Index staged a slight recovery on December 24 as the IMF
Board approved the fourth tranche of US$ 1.2bn. The last week of the year saw the market fizzle out
due to 10th Muharram terrorist attack in Karachi, and lack of interest among investors.
Comparative Performance
2009 was a good year for most equity markets around the world. The Asian markets generally posted
the higher returns relative to the European and North American markets. The best performing
markets were Sri Lanka, Indonesia, China and India. Pakistan was at the lower end of the Asian
Performance of Selected Markets during 2009

Period YoY
Index Country 31-Dec-08 31-Dec-09 Change
Sri Lanka All Share Sri Lanka 1,503.02 3,385.55 125.25%
Jakarta Composite Indonesia 1,355.41 2,534.36 86.98%
SSE Composite China 1,820.80 3,277.14 79.98%
Sensex India 9,720.00 17,464.81 79.68%
Taiwan Taiex Taiwan 4,591.22 8,188.11 78.34%
Strait Times Singapore 1,761.56 2,897.62 64.49%
Bangkok SET Thailand 449.96 734.54 63.25%
PSEi Philippines 1,872.85 3,052.68 63.00%
KSE-100 Pakistan 5,865.01 9,386.92 60.05%
Hang Seng Hong Kong 14,387.48 21,872.50 52.02%
KRX 100 South Korea 2,373.06 3,578.76 50.81%
FTSE Bursa Malaysia KLCI Malaysia 876.75 1,272.78 45.17%
Nasdaq Composite USA 1,577.03 2,269.15 43.89%
DAX Germany 4,810.20 5,957.43 23.85%
S&P 500 USA 903.25 1,115.10 23.45%
CAC-40 France 3,217.97 3,936.33 22.32%
FTSE 100 UK 4,434.17 5,412.88 22.07%
Nikkei 225 Japan 8,859.56 10,546.44 19.04%
DJIA USA 8,776.39 10,428.05 18.82%
Source: Business Recorder, Bloomberg
7
revival but outperformed some of the major European and North American bourses. It will be
interesting to see if the equity markets can continue to post similar performances during 2010.
Looking ahead to 2010

Political factors
Domestic
The fallout from the National Reconciliation Ordinance decision by the Supreme Court on December
16, 2009 is likely to drag out into the early part of the new year, as it appears that the PPP is taking
a confrontational approach. The PPP Central Executive Committee meeting on December 19, 2009
decided not to ask the effected ministers to resign, but will defend them in the courts. Negative
consequences can be expected for the ruling party if it decides to take on the judiciary by obstructing
the directives issued by the courts at this point in time, as the government has lost the moral
authority while the popular opinion is solidly backing the superior courts. Confrontation with the
judiciary will lead to further political uncertainty and possible instability where the military/security
establishment would play its role behind the scenes to stabilize the situation, as seen in the long
march back in mid-March 2009.
Some political and market observers may see the striking down of the NRO as a positive development
if it means that corrupt members of the cabinet will be replaced and that cabinet can be trimmed
down as an austerity measure. In addition, this could improve the level of governance.
Despite the Supreme Court verdict, we feel that it would be difficult for President Zardari to be forced
out of office, unless the court rules that without the NRO, he was ineligible to be a candidate for the
post. In addition, we believe that the military establishment does not have the stomach to undertake
another coup and rule. The leader of the major opposition party, Nawaz Sharif has stated in public
that he does not want to play into the hands of the establishment and destabilize the current
dispensation, as he realizes that it could cost him an opportunity to return to power in the near
future.
The only way out of this current political imbroglio is compromise by the major stakeholders. The
President should be willing to return some of the powers back to the Prime Minister and the
parliament as envisage by the original 1973 constitution. This would mean that Mr. Zardari would
have to live with being a ceremonial head of state but he would still be powerful if he retains the post
of Co-Chairman of the PPP. In return, the opposition and the military should allow the government
to complete its term in office. The government would need to act quickly on introducing the 18th
Amendment Bill in parliament to prove its sincerity.
There is speculation that in return for amending the constitution that the PPP would try to convince
the PML-N to return to the federal government. If this occurs, this would be a positive development
in terms of political stability and may lead to a much needed better governance.
The fight against militants in various areas of Pakistan is likely to continue in 2010 due to domestic
pressures, as the attacks during 2009 have been targeting both civilians and military/security person-
nel and installations. It is likely that the military may begin operations in North Waziristan after
hopefully stabilizing South Waziristan.
If the government can act swiftly and deftly on both the NRO issue and the constitutional package
that would appease the opposition, we feel that 2010 could be a year of relative political stability for
8
Pakistan. This development would be a boon for the capital markets.

Geopolitical
With U.S. President Barack Obama announcing a surge of additional 30,000 troops in Afghanistan
starting in the spring of 2010 with a timeline to withdraw all troops by July 2011, this would place
further pressure on Pakistan to do more to help the U.S. accomplish its objectives in Afghanistan. We
believe that Pakistan is being setup as the scapegoat for U.S. failure in Afghanistan. However, we feel
that it would not be possible for Pakistan to completely follow the American game plan at the expense
of its national interest. As the current Afghan government is Pro-India, mainly comprising of
minority ethnic groups such as Tajiks and Uzbeks while the majority Pashtuns are not represented
according to their numbers. It is advocated by a number of experts that the resurgence of the Afghan
Taliban is more of an expression of Pashtun nationalism and a liberation movement to drive out the
foreign occupiers than a religious movement. We feel that the Pakistan military would continue to
fight the Pakistan Taliban and other militants that are attacking the very existence of the state rather
than take action against the Afghan Taliban. This would lead to further tension between the two
countries. On the other hand, this could be an opportunity for Pakistan to try to mediate a settlement
between the U.S. and the Afghan Taliban that would include the Taliban in the government, in return
that the Taliban do not allow Al Qaida to use Afghanistan as a base for attacks on Western soil and
that the U.S. withdraws from the country.
We do not foresee any major thaw in relations between Pakistan and India, as it appears that both
governments have adopted a hawkish stance towards each other. The hawkish stance on part of the
Pakistani government could be seen as an act to appease the military as it was known that it was not
satisfied with the government's policy of appeasement of India.
We feel that the geopolitical scenario could be turbulent for the country and the region heading into
the new year that could unsettle the capital markets from time to time.
Economic factors
Since undergoing the stabilization plan in November 2008 along with a decline in international
commodity prices, the Pakistani economy has witnessed gradual improvement in a number of mac-
roeconomic indicators such as lower current account deficit, rebuilding of forex reserves and declin-
ing inflation. According to the World Bank Economic Update on Pakistan, the macroeconomic
situation remains fragile and the medium term outlook is uncertain. Fiscal discipline during the
current fiscal year might be difficult to achieve because of lower than expected revenue collection and
uncontrolled public spending. The first quarter fiscal update released by the Ministry of Finance
alludes to this problem as the fiscal deficit has come in at 1.5% of projected annual GDP, higher than
anticipated. The World Bank has also stated in its report that the volatile political and security
situation has complicated the policy making and made the implementation of stabilization measures
tough. The gradual recovery in the global economy expected to start in 2010 may pose risks to
Pakistan during FY10 on the external front until the global recovery kicks into full swing. FY10 would
be a year of consolidation for the Pakistani economy as viewed by a number of international financial
institutions such as Moody's, Asian Development Bank and the World Bank.
The World Bank projects Pakistan's real GDP growth for FY10 to be 3.0% that will rise to 5.5% in
FY14. The main drivers of this growth tangent are growing public investment and rising gross capital
formation. Agriculture and services sectors are expected to show robust growth while manufactur-
ing sector will recover gradually as domestic aggregate demand improves and power supply increases.
9
The current account deficit is expected to be 4.7% of GDP that the World Bank forecasts to fall
to 3.4% by FY14. The forex reserves are expected to rise in the medium term from US$ 9.1bn end-
June 2009 to US$12.1bn at the end of FY14 due to higher inflows into the financial and capital
accounts through FDI and foreign portfolio investment. However, the import coverage ratio is
projected to remain stagnant at 3 months and also, the foreign inflows will be dependent on the
overall economic, political and security scenarios, which remain uncertain at this time.
Medium-term Macroeconomic Framework Projections

FY10 FY11 FY12 FY13 FY14
Real GDP Growth (%) 3.0 4.0 4.5 5.0 5.5
CPI (average) (%) 10.0 7.0 6.0 6.0 6.0
Fiscal Balance (% of GDP) -4.7 -43 -3.2 -2.9 -2.8
Current Account Balance (% of GDP) -4.7 -5.3 -5 -4.3 -3.4
Source: Pakistan Economic Update September 2009, The World Bank
In the medium term outlook, the fiscal deficit is estimated to be 4.9% of GDP in FY10 and to
decline to 2.8% by FY14. The foundation for this improvement relies on the increase in tax
revenues over time through comprehensive tax reforms, expanding the tax base and introduc-
tion of Value-added tax. Also, expenditure must be controlled and power subsidies phased out as
per commitment with the IMF. The increase in spending during the current fiscal year was to be
financed by external inflows pledged by various international donors such as the Friends of
Democratic Pakistan that has committed US$5.2bn of which little has been disbursed. If these
pledges do not significantly materialize, it is likely to lead to a cut in the PSDP budget that will
have long-term implications on the economic growth scenario. The World Bank has acknowl-
edged that the revenue targets appear ambitious, and are at significant risk of not being met.
Political will at all levels of government would be needed to implement these tough reforms and
measures, and this is the key risk in the whole fiscal scenario.
According to data released by FBS, CPI based inflation detracted from its downward trajectory
after declining for eight consecutive months, as price levels surged by 10.51% YoY in Nov'09 as
against a rise of 24.68% in Nov'08. The rise in price levels was largely expected on account of
dilution of higher base effect in Nov'09. Moreover, hike in food prices by 11.13% YoY in Nov'09
also contributed towards derailing the headline inflation from its downward trajectory. Also, the
Ministry of Finance has revised upwards its estimates for average headline inflation for FY10 at
11.5%.
The benefits of higher base effect will experience further dilution till Feb'09 and inflationary
pressures may have be entrenched in the economy till that time. Moreover, increase in electricity
tariff and volatile commodity prices will also act as a catalyst to propel the price levels upwards.
The World Bank forecast average CPI inflation for FY10 to be 10.0% with the medium term
inflation standing at 6.0% within the next 2 years.
Core inflation, which according to the IMF, should be the key in determining any cut in the
discount rate, has receded to 10.6% YoY in Nov'09 from 11% last month. The persistent fall in
core inflation since Feb'09 is encouraging and may act as a catalyst for the SBP to continue on
the path of monetary easing. Moreover, we would like to reiterate our view that, threats to
inflationary pressure cannot be mitigated by keeping interest rates higher. This is because the
nature of inflation for Pakistan is mostly cost-push rather than demand-pull and associated
with supply side constraints.
10
Capital Markets
One of the major issues for the equity market is the introduction of a margin financing product that
hopefully would be introduced at soon as possible in the new year. The other major issue that
investors will likely deal with is the introduction of a capital gains tax on stocks in the next federal
budget expected in the end of May. The capital gains tax exemption is expiring on June 30, 2010, and
the government has been hinting for quite some time that this exemption will not be extended
further, as the tax base needs to be expanded due to the precarious fiscal situation.
PE Comparison
Pakistan's 12-month forward PEx comes to 7.3 as against the regional average of 14.0, while the 12-
month forward dividend yield comes to 6.35% as against the regional average of 2.64%. It is possible
that the wide discount in PEx may narrow in 2010, as long as the Pakistan economy continues to
show recovery and the political situation becomes stable so that liquidity from both local and foreign
investors continue to stream into the bourses.
Regional Valuation Comparison

12m F 12m F
Country PEx Dividend Yield (%)
China 18.98 1.00
Hong Kong 14.46 2.35
India 15.07 1.12
Indonesia 13.52 1.47
Malaysia 13.53 3.09
Pakistan 7.30 6.35
Philippines 12.15 3.17
Singapore 14.29 4.87
South Korea 10.16 1.13
Taiwan 17.05 2.53
Thailand 10.80 5.71
Source: Thomson One Analytics
Date: December 17, 2009
Investment Strategy for 2010

2009 has been a turnaround year for the local equity markets as the trough was reached within the
first few weeks of the beginning of the year. The attractive valuations namely PEx and dividend yield
led to positive portfolio inflows by both local and foreign investors. However, the last quarter of 2009
was flat due to profit taking and investor apprehension, derived from political uncertainty over the
NRO and shaky security situation.
We expect the economy to continue to show steady recovery, but a number of risks to the macroeco-
nomic scenario remain. Both the domestic political and geopolitical situations are also uncertain
that could lead to lower direct and portfolio investment inflow. The U.S. plan for a surge in troops to
Afghanistan could have blowback implications for Pakistan that could mean more terror attacks on
its soil.
Albeit some stability has come to the economy and the capital markets, because of the homegrown
stabilization program developed in October 2008 in conjunction with the IMF Standby Arrangement,
we would still advocate a cautious approach towards equity investment and recommend a balanced
11
approach. 2010 could see some turbulence for the market. We would advise investors to
gradually accumulate a combination of dividend and value stocks from major sectors such as
petroleum, power, telecom, banks and fertilizer .
Some of our top picks are Hubco, APL, PTCL, PPL, BAFL, FFBL and Kapco.
Top Picks for 2010

Price
Stock Fair Value Dec 31-09 Upside FY10F EPS FY10F DPS FY10F Dividend Earnings
PKR PKR Potential % PKR PKR PEx Yield % Yield %
Hubco 43.98 31.08 41.51 4.62 4.20 6.73 13.51 14.86
APL 458.50 347.62 31.90 50.27 23.00 6.92 6.62 14.46
PTCL 23.10 17.65 30.88 2.29 1.85 7.71 10.48 12.97
PPL 235.30 189.59 24.11 23.12 12.00 8.20 6.33 12.19
Bank Alfalah 16.98 13.77 23.31 2.40 NIL 5.74 - 17.43
FFBL 31.77 26.13 21.58 3.29 3.00 7.94 11.48 12.59
UBL 70.87 58.45 21.25 9.95 3.00 5.87 5.13 17.02
POL 277.94 230.77 20.44 27.92 20.00 8.27 8.67 12.10
PSO 357.13 297.44 20.07 37.90 13.50 7.85 4.54 12.74
Kapco 54.00 45.87 17.72 7.63 7.00 6.01 15.26 16.63
Engro Corp 214.00 183.27 16.77 10.59 5.00 17.31 2.73 5.78
Lucky Cement 75.20 66.24 13.53 11.72 2.50 5.65 3.77 17.69
FFC 109.27 102.93 6.16 10.91 11.50 9.43 11.17 10.60
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SECTOR STANCE DESCRIPTION

We are upgrading our stance on the banking sector from ‘Neutral’ to ‘Neutral to
Positive’ as we believe that the banks have embarked on a journey towards recovery.
This is based on the improvement in fundamentals as evidenced by 3QCY09
Commercial Neutral to
earnings. We expect earnings momentum to continue in the 4QCY09, which shall
Banks positive
eventually pave the path for sustained growth in CY10. Moreover, the banks’ focus
shall shift on asset growth during CY10 on account of downward interest rate
trajectory. We recommed BUY on BAFL and UBL
The sector is under threat due to various reasons, such a s , the breaching of Price
Consensus & uncertainty in the PSDP expenditure only to n a m e a few. Lower Exports
Negative due to the capacity expansion by the regional peers is expected to bring the earnings
Cement
to Neutral down further. Local demand at the s a m e time has gone down with little or no
development activities partly on the back of security concerns and political instability.
Another reason is the restriction by the IMF to curtail the fiscal deficit.
Revenue stream is expected to c o m e under pressure on acount deceleration in
subscriber b a s e and intensity of competition, which may lead to M&A activety in the
Telecom Neutral sector. However, we continue to like PTCL on account of inceased management
focus on value added services and perfromance of Ufone. W e recommend a BUY on
PTCL.
We expect the crude oil prices to remain stable in the immediate term, while our long-
term price assumption is US$75. Hence, sustainability in earnings of E&Ps will be
Oil & Gas E&P Positive contingent on volumetric growth, local currency depreciation against US Dollar and
circular debt situation.
We recommend BUY for both POL and PPL and HOLD for OGDC.
Neutral to We maintain a Neutral-Positive stance on the sector on the back of increased

Oil Marketing
positive demand for Furnace Oil and High Speed Diesel. We have an ACCUMULATE stance
on PSO, HOLD on SHEL and BUY on APL.
The sector is expected to grow with the rising power demand. Both stocks are
IPPs Positive attractive as they provide a hedge against devaluation in Pak Rupee against US
Dollar. We recommend a STRONG BUY for Hubco while ACCUMULATE for Kapco.
The fertilizer sector scrips, with strong earnings growth and high dividend yield
remain a safe haven for investors in times of economic uncertainty. We maintain a
Fertilizer Positive POSITIVE stance for the fertilize sector on the back of rising urea prices and declining
DAP prices. W e recommend HOLD on FFC, BUY on FFBL whereas ACCUMULATE for
ENGRO
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14
SECTORAL REVIEWS
15
BANKING SECTOR NEUTRAL TO POSITIVE

Road to recovery
We are upgrading our stance on the banking sector from 'Neutral' to 'Neutral to Positive' as we
believe that the banks have embarked on a journey towards recovery. This is based on the improve-
ment in fundamentals as evidenced by the 3QCY09 earnings. We expect the earnings momentum to
continue in the 4QCY09, which shall eventually pave the path for sustained growth in CY10. More-
over, the banks focus shall shift to asset growth during CY10 on account of downward interest rate
trajectory.
Our premise for growth in CY10 is based on:
?Reduction in credit cost on account of slower NPL accretion.
?Growth in the loan book fostered by an increased credit appetite on account of improvement in key
metrics and availability of access funds because of low ADR.
?Increase in deposit mobilization due to improved liquidity position.
?Banks availing benefit of changes in prudential regulation pertaining to FSV.
Moreover, the banking sector and in particular, the TSL bank universe is trading at value multiples
(Lower end of P/B band). This suggests that there will be a sustained positive price discovery going
forward.
Expected reduction of 50-100bps in the upcoming Jan'10 monetary policy may provide an additional
price trigger. Target prices for TSL universe would increase by 4.8%-6.8% in the event of a 100bps cut
in the discount rate.
Based on Dec31'09 closing prices, we have a 'BUY' recommendation on UBL and BAFL.
Dec31'09 Dec31'10 Upside/(Downside) EPS (PKR) P/BVS (x)

Bank Stance
Closing price Target Price potential CY10F CY10F
BAFL 13.77 16.98 23.31% 2.40 0.74 BUY
UBL 58.45 70.87 21.25% 9.95 1.09 BUY
ABL 58.73 61.92 5.43% 10.12 1.39 HOLD
HBL 123.44 121.27 -1.76% 21.15 1.26 Reduce
MCB 219.68 197.71 -10.00% 24.95 2.20 Reduce
Source: TSL Research
Analyst: Muneeb Azhar

16 Email: muneeb.azhar@taurus.com.pk
NPLs: The worst is over

NPLs of the banking sector have surged to an all-time high of PKR 421.6bn in the 3QCY09, depicting
a YoY and QoQ jump of 52% and 6% respectively. The mammoth rise in NPLs is primarily on account
of higher interest rates and economic slowdown.
It is pertinent to mention that NPLs for the 3QCY09 have shown improvement, as they surged by PKR
22.3bn in comparison to the quarterly average of PKR 30.9bn from Mar08 to Jun09. This depicts a
sharp reduction in NPL accretion, which suggests that the credit cycle may have peaked. Moreover,
the infection ratio for 3QCY09 also hiked by 85 bps QoQ to 12.4%. This rise in the infection ratio was
on account of negative loan growth during the quarter. We expect loan growth to pick up during
4QCY09 on account of seasonal demand and as a consequence, the year end infection ratio may be
lower. Moreover, 3QCY09 also witnessed improvement in the coverage of NPLs. The provisioning to
NPL ratio has improved by 183bps to 69.66% as of Sep 30'09 as compared to 67.83% on Dec 31'08.
TSL banking universe exhibited similar trends as NPL accretion declined to 4% QoQ in 3QCY09. In
absolute terms, NPL surged by PKR 5.2bn as compared to the average hike of PKR 9.58bn in the
previous two quarters. Though NPL accumulation has slowed in the 3QCY09, the infection ratio for
our universe persisted with its rising trend on account of negative loan growth witnessed during the
quarter. The infection ratio for our banking universe hiked to 8.5%, depicting a jump of 52bps QoQ.
Moreover, the coverage ratio for our cluster also moved in tandem with the industry as it surged to
68.3% in 3QCY09 in comparison to 64.7% and 66.4% on Dec 31'08 and Jun 30'09 respectively.
It is also pertinent to mention that, the fully provisioned loss category for our universe now accounts
for 62% of all infected loans, in comparison to 58% on Jun 30'09 and 54% on Mar 31'09. This is
testament to the fact that a significant bad loan ageing has already occurred, which may have
resulted in credit cost to peak. On the basis of sharp reduction in NPL accretion and lower NPL ageing
concerns, we believe that loan provisioning may have peaked. Lower provisions and the subsequent
reduction in the credit cost should be the vital growth driver in CY10.
TSL Universe Infection ratio

11.0%
10.0%
9.0%
Dec08
8.0%
Mar09
7.0%
Jun09
6.0% Sep09
5.0%
4.0%
3.0%
MCB UBL BAFL HBL ABL
17
TSL Universe-Bad loan ageing

120%
100%
80% Loss
Doubt
60%
Sub
40%
OAEM
20%
0%
Dec08 Mar09 Jun09 Sep09
Advances: Improvement in fundamentals and low ADR to foster growth

Loan growth as on Sep 30'09 for our cluster witnessed YTD and QoQ contraction of 1.8% and
2.0% respectively. Reduced credit demand from the private sector, conservative lending policies
due to fear of default, higher interest rates and sharp contraction in LSM growth propelled the
loan growth into the red zone.
Industry advances witnessed similar trends during 3QCY09, as they posted a decline of 0.4%
QoQ. However, we believe that the loan growth will pick up in 4QCY09 on account of rebound in
private sector credit appetite. Loan extended towards the private sector depicted a jump of 4.4%
from PKR 2.84tr on Sep12'09 to PKR 2.96tr on Dec19'09. This modest jump in the private sector
credit is encouraging and shall continue in CY10. Moreover, macroeconomic indicators such as
inflation, external account, LSM growth etc are beginning to show signs of improvement.
Continued improvement in key indicators shall foster growth in advances during CY10E. The
growth in advances is even expected to outpace the decelerating growth in infected loans.
Consequently, asset quality indicators are expected to improve in CY10.
Moreover, our premise of loan growth also hinges upon the availability of ample liquidity. The
industry ADR plunged by 590bps YTD from 75.5% on Dec 31'09 to 69.6% on Sep 30'09. This is
because of a drop in advances as mentioned earlier and an increase in the deposit base. More-
over, this low utilization of funds also emanates from the Bank's target of diminishing its risk
of default by shedding risky assets. Consequently, the Capital Adequacy ratio witnessed an
increase from 12.3% on Dec 31'08 to 14.3% on Sep 30'09. The low ADR ratio indicates little
utilization of available funds, and a strong ability for expanding the loan book.
18
Deposits to hinge on M2
The increase in deposit base by 9.5% during 9MCY09 is attributed to the improvement in NFA
(Net Foreign Assets) in the last two consecutive quarters. A boost in workers remittances and
IMF disbursement for budgetary support contributed to an increase in NFA. A rise in NFA results
in enhancing the money supply, which subsequently leads to an improvement in the deposit
base. NFA during Jul-Sep 2009 reached PKR 124bn as compared to minus PKR 188bn last year.
This resulted in broad money stock to stand at PKR 5.19tr during Jul-Sep 2009, depicting a
growth of 1.01% since Jun'09. Consequently, the deposit base for Jul-Sep 2009 also increased by
1.01% from Jun'09 to stand at PKR 4.2tr.
The deposit base during 9MCY09 for our universe experienced a similar rising trend as the
industry, but lagged behind as far as the quantum of appreciation is concerned. This is because
deposits for MCB, HBL and ABL registered an appreciation of 10%, 6% and 1% respectively,
whereas UBL and BAFL deposit base dropped by 6% and 2% respectively. This decline can be
attributed to the bank's efforts to reduce costly funds as total share of remunerative deposits for
UBL fell by 3bps to 70% during 9MCY09.
On QoQ basis, the deposit base for our cluster depicted a contrasting trend to that of the
industry as it fell by 4% during 3QCY09. With the exception of MCB, the deposit base for the
remaining 4 banks in our universe witnessed a decline during 3QCY09. This reduction can be
attributed to the shedding of costly funds as banks experienced an increase in CASA deposits.
MCB was the sole exception as its CASA deposits hiked by 100bps during 3QCY09.
During 4QCY09, we expect the deposit base to surge on the back of 5.5% increase in broad money
(M2) between Sep12'09 to Dec19'09. In CY10, we expect liquidity conditions to improve on
account of reduction in current account deficit and pledged external inflows. Consequently, the
deposit base is expected to continue with its rising trend on the back of 12.3% YoY expected
increase in M2 during CY10.
Deposit gowth moving inline with MS growth
30%
Deposit growth M2 Growth
25%
20%
15%
10%
5%
0%
CY05 CY06 CY07 CY08 CY09E CY10E
19
Spreads contraction
As per latest available data, the banking spreads for Nov'09 registered a decline after persisting
with their rising trend during Sep'09 and Oct'09. Banking spreads for the period in review
declined by 8bps from 7.41% in Oct'09 to 7.33% in Nov'09. This decrease can be attributed
primarily to the drop in lending rates for Nov'09. On MoM basis, the lending rates fell by 9bps to
13.58%, whereas cost of funds dropped by a meager 1bps to 6.25%.
During Nov'09, the pace of decline in lending rates was more than the fall in the cost of funds.
The steeper slide in lending rates can be attributed to a plunging KIBOR rate during the month
in review. The 6 month KIBOR witnessed a decline of 44bps and settled at 12.41% at the end of
the month.
Moreover, since Aug'09, lending and deposits rates have witnessed a decline of 15bps and 16bps
respectively. This fall in the cost of funds can be attributed to the banks ability to reduce reliance
on costly deposits on account of low credit demand. However on MoM basis, the deposit rates
only fell by 1bps in Nov'09. This meager fall could be a testimony to the fact that prior to Nov'09
the banks had already shed most of their expensive deposits.
The YTD analysis reveals that spreads in Nov'09 have declined by 45bps from Jan'09 peak of
7.78%. This fall can be attributed to the continuation of loose monetary policy stance by the SBP,
which has resulted in the average 6 month KIBOR rate to decline from 15.48% in Jan'09 to
12.73% in Nov'09. The average lending rates followed the same downward trajectory as they
declined by 108bps since Jan'09. The decline in lending rates was steeper than the deposits rates
(63bps YTD), which caused the spreads to shrink during 11MCY09. This is because a vast
majority of advances are based on floating rates where KIBOR is used as the bench mark rate,
and deposit rates are exhibiting a downward stickiness on the back of placement of 5% floor rate
on savings accounts.
Going forward, we expect the average industry spreads to contract on account of 1) An expected
reduction in discount rate by 100-150bps by 1HCY10 will lower the KIBOR rate (ceteris paribus).
The reduction in KIBOR will eventually lead to lower lending rates. 2) The deposit rates are
expected to consolidate on the back of placement of 5% minimum rate on savings account,
which constitutes 35% of the total deposits. However, our correspondence with various institu-
tions indicates that SBP might reduce the minimum rate of 5% on savings deposits. Any such,
development shall reduce spread contraction, and consequently lead to NIM expansion.
Spreads vs 6 month KIBOR

(%) (%)
Spreads (LHS) Avg KIBOR (RHS)
7.9 16.0
7.8
15.0
7.7
7.6 14.0
7.5
13.0
7.4
7.3 12.0
7.2
11.0
7.1
7 10.0
Jan09 Feb09 Mar09 Apr09 May09 Jun09 Jul09 Aug09 Sep09 Oct09 Nov09
Source: SBP
20
Changes in Prudential Regulations

The SBP amended the prudential regulations for NPL provisioning and rescheduling/restructuring
by issuing Circular No: 10 of 2009 on Oct 20'09. According to the circular, FSV benefit has been
increased to 40% from 30% of 'pledged stock and mortgage residential and commercial properties
held as collateral against all NPLs for three years from the date of calculating provisioning require-
ment w.e.f Sep 30'09.' Furthermore, FSV benefits may also be availed on industrial properties (land
and building only).
The timing of the aforementioned circular did not allow most banks to book provisioning reversals in
3QCY09 results. We believe that the banks would avail the FSV benefit in 4QCY09 and beyond.
Consequently, the quantum of provisioning is expected to be lower on account of booking changes in
the prudential regulations. Moreover, SBP has also allowed the infected loan restructuring which
could lead to improvement in the asset quality.
Value Multiples
The banking sector and in particular the TSL bank universe is trading at the lower end of their P/B
band. We believe the market has not priced in the sequential earnings improvement in the 4QCY09
and growth prospects in CY10F. Consequently, the valuations provide sufficient room for an extended
period of positive price discovery.
BAFL-P/B band (CY06-CY09E)
7.5x
5.2x
3.5x
2.0x
.5x
02-Jan-06 17-Oct-06 07-Aug-07 26-May-08 13-Mar-09 29-Dec-09
UBL-P/B band (CY06-CY09E)
7x
5x
4x
2x
1x
21
ABL-P/B band (CY06-CY09E)
5x
4x
3x
2x
1x

HBL-P/B band (CY07-CY09E)
3.0x
2.5x
2.0x
1.5x
1.0x
24-Sep-07 25-Jun-08 31-Mar-09 29-Dec-09

MCB-P/B band (CY06-CY09E)
5.0x
4.0x
3.0x
2.0x
1.0x
22
Discount rate reduction may provide further price trigger

We are expecting the SBP to slash discount rate by 50bps to 100bps in the upcoming monetary
policy review, scheduled to be held in Jan'10. Slashing of the discount rate may provide an
additional trigger for prices to march upwards, primarily on account of improvement in loan
quality, as loans are repriced at lower rates.
Our expectation for a discount rate reduction is based on reduced inflationary pressures and
improvement in government finances. A reduction in the twin deficit and improvement in
external account on account of amount received by IMF for budgetary support shall curtail
government borrowing. Moreover, the amount expected to be received under Kerry-Lugar bill
and from other multilateral and bilateral donors shall provide additional room for the govern-
ment to fund its budget deficit.
The following table depicts changes in our Dec 31'10 target price on account of changes in
discount rate (ceteris paribus).
Target price sensitivity to discount rate (PKR)

Discount rate BAFL UBL ABL HBL MCB
12.50% 16.98 70.87 61.92 121.27 197.71
12% 17.48 72.88 63.95 124.84 201.94
11.50% 18.02 75.01 66.13 128.63 207.20
Risk to projections
Macroeconomic risk: While macroeconomic variables have shown improvement in CY09, the
extent and pace of economic recovery is still tenuous. A key risk stems from the resurgence in
inflation primarily on account of rising commodity prices and higher power tariffs.
Political and security risk: The political environment has received a fresh blow in the aftermath
of NRO verdict. Moreover, the country is back in the grip of fear on account of recent bombing
at the Moharram procession in Karachi. Any further deterioration of trust among political
juggernauts along with increased terrorism shall debilitate the road to recovery.
Monetary tightening: Continuation of high interest rates may further cripple the private sector
credit demand and could lead to a fresh NPL accretion. In such case, loan growth may be lower
and infected loans may rise, subsequently leading to lower earnings.
Deposit growth: A deterioration in domestic liquidity on account of rising deficits and shortfall
in external inflow shall create a hurdle for deposit mobilization, which will eventually lead to
slower than expected growth.
Global Economy: Recovery in global environment shall bode well for export oriented industries,
such as textile sector. However, such industries and eventually the banks may bare the brunt in
the aftermath of a global economy relapse.
23
Bank Alfalah Limited: Weathering the Storm

BAFL scrip underperformed the KSE 100 index by 75% during 9MCY09 on account of its dismal
financial performance during the same period. However, we believe that the scrip has factored in all
the negatives and is available at attractive levels. We expect BAFL earnings to show sequential
improvement going forward with an EPS of PKR 1.56 and PKR 2.40 in CY09 and CY10 respectively.
This is on account of: 1) maturing of high cost deposit , 2) persistence on cost control, 3) maintain-
ing a healthy share in overall advances, 4) improvement in loan quality, and 5) availing benefits of
FSV going forward. Moreover, over the medium term, the scrip may gain further momentum on
account of divestment in telecom associates (Warid and Wateen). Based on Dec 31'09 price of PKR
13.77, the stock is offering an upside potential of 23% from our estimated Dec 31'10 target price of
PKR 16.98 per share.
9MCY09 result review: BAFL’s net earnings declined by 36% YoY in 9M CY09 to PKR 1.56bn (EPS:
PKR 1.16) primarily on account of a flattish growth in the gross income, a mammoth rise in the
provisioning expense and decline in credit off-take. Moreover, as per CY08 annual accounts, BAFL
has one of the lowest Capital Adequacy Ratio (CAR) in the sector, and as a result was forced to
curtail its risky assets during the period (advances down 5.8% YTD). Consequently, the scrip
underperformed the index by 75% during 9MCY09.
Warid and Wateen-the hidden potential: As already highlighted in our Oct'09 publication,
divestment in telecom associates by BAFL may have a one time positive earnings impact of at least
PKR 3.5/share. According to news reports, Warid Telecom (BAFL: 8.76% stake) might head for a
potential takeover, whereas Wateen Telecom is considering an IPO. In our view, the potential
divestment will be a vital price performance trigger going forward.
Dilemma of bad loan ageing: As on Sep31'09, BAFL had the lowest infection ratio amongst our
banking cluster. NPL accretion receded to 6% QoQ in 3QCY09 as compared to average accretion
levels of 14% QoQ over the previous two quarters. However, with 43% of infected loans resting in the
substandard and doubtful category, loan provisioning may not peak until 2HCY10. In this regard,
we expect some respite to arise from FSV related provisioning reversals going forward. On the hind
side, with 43% bad loan susceptible to ageing, any improvement in the economy will bode well for the
bank in term of improvement in loan quality and potential surge in reversals.
Valuation and recommendation: BAFL is trading at a CY10F P/B multiple of 0.74x and a PER
of 5.73x. The stock has underperformed the KSE-100 index by 67% during CY09 (9MCY09: -75%,
4QCY09: +7.4%). Based on the Dec 31'09 closing price of PKR 13.77/share, the scrip is offering an
upside potential of 23% from our Dec 31'10 target price of PKR 16.98/share. Consequently, we have
a BUY stance on the scrip.
24
Bank AlFalah Limited
BAFL: Key income statement data PKR (m)

CY08 CY09E CY10E CY11E CY12E
NII 10,715 12,660 14,600 16,422 20,186
Gross Income 15,961 18,866 21,209 23,753 28,766
PPOP 5,338 7,192 8,137 9,031 12,034
PBT 1,795 3,231 4,992 5,559 8,069
PAT 1,301 2,100 3,245 3,613 5,245
BAFL: Key balance sheet items PKR (m)

Bash & bank balances 54,268 55,755 61,888 69,314 76,101
Lending to financial inst. 3,316 9,202 17,024 19,067 21,356
Investments 75,973 92,170 91,923 102,854 128,023
Advances 192,671 191,643 213,520 236,473 263,412
Total Assets 348,991 373,953 412,802 460,263 519,219
Deposits 300,733 306,748 340,490 381,349 427,110
Borrowing 13,690 15,649 17,101 18,935 21,631
Total Liab. 331,946 350,078 385,023 428,190 482,846
Tier 1 Capital 14,609 21,151 25,070 29,430 33,724
Total Equity 17,045 23,875 27,779 32,073 36,373
BAFL: Key metrics

EPS 0.96 1.56 2.40 2.68 3.89
BVS 10.83 15.68 18.58 21.81 25.00
PB Tier 1 (x) 1.27 0.88 0.74 0.63 0.55
PE (X) 14.28 8.85 5.73 5.14 3.54
NIM 3.90% 4.00% 3.75% 3.72% 3.70%
ROAA 0.38% 0.58% 0.82% 0.83% 1.07%
ROAE 9.17% 11.74% 14.04% 13.26% 16.61%
ADR 66.11% 65.50% 65.90% 66.45% 66.99%
Infection ratio 4.5% 8.0% 6.0% 5.5% 5.0%
Cost to income 66.56% 61.88% 61.64% 60.20% 58.17%
Source: TSL Research, Company Accounts
25
United Bank Limited: Good days ahead

UBL scrip outperformed the KSE-100 index by 25.5% during 9MCY09 on account of improvement in
key metrics. We believe, UBL offers a unique interplay between domestic and foreign operations,
thus making it prone to potential higher earnings. This improvement in fundamental metrics is
balanced by a poor asset quality in the international loan books. We expect UBL earnings to show
sequential improvement going forward with an EPS of PKR 7.84 and PKR 9.95 in CY09 and CY10
respectively. This is on account of: 1) Increased credit appetite, 2) Higher share of non remunerative
deposits preventing NIM deterioration, 3) Improvement in domestic and international asset quality,
4) Surge in consumer related income, 5) Loan provisioning likely to peak in CY09 and 6) Availing FSV
benefit. Based on Dec 31'09 price of PKR 58.45, the stock is offering an upside potential of 21% from
our estimated Dec 31'10 target price of PKR 70.87 per share.
Improvement in fundamentals: UBL has been able to reduce reliance on costly deposits as it
was successful in increasing CASA deposits by 200bps QoQ and 600bps YTD as on Sep 30'09.
Consequently, NIMs were higher by 20bps in 9MCY09. CAR also surged by 100bps QoQ and 220bps
YTD on Sep 30'09.
Provisioning likely to peak-balance sheet clean up to foster growth: Domestic and
overseas NPLs surged by 4.4% QoQ and 27% QoQ respectively, whereas coverage ratio has also
surged by 180bps on QoQ basis during 3QCY09. This implies that the bank has been providing
adequate coverage for its infected loans. Moreover, ageing of bad loans should not pose a threat, as
the proportion of infected loans as on Sep 30'09 in the loss category surged by 700bps and 200bps on
YTD basis and QoQ basis respectively. This indicates that a significant bad loan ageing has taken
place and provisions have already been booked on account of surge in coverage ratio. We believe that
this trend shall continue in 4QCY09 which may result in loan provisioning to peak in CY09, thus
providing much needed impetus for growth in CY10.
Valuation and recommendation: UBL trades at CY10F P/B multiple of 1.09x and PER of 5.87x.
In our view, the ongoing balance sheet cleanup and improvement in international asset quality shall
bode well for earnings growth in CY10 and onwards. The improvement in fundamental metrics and
the potential growth prospects have resulted in the scrip to outperform the KSE 100 index by 14%
during CY09. Based on Dec 31'09 closing price of PKR 58.45/share, the scrip is offering an upside
potential of 21% from our Dec 31'10 target price of PKR 70.87/share. Consequently, we have a BUY
stance on the scrip.
26
United Bank Limited
UBL: Key income statement data PKR (m)

2008A 2009E 2010E 2011E 2012E
Net Interest Income 28,136 31,890 32,307 35,689 40,939
Gross income 38,537 42,675 44,671 49,841 56,560
PPOP 21,972 24,011 24,845 28,156 32,673
PBT 13,874 13,635 17,037 20,809 25,583
PAT 8,333 8,727 11,074 13,526 16,629
UBL: Key balance sheet items PKR (m)

2008A 2009E 2010E 2011E 2012E
Cash and Bank Balances 57,567 84,736 74,313 81,094 86,019
Lendings to Financial Instit 22,805 14,776 18,189 20,554 22,633
Investments 116,328 140,351 149,027 157,372 167,396
Advances 371,140 365,188 379,000 428,458 484,017
Total Assets 605,072 642,768 660,552 731,804 809,030
Deposits 483,560 492,545 519,695 587,246 646,662
Borrowings 44,196 55,394 34,656 25,486 28,151
Total Liabilities 561,210 585,956 595,144 655,241 717,250
Tier 1 Capital 42,221 50,758 59,658 71,142 86,705
Total SHE 43,861 56,813 65,408 76,563 91,780
UBL: Key metrics

2008A 2009E 2010F 2011F 2012F
EPS 7.49 7.84 9.95 12.15 14.94
BVS 37.94 45.61 53.61 63.93 77.91
PB Tier 1 (x) 1.54 1.28 1.09 0.91 0.75
PE (X) 7.81 7.45 5.87 4.81 3.91
NIM 6.00% 6.30% 6.10% 5.90% 5.75%
ROAA 1.47% 1.40% 1.70% 1.94% 2.16%
ROAE 21.86% 18.77% 20.06% 20.68% 21.07%
ADR 80.84% 79.97% 78.64% 78.00% 79.33%
Infection ratio 7.50% 10.79% 9.71% 8.55% 7.42%
Cost to income 42.99% 43.74% 44.38% 43.51% 42.23%
Source: TSL Research, Company Accounts
27
CEMENT SECTOR NEGATIVE TO NEUTRAL

Light at the end of the tunnel
The Cement sector stands as one of the most vital industries of Pakistan. The growth of the cement
industry is therefore, rightly considered to be the barometer of economic activity. In FY09 alone, the
industry has earned a foreign exchange of $750m with PKR 30bn being contributed to the national
exchequer. In order to shape up or ship out, an injection of $6bn has been made over a period of time
to expand the sector's production capacity from 16.72m tones to 41.76m tones from FY02 to FY09.
Share Price Fair Potential 1QFY10 YOY FY10F FY10F Stance

31-Dec Value Upside/ PAT Growth EPS P/EX
PKR PKR Downside % PKR
LUCKY 66.24 75.20 14% 14% 11.72 4.37 Accumulate
DGKC 32.56 34.25 5% Nm 0.74 41.74 No Ratings
ACPL 52.00 46.39 -11% 35% 9.25 5.62 Sell
MLCF 3.76 2.60 -31% -37% -2.15 Nm Sell
FCCL 6.16 4.30 -30% -33% -0.74 Nm Sell
LPCL 2.19 1.93 -12% 40% -0.01 Nm Sell
CHCC 12.55 6.28 -50% -91% -0.35 Nm Sell
Source: TSL Estimates & Company Reports
PSDP
A can of worms
The allocation of Public Sector Development Program (PSDP), which acts as the major demand
driver for the industry showing a strong positive correlation of 0.99, has generated a lot of buzz for
FY10 as the Government has allocated a hefty budget of PKR 646bn which is like comparing apples to
oranges when being compared to the actual disbursement of funds, which was around PKR 346bn in
FY09. This is mainly on the back of 8 small dams to be built in all the four provinces, which bodes well
for the country's long term cement demand.
Despite the enormous budget for FY10, there may be an anticipated cut in the PSDP of PKR 75-150bn
on account of various factors such as, IMF's pressure to keep the fiscal deficit under control. These
pressures relate to high inflation levels, which although seems to have lowered but in actuality have
risen on a MoM basis. It is only the base effect compared to last year, which triggered the fall in
inflation, the people thus being misled that the inflation rates are drastically falling.
Coal Scenario
Coal is adding further to the agony of the cement sector. International Coal Prices have witnessed a
hike of 25% in the past eight months of May - December 2009, where they have risen from $57.93 per
ton in May to $72.34 in December 2009. The rise of coal prices would do no good as witnessed in the
Fiscal Year 2008 era where the coal prices sky rocketed and the cost of sales had risen enormously only
to adversely affect the bottom line for the cement manufacturers. The coal prices are rising by an
average of 3% MoM in the wake of an already worsening situation for the sector.
Analyst:Saad Najaf Ali Sayed

28 Email: saad@taurus.com.pk
Coal Price Trend May - Dec

Coal Prices US ($) per ton
100
90
80 72.34
60.6 63.93 64.96
70
60
61.45 60.04 66.84
50 57.93
40
30
20
10
0
May Jun Jul Aug Sept Oct Nov Dec
2009
Source: TSL Research & Company Reports
Local Demand & Price Consensus

Threat to survival
The fiscal year 2010 kicked off in a state of turmoil on the back of a price war. Finally, the price
consensus was breached between the cement manufacturers and now they stand scattered and
divided, inevitably struggling for their survival. Therefore, an ostrich strategy would not hold and as
such, some drastic rescue measures ought to be taken to pull the whole sector out of the trilemma.
The prices have dropped from as high as PKR 375 per 50kg bag to PKR 230-240 per 50kg bag, which
is almost a 39% decline doing no good to the infant companies in the sector. In the light of the above,
we maintain our stance that volume driven earnings cannot compensate for price driven earnings.
The sector is going through a rough patch at this time, some even designating it as the worst ever
crisis of the sector. If prices remain persistently low and to further aggravate the matters, if there is
a sharp cut in PSDP, then the entire survival of the sector seems gloomy.
Going forward for the fiscal year 2010, we believe that a pricing consensus will be formed as when the
going gets tough, the tough get going; manufacturers are still marred by high borrowing, fixed and
variable costs. However, timing of the price recovery cannot be ascertained. In the past, price wars
have lasted from a few days to approximately 9 months. It is pertinent to note that, cement manufac-
turers are highly leveraged and will face problems with debt repayment in a low price regime, adding
the risk of bridging the liquidity gap with short term financing. Therefore, we expect the industry to
form a price consensus by 2HFY10.
Exports
Threading the needle
Exports from Pakistan have witnessed a spectacular growth in FY09 as they grew by 47% with a sales
volume of 11.38m tons against the comparative period's volume of 7.72m tons per anum. With the
expansion of global production capacities coming into play, it's a high time for the Pakistani sector
to explore new markets like Lucky boded well with the drumming up of new markets in the African
region. Countries like India, Iran and Saudi Arabia have and are in the process of expanding their
capacities.
29
In regards to the above, one of the major threats for our exports would be Saudi Arabia (KSA).
With the removal of its export ban, now it can export surplus cement which would render it
cheaper freight due to the proximity (mostly inland route-giving further edge of improved
delivery time) and thus, cost advantage. Back-of-the-envelope calculations showed that the
production cost for KSA's cement averaged US$ 28 per ton against Pakistan's average cost of
US$ 36 per ton in FY09. Furthermore, apart from optimum location advantage, KSA is also one
of the lowest cost producers in the region partly because production cost is govt-subsidized in
terms of energy and fuel. This further poses a threat to cement companies based in the North
region as they are incurring US$ 12-15 per ton as in-land freight to bring the cement to the port
for exports. In case of a global price competition, it would greatly deter their exports and
consequently be fatal for some companies to bear such a brunt.
Going forward for FY10, we believe that exports will be the main savior for the cement companies
(but one shouldn't forget the Murphy's Law) as contrast to the damage being done by the price
war, which would inevitably leave a scar on the profitability for the year.
Lucky Cement Company Limited
Lucky Cement, a blue chip company with a growing admiration of being on top of the trends is
expected to post earnings after tax for FY10 of PKR 3,790m (EPS: PKR 11.72) against the
comparable period's earnings after tax of PKR 4,597m (EPS: PKR 14.21). This would be a
projected 18% YoY decline in profits mainly on the back of prevailing economic recession, secu-
rity concerns and political instability in the country further being fuelled by the price war that
was initiated in the first quarter of FY10 and still persists. Despite these irregularities, Lucky
stands tall in its sector, jumping through hoops and living upto the expectations of a true
market leader. Diversification of export market might be the saving grace for the company
going forward. Given the changing scenarios in the domestic and global front, we have revised
our fair value to PKR 75.20 from the previous fair value of PKR 84.20.
Earnings Outlook
Going forward, Lucky is projected to produce an earnings after tax for FY10 of PKR 3,790m
(EPS: PKR 11.72) against the comparable period's earnings after tax of PKR 4,597m (EPS: PKR
14.21). It may give out dividends of PKR 2.50-2.75 per share for the period ending June 2010.
Both the top line and the bottom line are projected to grow with a Compound Annual Growth
Rate (CAGR) of 9%. The CAGR has been determined on the basis of estimated future projections
from the period of FY10 to FY14. Exports for the period of FY10 are expected to hover around the
same level of last year FY09 or rise by 5% as compared to FY09, which were 3.4m tones. With the
cornering of markets in the African region the exports are expected to rise in the upcoming
years.
The company has boded well with the financial costs, giving itself an edge in times of crisis
whereby, the overall profitability of the sector is less and the company is able to translate the
modest gross margins to the bottom line, unlike other companies whose profits are crunched
due to finance costs. Lucky is left with two non-current loans to be repaid by the end of FY2013.
The sector reaped the benefits of falling coal prices since its prices rose to new heights in 2008.
The coal prices have stabilized and are expected to rise by a meager 5-10% per annum.
30
The company is projected to remain in the green zone for the years to come based on its highly
capable management, which has an innate quality of dealing with emergent strategies based on
continous changing events. Despite a declining trend in profits, which is inevitable to the sector
given the current political unrest and economic instability as well as an expected cut in PSDP, the
company with its continous ability to hunt for new markets for exports and due to economies of
scales has the ability to survive in the long-run. This current price war may very well pull the
plugs for small cement players in the sector, leaving behind even a greater opportunity for the
company to capture and extend the local share in the market.
Valuation & Recommendation

With a WACC of 17.9% and Terminal Growth of 4%, our DCF based fair value for the scrip comes
to PKR 75.20 per share. At the price of PKR 66.24 per share on December 31, 2009, we recom-
mend Accumulate for the scrip.
Valuation Snapshot PKR

LUCKY FY08A FY09A FY10E FY11F FY12F
EPS 8.28 14.21 11.72 13.38 13.77
DPS 0.00 4.00 2.00 3.00 4.00
BVS 57.69 71.9 83.62 93.8 103.74
PEx 7.67 4.44 4.37 4.95 4.81
Dividend Yield 0% 6% 3% 5% 6%
PBx 1.1 0.88 0.76 0.68 0.61
Source: Company Reports & TSL Estimates
31
Taurus Securities Limited Pakistan Outlook : 2010
INDEPENDENT POWER PRODUCERS POSITIVE

Valuation & Stance
Share Fair Potential 1QFY10 YoY FY10F FY10F
Price 31- Value Upside/ PAT EPS DPS Dividend FY10F
Dec-2009 PKR (Downside) Growth PKR PKR Yield % P/Ex Stance
HUBCO 31.08 43.98 42% 57.9% 4.62 4.20 13.5% 6.7 Strong Buy
KAPCO 45.37 54.00 19% -13.0% 7.63 7.00 15.4% 5.9 Accumulate
Source: Company Reports and TSL Estimates
Power Sector - In doldrums

During the last ten years, Pakistan has seen a significant increase in urbanization and industrializa-
tion, and as a result power consumption has increased as well. Statistics have shown that power
demand has risen by a CAGR of 5.2% over the last decade. Despite the rising demand, appropriate
measures have not been taken to curb the shortage in supply. To further aggravate the matters,
"Circular debt" has gained popularity, which has surfaced with more velocity in the past few months.
Circular debt is discussed later in the report.
On the other hand, demand supply has seen shortages ranging from 2,500 to 4,000 MW. Independent
Power Producers (IPPs) are considered to be the main stay of the local power sector. IPPs have been
effective in countering the severe shortfall of power requirement over the years. However, a lot still
needs to be done.
IPPs - Biting off more than they can chew

There are a total of 17 IPPs currently operating in Pakistan that are generating around 6,000 MW
which fulfills around 30% of the nation's generation capacity. It is worth mentioning that IPPs are
not exposed to market risk on their outputs mainly because they have guaranteed dollar based
returns adjusted for US CPI which are an effective hedge against the local rupee which faces devalu-
ation every now and then.
KAPCO and HUBCO are the largest IPPs with a gross generation capacity of 1,600 MW and 1,292 MW
respectively. Other IPPs are Altern Energy, Kohinoor Energy & Nishat Chunian Power only to name
a few.
Circular debt - Tip of the iceberg

Circular debt is a result of the usage of thermal IPPs in recent times, which proved to be quite costly.
The situation was further aggravated by the lack of appropriate increase in tariffs with time, trans-
mission and distribution losses of WAPDA, along with power theft which made matters worse.
PEPCO plays a major role in exacerbating the circular debt issue. PEPCO currently sits on over PKR
90bn worth of payables to the oil companies. Even if all the energy sector companies clear their dues
(which we hardly see coming), the net outstanding dues would still stand at PKR 250bn. PEPCO is
piling up on an approximate PKR 300m on account of arrears daily- a catch 22, whereby the
receivables and payables gap is widening simultaneously.
Analyst: Saad Najaf Ali Sayed

32 Email: saad@taurus.com.pk
A major brunt is borne by the Oil & Gas Suppliers, who haven't received payment due to PEPCO's
inability to release funds to the private sector companies. For instance, KAPCO & HUBCO have
stopped payments of over PKR 16bn & PKR 30bn respectively to PSO.
Furthermore, subsidies were also one of the reasons behind the circular debt. In order to effectively
reduce the circular debt, the present government upon pressure from the International Monetary
Fund (IMF), has decided to withdraw the power subsidy which was previously given to the power
sector. As a result, power tariffs were increased by 6% in October 2009. Moreover a 12% increase has
been announced in January 2010 and a 6% rise in April 2010.
In March 2009, PEPCO issued TFCs worth PKR 80 billion to a consortium of ten banks, which helped
to cool the fire temporarily but did not extinguish it completely. The effect was such that PEPCO did
manage to curtail the circular debt but only for a while as no permanent solution was sought.
Hub Power Company Limited (HUBCO) - Putting on a brave face

With a gross capacity of 1,292 MW, it is the second largest IPP in Pakistan. The company enjoys a 30
year power purchase agreement (PPA) with PEPCO which was made in 1997. HUBCO will supply
power to PEPCO up till 2027 under the terms of the agreement. Since HUBCO is a furnace oil based
IPP, it proved to be an expensive supplier for PEPCO, and thus restricted itself from purchasing
power from HUBCO when the country witnessed an enormous power shortage this year.
HUBCO has initiated an expansion project of "225 MW-Narowal project", the work on which is on
schedule , and power production is expected by March 2010. This project will add PKR 3.1 per share
to HUBCO's target price.
HUBCO has acquired Laraib Energy Ltd. (75% owned), which is setting up an EPC (Engineering
Procurement & Construction) Contract for the Laraib Hydropower project. This project has finally
been given to the South Korean concern named Sambu Corporation. This will be the first hydel IPP
of Pakistan with a gross capacity of 84 MW. The estimated completion time of the project is by
FY2013.
The circular debt situation has worsened this year. The debt to equity has further deteriorated from
an already higher 76% in FY08 to 97% in FY09. Receivables from WAPDA saw an increase of almost
200% this year from PKR 25bn to PKR 46bn. On the other hand, HUBCO has witnessed a remarkable
improvement of 57.9% in PAT for 1QFY10 YoY.

HUBCO FY08A FY09A FY10E FY11F FY12F
EPS 2.25 3.27 4.62 5.30 6.27
DPS 2.15 3.35 4.20 4.60 5.50
BVS 23.46 23.52 23.91 24.58 25.34
PEx 13.34 9.18 6.49 5.67 4.78
Dividend Yield 7% 11% 14% 15% 18%
PBx 1.28 1.28 1.25 1.22 1.18
33
Kot Addu Power Company Limited (KAPCO) - Old dog for a hard road
KAPCO is the largest IPP in Pakistan and has a gross capacity of 1,600 MW. Unlike HUBCO, it is
a multi-fuel based IPP.
KAPCO has been in news of possible expansion for some years now. Its Brownfield project has
been in talks for the past couple of years, and this year it decided to reduce its capacity to 280 MW
as compared to 400-450 MW. By reducing the capacity it can be believed that KAPCO may finally
take concrete steps to bring this project to reality.
In addition to the above, the hike in tariff of 30% by NEPRA has also eased out KAPCO's burden
in regards to the circular debt along with other IPPs. Further rise in tariffs are expected, which
can bring fruitful results to the sector in terms of lightening the debt burden.
The magnitude of circular debt for KAPCO has eased relatively as compared to HUBCO this year,
which saw a mammoth increase in its long term debts partly on the back of expansion projects.
Moreover, receivables from WAPDA also increased this year by 9% from PKR 29bn in FY08 to
32bn in FY09. On the other hand, KAPCO saw its PAT decline by 13% YoY in the first quarter of
fiscal year 2010.

KAPCO FY08A FY09A FY10E FY11F FY12F
EPS 9.05 6.44 7.63 8.17 8.63
DPS 5.45 6.50 7.00 7.60 7.70
BVS 22.03 26.22 26.86 27.46 28.37
PEx 7.82 7.23 6.11 5.70 5.40
Dividend Yield 12% 14% 15% 16% 17%
PBx 2.12 1.78 1.74 1.70 1.64
34
OIL MARKETING SECTOR NEUTRAL TO POSITIVE

Valuation and Stance NEUTRAL to POSITIVE
Share Fair Potential 1QFY10 FY10E
Price Value Upside/ PAT EPS FY10E
31-Dec PKR PKR (Downside) Growth % PKR P/Ex Stance
PSO 297.44 357.13 20% 77% 37.90 7.85 Accumulate
SHEL* 250.36 276.50 10% 42% 17.86** 14.01 Hold
APL 347.62 458.50 32% -7% 50.27 6.92 Buy
Source: Company Reports & TSL Research
* Calender Year Company
** CY09E
FY2009 had been a dreadful year for the Oil Marketing Companies. The sector had to suffer from
quite a few setbacks. This included the following:
?The disaster faced by OMCs from sinking crude oil prices as massive bailouts by the US government
in the financial sector sent markets into a tailspin on fears of a deepening global economic slump,
causing international oil prices to plunge
?Circular debt- which the consumers owe to OMCs and the latter to refineries- is one of the major
problems being faced by OMCs. The whole energy sector was entangled by circular debt that caused
short term borrowing of listed OMCs to swell to PKR 23.45 billion on June 30, 2009. The debt issue has
been haunting OMC's and refineries till now. Higher borrowing had dented the profitability of OMC
sector as we witnessed an immense increase in the financial cost of PKR 6.2 billion (PKR 23.62 per
share) and PKR 1.8 billion (PKR 17.83 per share) for PSO and Shell respectively during FY09.
?Last but not the least, High Speed Diesel (HSD) demand narrowing by 7.2% YoY from 8.2 million
tons in FY2008 to 7.6 million tons in FY2009.This was basically an aftershock of economic slowdown
that hampered the transportation activities in the country.
After a Storm comes Calm

We however anticipate that the worst for the sector is over as it cannot stay in turmoil for very long.
We expect the circular debt to ease down as the government has floated Term Finance Certificates
(TFCs) of PKR 162.4 billion in two phases. PKR 80 billion was issued in March 2009 followed by PKR
82.4 billion in September 2009. Besides this, in order to keep circular debt in manageable quantum,
the government has decided to withdraw power subsidy during FY2010. The government has decided
to raise the power tariff in three phases, with a 6% hike already taken place in October 2009, whereas
10% and 6% rise is expected in January 2010 and April 2010, respectively. This would improve the
liquidity position of WAPDA and the Independent Power Producers, as well as improve the circular
debt issue.
We further expect a prominent increase in the demand for Furnace Oil (FO), with the upcoming IPPs
of 3,475 mega watts and Rental Power Plants (RPPs) of 2,250 mega watts. Out of the 3,475 mega
watts Independent Power Producers, 910 MW are duel fired by both oil and gas, whereas, the
remaining 2,565 mega watts are to be generated using Furnace Oil. This is expected to increase
Furnace Oil demand by 3.5 million tons per annum. On the other hand, RPPs are basically thermal
power units which result in lower thermal efficiency. This lower thermal efficiency increases the
Analyst: Atiya Abdullah

35
Email: atiya@taurus.com.pk
Furnace Oil requirements. These RPPs are expected to generate an additional Furnace Oil
demand of 3.1 million tons per annum. We expect the total Furnace Oil demand to surpass 12
million tons in FY2013 from 8 million tons in FY09, growing at a 4-year CAGR of approximately
11%.
We also expect the interest rates to decline further, and look forward to stable international oil
prices.
We have also witnessed a growth in the High Speed Diesel in October 2009. This is mainly
attributable to improved agricultural outlook due to higher support prices by the government,
as well as growth in the large scale manufacturing sector during FY10. We expect HSD demand
to grow at a CAGR of 5% (FY09-FY13) period, mainly on the back of strong agricultural outlook
and picking up transportation activities, going forward.
According to the new price regime, the margins on the High Speed Diesel have been fixed in rupee
terms as PKR 1.35 per liter. It benefited the sector when the oil prices fell during FY09 by
preventing the margin from following the down sloping trend. However on the other hand, as
international oil prices are rising, fixed margins are now keeping the margins lower in percent-
age terms. We feel that a significant rise in the crude oil prices may compel OGRA to revise the
High Speed Diesel margin formula to protect the OMCs.
The government has now set up a five-point revised oil pricing formula, headed by the Secretary
of Petroleum. This mechanism suggests the following:
?Substituting the 7.5% duty on diesel with a fixed processing fee of US$ 2 per barrel, and
elimination of Inland Freight Equalization Margin (IFEM) on all petroleum products. Under
this formula, the companies would be free to fix product prices on the basis of transportation
cost. Product prices would vary by Rs4-6 per litre across the country - cheaper in Karachi and
higher in the upcountry.
?A fixed annual rate of general sales on petroleum products instead of a variable 16% GST
currently applicable on product prices which fluctuates with the international oil prices.
?Fixed rates of dealers' commission and companies' margin in rupee term per litre.
Stance on the Sector

We have updated our fair values for the OMC sector, and based on the DCF based fair value PSO
has a fair value of PKR 357.13 and APL has a fair value of PKR 458.50, whereas Shell has a fair
value of PKR 276.50. Hence we recommend ACCUMULATE for PSO, BUY for APL, and HOLD
for Shell. Hence we maintain a NEUTRAL to POSITIVE stance on the sector, on the back of
increased demand for Furnace Oil and High Speed Diesel.
Pakistan State Oil

Pakistan State Oil Company Limited, market leader in the OMC sector with more than 70% share
in the volumes, is attracting investors due to increase in furnace oil demand, reduced financial
cost due to expected improvement in liquidity position as circular debt lowers its intensity going
forward and tremendous turnaround in the profitability after a massive loss in FY09.
The scrip is offering an upside potential of 20% to its June 2010 target price of PKR 357.13 per
share, thus we recommend Accumulate on the scrip. The scrip offers a dividend yield of 4.52%
36
and 9.04% for FY10 and FY11, respectively.

After incurring a loss in FY09, PSO posted strong earnings during the 1QFY10, on the back of buoyant
furnace oil sales and inventory gains. PSO witnessed an increase of 30% in Furnace Oil due to strong
demand from the power sector. The company also recorded inventory gains of approximately PKR
950m as oil prices increased from US$ 60 per barrel to US$ 73 per barrel in the 1QFY10.
FY09 had been a dreadful year for the company as there was an unprecedented plunge in the oil
prices; the company also suffered immense exchange losses, soaring circular debt and finance cost.
But FY10 is suppose to be a bit different for PSO, as international oil prices are more likely to exhibit
a normal behavior causing typical inventory gain or loss, and the Rupee/ Dollar parity is suppose to
stabilize which would reduce exchange losses. Not just that but a reduction in circular debt is also
expected which will help reduce the extreme finance cost faced by the company.
PSO caters to almost 87% of the Furnace Oil demand in the country, thus the expansion in the
demand of furnace oil would strengthen PSO's reign in the OMC sector. The new Independent Power
Plants (3.745 MW) and Rental Power Plants (2,250 MW) will keep the Furnace oil demand flourish-
ing making PSO the most beneficiary among the OMCs. The Company has signed a long term
agreement with the Northern Power Generation Company Limited (NPGCL) for the supply of Fur-
nace Oil, which is likely to stimulate the top line of the Company at a 4 year CAGR of 12% from PKR
613 billion in FY09 to PKR 949 billion in FY13.
The financial cost for FY10 would remain high, as short term borrowing at the end of 1QFY10
mounted to PKR 21.8 billion. We anticipate a significant decline in the finance cost during FY11 with
the withdrawal of power subsidy which would ease off the circular debt. This is expected to improve
the working capital condition for the oil giant, which is facing a credibility crisis on its import LCs.
We expect Furnace Oil volumes to grow at a 4 year CAGR of 12% from FY09-13, whereas HSD volumes
are assumed to grow at a 4 year CAGR of 5% from FY09-13.

PSO FY08 FY09 FY10 FY11F FY12F FY13F
EPS 81.94 -39.05 37.90 59.34 69.96 76.43
DPS 23.50 5.00 13.50 27.00 37.50 46.70
BVS 180.53 121.68 152.83 191.92 229.63 263.97
PE(x) 3.63 NM 7.85 5.01 4.25 3.89
Dividend Yield 7.90% 1.68% 4.54% 9.08% 12.61% 15.70%
P/B Ratio(x) 1.65 2.44 1.95 1.55 1.30 1.13
Shell Pakistan Limited

Shell Pakistan Limited changed its financial year-end to Dec from June. Based on our DCF valuation
we have a fair value of PKR 276.50. Based on the price PKR 250.36 on Dec 31st 2009, the scrip offers
a potential upside of 10% to its fair value so we recommend a hold on the scrip. Based on our CY10F
EPS of PKR 28.75, the stock is trading at a PEx of 8.71x.
During the first nine months of 2009, Shell's PAT decreased by 24%, because in the previous year, the
Company had benefited from inventory gains resulting from the unusually high price volatility in the
international oil prices during the 9MCY08. In the 3QCY09, Shell earned a PAT of PKR 690m
compared to a loss of PKR 1,196m in the corresponding period last year due to improved business
37
performance, better margin management and lower price volatility in the international market
compared to the previous year.
Shell is focused towards working capital reduction and better cash management, due to which
there has been a significant reduction in the Company's borrowings. This was inspite of the
continued challenge of managing government receivables, mainly comprising of price differen-
tial claims and sales tax refunds.
Shell does not have any fuel contracts with the power sector which has both a positive and
negative affect. On one hand, it limits the Company's volume growth and on the other hand, it
does not create circular debt for the company as faced by PSO. We expect the sales volume of
Shell to grow at a 4 year CAGR of 8% resulting in an increase in the bottom line from PKR 791m
in FY09 to PKR 2.45bn in FY13 (CAGR of 33%).
Effective from 1st January 2009, the Government had raised the OMC margins by 50bp to 4%.
This helped produce greater gross margins, and this increase in margins will help boost the
company's bottom line in the upcoming years. The gradual phasing out of subsidies on fuel and
electricity by the GoP will also help the company achieve improved financial performance which
is likely to continue in the future.

SHELL CY08 CY09E CY10F CY11F CY12F CY13F
EPS (0.40) 17.86 28.75 37.21 41.87 46.33
DPS 50.00 16.00 26.00 33.00 38.00 42.00
BVS 91.34 89.63 93.63 97.40 97.89 95.96
PE(x) NM 14.01 8.71 6.73 5.98 5.40
Dividend Yield 19.97% 6.39% 10.39% 13.18% 15.18% 16.78%
P/B Ratio(x) 2.74 2.79 2.67 2.57 2.56 2.61
Attock Petroleum Limited

Attock Petroleum Limited is an associated company of the Attock Group, the only vertically
integrated oil group in Pakistan having ample presence in up, middle and downstream. APL is
the only OMC in the country that markets Asphalt, JBO and Process Oil. The Company has the
financial distinction of 'no debt' which is a luxury considering heavy debts on the OMCs.
The company is following an aggressive expansion plan with a sporadic growth in the fuelling
stations across the country. The number of retail outlets has jumped to 246 at the end of FY2009
as compared to a modest of 75 stations in FY2004, with a Compounding annual growth rate
(CAGR) of 29%.
The company has been witnessing a steady decline in Furnace Oil volumes for the last couple of
years as volumes registered contraction of 14% and 4% in FY2008 and FY2009, respectively. This
declining trend intensifies in FY10 as there is evidence of a YoY plunge of 20% in Furnace Oil
volumes. However from FY10-13, we expect Furnace Oil volumes to grow at a CAGR of 3%.
We expect the top line of the company to grow at a 4 year CAGR of 13% from FY09-13, due to
improvement in volumes and also because of the expected rising trend in the international crude
oil prices. Whereas the bottom line of the company is expected to grow at a CAGR of 6%, due to
increase in volumes. The Company has a history of healthy payouts with an average payout of
45%. We expect the Company to retain its payout ratio with an expected dividend per share of
38
PKR 19, PKR 23 and PKR 25 for FY10, FY11 and FY12 respectively.

APL FY08 FY09 FY10 FY11F FY12F FY13F
EPS 45.86 53.51 50.27 56.87 63.06 68.60
DPS 16.67 25.00 23.00 26.00 28.00 31.00
BVS 96.11 122.96 140.23 171.09 206.16 243.75
PE(x) 7.58 6.50 6.92 6.11 5.51 5.07
Dividend Yield 4.79% 7.19% 6.62% 7.48% 8.05% 8.92%
P/B Ratio(x) 3.62 2.83 2.48 2.03 1.69 1.43
39
E&P SECTOR POSITIVE

Valuation and Stance
Share Price Potential 1QFY10 YoY FY10F
31-Dec Fair Vaue Upside/ PAT Growth EPS FY09F
PKR PKR Downside % PKR P/Ex Stance
OGDC 110.61 117.80 7% -36% 13.28 8.33 Hold
PPL 189.59 235.30 24% -36% 23.12 8.20 Buy
POL 230.77 277.94 20% -37% 27.92 8.27 Buy
1QFY10 (Jul-Sep 2009) Review

? The performance of the TSL E&P universe was a reversal from the same period last year mainly
because of both lower production and oil and gas prices. The overall topline declined by 24% YoY to
PKR 47.19 bn leading to a 36% YoY drop in PAT to PKR 18.47bn. Besides the drop in the topline, the
other factor leading to the slump in the bottomline was the 55% YoY plunged in other income to PKR
1.65bn. This decrease in other income can be attributed to lower interest income on the back of lower
cash balances that might be caused by the ongoing circular debt issue. The average realized crude oil
price of the TSL universe companies was US$ 57.47 as compared to US$ 93.32, a decrease of 32%. The
average combined realized price of natural gas during 1QFY10 was PKR 164.81 per mcf as against
PKR 180.24 during the same period last year, a decline of 9.0%. The combined crude oil production
during 1QFY10 decline by 6.3% YoY to 4.21m barrels while natural gas production decreased by 2%
YoY to 168.3 bcf.
? Out of the 3 TSL E&P Universe companies, Pakistan Oilfields (POL) suffered the largest decline in
net revenues and production. The steep decline in international crude oil prices over the last 12
months along with falling production has had a negative impact on POL, since its revenues are the
most sensitive to crude oil price movements due to the higher proportion of oil in the revenue mix.
The oil revenues as a percentage of total net revenues declined from 60% in 1QFY09 to 52% in 1QFY10.
? PPL's topline was adversely affected by the 16% YoY decline in average realized natural gas price to
PKR 131.21 per mcf as well as the 5.6% YoY drop in gas production to 76.54 bcf in 1QFY10. Other
income plunged by 53.5% Yoy to PKR 570m.
? OGDC was the least affected by the downward revision in the wellhead gas pries for 1HFY10 by
Ogra. The average realized gas price during the period under review was PKR 160.51 per mcf as
against PKR 166.47 per mcf in 1QFY09. OGDC witnessed a 1.8% YoY improvement in gas production
to 983 mmcfd, but experienced a 6.2% YoY drop in oil production to 39k bpd due to natural decline in
some of its fields.
Going Forward
? The start of full production of the Manzalai Central Processing Facility to 250 mmcfd and 4,000
bpd of oil will have a beneficial impact for all 3 TSL Universe companies for 2HFY10 and beyond, but
the largest beneficiary in terms of EPS would be POL due to it smaller equity base.
? The circular debt issue could affect the working capital and dividend paying ability for both OGDC
and PPL if a permanent and quick solution is not found. As per the 1QFY10 accounts, OGDC is owed
PKR 32.7bn while PPL has posted receivables of PKR 24.9bn from various government entities.
40 Analyst: Salman Rasheed

Email: salman@taurus.com.pk
? The future global oil price scenario will depend on the timing and robustness of economic
recovery, especially for the Eurozone and North American economies. OPEC in its December 2009 Oil
Report projects global economic growth to be 2.9% in 2010, which will lead to higher oil demand,
particularly in the second half of the year. The estimates of additional demand during 2010 varies
between 0.7m to 1.6m bpd, however, OPEC pegs the boost in oil demand at 0.8m bpd to an average of
85.1m bpd as compred to 84.3m bpd in 2009. Our crude oil assumption over the next few years shows
cautious optimism as we expect a gradual increase in the crude oil price to US$ 75 a barrel by FY13.
? In March 2009, the Ministry of Petroleum and Natural Resources has affirmed a new Petroleum
Policy 2009 in order to address some shortcomings in the 2007 policy, and to encourage further
exploration activity. A new pricing formula has been introduced for gas wellhead pricing with a floor
of US$ 37 a barrel and a ceiling of US$ 100. However, the impact of this policy will be seen in the long-
term, as it applies on concessions granted after the notification of this policy.
Impact of changes in oil price PKR

Crude Price ($bbl) Fair Value EPS FY10F EPS FY11F EPS FY12F
Base case Oil Assumption US $65 US $70 US $73
OGDC
-20$ 102.50 11.60 13.64 14.36
-10$ 110.20 12.44 14.66 15.46
Base case 117.80 13.28 15.68 16.56
+10$ 125.40 14.12 16.70 17.66
+20$ 133.00 14.97 17.72 18.76
PPL
-20$ 186.60 18.37 21.74 22.54
-10$ 210.90 20.75 24.47 25.45
Base case 235.30 23.12 27.20 28.36
+10$ 259.60 25.49 29.92 31.26
+20$ 284.00 27.86 32.65 34.17
POL
-20$ 233.66 21.95 33.40 34.01
-10$ 255.85 24.94 37.43 38.08
Base case 277.94 27.92 41.45 42.11
+10$ 300.14 30.91 45.49 46.17
+20$ 322.30 33.89 49.52 50.23
? We have a POSITIVE stance on the sector as we expect both oil prices and production to improve
gradually, which should augur well on the bottomline of the sector over the next 3 to 5 years. The
potential upside based on December 31, 2009 closing price for PPL comes to 24%, while POL and
OGDC comes to 20% and 7%, respectively.
41
Pakistan Oilfields (POL)

Among the 3 E&P stocks in the TSL Universe, POL would be our top pick going into the new year.
On valuation metrics such as PEx and P/Bx POL is the cheapest relative to its peers over the next
3 years. It is the largest beneficiary of the production growth expected in the Tal Block over the
next few years in terms of EPS and valuation due to its smaller equity base. We project crude oil
production for POL to improve by 9% per annum over the next 3 years from 1.42m barrels in
FY09 to 1.83m barrels in FY12. Natural gas production over the same period is estimated to
jump by about 35.0% per annum from 14.87bcf in FY09 to 36.35bcf in FY12. We forecast EPS to
grow by a 3-year CAGR of 21% to PKR 42.11 in FY12.
POL
FY08 FY09 FY10F FY11F FY12F
EPS 36.43 23.75 27.92 41.45 42.11
DPS 16.00 18.00 20.00 21.00 21.00
BVS 107.25 109.64 117.52 137.97 159.08
PE(x) 6.34 9.72 8.27 5.57 5.48
Dividend Yield 6.9% 7.8% 8.7% 9.1% 9.1%
P/B Ratio (x) 2.15 2.10 1.96 1.67 1.45
Source:Company Accounts and TSL estimates
Pakistan Petroleum (PPL)

After POL, PPL is the next cheapest E&P stock based on PEx and P/Bx. It is the largest natural
gas producer in Pakistan accounting for around 25% of total production. However, we estimate
that gas production will only improve by a meager 2.6% per annum over the next 5 years because
of the depletion of its largest field, Sui. On the other hand, we project crude oil/NGL production
to rise by a 5-year CAGR of 15% on the back of oil discovery at Nashpa with expected production
of 6,400 bpd (PPL' share is 26.05%). We forecast EPS to decline in FY10 to PKR 23.12 due to the
lower gas price, but earnings are expected to rise over the next 2 years by 10.8% per annum to
PKR 28.36 in FY12.

PPL
EPS 19.79 27.82 23.12 27.20 28.36
DPS 11.74 10.83 12.00 14.00 14.00
BVS 43.84 63.32 70.11 77.30 82.66
PE(x) 9.58 6.82 8.20 6.97 6.69
Dividend Yield 6.2% 5.7% 6.3% 7.4% 7.4%
P/B Ratio (x) 4.32 2.99 2.70 2.45 2.29
42
Oil & Gas Development Company (OGDC)

As compared to its listed peers, OGDC is slightly expensive on the basis of PEx and P/Bx. However, it
has the better potential to add to its production because of its track record of aggressive exploratory
activity within the country , and it also has the largest exploration acreage of any single company at
68,310 square kilometers. We estimate crude oil production to increase by 19% per annum over the
next 3 years to 19.8m barrels, while natural gas production is projected to grow by 5.8% per annum
to 394 bcf in FY12. We forecast EPS to grow by a 3-year CAGR of 8.7% to PKR 16.56 in FY12. We
estimate the dividend per share to vary from PKR 9 to PKR 13 over the next 3 years.

OGDC
EPS 10.31 12.91 13.28 15.68 16.56
DPS 9.50 8.25 9.00 12.00 13.00
BVS 25.67 29.34 33.42 37.10 40.66
PE(x) 10.73 8.57 8.33 7.06 6.68
Dividend Yield 8.6% 7.5% 8.1% 10.8% 11.8%
P/B Ratio (x) 4.31 3.77 3.31 2.98 2.72
43
TELECOM SECTOR NEUTRAL-POSITIVE

PTCL
FY08A FY09A FY10F FY11F FY12F
EPS (0.40) 2.14 2.29 2.36 2.76
DPS - 1.50 1.85 2.00 2.00
PE (x) NM 8.25 7.72 7.47 6.40
P/B (x) 0.88 0.86 0.84 0.83 0.80
Dividend Yield (%) NM 8.50% 10.50% 11.31% 11.32%
Source: Company accounts, TSL Research
Telecom Update
Slowdown in economic activity has started to stall growth in the subscriber base as teledensity for
Oct'09 remained stagnant at 62.4% on a MOM basis. The overall fixed-line teledensity was recorded
at 3.8%, while cellular segment contributed 58.6% to the total penetration.
PTCL persisted with its dominance in the fixed line segment with a total market share of 96%. The
total fixed line connections as on Mar'09 stood at 3.53mn as compared to 4.42mn in FY08, depicting
a decline of 20% YTD. Fixed line connections are expected to decline further in CY10 on account of
ample availability of substitutes.
WLL (Wireless Local Loop) subscribers witnessed a modest growth of 1.5% MOM to 2.72mn in Oct09.
PTCL's Vfone remained the market leader with a 48% share, followed by Telecard and Worldcall with
a share of 24% and 21% respectively. We expect the WLL subscriber base to depict a modest growth of
8% during CY10. Our premise for growth is based on the ease of penetration in rural areas, and lower
capital expenditure per line.
In the cellular segment, Mobilink remained the market leader with a 32% market share, followed by
Telenor with 23% market share in Oct'09. Ufone registered a steepest monthly fall of 4.1% MOM in its
subscriber base during Oct'09.
Looking ahead, we expect growth in the subscriber base to slowdown which will eventually hurt
revenues of the telecom companies through price competition. Moreover, with the recent imposition
of a 0.5% R&D tax on the gross revenue of cellular companies, the profitability of the said segment
would come under additional stress.
PTCL
Although reduction in fixed line revenue stream for PTCL is on the cards, growth in WLL, broadband,
the international and value added segment shall foster growth in earnings during FY10. Moreover,
Ufone is expected to contribute a 37% share in the total revenue which shall allow FY10 profitability
to grow by 7% YOY on a consolidated basis. Currently, the stock is trading at FY10F PE and P/B of
7.72x and 0.84x, we reiterate our BUY stance on the scrip with Jun 30'10 target price of PKR 23.1 per
share.
Riding on Ufone: Although Ufone market share has dropped in the cellular segment by 1bps to 19%
on MOM basis in Oct'09, we expect the cellular giant to increase it’s subscriber base by 3% in CY10,
and consequently contribute 36% to the group total revenue in FY10.
Analyst: Muneeb Azhar

44 Email: muneeb.azhar@taurus.com.pk
Cash rich: PTCL has a history of distributing regular cash dividends, barring FY08, on account
of dent in company's earnings due to one-time Voluntary Seperation Scheme. The company is
expected to distribute PKR 1.85 per share as cash dividend in FY10F. Consequently, the scrip
offers a decent dividend yield of 10.5% at current levels.
45
FERTILIZER SECTOR POSITIVE

Valuation and Stance POSITIVE
Share Fair Potential 9MCY09 CY09E
Price Value Upside/ PAT EPS CY09E
31-Dec PKR PKR (Downside) Growth % PKR P/Ex Stance
FFC 102.93 109.27 6% 25% 10.59 9.72 Hold
FFBL 26.13 31.77 22% 232% 3.15 8.30 Buy
ENGRO 183.27 214.00 17% -23% 8.89 20.62 Accumulate
Fertilizer Update
The three listed fertilizer companies FFC, ENGRO and FFBL (our universe) posted a cumulative net
revenue and net profit of PKR 74bn (56% YoY) and 11bn (20% YoY) in 9MCY09 respectively. The
reason for this tremendous growth in the fertilizer sector is mainly due to the decline in DAP prices
that boosted the product's demand, as well as better urea prices and margins.
Last year, one of the major concerns for Pakistan's fertilizer industry was low DAP offtake, due to
high prices. The local DAP prices are directly linked to the international rates, and in Nov 2008
international DAP prices hit the sky at US$ 855 per ton (PKR 3,075 per 50 kg bag). But now DAP prices
have declined again, and DAP is currently sold in the international market at approximately US$ 318
per ton, and in the local markets around PKR 1,996 per bag (35% YoY decline). This encouraged more
balanced fertilizer usage among farmers. The product's proper application is pivotal for crop produc-
tivity, especially for wheat which is Pakistan's staple crop. Going forward, we expect DAP prices to
gradually increase by 5% annually, and we expect the demand for phosphoric fertilizers to grow at a
CAGR of 4% between CY09 to CY13.
Phosphoric acid is a very important raw material used for the production of DAP. It accounts for 85%
of the total variable cost in the production of DAP. Any increase or decrease in phosphoric acid price
marks a similar increase or decrease in the price of DAP. Currently, phosphoric acid is trading at a
price of US$ 508 per ton as compared to 4QCY08 when it was being traded at a price of US$ 2,350 per
ton. This has caused DAP prices to decline by almost 63% from US$ 855 per ton in 2008 to US$ 318 per
ton currently. Lower than expected international DAP prices, is a key assumption in our future DAP
price assumption. But prices are expected to pick up gradually in the future as DAP offtake recovers.
Urea demand during CY08 and 9MCY09 has been robust too. In spite of increase in urea prices to PKR
753 per bag in Oct'08 from PKR 547 in the corresponding period last year (38% increase YoY), CY08
demand grew by 13% while 9MCY09 demand witnessed a growth of 12% as compared to the corre-
sponding period last year.
The domestic fertilizer industry continues to play its role for the welfare of farmers by maintaining
local urea prices way below international prices. The spot landed price for imported urea is approxi-
mately PKR 1,268 (US$ 278/ton). Going forward, we expect Urea demand to increase with Engro's
urea expansion project coming up in CY10, as well as Fatima Fertilizer starting its operations by the
end of 2009. Our CY09-CY13 CAGR for urea demand is 9%. We further expect urea prices to increase
by 5% annually due to an increase in gas rates by the government.
Analyst: Atiya Abdullah

46 Email: atiya@taurus.com.pk
The cost of sales for the three companies has increased by 74% from PKR 29bn in the 9MCY08,
to PKR 51bn in the current period. This increase was mostly due to the increase in gas rates,
used as fuel and feedstock. Due to the completion of the 10 years period of subsidized feed gas
agreement for FFBL, all three fertilizer companies are now provided feedstock gas at the rate of
PKR 102.01/MMBTU. The gas used for generating fuel is being provided at a rate of PKR 324.3/
MMBTU. This hike is passed on to the consumers by increasing the retail prices. This is one of
the reasons why the price of urea has increased over the year. Even after passing on this increase
in cost, local urea prices still remain below international rates, enabling manufacturers to
maintain their margins. In the future, the prices of gas are very unpredictable, and according to
the latest policy announced by the GOP, prices of gas are expected to increase by 19% from the
year 2010. This increase in gas rates would not be applicable on gas used as feedstock but would
only be applicable on gas used as fuel. It would lead to an increase of almost PKR 23-30 per bag
of urea in CY10. Keeping this in mind, we have adjusted our feedstock and fuel cost in the future
years, therefore causing our gross margins to fluctuate.
However going forward, the feed gas expenses per ton for Engro are expected to decline since the
gas consumption of new plant will be low, and the tariff on the new plant would be fixed at PKR
36.77 per MMBTU for 10 years according to the Fertilizer Policy 2001 regarding the 10 years
period of subsidized feed gas. After the ten year period, the tariff would increase to whatever the
prevailing rate would be at that time. Fatima Fertilizer would also be benefiting from this
agreement and would be receiving feed gas at a subsidized rate for the initial 10 years.
Another reason for the recent increase in fertilizer offtake is the farmers improved liquidity
position. The government has increased the wheat support price from PKR 625/maund in 2007-
08 to PKR 925/maund in 2009-10, resulting in adequate urea and phosphate fertilizer applica-
tion on crops. The GOP has also increased the Agri Credit disbursement target for FY10 to PKR
260bn from PKR 250bn in FY09.This would further increase farmer's liquidity position and help
maintain high fertilizer demand.
The cumulative financial cost for FFBL, ENGRO and FFC has declined by 9%, to PKR 3.2bn. This
decline was due to the decline in interest rates. Other income also declined by 16% to PKR 3.8bn
in 9MCY09, which was mostly because of the net loss of PMP (Pak Maroc Phosphore) incurred
by FFBL. This situation is expected to continue till the issues are resolved by the management.
Going Forward
Going forward, with the commissioning of Engro's expansion project at Daharki (capacity of
1.3m tons per annum) and Fatima Fertilizer plant (capacity of 0.35m tons per annum), we
expect urea supply to exceed demand by CY11. If such a situation occurs then the fertilizer
companies expect the government to allow exports of the surplus production. Historically Paki-
stan has faced a shortage of urea supply, with demand exceeding local production and the gap
being filled by imports. But once these plants become operational, Pakistan would no longer be
faced with this problem, and we might be in a position to export urea. If the GOP allows export
of the surplus urea, then the government could benefit by pocketing the differential between the
local and exported urea prices, while manufacturers would be allowed to maintain their existing
margins. It would also address the balance of payment problems faced by the country. The major
export market for Pakistan would be India and USA, which are the largest urea importers. If for
some reason, exports to India are not possible, then Pakistan could still export to USA and other
countries like China.
47
Engro is currently the second largest fertilizer manufacturer after FFC. But after the expansion
of 1.3 million tons per annum costing approximately USD 1,050m, it will take the company's
urea production capacity to 2.3 million tons per annum, making it the largest urea manufac-
turer. The start up of the plant is expected by early third quarter 2010.
Stance on the Sector

The fertilizer sector scrips, with strong earnings growth and high dividend yield remain a safe
haven for investors in times of economic uncertainty. We maintain a POSITIVE stance for the
fertilizer sector on the back of rising urea prices and declining DAP prices, which would have a
positive impact on both urea and DAP offtake. At current levels, FFC is considered to be the safest
pick, with a strong dividend history and a healthy earnings potential. Whereas for Engro with its
aggressive growth strategy, its long term prospects remain intact.
Engro Chemical Company Limited

Standing Tall!
Engro is our preferred player in the fertilizer sector where we have raised our target price for the
scrip from PKR 213 per share to PKR 214 per share, on account of low interest rates, and
increased earnings in the future due to increase in urea prices. Also with the urea expansion
project underway, we expect Engro's earnings to increase in the future years. But we expect
earnings to decrease by 38% YoY from PKR 14.23 in CY08 to PKR 8.89 in CY09, due to a 54%
plunge in Engro's other income from PKR 2,754m in CY08 to PKR 1,246m in CY09. This fall in
other income is owing to a lower dividend contribution from Eximp due to the fall in interna-
tional DAP prices. We expect the dividend from Eximp to fall by 72% approximately to PKR 612m
in CY09 from PKR 2,200m in CY08. In CY08, Eximp capitalized through the high prices of DAP,
but as the prices for phosphoric fertilizer fell, so did Eximps earnings. But we expect the DAP
market to improve in the years to come. However, higher input costs and lower DAP prices are
likely to suppress Engro's gross margins from 27% in CY08 to 25% in CY09.
Engro is currently trading at a CY09E P/E ratio of 20.62x, which is expected to improve once the
urea expansion project becomes operational by the first quarter of 2010. This increase in
volumetric growth as a result of urea expansion is expected to drive CY09-13 top and bottom line
CAGR by 21% and 36% respectively. By CY10 we also expect the dividend income to increase to
PKR 2,033m as dividend from Engro Foods and Engro Energy begins to flow in. We expect
dividend income for Engro to increase at a CAGR of 13% from CY10-13.
Engro's most talked about subsidiary, Engro Foods Limited (100% owned) had posted a loss of
PKR 391m for 9MCY09. But we are optimistic about the growth prospects of Engro Foods, as
Engro Foods UHT business (Olpers) has already become a market leader by capturing 38%
market share, surpassing Nestle. Engro has been able to create significant brand strength
which has catapulted it into a market leader position in the UHT market. The ice cream segment
(Omore) holds the number 2 position in the market, right behind Walls. Since its launch, Omore
ice cream now has 36 SKUs (Stock- Keeping Units), and its distribution network has spread to 12
towns. By 2010, we expect Engro Foods to make a 47% contribution to the dividend income.
Engro is further looking to expand its already vast portfolio of business. Engro is currently
exploring opportunities in North Africa to setup a phosphate fertilizer manufacturing plant in
partnership with local companies. Engro is also entering into the rice processing and export
48
business. A rice processing plant of 20 thousand tons per annum will be set up in Punjab at a
cost of PKR 3.2bn. The plant is expected to come online by 4QCY10, with rice being exported to
the Middle East and European Union. Engro is also expanding its energy portfolio with its
second energy subsidiary, Engro Energy at Qadirpur. It is expected to start commercial produc-
tion by the end of Dec 2009, or beginning of Jan 2010. The production capacity stands at 217
mega watts, and utilizes flare gas from Qadirpur gas fields. The dividend income is expected to
flow in by the 3QCY10. Engro has also formed a joint venture with the Government of Sind, Sind
Engro Coal Mining Company Limited. Engro would be involved in both mining the coal, as well
as electricity generation.
Engro Chemical Pakistan has also planned to demerge itself, by separating its fertilizer business
into a wholly owned subsidiary of ECPL, Engro Fertilizer Limited (EFL). After the demerger the
name of ECPL has been effectively changed to "Engro Corporation Limited". This merger would
bestow greater flexibility on Engro, and enable it to concentrate on it’s separately created
Strategic Business Units more effectively and efficiently. This demerger would have no major
impact on our earnings estimates.
In our opinion, a scrip like ENGRO has immense potential for capital appreciation, and would
start giving attractive dividends once the company's projects come online. Although in the short
term ENGRO can be considered to be a volatile scrip, because of its massive loans which are
exposed to both the interest rate and exchange rate risk that may cause distress to the stock's
performance in the short term.
ENGRO CY08 CY09E CY10F CY11F CY12F CY13F
EPS 14.23 8.89 10.59 15.17 22.18 30.46
DPS 4.29 4.45 5.00 5.45 5.90 6.55
BVS 77.48 76.50 82.09 91.82 108.10 132.01
PE(x) 12.88 20.62 17.31 12.08 8.26 6.02
Dividend Yield 2.34% 2.43% 2.73% 2.97% 3.22% 3.57%
P/B Ratio(x) 2.37 2.40 2.23 2.00 1.70 1.39
Fauji Fertilizer Company Ltd

Better Safe than Sorry!
We have raised our target price for the scrip from PKR 104.2 to PKR 109.27. FFC is currently
trading at a P/E ratio of 9.72x and 9.43x for CY09E and CY10E, respectively. The company offers
a dividend yield of 12.15% and 11.13% for CY09 and CY10 respectively.
Currently Fauji Fertilizer Company is the largest urea manufacturer in Pakistan, with a produc-
tion capacity of 1.9m tons per annum. But by 2010, it would no longer be the largest urea
manufacturer in Pakistan, but will become the second largest producer after Engro's 1.3m tons
expansion comes online. The preference for FFC is based mostly on its high dividend yield. FFC is
considered to be a safe play for risk-averse investors. FFC has maintained an average payout
ratio of 103% over the past five years. When compared to the other fertilizer companies in
Pakistan, FFC is considered to be the highest dividend yielding stock. This has been attractive for
the investors in a declining market as well, as high dividend payouts ensure a continuous stream
of income from the investment. Investors looking for high dividends would certainly find this
49
stock attractive.
FFC has no plans of expansion in the future. Our concern about FFC is not based on their ability
to sell Urea or to maintain its market share in the fertilizer market, but their inability to look for
opportunities beyond fertilizers. One of the strongest points for FFC is its low level of leverage.
This provides FFC with the perfect opportunity to undertake other projects and to utilize its large
capital base, but we do not see that happening in the near future.
We expect FFC to project an EPS of PKR 10.59 and PKR 10.91 for CY09 and CY10 respectively. We
anticipate FFC's top line to increase with a CAGR of 13% for CY09-13, due to high urea prices and
increase in production. But the gross margins are expected to fall due to increase in feedstock
and fuel prices in the future. We further foresee FFC's bottom line to increase at a CAGR of 5%
for CY09-13 on the back of considerable dividend inflow from Fauji Fertilizer Bin Qasim (FFBL),
Pak Marroc Phosphate (PMP) and Fauji Cement. However considering the volatile DAP interna-
tional market, dividend income from FFBL and PMP is expected to be a bit volatile. Besides, PMP
had incurred losses for the year CY09 because of the plant being shutdown for about three
months, and also because of certain issues of imbalance between input and output prices. Till
these issues are not settled, PMP will continue to incur a loss.

FFC CY08 CY09E CY10F CY11F CY12F CY13F
EPS 9.62 10.59 10.91 11.03 11.92 12.52
DPS 10.00 12.50 11.50 11.00 12.00 12.25
BVS 18.25 17.01 16.68 16.78 17.44 17.68
PE(x) 10.70 9.72 9.43 9.33 8.63 8.22
Dividend Yield 9.72% 12.14% 11.17% 10.69% 11.66% 11.90%
P/B Ratio(x) 5.64 6.05 6.17 6.14 5.90 5.82
Fauji Fertilizer Bin Qasim

Worst maybe Over!
9MCY09 proved to be a satisfactory period for FFBL. Compared to the previous year, the overall
performance of FFBL remained adequate. The year 2008 brought a lot of predicaments for FFBL
in the form of extraordinary low DAP offtake with an abnormal soar in its prices, as well as surge
in the financial charges. But this year proved to be a bit different. FFBL's share in the DAP
market rose to 49%, as compared to 23% last year. FFBL recorded DAP sales of 641 thousand
tons during the 11MCY09, which is 264% of the corresponding period last year. We further
expect DAP offtake to rise in the 4QCY09, but this surge would be a meager 5%, due to speculative
buying by buyers in September 2009. We further anticipate that FFBL would declare an EPS of
PKR 3.15 for the CY09, with an expected dividend of PKR 2.83 per share.
The 3QCY09 proved to be a blessing in disguise for FFBL, with a massive surge in DAP offtake,
and receipt of the entire amount of DAP subsidy from the Government of Pakistan. This helped
reduce the company's finance cost. Considering the improved local DAP prices and favorable
international scenario we are revising our CY09 EPS forecast by 13% from PKR 2.8 to PKR 3.15.
We further anticipate an uphill trend in FFBL's earning per share for CY10, CY11, CY12 and CY13
at PKR 3.29, 3.37, 3.62 and 3.98 respectively.
50
Currently FFBL is trading at a P/E Ratio of 8.30x for CY09E, while going forward FFBL would be
trading at a P/E Ratio of 7.93x in CY10F. Additionally the scrip offers a dividend yield of 10.84%
and 11.47% for CY09 and CY10 respectively. Going forward, we estimate an increase of 9% CAGR
in dividend per share from CY09-13, on account of high DAP sales.
Currently, FFBL enjoys a market share of 10% and 47% in Urea and DAP respectively. FFBL has
a benefit over other fertilizer companies as it is the sole producer of Di- Ammonium Phosphate
(DAP) in Pakistan. FFBL meets approximately 35% of the country's DAP demand, whereas the
rest is being met through imports. Another competitive edge that FFBL has over other fertilizer
companies is that it receives an uninterrupted supply of phosphoric acid from Pak Maroc
Phosphate (PMP), where FFBL has a 25% direct equity stake. FFBL's investment in PMP project
will also help improve company's earnings by way of expected dividend from PMP, which would
increase the other income for FFBL. But this year proved to be unfortunate for PMP, where it
suffered losses of almost PKR 618m in the nine months.
The gross margins in CY09 are expected to decline to 24% in CY09 from 31% in CY08. This
decrease in gross margins is mainly due to increase in gas rates by the government. One of the
major reasons for this increase in gas prices is the completion of FFBL's stipulated 10 year gas
concession period, due to which FFBL will receive feedstock gas at a normal rate. Prior to the
completion of the concession period, FFBL was receiving feedstock gas at a rate of PKR 36.77 per
mmbtu, but now it receives gas at a rate of PKR 102.01 per mmbtu. FFBL's urea margins are
directly related to the feedstock gas price. Any increase in feedstock gas price would be directly
passed on to the consumers, in the form of high urea prices. This is one of the reasons why the
price of urea has increased by almost 30% to PKR 768 in Nov 2009 as compared to PKR 593 in Jan
2008.
We expect the bottom line of the company to grow at a CAGR of 7% from CY09-13 on account of
high DAP sales, due to declining phosphoric acid prices which is the chief component in produc-
ing DAP. It is the biggest uncontrollable variable cost faced by FFBL, which accounts for approxi-
mately 85% of the total variable cost. Adverse changes in phosphoric acid will have a major
impact on FFBL's DAP margins, and proves to be a huge risk factor for FFBL. FFBL's financial
prospects are highly correlated to international phosphoric acid prices, and any volatility in its
prices would affect FFBL's valuation too. One important factor that we should keep in mind
which may add value to the scrip for FFBL is that it is the only producer of DAP in Pakistan, so
in case of a surge in DAP demand, FFBL will benefit the most.
FFBL CY08 CY09E CY10F CY11F CY12F CY13F
EPS 3.10 3.15 3.29 3.37 3.62 3.98
DPS 2.85 2.83 3.00 3.10 3.50 3.90
BVS 11.23 11.62 11.67 11.99 12.32 12.60
PE(x) 8.42 8.30 7.93 7.76 7.21 6.57
Dividend Yield 10.91% 10.84% 11.47% 11.85% 13.38% 14.92%
P/B Ratio(x) 2.33 2.25 2.24 2.18 2.12 2.07
51
NOTES
52
RATINGS GUIDE
December 31, 2009
Target Div
Stock Price Curr. Rating EPS(Rs) DPS(Rs) BVPS(Rs) P/E Yld P/BV Beta Sh.Out Year
(LT) Price (LT) FY08A FY09F/A FY10F FY08A FY09F/A FY10F FY08A FY09F/A FY10F x (%) x (m) end
Allied Bank 61.9 58.73 Hold 5.9 9.7 10.1 2.5 3.4 3.5 29.3 36.5 42.3 6 6% 1.6 1.24 711 Dec
Bank Alfalah 16.9 13.77 Buy 1.0 1.6 2.4 NIL NIL NIL 10.8 15.7 18.6 8.6 NIL 0.9 1.2 1,349 Dec
HabibBank 121.3 123.4 Reduce 11.0 16.4 21.2 5.5 4.0 4.0 67.3 79.8 97.7 7.5 3% 1.5 1.21 911 Dec
MCB Bank 197.7 219.7 Sell 22.3 22.8 25.0 11.5 10.0 11.5 75.6 91.1 110.1 9.9 5% 2.4 1.25 691 Dec
United Bank 70.9 58.45 Buy 7.5 7.8 10.0 2.5 3.0 3.0 37.9 45.6 53.6 7.5 5% 1.3 1.3 11
,13 Dec
AttockCement* 46.4 52 Sell 6.0 20.7 9.3 1.5 3.2 2.3 48.9 66.2 73.9 5.6 4% 0.7 0.85 72 Jun
Cherat Cement* 6.3 12.55 Sell 0.1 1.7 -0.4 NIL NIL NIL 22.6 23.7 23.7 N/A NIL 0.5 0.92 96 Jun
D.G.Khan
Cement 34.3 32.56 Hold -0.2 1.3 0.7 NIL NIL NIL 98.9 59.2 75.9 25 NIL 0.6 1.25 304 Jun
FaujiCement* 4.3 6.16 Sell 0.6 1.5 -0.7 NIL NIL NIL 13.4 14 14.6 N/A NIL 0.4 11
.9 693 Jun
Lafarge
Pakistan Cem 1.9 2.19 Sell -1.1 -0.1 0.0 NIL NIL NIL 9.7 8.3 8.3 N/A NIL 0.3 1.05 1,135 Dec
LuckyCement* 75.2 66.24 Accumulate 8.3 14.2 11.7 NIL 4.0 2.0 57.7 71.9 83.6 5.7 3% 0.8 1.2 323 Jun
M.LeafCement 2.6 3.76 Sell -1.8 -2.1 -2 NIL NIL NIL 22.5 18.9 18 N/A NIL 0.2 0.95 372 Jun
National
Refinery* 223.3 176.8 Buy 75.1 19.2 19.2 20.0 12.5 6.0 211.6 217 237.7 9.2 3% 0.7 0.92 80 Jun
Pakistan
Refinery* 168.6 120.7 Buy 60.3 -130.6 2.1 1.4 NIL NIL 194.5 62.3 225.8 58 NIL 0.5 0.88 35 Jun
Hub Power * 44 31.08 Strong Buy 2.3 3.3 4.6 2.2 3.4 4.2 24.6 25.5 23.9 6.7 14% 1.3 0.74 1,157 Jun
KAPCO* 54 45.87 Accumulate 9.1 6.4 7.6 5.5 6.5 7.0 24.2 26.2 26.9 6 15% 1.7 0.43 880 Jun
Attock
Petroleum* 458.5 347.6 Buy 45.9 53.5 50.3 16.7 25.0 23.0 96.1 123 140.2 6.9 7% 2.5 0.92 58 Jun
P.S.O* 357.1 297.4 Buy 81.9 -39.1 37.9 23.5 5.0 13.5 180.5 121.7 152.8 7.8 5% 1.9 1.05 172 Jun
ShellPakistan 276.5 250.4 Accumulate 75.0 17.9 28.8 40.0 16.0 26.0 91.3 89.6 93.6 14.0 6% 2.8 0.61 68 Jun
SuiNorthGas* 54.7 24.8 Strong Buy 4.6 1.7 5.9 NIL NIL 3.0 31.2 29.4 37.2 4.2 12% 0.7 1.08 549 Jun
SuiSouthGas 14.4 13.43 Hold 1.5 2.5 3.2 NIL 2.2 2.9 15.4 16.9 17.9 5.4 16% 0.8 0.97 671 Jun
Oil&GasDev.* 117.8 110.6 Hold 11.5 12.9 13.3 9.5 8.3 9.0 25.4 29.3 33.4 8.3 8% 3.3 11
.7 4,301 Jun
Pakistan
Oilfields * 277.9 230.8 Buy 36.4 23.8 27.9 13.3 1.8 20 107.2 109.6 117.5 8.3 9% 2 1.08 237 Jun
Pakistan
Petroleum* 235.3 189.6 Buy 19.8 27.8 23.1 11.7 10.8 12.0 43.8 63.3 70.1 8.2 6% 2.7 1.1 996 Jun
Honda Atlas
Cars 14 19.12 Sell 0.5 -2.8 0.6 NIL NIL NIL 22.6 20 20.6 N/A NIL 1 0.75 143 Mar
IndusMotors* 121.7 196.5 Sell 29.2 17.6 11.5 10.5 10.0 4.0 120.1 131 134.6 17.1 2% 1.5 0.57 79 Jun
Pak Suzuki 91.2 88.96 Hold 7.6 4.5 6.0 NIL NIL 1.0 172 175 180 19.8 NIL 0.5 0.71 82 Dec
P.I.C.T.* 74.6 99.11 Sell 4.9 8.6 7.0 2.5 NIL 2.0 21.4 27.2 39.2 14.2 2% 2.5 0.89 109 Jun
P.T.C.L. 23.1 17.65 Buy -0.4 2.1 2.3 NIL 1.5 1.9 20.0 20.6 20.9 4.8 14% 0.6 1.1 5,100 Jun
EngroChemical 214 183.3 Accumulate 14.2 8.9 10.6 5.9 4.5 5.0 77.5 76.5 82.1 20.6 2% 2.4 0.97 298 Dec
FaujiFert.Bin 31.8 26.13 Buy 3.1 3.2 3.3 2.9 2.8 3.0 11.2 11.6 11.7 8.3 11% 2.2 0.94 934 Dec
FaujiFertilizer 109.2 102.9 Hold 9.6 10.6 10.9 10 12.5 11.5 18.1 17 16.7 9.7 12% 6.1 0.76 679 Dec
EngroPolymer 18.4 17.94 Hold 0.7 -0.1 0.8 NIL NIL 0.5 12.6 12.5 13.5 N/A NIL 1.4 1.04 520 Dec
ICI Pakistan 157.3 168.5 Reduce 14.9 17.7 22.0 6.5 6.5 6.8 91.4 112.4 122.9 9.5 4% 1.5 0.9 139 Dec
Tri-Pack Films 164.5 103 Strong Buy 16.0 13.9 16.0 14.0 11.0 12.0 43.7 46.6 50.7 7.4 11% 2.2 0.81 30 Dec
`
53
KSE 100 - KEY INDICATORS

Sector Company Mkt. Cap Equity Sh. O/S PAT EPS P/E Price Dividend Weightage
(mln) (mln) (mln) (mln) (Rs) (x) 31-Dec Yield (%) (%)
Mutual Funds PICIC Growth Fund** 4,042.7 6,522.9 283.5 (2,343.0) (8.3) N.M 14.26 0.00 0.18%
Modaraba First Habib Modaraba** 836.6 2,618.1 201.6 243.6 1.2 3.4 4.15 24.10 0.04%
Leasing Cos. Sigma leasing Corp. Ltd.** 2,844.0 346.8 30.0 (67.9) (2.3) N.M 94.8 0.00 0.13%
Inv Co. / Banks Arif Habib Securities** 18,476.3 16,135.3 375.0 (2,768.9) (7.4) N.M 49.27 3.04 0.84%
JS Global** 3,511.0 3,299.2 50.0 206.2 4.1 17.0 70.22 14.24 0.16%
Sec. P/E: 17.02 Jahangir Siddiqui & Co** 22,952.0 19,279.0 763.3 (14,413.4) (18.9) N.M 30.07 0.00 1.05%
Commercial Bank Allied Bank Limited 41,757.1 22,355.6 711.0 4,156.7 5.8 10.0 58.73 4.26 1.90%
Askari Bank Limited 13,850.6 12,971.4 507.3 386.2 0.8 35.9 27.3 0.00 0.63%
Bank Al-Habib 19,988.1 11,633.0 610.1 2,425.0 4.0 8.2 32.76 3.82 0.91%
Bank Al-Falah 18,577.9 17,044.7 1,349.2 1,301.3 1.0 14.3 13.77 0.00 0.85%
Bank Of Punjab 10,311.5 3,743.1 528.8 (10,059.5) (19.0) N.M 19.5 0.00 0.47%
Faysal Bank 10,677.4 10,772.1 609.1 1,115.0 1.8 9.6 17.53 0.00 0.49%
Meezan Bank 10,467.2 5,975.0 665.0 621.2 0.9 16.9 15.74 0.00 0.48%
Habib Bank 112,429.2 75,180.4 910.8 15,614.0 17.1 7.2 123.44 4.46 5.12%
Habib Metropolitan Bank 23,448.2 15,092.8 752.8 3,277.4 4.4 7.2 31.15 0.00 1.07%
JS Bank Limited 3,112.8 5,275.8 612.8 54.8 0.1 56.8 5.08 0.00 0.14%
KASB Bank 2,967.0 9,199.5 401.5 (973.0) (2.4) N.M 7.39 0.00 0.14%
NIB Bank 19,409.9 36,592.0 4,043.7 (350.6) (0.1) N.M 4.8 0.00 0.88%
MCB Bank Ltd. 151,821.8 52,244.9 691.1 15,374.6 22.2 9.9 219.68 5.23 6.92%
National Bank 80,049.6 102,459.2 1,076.4 15,458.6 14.4 5.2 74.37 8.74 3.65%
Royal Bank 30,923.7 10,054.7 1,718.0 (517.7) (0.3) N.M 18 0.00 1.41%
Silk Bank 4,267.5 4,391.4 900.3 (2,014.3) (2.2) N.M 4.74 0.00 0.19%
Soneri Bank 5,556.4 7,113.0 501.9 701.0 1.4 7.9 11.07 0.00 0.25%
Standard Chartered Bank 34,650.7 42,757.1 3,871.6 629.5 0.2 55.0 8.95 0.00 1.58%
Sec. P/E: 8.41 United Bank Limited 65,048.5 36,399.4 1,112.9 9,237.0 8.3 7.0 58.45 4.28 2.96%
Insurance Adamjee Insurance 13,866.2 8,444.2 112.5 1,099.2 9.8 12.6 123.3 2.03 0.63%
E.F.U. General Insurance 11,224.0 10,105.9 115.0 (5,471.2) (47.6) N.M 97.6 3.33 0.51%
E.F.U. Life Assurance 10,312.5 1,254.4 75.0 (473.2) (6.3) N.M 137.5 3.27 0.47%
IGI Insurance 5,261.9 10,846.5 59.9 (377.0) (6.3) N.M 87.89 1.71 0.24%
New Jubilee Insurance 3,838.9 2,061.3 65.9 (267.2) (4.1) N.M 58.24 2.58 0.17%
Sec. P/E: 12.94 Pakistan Reinsurance 7,830.0 7,265.7 300.0 886.2 3.0 8.8 26.1 4.79 0.36%
Textile Spinning Fazal Textile** 2,598.8 736.0 6.2 25.3 4.1 102.7 420 0.36 0.12%
Textile Weaving Nakshbandi Industries** 1,205.3 304.4 117.6 (6.4) (0.1) N.M 10.25 0.00 0.05%
Textile Composite Azgard Nine Limited 9,342.0 10,124.1 449.3 897.3 2.0 10.4 20.79 0.00 0.43%
Sec. P/E: 12.14 Nishat Mills** 16,949.5 19,330.8 242.5 1,268.0 5.2 13.4 69.9 2.86 0.77%
Woollen Bannu Woollen 98.0 527.8 7.6 26.7 3.5 3.7 12.89 0.00 0.00%
Syn. & Rayon Ibrahim Fibers 11,370.8 100,704.3 310.5 1,582.7 5.1 7.2 36.62 4.10 0.52%
Jute Thal Limited** 1,809.0 4,387.6 21.3 654.1 30.7 2.8 84.87 1.18 0.08%
Sugar Haib Sugar Mills Ltd. 3,827.5 2,030.5 96.0 403.7 4.2 9.5 39.87 3.14 0.17%
Bestway Cement 5,928.6 6,856.5 325.7 168.6 0.5 35.2 18.2 0.00 0.27%
D.G. Khan Cement** 9,906.4 20,918.4 304.2 525.6 1.7 18.8 32.56 0.00 0.45%
Fauji Cement** 4,270.7 9,690.7 693.3 1,007.6 1.5 4.2 6.16 0.00 0.19%
Javedan Cement** 2,099.0 731.3 29.1 (428.0) (14.7) N.M 72.22 0.00 0.10%
Lafarge Cement 2,874.7 11,034.4 1,312.6 (1,242.5) (0.9) N.M 2.19 0.00 0.13%
Sec. P/E: 5.91 Lucky Cement** 21,420.4 23,252.0 323.4 4,596.5 14.2 4.7 66.24 6.04 0.98%
Tobacco Lakson Tobacco Comp. 16,427.2 6,994.0 61.6 1,105.4 18.0 14.9 266.76 3.37 0.75%
Sec. P/E: 11.89 Pakistan Tobacco 26,826.8 3,608.3 255.5 2,532.3 9.9 10.6 105 7.67 1.22%
Refinery Attock Refinery** 11,764.5 10,147.1 85.3 1,016.8 11.9 11.6 137.93 0.00 0.54%
National Refinery** 14,139.7 17,352.7 80.0 1,533.0 19.2 9.2 176.82 7.07 0.64%
Sec. P/E: 10.16 Pakistan Refinery** 4,224.5 2,179.3 35.0 (4,571.7) (130.6) N.M 120.7 1.18 0.19%
Compiled by: Taurus Research

Email: research@taurus.com.pk 54
Sector Company Mkt. Cap Equity Sh. O/S PAT EPS P/E Price Dividend Weightage
(mln) (mln) (mln) (mln) (Rs) (x) 31-Dec Yield (%) (%)
Power Gen. & Dist. K.E.S.C.** 12258.5 -8737.5 4608.5 -15484.9 -3.4 N.M 2.66 0 0.56%
Kohinoor Energy*** 5253.2 6703.3 169.5 905.1 5.3 5.8 31 14.52 0.24%
Kot Addu Power Co. Ltd** 40377.2 23083.2 880.3 5672.4 6.4 7.1 45.87 14.06 1.84%
Sec. P/E: 7.88 Hub Power Company** 35964.4 29532.4 1157.2 3781.0 3.3 9.5 31.08 10.78 1.64%
Oil & Gas Mkt Attock Petroleum Ltd** 20022.9 7082.3 57.6 3082.4 53.5 6.5 347.62 7.19 0.91%
Pakistan State Oil** 51016.8 20870.8 171.5 -6698.5 -39.1 N.M 297.44 1.68 2.32%
Shell Pakistan 17146.6 13611.6 68.5 5137.1 75.0 3.3 250.36 19.97 0.78%
Sui Northern Gas Ltd** 13617.8 16147.5 549.1 930.5 1.7 14.6 24.8 0.00 0.62%
Sec. P/E: 6.36 Sui Southern Gas** 9013.9 9683.5 671.2 257.5 0.4 35.0 13.43 0.00 0.41%
Oil & Gas Expl. Mari Gas** 5028.5 6281.4 36.8 2151.9 58.6 2.3 136.83 2.35 0.23%
(E&P Sector) O G D C** 475725.7 126171.4 4300.9 55539.6 12.9 8.6 110.61 7.46 21.67%
Pakistan Oilfields** 54587.7 23559.3 236.5 5618.3 23.8 9.7 230.77 7.80 2.49%
Sec. P/E: 7.96 Pakistan Petroleum Ltd** 188796.6 63058.6 995.8 27702.8 27.8 6.8 189.59 6.86 8.60%
Engineering International Industries** 5862.7 2660.3 99.9 374.8 3.8 15.6 58.68 3.83 0.27%
Auto Assembler Al-Ghazi Tractors 10220.6 4427.8 42.9 1113.3 25.9 9.2 238.04 14.70 0.47%
Atlas Honda 7551.4 3404.2 54.4 703.0 12.9 10.7 138.83 2.34 0.34%
Indus Motors** 15446.5 10297.0 78.6 1385.1 17.6 11.2 196.52 5.09 0.70%
Sec. P/E: 7.18 Pak Suzuki Motors 7321.4 13977.0 82.3 2774.5 33.7 2.6 88.96 1.12 0.33%
Auto & Allied Agri Auto Industries Ltd.** 1735.2 1442.2 28.8 273.4 9.5 6.3 60.25 3.32 0.08%
Cables & Elect. Siemens Engineering 10398.3 6288.3 8.2 1679.1 203.6 6.2 1260.86 7.14 0.47%
Transport P.I.A.C. (A) 5589.4 -46701.9 2141.6 -35880.2 -16.8 N.M 2.61 0.00 0.25%
P.I.C.T** 10818.2 2964.6 109.2 935.7 8.6 11.6 99.11 3.03 0.49%
Sec. P/E: 5.03 P.N.S.C.** 6207.0 15834.7 132.1 2448.5 18.5 2.5 47 6.38 0.28%
Tech. & Comm. PTCL** 66611.1 99389.6 3774.0 9151.2 2.4 7.3 17.65 8.50 3.03%
Fertiliser Dawood Hercules 19668.2 17382.7 109.4 3062.7 28.0 6.4 179.81 1.39 0.90%
Engro Chemical 54603.9 23084.1 297.9 4240.4 14.2 12.9 183.27 3.27 2.49%
Fauji Fertiliser Bin Qasim 24408.3 10486.4 934.1 2899.6 3.1 8.4 26.13 10.91 1.11%
Sec. P/E: 10.07 Fauji Fertilizer 69840.8 12285.2 678.5 6525.1 9.6 10.7 102.93 13.36 3.18%
Pharmaceutical Abbot Laboratories 11867.5 3568.5 97.9 344.0 3.5 34.5 121.22 4.12 0.54%
Sec. P/E: 13.27 GlaxoSmith-Kline Pak Ltd. 18649.3 8354.9 170.7 1955.2 11.5 9.5 109.27 8.69 0.85%
Chemicals Colgate Palmolive** 9642.1 2700.2 27.5 750.0 27.3 12.9 351 3.28 0.44%
Engro Polymer & Chem. 9335.4 6565.9 520.4 353.3 0.7 26.4 17.94 0.00 0.43%
ICI Pakistan 23386.8 12683.9 138.8 2068.9 14.9 11.3 168.49 3.86 1.07%
Sec. P/E: 13.36 Pak PTA Ltd. 12113.7 4067.1 1514.2 -1760.5 -1.2 N.M 8 0.00 0.55%
Paper & Board Packages Limited 12150.6 16272.6 84.4 -195.8 -2.3 N.M 144 0.00 0.55%
Valaspati & Allied Wazir Ali Ind.** 73.9 -213.7 8.0 -55.9 -7.0 N.M 9.25 0.00 0.00%
Leather & Tenn. Bata Pakistan Ltd 7401.2 1435.7 7.6 477.8 63.2 15.5 979 0.82 0.34%
Food & Per. Care Nestle Pakistan 56503.8 4388.8 45.3 1552.9 34.2 36.4 1245.96 3.33 2.57%
Rafhan Maize 13716.1 3486.1 9.2 1492.4 161.6 9.2 1485 6.73 0.62%
Unilever Pakistan Ltd. 30575.9 2215.8 13.3 1984.3 149.3 15.4 2300 5.35 1.39%
Sec. P/E: 20.23 Unilever Foods Ltd 8004.9 301.2 6.2 348.5 56.6 23.0 1300 2.77 0.36%
Glass & Ceramics Ghani Glass** 4998.6 3460.9 97.0 712.8 7.3 7.0 51.54 5.82 0.23%
Miscellaneous Dreamworld Ltd** 18880.0 345.2 32.0 5.0 0.2 3813.7 590 0.17 0.86%
Pak Services 5731.8 2371.9 32.5 649.5 20.0 8.8 176.23 0.85 0.26%
(*) Companies have PAT & Equity of 2007, while others have 2008 data
N.A = Not Available, N.M = Not Meaningful KSE-100 INDEX 9,386.92
(**) Companies have equity, dividend yield and PAT of 2009 Market Cap. (Rs m) 2,195,328
P/E (x) 8.64
Cash Yield (%) 6.12
ROE (%) 19.59
55
KSE-100 STATISTICS
December 31, 2009
20 Lowest P/E x Stocks 20 Lowest P/BV x Stocks Top 20 EPS Stocks (Rs)
Mari Gas 2.3 Ibrahim Fibers 0.1 Siemens Engineering 203.6
P.N.S.C. 2.5 Bannu Woollen 0.2 Rafhan Maize 161.6
Pak Suzuki Motors 2.6 WorldCall Telecom 0.3 Unilever Pakistan Ltd. 149.3
Thal Limited 2.8 Lafarge Cement 0.3 Shell Pakistan 75.0
Attock Cement 3.0 First Habib Modaraba 0.3 Bata Pakistan Ltd 63.2
Shell Pakistan 3.3 KASB Bank 0.3 Mari Gas 58.6
First Habib Modaraba 3.4 P.N.S.C. 0.4 Unilever Foods Ltd 56.6
Bannu Woollen 3.7 Thal Limited 0.4 Attock Petroleum Ltd 53.5
Fauji Cement 4.2 Fauji Cement 0.4 Millat Tractors 41.5
Lucky Cement 4.7 D.G. Khan Cement 0.5 Nestle Pakistan 34.2
National Bank 5.2 IGI Insurance 0.5 Pak Suzuki Motors 33.7
Kohinoor Energy 5.8 Pak Suzuki Motors 0.5 Thal Limited 30.7
Siemens Engineering 6.2 NIB Bank 0.5 Dawood Hercules 28.0
Agri Auto Industries Ltd. 6.3 JS Bank Limited 0.6 Pakistan Petroleum Ltd 27.8
Dawood Hercules 6.4 PICIC Growth Fund 0.6 Colgate Palmolive 27.3
Attock Petroleum Ltd 6.5 PTCL 0.7 Al-Ghazi Tractors 25.9
Pakistan Petroleum Ltd 6.8 Packages Limited 0.7 Pakistan Oilfields 23.8
Ghani Glass 7.0 Soneri Bank 0.8 MCB Bank Ltd. 22.2
United Bank Limited 7.0 National Bank 0.8 Pak Services 20.0
Kot Addu Power Co. Ltd 7.1 Kohinoor Energy 0.8 National Refinery 19.2
Top 20 ROE Stocks (%) Top 20 Market Cap Stocks (Rsm) Top 20 Div. Yld Stocks (%) C
Unilever Foods Ltd 115.71 OGDC 475,726 First Habib Modaraba 24.10
Unilever Pakistan Ltd. 89.56 Pakistan Petroleum Ltd 188,797 Shell Pakistan 19.97
Pakistan Tobacco 70.18 MCB Bank Ltd. 151,822 Al-Ghazi Tractors 14.70
Fauji Fertilizer 53.11 Habib Bank 112,429 Kohinoor Energy 14.52
OGDC 44.02 National Bank 80,050 JS Global 14.24
Pakistan Petroleum Ltd 43.93 Fauji Fertilizer 69,841 Kot Addu Power Co. Ltd 14.06
Attock Petroleum Ltd 43.52 PTCL 66,611 Fauji Fertilizer 13.36
Rafhan Maize 42.81 United Bank Limited 65,048 Millat Tractors 11.85
Shell Pakistan 37.74 Nestle Pakistan 56,504 Fauji Fertiliser Bin Qasim 10.91
Millat Tractors 36.05 Engro Chemical 54,604 Hub Power Company 10.78
Nestle Pakistan 35.38 Pakistan Oilfields 54,588 National Bank 8.74
Mari Gas 34.26 Pakistan State Oil 51,017 GlaxoSmith-Kline Pak Ltd. 8.69
Bata Pakistan Ltd 33.28 Allied Bank Limited 41,757 PTCL 8.50
P.I.C.T 31.56 Kot Addu Power Co. Ltd 40,377 Pakistan Oilfields 7.80
Attock Cement 31.25 Hub Power Company 35,964 Pakistan Tobacco 7.67
East West Insurance Co.Ltd. 30.67 Standard Chartered Bank 34,651 OGDC 7.46
MCB Bank Ltd. 29.43 Royal Bank 30,924 Attock Petroleum Ltd 7.19
Colgate Palmolive 27.77 Unilever Pakistan Ltd. 30,576 Siemens Engineering 7.14
Fauji Fertiliser Bin Qasim 27.65 Pakistan Tobacco 26,827 National Refinery 7.07
Pak Services 27.38 Fauji Fertiliser Bin Qasim 24,408 Pakistan Petroleum Ltd 6.86
56
KSE-100 Sector Statistics

P/Ex ROE(%) P/Ex ROE(%)
Mutual Funds nm nm Oil & Gas Marketing 6.4 13.96
Modaraba 3.4 9.30 Oil & Gas Expl. 8.0 41.54
Leasing Cos. nm nm Engineering 15.6 14.09
Inv Co. / Banks 17.0 0.53 Auto Assembler 7.2 20.27
Commercial Bank 8.4 14.62 Auto & Allied 6.3 19.0
Insurance 12.9 5.51 Cables & Elect. 6.2 26.70
Textile Spinning 102.7 3.44 Transport 5.0 18.00
Textile Weaving nm nm Tech. & Comm. 7.6 8.15
Textile Composite 12.1 7.35 Fertiliser 10.1 26.45
Woollen 3.7 5.05 Pharmaceutical 13.3 19.28
Syn. & Rayon 7.2 1.57 Chemicals 13.4 12.19
Jute 2.8 14.91 Paper & Board nm nm
Sugar 9.5 19.88 Leather & Tenn. 15.5 33.28
Cement 5.9 8.46 Food & Per. Care 20.2 51.75
Tobacco 11.9 34.31 Glass & Ceramics 7.0 20.59
Refinery 10.2 8.59 Miscellaneous 37.6 24.09
Power Gen. & Dist. 7.9 17.46 KSE-100 Index 8.64 19.59
Top 20 Liquid Shares (m) 20 Lowest PEG Stocksa 10 Highest/Lowest Rel. Perf.
Jah.Siddiq.Co 10.48 Mari Gas 0.07 KASB Bank 29%
Oil & Gas Dev. 8.60 Lucky Cement 0.10 Gharibwal Cement Ltd. 28%
D.G.K.Cement 7.79 Attock Petroleum Ltd 0.12 Haib Sugar Mills Ltd. 26%
Arif Habib 7.31 Shell Pakistan 0.12 Abbot Laboratories 26%
Pak.PTA Ltd. 6.98 Thal Limited 0.12 Pak Services 24%
Bank Alfalah 6.77 Pakistan Oilfields 0.15 Atlas Honda 17%
P.T.C.L.A 6.42 Fauji Cement 0.16 D.G. Khan Cement 16%
National Bank 6.10 Allied Bank Limited 0.17 Pakistan Refinery 16%
Lucky Cement 4.90 National Bank 0.17 Millat Tractors 13%
Nishat Mills 4.14 Nishat Mills 0.19 GlaxoSmith-Kline Pak Ltd. 13%
Fauji Fert Bin 4.01 Habib Metropolitan Bank 0.19 Thal Limited -20%
B.O.Punjab 3.72 MCB Bank Ltd. 0.21 Javedan Cement -17%
Pak Oilfields 3.70 Habib Bank 0.23 IGI Insurance -15%
MCB Bank 3.20 Ghani Glass 0.26 Nakshbandi Industries -14%
Adamjee Ins. 3.20 Ibrahim Fibers 0.27 Indus Motors -10%
Engro Chemical 2.99 United Bank Limited 0.27 P.I.C.T -9%
PPL 2.82 Pakistan Petroleum Ltd 0.29 Attock Refinery -9%
Hub Power 2.65 Siemens Engineering 0.30 Allied Bank Limited -8%
Fauji Cement 2.20 Azgard Nine Limited 0.33 JS Global -7%
Fauji Fertilizer 2.14 Millat Tractors Limited 0.36 Siemens Engineering -7%
a
growth taken over last 5 years Rel. Perfomance taken over MoM
57
ECONOMIC INDICATORS
FY03 FY04 FY05 FY06 FY07 FY08 FY09A/P

Nominal GDP (Rs billions) 4823 5533 6548 7195 8235 9962 12460
Real GDP Growth (%) 4.8 6.4 8.4 5.8 6.8 4.1 2.0
Large Scale Manufacturing Growth(%) 7.2 18.2 15.4 8.3 8.7 4.0 (7.7)
Agriculture Growth (%) 4.1 2.2 7.5 6.3 4.1 1.1 4.7
Major Crops: Wheat (m tons) 19.2 19.5 21.6 21.6 21.3 23.3 21.0
Cotton (m bales) 10.2 10.0 14.3 14.3 13.0 12.9 11.7
Sugarcane (m tons) 52.1 53.4 47.2 47.2 44.7 54.7 63.9
Rice (m tons) 4.5 4.8 5.0 5.0 5.5 5.4 5.6
Services Sector Growth (%) 5.2 6.0 7.9 6.5 7.0 6.6 3.6
Exports (US$ millions) 11160 12313 14391 16451 16976 19052 17782
Growth (%) 22.2 10.3 16.9 14.3 3.2 12.2 (6.7)
Imports (US$ millions) 12220 15592 20598 28581 30540 39966 34822
Growth (%) 18.2 27.6 32.1 38.8 6.9 30.9 (12.9)
Trade Balance (US$ millions) (1060) (3279) (6207) (12130) (13564) (20914) (17040)
Current Account Balance (US$ millions) 3050 280 (1070) (4990) (6878) (13874) (8861)
SBP Foreign Exchange Reserves (US$ millions) 9285 10326 9578 10765 13345 8577 9118
Exchange Rate (Rs per US$) 58.5 57.6 59.4 59.9 60.6 62.5 81.3
% change (4.8) (1.6) 3.1 0.8 1.3 3.2 29.9
Total External Liabilities (US$ billions) 35.5 35.3 35.8 37.6 40.5 46.3 52.8
Domestic Debt (Rs billions) 1854 1979 2129 2322 2601 3266 3851
of which:
Permanent (Rs billions) 427 537 501 500 553 608 678
Floating (Rs billions) 516 543 778 941 1108 1637 1904
Unfunded (Rs billions) 910 899 850 882 940 1020 1269
Tax Revenue (Rs billions) 459 510 590 704 840 1010 1181
Budgetary Expenditures (Rs billions) 861 899 1001 1196 1365 1921 2101
Budgetary Deficit (% of GDP) 3.7 2.3 3.3 4.2 4.3 7.6 5.2
Borrowing for Budgetary Support (Rs billions) (56.0) 63.7 60.2 70.9 102.0 554.6 316.4
Credit Expansion (%) 0.6 23.7 22.2 16.1 14.2 29.3 15.4
M2 Growth (%) 18.0 19.6 19.1 15.1 19.3 15.4 9.6
Consumer Price Index (FY91=100) 3.1 4.6 9.3 7.9 7.8 12.0 20.8
Sensitive Price Index (FY91=100) 3.8 6.0 11.1 7.8 9.4 14.2 22.7
Source : SBP Annual Reports
58
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Pakistan Outlook 2010

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TAURUS

Exercising Caution and Prudence

Pakistan Market Review & Strategy 4

PAKISTAN MARKET REVIEW & STRATEGY

Paper & Board

#DIV/0! Total Market Cap.

Cable & Electrical

60% Chg. (45.6%)

Glass & Ceramics

Analyst: Salman Rasheed

Index The Market - January-December 2009

Pre and post budget activity

Foreign liquidity driven rally

Dull and lackluster finish

Performance of Selected Markets during 2009

Looking ahead to 2010

Pakistan. This development would be a boon for the capital markets.

Medium-term Macroeconomic Framework Projections

Regional Valuation Comparison

Investment Strategy for 2010

Top Picks for 2010

SECTOR STANCE DESCRIPTION

Neutral to We maintain a Neutral-Positive stance on the sector on the back of increased

Page is left blank intentionally

BANKING SECTOR NEUTRAL TO POSITIVE

Dec31'09 Dec31'10 Upside/(Downside) EPS (PKR) P/BVS (x)

Analyst: Muneeb Azhar

NPLs: The worst is over

TSL Universe Infection ratio

TSL Universe-Bad loan ageing

Advances: Improvement in fundamentals and low ADR to foster growth

Deposit gowth moving inline with MS growth

Spreads vs 6 month KIBOR

Changes in Prudential Regulations

BAFL-P/B band (CY06-CY09E)

02-Jan-06 17-Oct-06 07-Aug-07 26-May-08 13-Mar-09 29-Dec-09

Source: TSL Research

UBL-P/B band (CY06-CY09E)

02-Jan-06 17-Oct-06 07-Aug-07 26-May-08 13-Mar-09 29-Dec-09

Source: TSL Research

ABL-P/B band (CY06-CY09E)

02-Jan-06 17-Oct-06 07-Aug-07 26-May-08 13-Mar-09 29-Dec-09

HBL-P/B band (CY07-CY09E)

24-Sep-07 25-Jun-08 31-Mar-09 29-Dec-09

MCB-P/B band (CY06-CY09E)

02-Jan-06 17-Oct-06 07-Aug-07 26-May-08 13-Mar-09 29-Dec-09

Source: TSL Research

Discount rate reduction may provide further price trigger

Target price sensitivity to discount rate (PKR)

Bank Alfalah Limited: Weathering the Storm

Bank AlFalah Limited

BAFL: Key income statement data PKR (m)

BAFL: Key balance sheet items PKR (m)

BAFL: Key metrics

United Bank Limited: Good days ahead

United Bank Limited

UBL: Key income statement data PKR (m)

UBL: Key balance sheet items PKR (m)

UBL: Key metrics

CEMENT SECTOR NEGATIVE TO NEUTRAL

Share Price Fair Potential 1QFY10 YOY FY10F FY10F Stance

Analyst:Saad Najaf Ali Sayed

Coal Price Trend May - Dec

Source: TSL Research & Company Reports