January 15, 2007

PAKISTAN RESEARCH
STRATEGY
BMA RESEARCH TEAM (+92) 21 - 111 262 111 Ahsan Javed Chishty ajaved@bmacapital.com Juvaria Jafri jjafri@bmacapital.com Navin Ali nali@bmacapital.com Ovais Siddiqui, CFA osiddiqui@bmacapital.com Uzma Makhani umakhani@bmacapital.com Uzma Shah ushah@bmacapital.com Yasir Shafi yasir.shafi@bmacapital.com

PAKISTAN OUTLOOK 2007: DIAMOND IN THE ROUGH
1HFY07 ECONOMIC GROWTH REMAINS ROBUST
Real GDP growth in FY07 should better our initial conservative projection of 6.6%-6.8%. Most indicators of consumption spending remain strong aiding the take-off of an investment cycle. This augurs well for asset markets. Key risks remain such as high inflation and a rising current account deficit. However, we believe that concerns about large on-off rupee devaluation in the short term are unfounded and the currency is much more likely to depreciate at a gradual 2% over the year.

IS A HIGH POLITICAL RISK PREMIUM JUSTIFIED?
We expect parliamentary elections to take place within the next 9-12 months following the presidential elections slated for October 2007. This will be the first Pakistan government to complete its tenure in over 29 years. We are confident about President Musharraf’s re-election, which will ensure continuity in policies and reforms. This is a long-term positive, not currently reflected in market valuations.

PAKISTAN MARKET UNDER VALUED
The year 2007 finds the market undervalued in a robust economic environment. The current market P/E is 9.8x CY06 against our forecast of 8.6x CY07. These valuations run at a 30%-50% discount to regional markets. From a macro perspective, there are key cyclical and structural themes that investors can capitalize on. Cyclical plays: The RACE strategy– high real interest Rates (R), high Agriculture income (A), Currency depreciation (C) and stable Energy prices (E). Structural Plays: The PICCS strategy – increasing Power & energy deficit (P), Infrastructure growth (I), rising Consumerism (C), Capacity expansions (C), and the Savings deficit (S)

SECTOR THEMES AND OUTLOOK
Sector Banks E&P Fertilizer OMC's FMCG Telecom Auto Cement Gas T&D Power Textile -2 +1 +1 -1 -1 -1 -1 -1 -1 +1 +2 +1 -1 -2 +1 +2 +2 +2 -2 +1 +1 +2 +1 +2 +1 +1 +1 R +1 A +1 C +1 +2 +2 +1 E P I +1 C +2 C +2 S -1 Total 7 4 3 3 2 2 1 7% 4% 4% 2% 10% MSCI 37% 11% 13% 11% KSE-100 26% 29% 5% 3% 3% 7% 2% 3% 2% 3% 1% Outlook Overweight Overweight Overweight Overweight Overweight Overweight Overweight Market weight Market weight Market weight Market weight

Impact: +2 Very Positive, +1 Positive, 0 Neutral, -1 Negative, -2 Very Negative

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January 15, 2007

CONTENTS

1 2 3 4

INTRODUCTION

3

MACRO OUTLOOK: ECONOMICS

5

KEY THEMES FOR EQUITIES

8

SECTOR STRATEGY & SNAPSHOTS

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January 15, 2007

1
Ahsan Javed Chishty ajaved@bmacapital.com

INTRODUCTION
The year 2007, according to the Chinese calendar, is the year of the pig. The year of the fire pig, to be precise. Worry not – pig in Chinese astrology stands for the bold and vivacious. And the fire pig, we are told, is bolder, more vivid and more vivacious than the rest of the pack. We will take their word for it. More importantly, pigs, we are also told, have a knack for being able to find a diamond in the rough. This, perhaps, is the tone for CY07. The new year finds the Pakistan equity market fairly undervalued relative to a robust domestic economic environment. The KSE had a less than memorable CY06. Annual nominal return was approximately 5% against 57.9% in CY05. Returns adjusted for inflation were negative. Given a P/E of 8.6x CY07 based on forward earnings, the market appears relatively cheap to many other costly regional diamonds. Consider the multiples of other regional equity markets based on forward earnings – the BSE Sensex trades at 19.1x, Indonesia at 14.1x, Thailand at 12x and Taiwan at 14.1x. Relative to these, Pakistan equities trade at a discount of 30%-50%. However CY06 was memorable for other reasons. Foreign portfolio investment continued to grow and two Pakistani corporates, MCB, and OGDC were successfully listed on the London Stock Exchange. Additionally, the much-touted forensic investigation into the March 2005 crisis was released. The findings, as expected, put to rest any concerns about manipulation by larger market players. Pakistan equities have traditionally traded at a discount to other emerging markets due to the higher risk premium attached to the country. Much of this is political while some of the more recent widening (late Dec 06) is probably economic (currency worries). But it is no secret that Pakistan suffers from a risk perception to actual risk mismatch: the market is perceived to be riskier than it really is. Gradual re-rating of the country risk (from default to three notches below investment grade) in the last 7 years has not yielded the same degree of foreign portfolio interest as seen in emerging markets with near-similar risk ratings. For instance Philippines, an emerging market rated only one notch above Pakistan by the S&P at BB-/Stable, attracted USD7.6bn worth of portfolio investments from January 2005 to September 2006. In comparison, Pakistan, over the same period, registered a relatively paltry USD974mn and only recently has this number doubled due to the OGDC GDR. Perhaps impacting the risk premium is a prospective precarious passage of politics in CY07. Parliamentary and presidential elections are expected within the next 9 to 12 months. The time frame is as yet uncertain though President Musharraf has stated that elections will take place according to the constitution – that is within 3 months of the end of the assembly run. Whenever the elections do take place, the political risk associated with the election appears exaggerated. Most analysts and commentators concur that President Musharraf should be able to secure re-election and ensure continuity of command and policy. According to Moody’s, ‘given a weak and divided political opposition (two of whose leaders are in exile) and the dominance of the military, it is highly likely that General Musharraf will remain in control of government beyond 2007’. After all, the President is popular with the masses. According to a survey conducted in September 2006 by the International Republican Institute (IRI), the research wing of the Republican Party, General Pervez Musharraf is more

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popular in Pakistan than Benazir Bhutto and Nawaz Sharif. Moreover, the US has recently made it clear that democracy in Pakistan is an internal affair – a policy move perceived by analysts as legitimizing General Musharraf’s reelection bid. While Pakistan might endure shifting political alignments in CY07, high political risk is the staple of most emerging markets. Consider Philippines: in early March 2006, the Arroyo administration survived a coup d’etat and a subsequent state of emergency. Risk premium widened only during the period of instability. In fact, over the same quarter, portfolio investment into Philippines surged by USD 2.2bn. In comparison, Pakistan’s political passage promises to be lighter. Moreover, if on schedule, elections are a 9 month to 12 month risk and should not detract from the fundamentally improved (and improving) economic architecture of the country. Strong economic dynamics and important undercapitalized macro trends suggest that sector dynamics are sound, corporate profitability should remain robust and asset markets should outperform. In turn, this is the right time to pick Pakistan - a diamond in the rough.

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11% in November 2006. then 5. steel.3% at the end of June 2006 to 34. Industries at capacity including power generation.8% YoY higher than CY05. Domestic sales tax collection.9% FY06 to 9.0% is probable.0% YoY higher in Jul-Sep FY07. livestock should deliver above average performance given the emphasis on the sector in Budget FY07. Consumer coattail: Revitalized investment The Jul-Dec period provided further evidence that a consumption boom had morphed into a fixed investment cycle.0% YoY driven primarily by higher wheat.7% YoY. should be at 4. Tele-density rose from 26. Most indicators of consumption spending remain robust. refinery and packaging. have advanced at a 20%+ clip in Jul-Sept FY07. communication.539 new companies were registered. In the coming months real estate. Currently real interest rates are between 1-2%.5mn bales for the fiscal year. should better our initial conservative projection of 6. th North-South corridor. autos. Much of the focus was in banking.0bn) in Jul-Dec FY07 despite real interest rates being positive. However. Agriculture growth. retail and power generation will probably receive more investor interest. grew 21.3% in FY05. Within agriculture. should continue to maintain above trend performance. was 15.2% to USD 2. Foreign direct investment grew 105. real GDP growth in FY07. Moreover. Air passenger and cargo turnover of PIA. The services sector.8%YoY in July-Nov. set out at over USD 5bn in budget FY07.7% YoY clip of FY06. after a fortuitous monsoon. a suitable proxy for consumption spending. Real interest rates positive The investment climate has remained robust despite the monetary climate becoming more restrictive in CY06. an indication of asset accumulation. Largescale manufacturing (LSM) growth in Jul-Sept stood higher at 9. the main engine of growth in the last 3 years.1bn and should close the year close to 3. cotton output is lower than that of FY06. Bhasha Dam. the decline is not stable 5 . which was 30. The liquidity cycle became less accommodative due to continued stubbornness in headline inflation. and rice output. And the restrictive policy can be expected to remain intact in 2HFY07 as SBP has declined all invitations to a premature easing of monetary policy and has established steadfast adherence to tight monetary policy. 2007 2 Ahsan Javed Chishty ajaved@bmacapital.6%-6. In CY06.0% of GDP. fertilizer. started to flex its muscle with the unveiling of several mega (e. The government’s own target of 7. Bank credit disbursement has grown at a respectable clip of 11.6% YoY and 18. moderately lower than the 10. sugar.January 15. Manufacturing also continued its robust form. the country’s dominant full service carrier.6% from 64. Heightened public investment. telecom and E&P. Based on data over the past six months. 4 port) and not-so-mega projects.8%. transport and retail services has remained robust as consumption spending remains strong. non-life insurance gross premiums. 5. Growth in financial.8%. are at different stages of considerable capacity expansion in the coming quarters.g Gwadar port stage 2. If corporate dairy sector revenues are any indication. Measures indicate that on the coat tails of accelerated consumerism private domestic investment remains robust.5% YTD (USD 3.com MACRO OUTLOOK: ECONOMICS The economy turns the corner into CY07 at a vigorous pace after a testy CY06. There are some reservations about the cotton crop at 12. An extended period of positive real interest rates has curbed inflation from 7. Capacity utilization levels in LSM in FY06 moved higher to 66.0% plus growth in livestock is likely.

5% in FY07 from 4. Hence. Pakistani experience does not compare to currency crisis in other emerging markets in the past.9% YoY growth in Jul-Nov CY06. Despite this. the central bank can take heart from indications of significant liquidity accretion: credit growth in the 1HFY07 has declined by 18.January 15. Currency: Lost in translation On the external front. increased fiscal prudence requires less short-term borrowing. for the time being. the central bank has ruled out devaluation and is sticking to its mantra of ‘flexible exchange rate’. The pro-growth bias of the central bank is strong. is expansionary and can drawdown national savings. barring a major external supply shock. Pakistan is not hostage to the same level of external debt accumulation and short-term money flows as the sample for financing of external deficit. A major reason behind the continuing inflation indiscipline is expansionary fiscal policy. The SBP establishes that. inflation expectations remain strong as does the hangover of price inertia (read Animal rd Spirits December 5: 3 Rock From The Summit). 6 . nominal interest rates may not rise anymore.0% of GDP. In this light.1bn same period last year.5% range.5% target and clock somewhere in the 6. Leveraged sectors are already feeling the pinch of higher nominal interest rates – further tightening might push real GDP growth below potential. a persistent and significant current account deficit is an ongoing concern. for 1HFY07 stands at a small surplus of USD 191. Broad money growth at 7.9mn against a deficit of USD 1. while the tax base remains low at below 10. The GoP is putting together a major relief package for exporters to take the sting out of eroding competitiveness. 2007 . Additionally. net foreign assets growth. However. Moreover. the accommodation of price targets entails that while the monetary cycle might not ease.7% in FY06. as the key economic risks have not yet mitigated. is keeping the central bank wary about price stability. more long-term borrowing. On most metrics. there are reasons to be optimistic.2% in FY06.4% YoY.6% YoY (Nov). Going forward. The capital account is robust and should ensure a balance of payments surplus for the country in FY07. Consequently. A more recent worry has been a slowdown in exports – 7. Moreover. a bigger tax base and less reliance on privatization proceeds. Jul-Nov data reveals a 17.4bn and we expect the current account deficit to reach 5. a proxy for BoP.9% worsening of the trade imbalance to USD 5. The central bank has already stated that inflation in FY07 is likely to exceed its 6. In fact. Thailand and Malaysia prior to severe currency devaluations in these emerging markets. though relative debt levels are declining. balance of risks favour real interest rates remaining in the positive zone for an extended period of time as real GDP growth continues to outpace potential growth.6% YTD has remained stable in the last six months and nominal money supply will probably underperform nominal GDP growth in FY07.0% of GDP in FY07 from 3. it will not tighten significantly either. Pakistan’s macro indicators are safe compared to those of Mexico. though more oriented towards development spending.inflation in Jul-Dec FY07 stands at 8. the central banks hawkish posturing appears adequate and appreciable. However even steady nominal USD/PKR depreciation of 2%YoY in FY07 will not set off any major impact on output and income. This is a euphemism for allowing steady depreciation pressure on the USD/PKR.6% YoY while core inflation has declined to 5.5%-7. Lower international oil prices and tighter monetary policy might provide some respite on the trade balance. Fiscal policy. A widening of the fiscal deficit to 4.

obstacles are likely to mar the transition from deficit to surplus. lags behind major regional players such as Thailand and China. supply stood at 19.0% of the current electricity generation mix while oil is 29. According to the World Bank’s Doing Business 2007. thermal based generation is 64.4% of primary energy supply. Bangladesh. Philippines and Indonesia. India. with respect to energy infrastructure.January 15. Businesses estimate that 5%-8% of annual sales are lost due to power problems. For example. 40% of firms in Pakistan own generators. Given the growing power deficit. In 2006. 2007 Load shedding A major impediment to Pakistan’s long-term growth prospects is a chronic deficiency in energy. 7 . According to another World Bank study. The country’s electrical generation capacity is starting to trail demand. The GoP has a comprehensive power policy in place that looks to encourage private sector investment. the comparative investment climate of Pakistan. in the number of firms suffering from shortages/outages in electricity. Pakistan is worse off than China. There are also increasing efforts to explore and produce energy supplies indigenously.439 MW. energy shortages and higher costs of domestic energy are likely to have an adverse impact on the costs of doing business. However. Moreover. Demand is growing at a 10% clip and is expected to outstrip current supply by 2010.

0 Neutral. RACE – Capitalizing on key cyclical themes R A C E Rates Agriculture Currency Energy High interest rates (PKR. +1 Positive.Capitalizing on key structural themes P I C C S Power Infrastructure Consumerism Capacity Savings Increasing energy deficit Infrastructure growth Growing consumerism Capacity expansion Increasing savings deficit Structural Structural Structural Structural Structural SECTOR THEMES AND OUTLOOK Sector Banks E&P Fertilizer OMC's FMCG Telecom Auto Cement Gas T&D Power Textile -2 +1 +1 -1 -1 -1 -1 -1 -1 +1 +2 +1 -1 -2 +1 +2 +2 +2 -2 +1 +1 +2 +1 +2 +1 +1 +1 R +1 A +1 C +1 +2 +2 +1 E P I +1 C +2 C +2 S -1 Total 7 4 3 3 2 2 1 7% 4% 4% 2% 10% MSCI 37% 11% 13% 11% KSE-100 26% 29% 5% 3% 3% 7% 2% 3% 2% 3% 1% Outlook Overweight Overweight Overweight Overweight Overweight Overweight Overweight Market weight Market weight Market weight Market weight Impact: +2 Very Positive. . 2007 3 KEY THEMES FOR EQUITIES From a macro perspective. there are several noteworthy themes to consider in formulating equity strategy. -1 Negative.2 Very Negative 8 . USD) Higher agriculture income Currency depreciation Stable oil prices Cyclical Cyclical Cyclical Cyclical PIICCS.January 15.

autos and telecoms) are also likely to be losers. Leveraged sectors (cements. There are some apprehensions about cotton output. The improved agriculture income prospects (44% of total labour force) are likely to positively impact several sectors including fertilizers.5mn bales. The original target of 13. autos. textiles. 2007 Sectors Outlook Overweight 7 6 5 4 3 2 1 Telecom Fertilizer Cement Marketweight Gas T&D Power Banks Auto RACE STRATEGY – TAKING ADVANTAGE OF KEY CYCLICAL THEMES R –REAL INTEREST RATES POSITIVE We have already discussed our view on real interest rates. the currency can be expected to weaken by 2% YoY in CY07.January 15. FMCGs and banks (again!). Wheat.5mn bales has been revised to 12. cements. 9 OMC's Textile E&P FMCG . textiles. some sectors can prosper/decline in a weak USD/PKR environment. banks. Bucking up the agri-economy is continued growth in the livestock sector – a destination of significant fiscal pump priming in FY07. The gainers include E&P. fiscal spending is lax and the current account deficit is widening. C – CURRENCY DEPRECIATION A growing trade deficit is likely to keep pressure on the USD/PKR parity. textiles and banks and the losers are autos. as discussed above. While most macro indicators are at comfortable levels and rupee weakness is unlikely to impact output. and OMCs. sugar and rice output are expected to yield surpluses. While we are ruling out a major depreciation. A –AGRICULTURE INCOME HIGHER Agriculture output has rebounded in FY07 after a lukewarm FY06 due to improved performance from major crops. Banks are likely to benefit while mutual funds are not. FMCGs. To summarize: we expect real interest rates to remain positive for the remainder of FY07 as inflation is still high.

total supply of primary energy has increased by 43. water supply. The infrastructure sector in Pakistan comprises power. The EIA forecasts that non-OPEC supply would increase by 1. Government of Pakistan). the GoP plans to develop the local energy sector and rigorous efforts are underway to attract local and foreign investment. Pakistan’s energy demand is likely to continue witnessing rapid growth on the back of increasing urbanization and industrialization. The US Energy Information Administration.6% earmarked for FY07. This entails a neutral impact for OMC and E&P.3% over the last 10 years.62bn in FY07 – 50% of which would be towards infrastructure.1% in Africa. This could be attributed to improved output from non-OPEC states. The EIA has also trimmed its forecast of world oil demand to 86.January 15. cyber parks.3m bbl/d from its December forecast. total development expenditure allocation has been ratcheted up from USD 1.2% in FY03 to 5. An ongoing fall out of this energy shortage is rising domestic energy costs and power outages.3% a year to 91. This has led to a rise in per capita availability measured in tons of oil equivalent (TOE) from 0. Hence.55 TOE (Planning Commission. In this light. a jump of 22%. In stark contrast. PICCS STRATEGY – TAKING ADVANTAGE OF KEY STRUCTURAL THEMES P – ENERGY/POWER DEFICIT According to the Pakistan Economic Survey FY06. A significant part of the leg-up in prices is attributable to cheap carry trades – reversal in these trades is likely to trim oil expectations. This amount remains miniscule on a global basis however. 2007 E –ENERGY PRICES STABLE International energy prices are likely to remain stable as global demand moderates and global energy supplies become more comfortable. down 0. However. E&P.2% a year to reach 44. a government agency. telecommunication. The Government has embarked upon massive plans for infrastructure development. improvements in infrastructure were required. Public development spending as a percentage of GDP has been steadily rising from 2. roads.2m bbl/d for the first quarter of the year.32m bbl/d by 2030. a total increase of 39 per cent since 2005. additional downward pressure can be expected from a more restrictive international monetary environment. air transport. In absolute terms. we expect oil prices to remain stable in the USD 55-USD 60 quadrant.85bn in FY03 to USD 5. A more recent development has 10 . Moreover. power and refinery are likely to gain from the shortage. These include rising real rates in the US and gradual Yuan appreciation.95m bbl/d by 2030. Recent quota cuts by OPEC might have stabilized downward oil price pressure but have not done enough to push the price gradient north of USD 60. and industrial estates. ports. discounting periodic cyclical moves. helped by robust annual growth of 4% in Russia and 4. railways. significantly below world average per capita availability of 1. OPEC supply is expected to rise by 1. I –INFRASTRUCTURE GROWTH The Asian Development Bank in 2003 assessed that if Pakistan was to growth at 8%. These will adversely impact profitability and productivity of manufacturing.05m bbl/d by 2030. waste management. has provided new long-term forecasts for global oil supply and demand showing global oil demand rising by 1. information technology.371 TOE in FY05.8% a year to reach 43.304 TOE in FY96 to 0.

auto. we are estimating PCE to grow by 8. capacity utilization has been steadily increasing over the last 4 years. In FY06.7 32. C.2 82.9 75.9 91 107 92.9 62. gas distribution.1 93. Under most metrics. This powerful dynamic can be expected to keep demand momentum intact and consumer confidence robust.1 87.6 69. autos.8 FY06 59 52 97. For FY07. power and refinery sectors are now in different stages of expansion that will allow them to take advantage of strong demand fundamentals.0%YoY. FMCGs.8 97.January 15.0% of GDP (FY06).5 79. fertilizers and banks.3 11. the gap between investment (I) to GDP and savings (S) to GDP continued to worsen.6 11. OMCs and retail will be better off.3 FY04 55.4 91.2 65.5 85.9 64. In FY06. While nominal gross fixed investment rose from 16.3 89 90.4 28. Private Consumption Expenditure (PCE) has grown at a stellar 8.5 14.7 14. Other likely gainers from infrastructure improvement are cements.2 91.2 64. nominal savings fell marginally 11 . Capacity utilization in selected industries (%) Industry Textiles Edible oil & ghee Automobiles Electronics Cement Steel (Pak Steel) Industrial chemicals Fertilizer Petroleum refining Paper & board Overall capacity utilization Overall capacity utilization * * Excluding Pak Steel production FY03 56.2% CAGR over the most recent 4 years with growth in FY06 at 8.7 85.9 59. insurance.6 110.2 47.7 108. The telecom.3 66. 2007 been increasing private investment in infrastructure much of which is focused in real estate.1 NA 13.3 3.7 66.09% YoY.97% YoY in FY06 and this trend is expected to remain the same in FY07.2 FY05 58. banking.2 S. capacity utilization in LSM moved up two hundred basis points to 66. has transformed into a domestic consumption boom that is both bonafide and self-sustaining. fertilizer.4 63 61.6 Demand-YoY 4.3% of GDP (FY05) to 20. telecoms.CONSUMERISM RISING Pakistan’s economic expansion.1 105.8 100. Banks. poverty has declined while 4 million new jobs have been created. telecom and power generation.6 88. Since 2003. Heightened external inflows of the past few years have so far saved the country blushes on the savings front.2 101 66.4 88.1 93. The middle class accounted for over 50% of income in FY04 against 45% in the beginning of the 90’s.2 95.8 16.SAVINGS DEFICIT The country’s savings deficit is the mirror image of its external deficit. C.CAPACITY EXPANSION: INVESTMENT CYCLE TAKE-OFF Private investment increased by 10.4 36.6% and a number of sectors in FY06 reached capacity. This increasingly potent domestic demand is being driven by rapidly expanding middle class incomes.2 5.9 39.3 33.6 20. initially bank rolled by a positive monetary supply shock.

a negative development for banks and funds.4% of GDP (FY06) from 16. 2007 to 16. The latter is not surprising given that real returns on saving instruments remain negative and are a disincentive to save. However this narrowing would entail higher real returns on money balances. Increased competition for savings will be a theme. which can be expected to extend beyond CY07 as the savings deficit gradually narrows.January 15. 12 .5% of GDP (FY05).

Equity outperfomance Overweight High interest rates Increasing savings deficit Overweight Gas Distribution OMC's Capacity expansion Growing consumerism Infrastructure growth High interest rates Market weight Overweight Power Capacity expansion Increasing energy deficit Market weight Textile Agricultural Growth Currency depreciation High interest rates Marketweight High interest rates Overweight Telecom Capacity expansion Growing consumerism 13 .January 15. 2007 SECTOR STRATEGY 3 Sector Auto Positive Themes Negative Themes Outlook Overweight Higher agriculture income High interest rates Capacity expansion Growing consumerism Currency depreciation Banks Higher agriculture income Currency depreciation Capacity expansion Growing consumerism Development Spending High interest rates Currency depreciation Increasing savings deficit Overweight Cement Infrastructure growth Capacity expansion High interest rates Currency depreciation Marketweight E&P Increasing energy deficit Currency depreciation Overweight Fertilizer Higher agriculture income Capacity expansion Overweight FMCG Closed-end Funds Higher agriculture income Currency depreciation Consumerism Wide discounts.

A marked slowdown in imports during the current fiscal indicates that local assemblers will be responsible for an even larger market share going forward. Expensive consumer credit constrains sales growth… Auto sales growth is expected to average between 5% and 8% during CY07. 14 . Real interest rates are of course currently at high levels relative to previous years and this will have an impact in upcoming quarters. The upcoming year will see the industry at this level of capacity. growth during the last fiscal year amounted to approximately 23%. Strong demand has been the basis for heavy capacity expansion in this sector. market capitalization for the sector has fallen by approximately 6%.January 15. The tariff based system replaces the deletion programme in CY06 and the current year should see assemblers apply increased localization through more proficient implementation of TBS (tariff based system). Data pertaining to recent fiscal years indicates a 97. demand fundamentals are still strong. with no major expansions taking place during the following year (CY08). and during the previous year it was 36%.6% correlation between auto sales growth and GDP growth. This figure is comparable to those in China and India and significantly lower than those of other regional economies. Pakistan motorization levels low. This is unsurprising since two thirds of car sales are made on bank credit. Key data indicates that demand for cars is considerable and growing.com AUTO ASSEMBLERS: STILL IN 4TH GEAR We remain positive on the auto sector. A weak rupee will dent the bottom line as the Japanese Yen becomes relatively dearer. OVERWEIGHT. Nevertheless eventual rate loosening combined with robust GDP growth will keep this sector on stable ground. This represents a slowdown that may be partially attributed to a high base effect. The PKR lost approximately 3.4% of its value against the JPY during CY06. and in Iran the figure is 23 cars for every 1000 persons. Motorization levels remain low. The local passenger car and light commercial vehicle assembly sector was responsible for approximately 81% of total domestic sales during the previous fiscal year. Current combined capacity of listed local assemblers (for passenger cars and LCVs) is approximately 240. … however rising incomes will continue to boost demand. PKR/JPY parity is the key driver for auto margins in an industry reliant on imported assembly kits. Sri Lankans have access to 25 vehicles for every 1000 persons. This will allow assemblers to market output that is uninterrupted by capacity expansion shutdowns Local production up. Higher real interest rates have clearly had a negative impact on sales growth. But TBS will partially offset the slide. Although margins are likely to be squeezed as a result of a relatively weaker rupee. at 10 vehicles for every 1000 Pakistanis. 2007 OVERWEIGHT Juvaria Jafri jjafri@bmacapital. Relative to 18% lost by the KSE-100 index since peak. Rising per capita incomes due to strong GDP growth are a crucial demand driver in this sector. PKR weakness may affect margins.000 units. Capacity building phase complete.

Solid dividend payout record (FY06 PKR 12 per share.5 ………………………………………………………………………………………………………… Leadership position in high margin 1300cc – 1800cc segment with 36% market share.a. FY05 PKR 10 per share) ……………………………………………………………………………………………… INDU 15 . Commands 54% of total local assembled passenger car segment Responsible for 56% of the total 800cc – 1000cc market.000 PSMC units p. Cash/ share of PKR 23. 2007 KEY STOCKS ……………………………………………………………………………………………… Largest assembler with an output capacity of 120.January 15.

0 144.6 Sector 2004 16.0x 2005 Price to Book Ratio 10.17 10.4 1.7 6.0x 20.23 4.0 8.1 2.0 103.00 22.0x 25.648 491 Per Share Data (PKR) EPS DPS Book Value 41.4 0.42 4.3 0.7 25.3 9.404 10 - 18.Earnings / Dividends EPS PKR 3Q06 54.39 1.1 3.7 0.675 5.6% 0.38 1.8 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2005 2004 2003 2002 35.0 4.9 4.5 16.89 16.61) 5.20 44.34 309.5 30.32 28.7x Dividends Cash - Bonus % - 250 PSMC vs Automobile Assembler PSMC 2005 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 10.994 850 30 - Price Multiples (based on current price) Price to Earnings Ratio 30.9 1.13 84.1 3M 9.0x 15.36 4.511 2.577 491 9.91 26.4% 0.9 5.5 15.0 7.4 5.2 2005 10.462 1.60 PE times 5.71 8.37 6.81 14.34 (10.159 5.73 32.4 3.0x 0.0 15.973 5.4% 1.0x 4.472 208 38.8 2.1 59.2 3.0 5.484 1.2 6.375 2.74 25.0x 5.570 30 - 10. Daily Turnover PKR '000' USD '000' Shares '000' 1M 7.7 3.237 50 - 24.6) 4.10 10.457 4.2% 1.0 2004 12.52 1.482 54 Dec Automobile Assembler Stock Chart PKR 500 450 400 350 300 Shares Thousands 500 450 400 350 300 250 200 150 100 50 200 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 0 Most Recent Announcement .826 540 13.61 59.2 29.0x 2.0 49.58 11.1 32.2 1.1 3.Company Snapshot Pak Suzuki Motor Company Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Automobile Assembler PSMC 416.0 78.93 4.550 7.3 5.72 68.9 6.8% 0.8 26.72 191.0x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 10.922 7.45 8.023 150 21.0x 2004 2003 2002 Balance Sheet Assets Liabilities Equity Paid-up Capital 18.49 37.23 16.0% 0.2 2.52 7.3 12M 12.1 Performance over Absolute (%) Relative to KSE100 1M 4% 6% 3M -2% 3% 12M 65% 62% Avg.218 491 8.748 10.0% 2005 2004 2003 2002 2004 2003 2002 .3 28.0 (10.0x 6.2% 0.5 28.0x 2005 Dividend Yield 1.0x 10.135 119 17.

Company Snapshot Indus Motor Company Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Automobile Assembler INDU 200.5 2.5 16.6 3.7 9.0% 5.50 5.8 5.15 6.0 2.6 18.5 5.0% 0.0 3.06 11.0 79.0x 0.450 8.557 4.635 1.0% 3.648 120 - 27.36 5.6 3.23 10.3 Sector 2005 10.237 2.9 2.473 90 - 15.2 3.3 1.54 39.63 2.9 2.0x 1.0x 2006 Price to Book Ratio 6.4 6.565 6.38 33.9 18.3 2005 10.8 4.9 5.200 1.5 1.17 2.4 5.5 6.0 7.720 79 Jun Automobile Assembler Stock Chart PKR 240 230 220 210 200 Shares Thousands 1.0x 12.74 5.485 100 - 22.66 78.5 42.50 72.9 78.4 0.00 15.97 1.4 5.83 5.822 9.0% 6.4 33.32 16.476 786 12.0x 10.069 8.0x 4.0 Performance over Absolute (%) Relative to KSE100 1M 0% 2% 3M -7% -2% 12M 4% 1% Avg.033 8.0x 2.1 32.938 786 Per Share Data (PKR) EPS DPS Book Value 33.0x 2005 2004 2003 Balance Sheet Assets Liabilities Equity Paid-up Capital 15.000 800 600 400 200 0 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Most Recent Announcement .1 6.0% 1. Daily Turnover PKR '000' USD '000' Shares '000' 1M 4.17 11.0% 4.00 27.77 5.0 56.913 115 34 12M 15.808 80 24 3M 6.6 37.0% 2006 2005 2004 2003 2005 2004 2003 .0x 4.4 2.Earnings / Dividends EPS PKR 1Q07 8.7 12.81 11.601 1.39 8.0 48.131 2.258 786 13.50 44.0x 8.0 16.678 3.04 17.2 2006 7.258 70 - Price Multiples (based on current price) Price to Earnings Ratio 14.5 1.12 10.0 37.0% 2.0x 2006 Dividend Yield 7.914 265 76 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 35.2x Dividends Cash - 190 180 170 Bonus % - INDU vs Automobile Assembler INDU 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 5.0x 2.7 4.8 2.400 1.0x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 5.5 28.2 1.04 42.39 6.772 786 11.6 0.39 7.52 42.00 22.9 10.01 PE times 6.81 12.56 0.67 518.0x 6.521 1.0x 3.5 7.

the prime driver of this pressure is the rush to raise new deposits by these banks. 2007 OVERWEIGHT Ovais Siddiqui. UBL etc. As mentioned before. Accordingly. this transmits monetary policy signals to lending rates fairly quickly. because of higher proportion of current and saving deposits in their deposit profile. Big banks winners in current scenario. However. Therefore. CFA osiddiqui@bmacapital. With a current advances deposit ratio (ADR) of 79.2%. These banks pay a very low return on these deposits. …while cost of deposits will rise. OVERWEIGHT. keeping the weighted average cost of deposits fairly insensitive to market interest rates. We believe that the most important determinant of any bank’s profitability in CY07 will be its ability to raise new and relatively cheap deposits. Strong remittances drive deposit growth. the SBP is also voicing its displeasure at the current low deposit rates. bigger banks are better placed than their smaller peers. the concerns of SBP will be addressed without any drastic measure. Since average deposit rates are now on the rise in the last couple of months. large banks. With around 24% growth in the latter in the first five months of FY07. but also to maintain the growth momentum of their advances. should perform better than their smaller peers. consequent to nominal increases in lending rates and more-than-nominal increases in the cost of deposits. On this measure. They need new deposits not only to reduce their liquidity risk. The sector is still trading at a discount to its target Price to Book ratio (PBR). the expected increase in the National Saving Scheme (NSS) rates will also build up some pressure on the banks to offer better returns on deposits. However. we expect some upward pressure on the cost of deposits of the banks. Pressure on spreads. like NBP. Although it is difficult to guess the next move of SBP in this regard. On the macro level. as inflationary pressure is now coming down. the interest rate spread of the banks would come under ‘minor’ pressure this 18 . Moreover. Lending rates likely to remain flat… Since banks benchmark interest rates on all lending against the Karachi Inter-bank Offer Rate (KIBOR). the growth in deposits has been historically linked with the level of foreign remittances. we do not expect it to impose a minimum deposit rate upon banks. So far. most of the smaller banks are in the midst of major expansions of their branch network which should help them raise new deposits. suggested by the long-term sustainable Return on Equity (ROE) and earnings growth of the sector. banks have now started feeling the pressure of raising new deposits.com BANKS: SPREADING THE WINGS We maintain our positive stance on the sector. it has only resorted to ‘moral suasion’ to push banks to pull up the return they give to depositors. Besides that. We do not expect the State Bank of Pakistan (SBP) to further tighten monetary conditions this year. In this situation. we expect the lending rates to increase very nominally this year. especially considering the fact that now banks are offering better returns on their deposit schemes. Ability to raise new deposits key to sector profitability.January 15. we are positive on its implications for the overall growth in deposits. MCB. This will depend on the size of its branch network and the rates it offers on the deposits.

48 3. suggesting ‘undervaluation’ for the sector. this growth will stabilize at the 13% level in the long-run.69 6.9% in CY06.29 2. CY06 was an exceptional year for the sector as its earnings are expected to show a growth 54%. the credit health of bank loans are still in good shape with net NPL to net loans at 1.0% 2. we used Gordon Growth Model to get an idea of the fundamental PBR for the sector.21 2. Asset quality healthy. However. energy. However. Coming to valuation. In an earnings context. on the back of expected growth in telecoms. Attractive Valuations.67 3. down from its peak of 40. However.34 2.48 2. In order to get an idea if the sector is overvalued or undervalued at the current PBR. we get a fundamental PBR of 3.0% 2. Banking Sector Fundamental PBR . 2007 year.40 7.3%. We believe that over the longer-term term the sector could sustain ROE of 24%. the effect could be more pronounced for smaller banks as.0% 1. coupled with high ADR and small branch network.38 3. Despite the substantial increase in interest rates over the past three years.0% 1. SMEs and consumer lending sectors.10 2. With better legal safeguards.05 4.77 5.76x.0% 25. especially on the consumer lending.31 9. In CY06 the credit growth was 26.79 2. This relative slackness in overall credit growth in CY06 can be mainly attributed to monetary tightening and the lesser credit appetite in the textile sector which is in the final phase of its expansion.60 19 .3% 9% 11% 13% 15% 21. The banking sector is expected to show ROE of 26.0% 24.90 2.08 3.60 Long-term sustainable ROE (%) 23. As illustrated in the figure below.93 2. we expect some recovery in the credit growth in CY07.00 26.20 8. a record low.0% 1. the core inputs for this model are the sustainable ROE and sustainable earning growth for the sector.80 27. in our view. banks are now well placed to contain minor incidents of defaults. the sector is currently trading at a CY07E Price to Book ratio (PBR) of 2. Taking these two inputs and a cost of equity of 16. they have no alternative but to raise new expensive deposits.9% into the model.38x for the sector.46 4.86 4.66 1.8% in CY04.80 22. Credit growth expected to recover this year.Gordon Growth Model Cost of equity Long-term sustainable growth Source: BMA Research 16.07 2.8%.00 8.January 15. improved capital and more stringent provisioning requirements.

58 a share capital gain at the current share price of Bank Al-Jazira GoP is expected to issue GDR of NBP this year Currently trading at a PBR of 2. 2007 KEY STOCKS ……………………………………………………………………………………………… The largest bank under the leadership of Mr.9x ………………………………………………………………………………………………………… BOP ADR on the higher side (77.7% ADR.2%.1%).2%). these cheap deposits reduce sensitivity of deposit cost to rising interest rates Interest rate spread to stay stable this year Expected selling of stake in Bank Al-Jazira is to realize handsome PKR 24.5%). Ali Raza. However. plans to launch new deposit schemes with competitive returns Interest rate spread could decline slight before getting stable Plans to enter into consumer banking in a big way this year. captive deposits of Government of Punjab making up 51% of its total deposits Relatively large branch network to support new deposit raising Interest rate spread to stay stable this year Despite being a state-owned bank.2x. discount to sector PBR 2. Using GDR proceeds to open up 60 new branches in two years and to set up IT infrastructure for consumer banking ………………………………………………………………………………………………………… MCB 20 . discount to sector PBR 2. a NBP seasoned and dynamic banker The current 68. on the back of very low cost of deposit.9x Has ADR on the higher side (76. suggesting a very healthy credit portfolio Currently trading at a PBR of 2. leaving little space for further credit expansion without new deposits Enjoys the highest interest spread in the sector (7.January 15. leaving little space for further credit expansion without new deposits Has been a highly successful bank in raising new deposits. compared to sector’s ADR of 80.0x. leaves a lot of room for further credit expansion without new deposits Large branch network to support new deposit raising Current and saving deposits make up 71% of total deposits. it enjoys a low NPL to Gross loans of 2. the bank desperately need new deposits to maintain the growth of its advances.3%.

9x ………………………………………………………………………………………………………… 21 .0x.8%).3x. a wide premium to sector PBR 2.7x.9x ………………………………………………………………………………………………………… ACBL Expected to issue 50% to raise the paid-up capital to PKR 3 billion. discount to sector PBR 2. discount to sector PBR 2. 2007 Currently trading at a PBR of 4.January 15. leaving little space for further credit expansion without new deposits Smaller branch network could restrict new deposit raising Enjoys captive deposits of Fauji and Askari foundations Interest rate spread to stay stable this year Currently trading at a PBR of 2.4% could expose the bank to severe liquidity risk Putting on new expensive deposits is taking a toll on interest rate spread that sharply dip in 3QCY06 Smaller branch network could restrict new deposit raising Higher portion of relatively expensive term deposits in total deposits makes cost of deposits more sensitive to market interest rates Interest rate spread could decline this year Currently trading at a PBR of 1.9x ………………………………………………………………………………………………………… FABL Very high ADR of 86. in order to meet SBP requirement Has ADR on the higher side (75.

5 16.97 7. Daily Turnover PKR '000' USD '000' Shares '000' 1M 2.8% 0.730 40.2 13.985 46.336 2.418 45.38 47.96 47.43) 86.5 2.7 2004 29.58 9.58 21.2% 0.584 4.798 14.44 105.40 1.058 12.93 2.0 2.0 6.0% 2005 2004 2003 2002 0.72 15.05 44.713 709 Dec Commercial Banks Stock Chart PKR 350 330 310 290 270 250 230 210 190 170 150 May-06 Mar-06 Feb-06 Jan-06 Jun-06 Aug-06 Sep-06 Oct-06 Apr-06 Jul-06 Nov-06 Dec-06 Shares Millions 90 80 70 60 50 40 30 20 10 0 Most Recent Announcement .06 81.52 16.76 PE times 9.4 22.403 21.556 12M 5.6% 0.253 13 10 - Price Multiples (based on current price) Price to Earnings Ratio 100.3 33.0 2.0x 14.48 (9.803 408.0x 2005 Dividend Yield 2004 2003 2002 2004 2003 2002 Per Share Data (PKR) EPS DPS Book Value Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) .41 0.0 21.Company Snapshot National Bank Of Pakistan Ltd Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Commercial Banks NBP 260.7 1.12 0.07 29.3 5.5 0.97 0.2 5.9x Dividends Cash - Bonus % - NBP vs Commercial Banks NBP 2005 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 14.0% 0.52 1.21 13.2 105.9 3.7 2.876 64.Earnings / Dividends EPS PKR 3Q06 19.14 29.22 0.1 1.1 0.204 6.7 2.9 Sector 2004 29.246 4.909 553.12 6.5 105.0x 2.2% 1.651 504.0x 17.0x 4.6 4.30 15.9 1.0x 80.9 3.2 1.740 11.1 1.2 19.103 432.424.50 184.90 0.509 3M 3.6 0.201 90.48 (17.1 19.3 38.0x 6.2 26.9 8.6 1.57 0.924 468.3 0.66) 96.195 15 20 - 26.6 0.5 105.231 506.867 23.5 65.744.4 0.8 47.19 0.887.7 26.8 8.0x Balance Sheet Assets Liabilities Equity Paid-up Capital 579.0x 60.0x 20.596 75.8 4.5 1.936 3.4 2005 14.972 441.388 27.97 9.63 0.6 Performance over Absolute (%) Relative to KSE100 1M -1% 1% 3M -3% 1% 12M 13% 10% Avg.0x 2005 Price to Book Ratio 10.198 13 20 - 32.5 29.0 1.4% 0.0x 0.709 25 20 - 29.9 2.261 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2005 2004 2003 2002 43.701 4.055 5.

945 9.0x 2005 Price to Book Ratio 10.808 3M 901.Company Snapshot Bank Of Punjab Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Commercial Banks BOP 107.8 27.06 9.45 2.0x 100.47 17.5 104.154 97.7 26.228 8.5 5.Earnings / Dividends EPS PKR 3Q06 10.07 22.55 0.0x 80.56 17.443 284 18 - Price Multiples (based on current price) Price to Earnings Ratio 120.8 11.021 8.6 2.484 13.62 8.5% 1.929 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2005 2004 2003 2002 7.7 4.0% 0.621 38.0x 2.6x Dividends Cash - 80 70 60 Bonus % - BOP vs Commercial Banks BOP 2005 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 13.06 44.0x 0.6 Performance over Absolute (%) Relative to KSE100 1M 2% 3% 3M 14% 18% 12M -5% -8% Avg.33 98.208 1.9 3.0% 2005 2004 2003 2002 2004 2003 2002 .353 52 - 3.0 2.0x 20.0x 40.481 7.525 26.1 0.0x 2005 Dividend Yield 2.456 2.277 15.9 4.58 0.2 47.305 1.7 1.5 3.2 1.016.688 287 Dec Commercial Banks Stock Chart PKR 130 120 110 100 90 Shares Millions 80 70 60 50 40 30 20 10 0 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Most Recent Announcement .7 0.652 1.12 0.368 40 - 2.004 Per Share Data (PKR) EPS DPS Book Value 8.3 5.05 30.27 20.96 0.47 0.20 11.69 27.59 0.3 4.700 16.0 1.834 12M 1.496 689 25 - 2.63 1.670 2.9 37.3 2.4 18.2 105.0x 6.0 72.62 13.0x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 13.2 19.0x 4.839 1.220 3.17 72.48 0.4 22.5 2005 14.50 PE times 7.5% 0.0 2.2 Sector 2004 22.2 1.2 26.204 4.0% 1.9 3.21 2.5 17. Daily Turnover PKR '000' USD '000' Shares '000' 1M 492.320 58.00 31.2 31.06 108.0x 2004 2003 2002 Balance Sheet Assets Liabilities Equity Paid-up Capital 111.52 37.0x 60.1 46.004 29.6 17.23 1.06 0.0 1.15 142.350 66.413 5.4 3.1 19.506 43.6 1.5 8.7 2004 29.4 98.

4 22.0x 10.0x 4.94 (10.6 Sector 2004 55.6 1.7 3.0x 6.3 5.3 16.Company Snapshot MCB Bank Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Commercial Banks MCB 264.98 266.0x 2005 Dividend Yield 2.236 3M 2.9 Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 15.0% 0.5 22.665 40.26 16.0 1.230 28 10 - 17.0x 2.0% 1.432 25 10 - 14.34 0.0x 12.7 3.7 9.2 105.4 4.922 43 20 - 13.Earnings / Dividends EPS PKR 3Q06 16.7 9.8 2.9 1.608 293.118 272.109 3.74 1.0x 2005 Price to Book Ratio 14.5 28.05 78.4 4.9 3.139 223.5% 0.04 (17.80 135.185 12.535 512 Dec Commercial Banks Stock Chart PKR 300 250 200 150 100 Shares Millions 60 50 40 30 20 10 0 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Most Recent Announcement .1 19.0x 0.10) 28.7 2005 14.5% 1.3 0.517 26.05 18.64) 9.8x Dividends Cash 6.621 14.6 3.3 46.215 11.497 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2005 2004 2003 2002 23.3 5.54) 56.82 1.07 55.71 0.0x 60.009 6.7 2004 29.174 244.1 .7 38.317 2.071 49.97 20.3 18.08 0.0x Balance Sheet Assets Liabilities Equity Paid-up Capital 317.942 7.169 8.0x 20.13 11.6 5.324 261.9 0.59 2.89 PE times 11.2 266.560.5 37.7 26.874 23.00 Bonus % - 50 - MCB vs Commercial Banks MCB 2005 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 15.4 2.440 11.0% 2005 2004 2003 2002 2004 2003 2002 2004 2003 2002 Per Share Data (PKR) EPS DPS Book Value 17.83 0.94 0.951.6 Performance over Absolute (%) Relative to KSE100 1M 1% 2% 3M -1% 4% 12M 35% 32% Avg.55 14.4 4.2 19.065 235.8 21.98 0.5 0.734 4.9 9.7 1.0x 8.036.976 1.05 60.94 (6.0 1.505 33.81 0.92 0.65 14.4 2.2 4.735 25 25 - Price Multiples (based on current price) Price to Earnings Ratio 100.55 9.744 12M 2.1 0.553 5. Daily Turnover PKR '000' USD '000' Shares '000' 1M 1.699 2.8 12.0x 0.88 38.265 259.0x 80.2 26.60 73.2 5.51 37.902 2.

0 20.6 1.6 Performance over Absolute (%) Relative to KSE100 1M 3% 5% 3M 16% 20% 12M -14% -17% Avg.02 0.06 20.6 2.197 1.828 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2005 2004 2003 2002 10.0x 35.9 74.507 107.387 80.6 23.1 1.376 1.0 2005 14.0x 5.980 200 Dec Commercial Banks Stock Chart PKR 150 140 130 120 110 100 90 80 70 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Shares 18 16 14 12 10 8 6 4 2 0 Millions Most Recent Announcement .4 32.333 2.142 70.79 1.016 1.8 5.698 12M 202.55 1.0x 10.39 1.82 5.2 105.7 1.313 66.256 85.34 31.7 2004 29.0x 2005 Dividend Yield 2.582 3.45 5.9x Dividends Cash - Bonus % - ACBL vs Commercial Banks ACBL 2005 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 11.027 1.4 2.1 1.1 19.8 31.0 30.Earnings / Dividends EPS PKR 3Q06 8.8 9.9 3.5 42.06 33.0x 3.2 19.923 20 20 - 5.74 21.42 31.04 16.86 1.3 1.0 25.75 74.3 1.7 26.74 (11.103 20 10 - 5.0x 4.5% 0.151 6.0x 2.6 2.3 1.340 5.Company Snapshot Askari Commercial Bank Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Commercial Banks ACBL 114.0x 25.0x 30.022 15 33 - 6.047 1.8 2.57 23.793 2.0x 0.9 3.07 11.0 1.0x 1.0% 2005 2004 2003 2002 2004 2003 2002 .90 12.0 5.5 2.0x 20.2 3.8 4.3 5.2 26.140 4.0% 1.74 13.230 3M 180.014 1.7 19.65 PE times 9.0x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 11.4 2.4 22.512 8.94 21.087 Per Share Data (PKR) EPS DPS Book Value 10.1 1.834 3.7 3.29 1.56 21.86) 60.5 2.587 1.121 1.4 0.31 68.100 136.4 5.02 24.5% 1.168 101.3 2.46 0.98 1. Daily Turnover PKR '000' USD '000' Shares '000' 1M 131.15 19.0x 15.00 0.0x 2004 2003 2002 Balance Sheet Assets Liabilities Equity Paid-up Capital 145.6 1.5 Sector 2004 11.65 22.0x 2005 Price to Book Ratio 6.173 1.96 1.704 687 20 5 - Price Multiples (based on current price) Price to Earnings Ratio 40.0% 0.1 0.20 0.

06 19.913 47.012 424 Dec Commercial Banks Stock Chart PKR 95 90 85 80 75 70 Shares Millions 30 25 20 15 10 5 0 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Most Recent Announcement .0x 1.4 (18.854 3M 378.260 3.9x Dividends Cash 2.0% 7.606 39.324 10.869 6.Earnings / Dividends EPS PKR 3Q06 5.24 75.31 12.538 68.7 12.6 38.5 5.0x Balance Sheet Assets Liabilities Equity Paid-up Capital 110.913 2.52 2.2 17.54 21.0% 2.45 0.2 105.788 2.0% 0.0 1.0x 40.1 5.0x 2.407 5.281 96.264 2.1 8.5 1.151 45 10 - 4.470 3.0 2.184 4.0x 2005 Dividend Yield 2004 2003 2002 2004 2003 2002 Per Share Data (PKR) EPS DPS Book Value Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) .2 3.793 12M 268.06 (4.069 35 30 - 4.0x 2005 Price to Book Ratio 6.3 5.0x 3.979 2.24 17.753 45 10 - 4.5 1.59 0.60 0.75 44.37 65 60 55 50 PE times 8.7 2004 29.671 31.0x 30.4 0.8 1.5 24.25) (18.10 41.021 14.1 5.15 5.0% 5.1 4.8 7.585 1. Daily Turnover PKR '000' USD '000' Shares '000' 1M 174.02 227.49) 38.5 Sector 2004 15.5 33.0% 4.9 7.9 3.0% 3.5 18.23 0.023 656 17 - Price Multiples (based on current price) Price to Earnings Ratio 50.78 0.314 5.5) 7.648 20.67 35.79 0.05 36.10 16.50 Bonus % - FABL vs Commercial Banks FABL 2005 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 8.0x 4.7 4.0x 8.8 75.93 26.5 21.Company Snapshot Faysal Bank Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Commercial Banks FABL 63.628 7.2 26.0% 1.0% 6.2 19.4 5.8 0.6 1.52 0.4 22.0x 10.8 1.1 1.648 36.4 2.0x 0.401 3.684 78.718 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2005 2004 2003 2002 8.1 2.17 2.21 60.1 4.214 2.49 83.9 36.6 3.1 19.06 12.75 27.47 1.0% 2005 2004 2003 2002 0.806 2.08 15.6 Performance over Absolute (%) Relative to KSE100 1M -4% -2% 3M -7% -2% 12M -22% -25% Avg.6 0.9 0.96 4.7 26.2 2005 14.0x 7.

expected growth 13. total installed production capacity is estimated to be around 33. cement prices are expected to remain under pressure as the sector struggles with excess output.7mn tons. the most of this negative information is already in the price.com CEMENT: WEATHERING THE GLUT We maintain our market weight stance on the cement sector in light of a widening supply surplus despite strong demand fundamentals. And since supply is expected to continue outpacing demand growth during FY07.3bn.9mn tons in FY06 to 19. Additionally.6% growth in local demand and 20% growth in export demand in FY07 and expect cement consumption to grow at a 16. cement consumption has gone up by 26% on a YoY basis to 11mn tones. we have assumed price declines of 10% and 5% in FY07 and FY08 respectively. Over the same period the KSE market cap has declined by 18%. In turn. Urbanization. For FY07. In the first half of FY07. This has a direct correlation with overall GDP at above 2x over the last 4 years. However. the total installed clinker capacity of the cement industry is expected to rise to 40mn tons by FY09. in FY07 alone. 1HFY07 consumption up 26% YoY. A third source of cement demand will be exports where Afghanistan will remain the prime market. we believe that at current levels the sector offers an opportunity for cherry picking. This implies over-capacity of approximately 7. Cement retail prices in CY06 declined almost to the extent of 50% to PKR 200-230 per bag. This trend should remain intact and we expect demand to reach 21.2% YoY for FY07.January 15. with 27 . from 16. Additionally.1mn tons in FY07.9%CAGR over the next 3 years. Market capitalization has declined from peak by 52. This represents a rise of 203% from year-end FY06 clinker capacity of 19. Hence. Already. This will no doubt weaken gross margins for the cement companies where average margins are already down during 1QFY07. 2007 MARKETWEIGHT Ahsan Chishty ajaved@bmacapital.1mn tons during FY07.5 years alone has been USD185mn against USD119mn in the FY02 to FY04 period. Based on a revised commissioning schedule for the sector. Domestic cement demand tends to largely consist of core local demand driven by developmental activities within the country. MARKETWEIGHT Supply surplus expected in FY07.5mn tones in FY07.2%YOY.6mn tons for the sector. Prices under pressure.5mn tons. For FY07 we remain positive about cement demand. we feel that the huge PSDP allocation of PkR 435bn is indicative of continuing focus on infrastructure by the GoP. residential and commercial space is likely to accelerate cement demand.0% to USD1. We expect core local demand to growth by 13. BMA research estimates put available installed capacity at 28. expanded development spending and rising disposable incomes indicate robust domestic demand for cements as the business cycle matures. Heightened public and private investment in infrastructure. However. Following complete capacity expansions. impacting sector profitability. leaving the supply glut at 6-7mn tones. foreign investment is likely to rise at an accelerated pace over the next few years especially with the start of work by Emaar on two island cities off the coast of Karachi. foreign investment in construction and cement sectors in the last 1. As a result. incorporating further delays. Core demand healthy . we expect 16.

at current levels we feel that cement stocks offer good entry levels for long term holding. Lucky.700 tpd capacity expansion coming online around March-07 Relatively higher gross margins owing to efficient German plant technology The largest cement producer with the ability to tap both local and export demand due to a nation wide presence via capacity expansions at Pezu and Karachi plants Continues to enjoy first mover advantage by bringing all four new lines online Portion of debt hedged against rise in interest rates by interest rate swaps ………………………………………………………………………………………………………… LUCK ………………………………………………………………………………………………………… 28 . All this is already in the price! In terms of stock prices. . 6. This is even more pertinent for companies which have undertaken huge loans for financing of new production capacities and whose impact will be felt with the commissioning of the new production capacity. as the sector remains highly leveraged. we expect an additional demand of 0. As a result. Higher financial charges in the wake of rising interest rates environment are expected to put an additional dampener on profitability growth.58mn tons over and above expected core demand of 19. 2007 the reconstruction activities in the earthquake hit areas in the North set to kick off in earnest during CY07. Financial burden of leveraged plants will increase. Market capitalization has declined from peak by 52.3bn.1mn tons during FY07.0% to USD1.January 15. KEY STOCKS ………………………………………………………………………………………………………… DGKC Strategic location in terms of access to the local market Income from equity investments (27% of assets) will help counter interest rate expenses. DG Khan and Maple all are significantly leveraged. Over the same period the KSE market cap has declined by 18%. we feel that investors have more than accounted for all the negatives in the sector.

72 31.303 6.5% 2.5 1.0 20.34 0.0x 15.41 0.0x 30.1 2006 10.0% 2006 2005 2004 2003 2005 2004 2003 2005 2004 2003 Balance Sheet Assets Liabilities Equity Paid-up Capital 34.1 1.844 11.5 Sector 2005 10.00 3.8 31.8 2.0x 10.1 2.575 5.25 29.1 Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 7.840 12M 2.036 19.1 1.318 1. G.0 43.29 21.5 5.398 6.58 6.39 12.304 15.86 18.1 1. Daily Turnover PKR '000' USD '000' Shares '000' 1M 239.05 0.280 1.7 2.268 1.7 1.2 2.33 35.5 36.5x 0.92) 16.25 50.7x Dividends Cash - 40 20 0 May-06 Mar-06 Feb-06 Jan-06 Jun-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jul-06 Bonus % - 60 40 DGKC vs Cement DGKC 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 7.5 1.3 1.660 4.5x 2.77 64.01 0.0x 2006 Dividend Yield 2.0x 25.5 24.3 51.0x 1.75 30.017 8.844 18.0x 0.421 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 7.1 19.0x 35.25 (208.924 254 Jun Cement Stock Chart PKR 160 140 120 100 60 80 Shares 140 120 100 80 Millions Most Recent Announcement .61 0.9 30.9 23.29 20.699 9.715 5.0 26.030 Per Share Data (PKR) EPS DPS Book Value 9.50 17.5% 1.23 10.781 3M 364. Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Cement DGKC 66.0% 1.956 2.5 76.57 0.8 2.211.883 794 15 10 - 2.2 1.988 3.55 7.8 3.0x 5.072 4. Khan Cement Co.Earnings / Dividends EPS PKR 1Q07 1.4 12.9 1.418 15 10 25 5.889 36.9 18.25 35.75 16.992 484 10 - Price Multiples (based on current price) Price to Earnings Ratio 40.5x 1.0x 0.8 0.0x 2006 Price to Book Ratio 3.69 43.865 18.8 2.295 3.3 2.2 0.0x 2.6 Performance over Absolute (%) Relative to KSE100 1M -3% -2% 3M -31% -27% 12M -45% -48% Avg.78 0.9 0.3 .05 9.0% 0.0 0.51 5.4 56.6 0.46 12.7 18.Company Snapshot D.676 9.1 111.6 2.682 15 - 3.9 1.5% 0.6 1.5x 3.97 111.317 1.0 6.16 9.085 2.9 2005 15.0x 20.91 PE times 8.

294 3.0x 3.Company Snapshot Lucky Cement Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Cement LUCK 62.307 2.0x 70.0x 60.621 2.936 10 - 3.0x 0.673 5.88 20.3 24.985 1.0 26.134 2.4 Sector 2005 20.54 20.1 19.0% 0.59 100.6 16.818 1.413 3M 257.8 13.27 24.5 2.7 18.0 20.41 6.0x 50.8 1.41 72.81 80 70 60 50 PE times 8.0x 20.5 5.0x 2005 2004 2003 Balance Sheet Assets Liabilities Equity Paid-up Capital 23.5 0.450 Per Share Data (PKR) EPS DPS Book Value 7.76 200.652 2.68 0.9 23.2 1.705 4.80 16.30 4.1 3.10 5.622 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 7.190 228 8 - Price Multiples (based on current price) Price to Earnings Ratio 80.5% 1.20 1.070 2.13 0.0x 30.1 1.5 1.0x 40.0x 2006 Dividend Yield 2.9 2005 15.634 7.2 1.38 8.0 26.00) 10.78 0.6 2.2 20.Earnings / Dividends EPS PKR 1Q07 1.0 3.7 4.3 0.160.908 686 8 - 2.1 19.1 2006 10.0x 2.5 2.5% 0.552 7.34 20.728 19.58 15.25 27.73 0.6 0.55 4.8 16.0% 1.345 10.634 14.0% 2006 2005 2004 2003 2005 2004 2003 .0x 2006 Price to Book Ratio 5.8 1.012 2.58) (11.0x 1.21 24.611 4.7x Dividends Cash - Bonus % - LUCK vs Cement LUCK 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 8.19 (0.622 16.80 23.2 2.0x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 8.4 32.78 0.478 2.239 12M 1.4 1.450 4.980 827 - 2.8 3.3 51.2 27.9 0.5 134.4 0.4 56.77 16.92 9.197 3.0 36.58 0.807 9.6 Performance over Absolute (%) Relative to KSE100 1M -13% -11% 3M -38% -34% 12M -37% -40% Avg.5 3.540 263 Jun Cement Stock Chart PKR 140 130 120 110 100 90 Shares 60 50 40 30 20 10 0 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Millions Most Recent Announcement . Daily Turnover PKR '000' USD '000' Shares '000' 1M 148.0x 10.61 134.6 1.8 2.

As we expect equity market to outperform in CY07. term deposits etc. Also. Discounts are currently at wide levels and are expected to begin closing during the first quarter of CY07 as the market recovers. Excellent dividend payout record. 2007 CLOSED END FUNDS: MIRRORING THE MARKET OVERWEIGHT Uzma Makhani umakhani@bmacapital. Rising interest rates enhance the appeal of alternative investments (NSS. Strong interest rates increases competition for funds.).7% Large frozen GoP holdings of PSO will provide a significant upside once privatization process commences ………………………………………………………………………………………………………… 31 .among the widest in the PGF market. have stronger incentives to divert their investments. dividend payouts are expected to be generous on the back of strong corporate earnings. Index performance is expected to improve and strong corporate earnings will ensure good dividends. OVERWEIGHT Market recovery is expected to narrow discounts. both retail and institutional.January 15. Anticipation of dividend payouts will also play a significant role in discounts closing as the June end approaches. funds will necessarily reflect market gains. KEY FUNDS ……………………………………………………………………………………………… Discount currently at 29.13% . Expectations of healthy payouts by end of FY07.This is a negative for the closed end funds sector as investors.com Wide discounts provide an ideal entry point for this sector that echoes KSE index performance. FY06 dividend yield 24.

0x 2006 Dividend Yield 30.36 25.3 2005 3.1 49.0x 5.7 0.79) 78.7 29.0 0.859 2.0x 3.3 4.37 48.60 28.0 0.657 161 321 12M 33.946 1.20 93.0x 0.5 0. Daily Turnover PKR '000' USD '000' Shares '000' 1M 6.9 0.0 42.21 11.6 1.292 284 Jun Closed-end Mutual Funds Stock Chart PKR 55 50 45 40 35 Shares 9 8 7 6 5 4 3 2 1 0 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Millions Most Recent Announcement .7 88.1 0.84 0.260 4.0x 2006 Price to Book Ratio 2.899 2.202 2.0x 2005 2004 2003 Balance Sheet Assets Liabilities Equity Paid-up Capital 12.97 798.835 9.0 12.8 0.0% 15.0x 1.3 11.0% 20.371 70 20 50 2.0% 2006 2005 2004 2003 2005 2004 2003 .4 35.121 35 50 Price Multiples (based on current price) Price to Earnings Ratio 7.14 3.678 35 25 - 1.2 23.9 0.29 0.9 6.0% 25.9 93.149 552 798 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 1.385 840 Per Share Data (PKR) EPS DPS Book Value 4.53 10.415 30 4.5x 1.97 46.5 23.5 31.Company Snapshot PICIC Growth Fund Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Close-end Mutual Funds PGF 29.93 973.91 1.2 12.67) (48.9 0.730 831 11.25 8.44 PE times 5.92 49.0 7.8) 23.15 0.43 96.38 (11.5 3.5 1.753 1.6 2006 3.5 Sector 2005 3.7 15.5 24.5 23.77 0.5x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 6.32 0.810 1.4 3.67 29.93 (38.0% 0.0x 6.1 0.0x 0.946 136 6.63) (15.31 4.0 (48.24 26.32 48.575 6.795 45 - 2.0% 5.2 11.0% 10.90 0.4 11.9 92.5 15.8 7.0x 4.1x Dividends Cash - Bonus % - 30 25 PGF vs Close-end Mutual Funds PGF 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 6.268 221 9.28 3.2 0.Earnings / Dividends EPS PKR 1Q07 1.0 9.047 1.4 15.5 0.7 78.1 Performance over Absolute (%) Relative to KSE100 1M -5% -4% 3M -8% -3% 12M -46% -48% Avg.881 115 237 3M 9.37) 92.04 0.0 26.0x 2.

The Economic Survey of Pakistan places the undiscovered potential at 27bn bbl of oil and 282 tcf of gas. oil prices provided a positive earnings surprise by rallying upto 78.January 15. The country has a large sedimentary basin that spreads over approximately 67% of total area and remains largely under-explored. km vs about 7 for the US). International oil price volatility and discovery of dry wells will remain the key investment risks for the E&P sector. we maintain our Overweight stance on the E&P sector backed by expectations of strong demand. Over the next three years. the likelihood of promising untapped reserves cannot be ignored. The upcoming Petroleum Policy 2007 is expected to raise this to USD 45/bbl. In this regard. As a result. Key risks. which will no doubt translate into strong revenue and bottomline growth going forward.com EXPLORATION & PRODUCTION: DEEP VALUE Despite declining international oil prices. On the supply side.a backed by expectations of continued economic growth. Pakistan has 843. 2007 OVERWEIGHT Navin Ali nali@bmacapital. With average real economic growth reaching 7. The two can impact the 33 . Iran and Central Asian countries and given that E&P activity has been sluggish over the past (around 3. Going forward. which while keeping the sector from reaping maximum gains from rising oil prices. prices are expected to come down and being conservative we are assuming an Arabian crude oil price of USD 55/bbl from FY07-10 onwards. it is surrounded by rich hydrocarbon basins of the Middle East. Hence. Furthermore. Oil & gas potential – relatively under-explored.2 wells per 1. International oil prices are a major driver for domestic E&P earnings since local prices are benchmarked against international crude oil prices. a number of petroleum policies have been issued which have taken wellhead-pricing parity to international oil prices from partial to full. profit growth is expected to be driven primarily by volumetric growth arising from new exploratory wells and development projects on existing fields. Successively favorable fiscal and pricing regimes.4/bbl in July-06. This implies that so far only 3% and 19% of total oil and gas reserves have been tapped. As a result. Volume growth to drive profitability. it will also attract new investment by offering better terms and conditions. OVERWEIGHT. 3yr demand CAGR of 5-7% and 8-10% for oil and gas. The GoP has successively been providing better fiscal and pricing environment for encouraging investment in the local sector. improving policy environment and growing focus on domestic E&P activity. During 2006.7% over the last three years. market capitalization for the sector has fallen by 68%. Geographically. The current applicable petroleum policy (2001) is capped at USD 36/bbl for gas. aggressive exploration efforts coupled with above average success ratio of 1:3. domestic E&P companies are well positioned to capitalize on this rising energy demand.000 sq.5 (against world average of 1:4) for the country can radically improve the future prospects. Relative to 18% lost by the KSE-100 index since peak. protects it on the downside.9mn bbl and 53 tcf of discovered proved and probable (2P) oil and gas reserves. This will be applicable on new discoveries only and will therefore provide a boost to exploration activities. energy needs have become more pressing and urgent. oil and gas demand is forecasted to rise by 5-7% and 8-10% p.

well positioned to benefit from country’s growing oil and gas requirements. sensitivity of EPS to oil prices is relatively low. Sensitivity of EPS to oil prices (at 0. 2007 profitability levels by dampening future revenue growth and increasing writeoffs in case of unsuccessful wells.37% & 32% share in country’s oil and gas reserves. FY07 is the last year for upward revision in Sui and Kandhkot wellhead discounts. Being a gas rich company. ………………………………………………………………………………………………………… PPL ………………………………………………………………………………………………………… POL ………………………………………………………………………………………………………… 34 . This can be a significant short term stock price driver. KEY STOCKS ………………………………………………………………………………………………………… OGDC Pakistan’s largest E&P company.5% and 39% in reserves at Pindori and Manzalai respectively are expected to be extremely positive for production growth going forward. Significant potential upside on the back of accelerated E&P activity. This indicates the group’s increasing focus on diversifying and penetrating deeper into the energy market as a whole. which would hedge the company against E&P sector specific risks. Lowest sensitivity to oil prices as gas accounts for 98% of production. upside in terms of percentage production enhancement is more as compared to bigger stakeholders such as OGDC and PPL.OGDC estimates oil and gas production CAGR of 13% over the next three years. Upward revision of 32. With 80% of production and 54% of revenues from gas.January 15. PPL is well positioned to capitalize on country’s growing gas focus. Production shares of 48% and 22% for oil and gas respectively. which together account for 83% of company’s total gas production. This would add to the company’s topline growth PPL is on the GoP’s privatization list and leading contenders include companies such as MOL. Hence. We feel this is a good integrating strategy.An aggressive E&P strategy with plans to drill 158 wells in the next three years as compared to 142 wells in the last ten years. Production enhancement from existing fields expected to provide near term volumetric boost. With 21% stake in the Tal block. POL holds 25% stake in NRL and now plans to bid for a stake in PSO as well.9% for every 1% oil price change) is the highest in the sector.

455 69.3 38.770 43.44 43.989 19.04 8.0x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 10.1 38.0% 2.752 Per Share Data (PKR) EPS DPS Book Value 10.4 7.048 43.579 31.73 39.0x 20.80 15.5 Sector 2005 15.461 65.0% 6.999 18.9 5.0x 6. Daily Turnover PKR '000' USD '000' Shares '000' 1M 920.0x 10.7 44.22 7.0% 8.6 0.0x 25.7 5.3 6.2 4.3 0.4 6.43 47.34 0.26 39.0x 2.930 40.51 48.0% 0.414 40 - 45.755 45.3 47.7 7.0% 2006 2005 2004 2003 2005 2004 2003 .3 3.0x 2005 2004 2003 Balance Sheet Assets Liabilities Equity Paid-up Capital 121.87 PE times 10.40 500.7 Performance over Absolute (%) Relative to KSE100 1M -5% -3% 3M -15% -11% 12M -5% -8% Avg.326 22.0 22.2x Dividends Cash 1.922 19.628 4.67 29.1 6.52 25.968 90 - 73.7 39.9 39.315 26.0x 0.47 23.6 42.8 46.6 0.7 5.0x 2006 Dividend Yield 10.42 43.937 3M 2.50 37.175.0x 4.008 20.0x 15.698 15.5 0.44 14.2 6.968 75 - 51.7 4.673 - Price Multiples (based on current price) Price to Earnings Ratio 30.3 2005 17.461 10.0x 5.08 44.210 43.58 24.67 0.5 19.1 42.009 84.53 24.941 76.0% 4.35 0.89 1.112 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 96.710 32.459.009 95.2 6.591 29.8 15.009 114.Company Snapshot Oil & Gas Development Company Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Oil & Gas Exploration OGDC 116.0x 2006 Price to Book Ratio 10.2 47.73 31.3 5.544 94.7 4.1 7.02 0.0 0.6 5.Earnings / Dividends EPS PKR 1Q07 2.078 12M 4.369 83.7 0.93 31.75 120 110 100 Bonus % - OGDC vs Oil & Gas Exploration OGDC 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 10.0 7.64 22.5 48.61 47.77 0.2 8.0 17.31 45.345 7.6 2006 12.0 44.89 0.7 9.9 6.3 17.62 28.301 Jun Oil & Gas Exploration Stock Chart PKR 170 160 150 140 130 Shares 160 140 120 100 80 60 40 20 0 May-06 Mar-06 Jan-06 Feb-06 Jun-06 Aug-06 Sep-06 Oct-06 Apr-06 Jul-06 Nov-06 Dec-06 Millions Most Recent Announcement .

11 1.194.49 1.4 6.4 3.051 6.6 42.7 44.294 8.92 37.10 0.451 9.40 38.0% 0.644 26.85 45.0x 2006 Price to Book Ratio 20.12 1.792 10.5% 3.45 41.0 40.0x 5.1 38.Company Snapshot Pak Petroleum Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Oil & Gas Exploration PPL 243.0x 10.00 166.0x 2006 Dividend Yield 2005 2004 2003 2005 2004 2003 Per Share Data (PKR) EPS DPS Book Value Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) .645 10.8 197.0 12.77 19.4 Sector 2005 19.39 32.26 31.245 6.6 4.045 3M 1.1 0.858 20.Earnings / Dividends EPS PKR 1Q07 5.5 31.5 42.84 30.8 2.9 3.2 44.623 55 - 17.401 90 - 23.190 - Price Multiples (based on current price) Price to Earnings Ratio 50.31 37.05 57.617 45 - 12.23 26.9 6.655 686 Jun Oil & Gas Exploration Stock Chart PKR 310 290 270 250 30 230 20 10 0 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Shares Millions 60 50 40 Most Recent Announcement .10 0.0% 2006 2005 2004 2003 0.5% 0.317 53.7 4.757 13.6 5.4 5.05 0.8 46.806 6.0x Balance Sheet Assets Liabilities Equity Paid-up Capital 41.6 5.189 6.3 30.3 7.54 PE times 11.423.78 20.0 44.858 20.5 1.858 25.181 4.77 15.723 6.0% 3.177 6.0x Dividends Cash - 210 190 170 Bonus % - PPL vs Oil & Gas Exploration PPL 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 12.815 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 31.2 10.0% 2.239 12.426 12M 3.33 55.668 6.570.7 Performance over Absolute (%) Relative to KSE100 1M 2% 3% 3M -1% 4% 12M 13% 10% Avg.0x 40.59 27.02 40.63 1.1 42.8 15.5 23.878 30.362 23.8 37.70 36.0x 10.066 10. Daily Turnover PKR '000' USD '000' Shares '000' 1M 1.546 21.0x 30.0x 12.70 39.3 2.1 15.7 5.858 31.0 9.6 4.4 3.3 2005 17.5 9.5% 2.340 9.6 2006 12.4 4.0x 0.10 812.73 25.0% 1.5% 1.0x 19.20 44.3 1.289 16.3 38.4 55.95 34.5 2.41 42.3 7.7 5.

79 39.0% 2006 2005 2004 2003 2005 2004 2003 .1 38.695 9.12 19.Earnings / Dividends EPS PKR 1Q07 9.294 3M 1.4 4.36 1.05 0.64 0.284 3.5 33.929.3 38.7 12.488 8.62 1.0% 3.840 4.70 19.30 37.7 5.708 11.3 17.8 33.87 66.57 37.0% 5.7 6.389 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 15.50 2.157.0x 2005 2004 2003 Balance Sheet Assets Liabilities Equity Paid-up Capital 23.1 40.0% 4.624 1.5 12.0x 15.998 3.307 65.4 18.84 41.069 19.1 5.0 7.1 3.0x 2006 Dividend Yield 6.428 175 60 - Price Multiples (based on current price) Price to Earnings Ratio 30.47 27.0x 25.66 5.6 12.75 10.4 6.32 22.617 14.1x Dividends Cash - Bonus % - POL vs Oil & Gas Exploration POL 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 11.8 41.5 56.703 3.Company Snapshot Pakistan Oilfields Ltd.0x 2.314 12.673 125 - 6.0x 0.9 6.396 197 Jun Oil & Gas Exploration Stock Chart PKR 800 700 600 500 400 300 200 100 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 15 10 5 0 Shares Millions 35 30 25 20 Most Recent Announcement .0x 10.1 13.314 10.39 70.0 66.8 4.0x 5.241 8.0x 8.227 6.971 15.2 3.3 2005 17.842 2.7 12.463 2.0% 0.0 10.9 Sector 2005 18.81 0.0 74.308 12M 3.76 0.507 821 Per Share Data (PKR) EPS DPS Book Value 31.6 0.7 44.874.0x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 11.50 47.5 45.82 32.0x 6.66 31.19 0.0x 4.134 31.126 150 50 - 8.7 4.75 36.8 46.54 27.008 1.495 125 - 6.6 5.2 18.734 4.66 18.0 3.35 PE times 9.20 40.6 4.0x 20.132 1.90 67.7 Performance over Absolute (%) Relative to KSE100 1M -7% -5% 3M 4% 8% 12M -24% -27% Avg.0% 2.89 26.0 4.6 39. Daily Turnover PKR '000' USD '000' Shares '000' 1M 1.0% 1. Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Oil & Gas Exploration POL 341.1 15.1 42.0x 2006 Price to Book Ratio 12.375 6.57 27.236 5.5 17.99 23.6 42.0 0.0 2006 12.87 2.4 47.6 7.

Engro.8% Di-Ammonium Phosphate (DAP) is expected to grow at 3. Overall fertilizer off-take is expected to grow at a modest 2. However the country will continue to import fertilizers. Fertilizer off-take to grow at 2. The sector offers an excellent defensive play in the market. the ability of manufacturers to pass on cost increases will ensure stable margins and positive earnings growth. Tight supply situation is expected to carry on despite fertilizer companies producing above their nameplate capacity. which in absence of this new expansion was expected to grow to about 1. the sector is trading at a discount of 23%.9% (5year CAGR) comprised of the following. Hence demand and supply will come at par only for a year or two that is likely to be that is 2010 and 2011. Wheat accounts for 50% and 35% of Pakistan consumption of DAP and urea. Currently macro and agricultural indicators are doing well with strong agricultural credit offtake.2mn tons in the next five years. Fundamentals remain positive for the fertilizer business with stable growth of about 3% in consumption.9%. The increase in production capacity will help bridge some of the supply-demand gap. Capacity to increase to 6.3mn tons by 2010 with addition of capacity of 1. OVERWEIGHT. A key driver in fertilizer sector performance is the health of the agri-sector.3mn by 2010. The main reasons for the number being lower relative to last 3-years growth rate of around 6% are supply side constraints. Supply side constraints. GoP has allocated 100 Chemical to build a new urea plant.4% in line with the aim of balanced nutrient off-take. Tight supply situation to continue in 2007. However. In order undersupply of fertilizers. 38 . Urea which makes-up 79% of total local fertilizer demand is expected to grow at 2. Total capacity of increase to 6. after which we expect the demand supply gap to surface. FFC and FFBL the three main players contribute 81% to total production and 73% to urea off-take.27mn tons and Fatima’s 0. On comparison the KSE100 market capitalization has declined by only 17%. Moreover against market peak. demand is expected to grow to the same level. Demand-supply gap met by increased capacity and imports. 2007 OVERWEIGHT Uzma Shah ushah@bmacapital. better than expected monsoon rains and better wheat crop. Fertilizer manufacturers are likely to have strong pricing power due to widening demand supply gap and domestic and international price differential.com FERTILIZER: HARVESTING GROWTH With ongoing supply side constraints. to ease the situation of MMCFD gas to Engro the fertilizer industry will Engro Chemical’s new Agriculture and credit off-take the key demand driver. Slow growth in prices. while healthy dividend payouts limit downside. strong farmer purchasing power.3mn tons. growth remains limited in the sector until Engro’s new capacity comes on line in FY10.January 15. However the price levels are and will be kept in check by GoP because of fertilizer being a vital sector due to its impact on agricultural growth and hence GDP growth. as by the time the new capacity comes online.

690 per ton. 3yr average: Selling price PKR11. ………………………………………………………………………………………………………… FFC Largest manufacturer/ distributor with strong pricing power 3yr average: Selling price PKR8. Long-term agreement for phosphoric acid with Maroc Phosphore S.033 per ton. cost (excluding depreciation) PKR 5. However in the medium-term Engro’s payout is expected to decline because of planned capex.25mn tons.27mn tons to 2. Granular urea is very well regarded in the farming community over the standard. 3yr average: Selling price PKR10. cost (excluding depreciation) PKR 7.A. 2007 Good dividend yields. cost (excluding depreciation) PKR 6.January 15. ………………………………………………………………………………………………………… FFBL ………………………………………………………………………………………………………… 39 .332 per ton. 541 per ton. KEY STOCKS ……………………………………………………………………………………………… Allocation of 100 MMCFD gas will enable the ENGRO company to increase its production capacity by 1. Engro’s share in total capacity as a result will increase from 20% to 35% Engro. The sector has always had good dividend yields and this is likely to remain so. Healthy dividend income cushions the bottom line. 3-yr average: gross margin 27% and net margin 13% The company is aggressive in exploring new business horizons in various sectors.801 per ton 3-yr average: gross margin 28% and net margin 17% Benefits from fixed gas feedstock prices till 2009. 270 per ton 3-yr average: gross margin 36% and net margin 18% Best gross margins (and net profit margins in the industry The most efficient urea producer Only local granular urea and DAP manufacturer in Pakistan.

0x 2004 2003 2002 Balance Sheet Assets Liabilities Equity Paid-up Capital 14.95 12.396 6.0 20.94 0.92 26.38 13.22 1.7 7.529 13.0 0.0x 5.4 Sector 2004 18.007 1.185 6.0x 0.199 1.0x 20.9 Performance over Absolute (%) Relative to KSE100 1M -1% 0% 3M -2% 2% 12M 3% 1% Avg.0 36.0% 6.3 8.5 2005 11.09 37.48 12.390 Per Share Data (PKR) EPS DPS Book Value 13.1 43.8 20.7 31.92 0.0x 2005 Dividend Yield 7.6 8.6 2.893 1.529 12.319 110 10 12.276 2.0x 1.0% 5.1 4. Daily Turnover PKR '000' USD '000' Shares '000' 1M 240.0 43.8 6.5 39.69 3.736 7.9 6.884 1.8 4.611 85 - 11.265 168 Dec Fertilizer Stock Chart PKR 250 240 230 220 210 200 190 180 170 160 150 May-06 Mar-06 Feb-06 Oct-06 Apr-06 Nov-06 Dec-06 Jun-06 Aug-06 Sep-06 Jan-06 Jul-06 0 4 2 6 10 8 Shares Millions 12 Most Recent Announcement .133 75 10 - Price Multiples (based on current price) Price to Earnings Ratio 30.72 7.5 4.300 4.0% 2.4 4.823 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2005 2004 2003 2002 18.93 2.0% 1.9 9.7 4.0% 3.0% 0.6 4.71 5.6 24.49 10.8 9.586 1.557 80 - 10.330 1.1 18.798 1.48 1.1 12.284 8.10 1.8 11.44 16.59 24.1 3.2 33.00 Bonus % - ENGRO vs Fertilizer ENGRO 2005 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 13.80 43.45 9.11 12.5 31.8 6.97 19.7 5.12 PE times 16.06 6.9 2.7 4.0% 4.870 963 12M 360.0x 15.0% 2005 2004 2003 2002 2004 2003 2002 .666 6.43 2.17 36.9 8.376 1.Company Snapshot Engro Chemical Pakistan Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Fertilizer ENGRO 179.30 18.197 2.11 42.10 25.0x 2005 Price to Book Ratio 6.8 0.46 12.599 6.8 3.Earnings / Dividends EPS PKR 3Q06 8.0x 10.0x 3.5 4.2 25.005 1.358 3M 172.69 31.26 7.1 9.953 5.90 30.865 6.3 41.112 6.1 4.0x 25.0x 4.6x Dividends Cash 6.0x 2.8 2004 16.529 14.40 21.0x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 13.0 4.6 12.1 1.7 3.

55 1.0x Balance Sheet Assets Liabilities Equity Paid-up Capital 28.9 12.0% 10.1 18.936 949 495 12M 120.0% 8.95 27.0% 2.07) 18.1x Dividends Cash 6.443 14.3 11.33 19.8 2004 16.8 22.481 4.565 28.2 27.18 22.027 4.010 939 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2005 2004 2003 2002 25.697 11.5 13.166 17.5 9.2 4.0 32.0 23.145 100 - 16.77 17.Earnings / Dividends EPS PKR 3Q06 6.004 150 30 - 21.0 4.0 25.8 4.0x 0.1 3.14 1.31 28.627 2.523 2.3 14.80 16.148 12.2 4.Company Snapshot Fauji Fertilizer Company Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Fertilizer FFC 107.04) 27.8 4.4 Sector 2004 13.0% 12.449 16.0 21.3 0.83 0.36 17.035 3.19 21.0x 2004 2003 2002 Per Share Data (PKR) EPS DPS Book Value 9.32 25.90 13.8x 2005 Dividend Yield 16.045 577 3M 56.05 0.3 19.403 10.9 0.99 (0.39 40.5 11.22 4.0% 6.3 19.09 (4.565 5.0x 10.0% 4.3 41.2 25.3 0.91 1.9 6.441 4.8 20.9 Performance over Absolute (%) Relative to KSE100 1M -8% -7% 3M -9% -4% 12M -24% -27% Avg.219 15.707 1.7 8.4 10.9 9.925 493 Dec Fertilizer Stock Chart PKR 150 145 140 135 130 125 120 115 110 105 100 May-06 Mar-06 Feb-06 Oct-06 Apr-06 Nov-06 Dec-06 Jun-06 Aug-06 Sep-06 Jan-06 Jul-06 Shares Millions 9 8 7 6 5 4 3 2 1 0 Most Recent Announcement .787 3.295 2.56 10.9 8.6 0.8 4.0% 0.31 19.29 11.0x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 10.0x 15.2 8.6 2005 11.04 32.2x 4.2 33.8x 4.2 9.0% 14.0x 2005 Price to Book Ratio 5.4x 4.950 27.763 2.31 14. Daily Turnover PKR '000' USD '000' Shares '000' 1M 62.71 0.25 52.6 3.0 20.935 26.14 PE times 13.21 2.897 120 40 - 21.6x 4.2 39.1 15.0 24.6 4.008 12.0% 2005 2004 2003 2002 2004 2003 2002 .073 90 - Price Multiples (based on current price) Price to Earnings Ratio 20.6 0.4 6.31 2.22 39.10 Bonus % - FFC vs Fertilizer FFC 2005 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 10.57 15.

953 2.5 17.2 (36.0 3.0x 2.4 4.0x 20.7 Sector 2004 14.2 .368 13.Earnings / Dividends EPS PKR 3Q06 1.728 9.0x 5.86 0.96 1.201 3 3.341 19.0% 2005 2004 2003 2002 2004 2003 2002 2004 2003 2002 Per Share Data (PKR) EPS DPS Book Value 2.0x 7.65) 23.462 1.75 17.8 20.0x 6.5 3.Company Snapshot Fauji Fertilizer Bin Qasim Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Fertilizer FFBL 28.1 Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 11.1 0.820 7.71) (166.0x 0.98 11.167 1.0 7.20 0.24 19.69 9.341 21.3 4.7 3.255 2.8 8.0x Balance Sheet Assets Liabilities Equity Paid-up Capital 24.0x 1.2x Dividends Cash 1.9 8.47 121.0x 5.71 (43.807 8.18 31.187 2.97 25.0 0.62 8.7 3.741 14.258 10.0 33.2 33.5 0.85 26.84 0.9 Performance over Absolute (%) Relative to KSE100 1M -4% -2% 3M 4% 9% 12M -29% -32% Avg.0x 4.6 2005 11.0 1.0x 15.099 18.8 2004 16.949 934 Dec Fertilizer Stock Chart PKR 45 43 41 39 37 35 33 31 29 27 25 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Shares Millions 80 70 60 50 40 30 20 10 0 Most Recent Announcement .27 12.473 3M 173.0% 8.0x 2005 Dividend Yield 10.229 1.967 14.7 1.34 1.2 25.5 3.907 2.0% 6.0 20.008 9.99 6.2 31.65 7.0x 0.831 10 - 5.0% 0.5 8.84 52.25 Bonus % - FFBL vs Fertilizer FFBL 2005 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 11.58 14.069 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2005 2004 2003 2002 14.2 30.1 3.48 15.3 41.4 2.0% 2.18) 53.449 25 - 11.0 25.910 12M 375.8 16.1 8.853 7.360 6.3 6.91 55.0% 4.1 3.453 6.7 52.0x 3. Daily Turnover PKR '000' USD '000' Shares '000' 1M 71.581 16.60 0.42 PE times 15.147 9.131 - Price Multiples (based on current price) Price to Earnings Ratio 25.37 1.099 10.8 0.36 33.6 2.0x 2005 Price to Book Ratio 8.5 0.6 4.1 18.52 22.898 5.9 9.3 2.934 3.67 24.

a in CY08 in order to meet rising demand as well as to target production efficiencies Healthy other income (from associated and subsidiary companies) cushions the bottom line.January 15. more educated. rising urbanization is a key driver for FMCG growth. However.76 bodes well for those producing goods and services. MARKETWEIGHT. some of the scrips are now trading at expensive valuations. BUT EXPENSIVE The wealth effect arising from the strong GDP growth has translated into healthy demand for the FMCG sector. The company is in the process of expanding production and expects to produce at 300. Since urban populations form the principal customer base for companies providing branded goods. offering consistent growth and healthy dividends. and more health conscious than their rural counterparts. The FMCG sector is comprised of low beta scrips that are at the same time regular dividend payers making them extremely attractive in the context of a defensive strategy. 2007 MARKETWEIGHT Juvaria Jafri jjafri@bmacapital.very appealing in a choppy market. KEY STOCKS ……………………………………………………………………………………………… Pakistan’s largest paper and board manufacturer PKGS Good exposure to virtually all areas of consumer demand. Urban consumers are growing at a rate of approximately 5% p.5% over the last three years places Pakistani FMCGs (fast moving consumer goods) in a desirable position.a and are significantly wealthier. Defensive strategy. ………………………………………………………………………………………………………… 43 . Economic growth. All the relevant macro economic indicators point to a market that will continue to expand at a rapid rate and offer strong value to potential investors. The ensuing wealth effect has had local consumers clamouring for more and more food and personal care goods.com FMCG: RIDING THE CONSUMER WAVE. A growth rate that has averaged 7. These scrips may be regarded as defensive investments .000 tonnes p. Consumerism. Urbanization. A market characterized by almost one third of a total population concentrated in the 15 years to 34 years age bracket and a marginal propensity of consume of 0.

55 14.0% 3.0x 2.0 9.0x 5.25 14.0% 2005 2004 2003 2002 0.0 11.3 13.0% 2.0x 14.819 475 10.25 11.5 3.2 3.0 1.0 40.96 22.62 24.0 22.0x 2005 Price to Book Ratio 6.303 38 11 3M 98.92 0.4 4.61 14.0 9.736 699 6.70 15.622 655 70 - Price Multiples (based on current price) Price to Earnings Ratio 25.43 0.0 Millions Most Recent Announcement .0 6.5 2.44 4.633 475 5.522 3.6 8.7 13.22 1.0x 3.50 0.13 17.638 475 12M 25.6 0.08 54.0 110.18 10.18 17.12 8.6 4.84 14.8 14.30 13.0x 15.474 2.3 13.5 6.95 18.4 7.04 14.99 22.0 Shares 3.224 70 Dec Paper & Board Stock Chart PKR 225 220 215 210 205 200 195 190 185 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 1.3 5.099 1.884 7.5 60.8 2.0% 0.8 14.79 1.7 4.154 2.0 0.4 6.3 3.0x 4.436 814 85 - 4.70 5.13 14.8 5.74 0.0 3.5 3.620 3.9 1.6 Performance over Absolute (%) Relative to KSE100 1M 1% 2% 3M 1% 6% 12M -3% -6% Avg.57 6.1 2004 14.5 0.1 16.1 21.950 3. Daily Turnover PKR '000' USD '000' Shares '000' 1M 2.5 1.131 2.0% 1.18 23.283 4.4 3.39 13.92 17.192 475 6.0% 4.Earnings / Dividends EPS PKR 3Q06 10.1 Sector 2004 14.295 1.015 60 47 5.88 21.8 5.0x Balance Sheet Assets Liabilities Equity Paid-up Capital 11.7 8.987 958 85 - 5.9 17.369 423 122 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2005 2004 2003 2002 7.0x 20.0x 0.0x 1.01 1.8 2005 13.5 52.0 1.0 2.0 2.0x 2005 Dividend Yield 2004 2003 2002 2004 2003 2002 Per Share Data (PKR) EPS DPS Book Value Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) .5 18.9 4.9 3.05 PE times 15.8 5.9 7.4 16.2x Dividends Cash - Bonus % - PKGS vs Paper & Board PKGS 2005 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 14.0x 14.Company Snapshot Packages Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Paper & Board PKGS 203.

if added supply from enhanced exploration activities and import of LNG do come online. Implementation of either of these formulae would be positive for Sui’s. Positive developments on the import front expected in CY07. It has been announced by the government that no single buyer would be sold both these companies. 45 . At present the return for the Sui’s are fixed at 17% and 17. it will ensure no gap prevails in the economy.January 15. 2007 MARKETWEIGHT Uzma Makhani umakhani@bmacapital. We can expect changes in policies and regulations to smooth transfer of ownership in CY07.com GAS DISTRIBUTION: UNCERTAINITY IN THE AIR Cheaper availability and increasing gas focus are the core reasons why we anticipate the demand for ‘natural gas’ to not only sustain current levels but also reach new heights. OGRA is considering a revision in the link of its bottom line formula to either a greater percentage return of the asset base or tagging it to the KIBOR rates. Demand for gas is primarily driven by the sectoral demand for gas in the economy.5% for SSGC and SNGPL respectively based on asset base. This process is one of the several measures being contemplated essentially as a major step towards privatization. However. Privatisation expected to materialize in CY07. labour expansion or the retail prices will not affect the bottom line of the companies. Therefore any changes in the cost structure. hence it opens room for ample changes on the policy front. We therefore forecast gas demand to experience a 3-yr CAGR of 8%. privatization might unlock latent value. Bottom line formula revision expected in CY07. Though Pakistan has not been able to reach a consensus on gas import from Iran. some of which are expected in CY07. The two Sui’s are on the Privatization Commission’s list of asset for sale by GoP. We expect increased demand for gas from the transport and power sector. increasing discoveries and import of LNG would enable the economy to meet the supply – demand gap for gas. Other sectors including household and fertilizer would be experiencing modest growth primarily due to the reduced availability of this energy source. MPNR is likely to announce a new gas policy in CY07 envisaging auction of new quantities of gas becoming available instead of their allocations to the subsidized sectors and allow sale to bulk consumers through THIRD PARTY ACCESS (TPA). Growth in the operating profits of the Sui’s can only be expected if the companies expand their asset base and infrastructure. However. This step would ensure no more gas allocations by the government as was done historically but would allow the best market price to prevail. Fixed return formula linked to the company’s asset base. Thereby. These are essentially the reasons why we maintain our ‘marketweight’ stance on the segment. Anticipate demand increase in transport sector. New gas policy can be a major step towards privatization. Turkmenistan or Russia. and we expect this delayed transaction to materialize in CY07. we anticipate some positive developments in this regard. MARKETWEIGHT.

However.January 15. ………………………………………………………………………………………………………… 46 . 2007 KEY STOCKS ………………………………………………………………………………………………………… SNGPL At present. in the long run. of the two Sui’s SNGPL is a better investment in terms of its transmission mechanisms and cash management techniques of the two gas companies. we would recommend investors to be cautious on the Sui’s amid the privatization uncertainty associated with the company.

0x 2006 Dividend Yield 5.09 3.1 2.992 47.3 3.24 4.Company Snapshot Sui Northern Gas Pipelines Ltd.7 2.24 7.8 3.58 51.59 50.2 32.09 3.01 2.1 3.521 409 303 12M 135.0% 0.0x 3.02 4.6 Sector 2005 14.744 8.21 6.2 2006 9.0 23.851 3.014 52.1 4.854 4.3 36.206 2.736 30 - 64.0x Balance Sheet Assets Liabilities Equity Paid-up Capital 51.722 30 10 - 83.0 0.28 21.67 4.8 3.5 0.312 15.05 3.171 303 263 3M 24.377 2.5 4.Earnings / Dividends EPS PKR 1Q07 1.6 2005 12.6 4.5 3.3 2.30 26.3 2.54 4.5 5.109 4.421 36.992 65.884 4.04 5.0 19.0% 1.409 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 105.0 4.0x 2006 Price to Book Ratio 5.301 38.30 29.3 21.74 23. Daily Turnover PKR '000' USD '000' Shares '000' 1M 18.17 4.3 8.0 3.0 36.5 0.06 14.0x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 10.15 24.7 3.5 24.1 5.0x 1.0 0.130 12.64 7.1 4.925 46.9 0.26 5.0 3.95 36.992 5.0% 3.5 0.300 549 Jun Oil & Gas Marketing Stock Chart PKR 130 120 110 100 90 Shares 16 14 12 10 8 6 4 2 0 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Millions Most Recent Announcement . Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Oil & Gas Marketing SNGP 69.58 21.0x 0.92 1.014 22 - Price Multiples (based on current price) Price to Earnings Ratio 20.22 14.0x 2.52 24.8 3.2 15.3 2.784 2.86 19.071 10.5 19.2 2.460 2.0% 2006 2005 2004 2003 2005 2004 2003 .6 2.0 4.7 29.0 3.3x Dividends Cash - 80 70 60 Bonus % - SNGP vs Oil & Gas Marketing SNGP 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 10.0x 10.0x 15.28 16.13 19.47 1.0% 2.5 25.75 38.0 27.556 4.1 Performance over Absolute (%) Relative to KSE100 1M -11% -9% 3M -26% -21% 12M 1% -1% Avg.0% 4.263 1.1 3.992 56.0x 2005 2004 2003 Per Share Data (PKR) EPS DPS Book Value 6.297 25 - 42.41 PE times 12.

Any major development on this issue will set off a strong speculative interest in the PSO stocks. thermal power plants are the largest consumer of FO in the country. yet the FO consumption by these plants declined annually by 13.com OIL MARKETING: NOW THE GOOD NEWS We have an ‘overweight’ recommendation for the sector. HSD consumption to grow. This macro outlook is a good omen for the growth of HSD consumption and. whereas gasoline accounts for 9% of the consumption. a big factor. OVERWEIGHT.1% in the last six years. FO consumption is expected to rise this year as the growing shortage in gas supplies is making it difficult for the Government of Pakistan (GoP) to guarantee supply of gas to a number of new proposed thermal power plants. most of the power plants switched to gas-based production that pushed up the usage of gas to 79% of the fuel consumption by these plants in FY05 from 43% in FY99. which together make up around 81% of the total POL consumption in the country. We believe that a number of international and local companies will show interest in taking over PSO. Shortage in gas supply to stabilize FO consumption. It recently called for new Expression of Interest (EoIs) and the last date for submission is January 15 2007. No substantial growth in gasoline consumption expected. this translated into only 3. Privatization of PSO.3% decline in the market.5% annual growth in the gasoline consumption. This sector underperformed the market over the last nine months as its market cap declined by 33. In Pakistan the consumption of petroleum products (POL) is heavily tilted in favor of High Speed Diesel (HSD) and Furnace Oil (FO).000 MW since FY99. the expected revival in POL consumption on the back of sustained economic growth and the recent urgency being shown by GoP on PSO privatization should trigger investor interest in the sector. we expect the economy to sustain its 6-8% growth pace over the next three years due to large expansions expected in the manufacturing and services sectors. Shell and other oil market companies (OMCs).January 15. decline in POL consumption in the country and delay in privatization of PSO are now factored in the sector valuation. However. As FO prices have been much volatile and higher than those of locally produced gas. As the activity in the transport sector is mainly dependent on macro growth.3% average annual growth in the number of cars plying on the roads since FY99.6%. Going forward. The installed thermal power generation capacity in the country is more or less stagnant at just over 12. Moving forward. we found a correlation of 64% between the real GDP growth and consumption growth in HSD. since HSD sells at a significant discount to gasoline at the retail level because of the substantial GoP’s subsidy. With 71% share in the total consumption of furnace oil (FO). CFA osiddiqui@bmacapital. 2007 OVERWEIGHT Ovais Siddiqui. compared to 17. We witnessed 9. for PSO. The transport sector explains 93% of HSD consumption in the country. However. We believe that all the negative effects of margin cut. The reason behind this disparity is the increased use of Compressed Natural Gas (CNG) in cars that resulted in the decline of per car 48 . accordingly. The GoP is in the advanced stages of divesting its 51% equity stake in Pakistan State Oil (PSO) to a strategic investor.

as it wants OMCs to build up their storage capacity to 45 days inventory from the current 25 days. generally it is much better than that on other POL products. despite the popularity of CNG among the car owners. a new earning source. we believe that the GoP will not resort to margin cut again.47 tonnes in FY99. PSO Expected higher growth in Furnace oil sales this year will positively impact the bottom-line HSD consumption is expected to revive after winter. Offsetting the decline in the growth of gasoline consumption. KEY STOCK ……………………………………………………………………………………………… Expected to be privatized by June this year. any further cut in margin could discourage these companies to finance any such expansion. especially post.January 15. 2007 annual gasoline consumption to 1. Further margin cut. These companies made handsome profits last year and this built up public pressure on the GoP to pull down their margin. This should arrest the decline in the gasoline consumption.PSO privatization. CNG sales. In March last year the GoP cut the margin of OMCs by 20%. However. Compressed Natural Gas (CNG) sales are rapidly growing every year because of its significant price advantage over gasoline. This will remove an important hitch in the privatization of this company Currently trading at discount to our fair value of PKR 349 a share ……………………………………………………………………………………………… 49 .06 tonnes in FY05 from 1. Accordingly. going forward. We expect the car ownership rate in the country to get to 1% in the next couple of years from the current 0.7% on the back of increasing purchasing power of the consumers and aggressive car-leasing schemes of the banks. a remote possibility. This will bode well for PSO as 43% of its sales volume comes from this segment The GoP is expected to retire all dues to PSO by March this year. Though the margin in CNG varies in a large range.

46 3.0x 4.33) 4.27 9.0 36.5 36.545 1.504 5.538 4.3 24.Earnings / Dividends EPS PKR 1Q07 3.5 3.0% 0.15 10.07 4.963 15.715 42.657 172 Jun Oil & Gas Marketing Stock Chart PKR 460 430 400 370 340 15 10 5 0 May-06 Mar-06 Feb-06 Oct-06 Apr-06 Nov-06 Dec-06 Jun-06 Aug-06 Sep-06 Jan-06 Jul-06 Shares 25 20 Millions Most Recent Announcement .262 3M 478.11 4.0x 0.81 12.0 2.46 13.5 16.6 5.446 4.3 3.55 34.5 2.72 14.169 49.312 6.525 340 - 212.61 27.50 2.0x 2006 Dividend Yield 12.3 34.0x 2.6 17.289 1.85 12.0x 2006 Price to Book Ratio 5.275 13.0x 2005 2004 2003 Balance Sheet Assets Liabilities Equity Paid-up Capital 70.0 33.0x 8.1 2.710 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 298.005. Daily Turnover PKR '000' USD '000' Shares '000' 1M 377.8 3.Company Snapshot Pakistan State Oil Company Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Oil & Gas Marketing PSO 307.7 32.3 8.3 11.4 0.338 19.0 0.308 34.0% 2006 2005 2004 2003 2005 2004 2003 .715 32.2x Dividends Cash - 310 280 250 Bonus % - PSO vs Oil & Gas Marketing PSO 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 7.878 16.0% 8.25 9.0% 10.0x 3.0x 2.9 34.968 1.06 12.07 40.7 29.0 0.715 Per Share Data (PKR) EPS DPS Book Value 43.063 1.30 PE times 23.212 175 - 172.34 30.02 2.24 10.5 25.33 4.6 2005 12.00 52.355 20.0% 2.715 52.0x 1.1 23.446 1.04 2.2 32.5 3.0 11.581 12M 1.5 90.0% 4.765 2.1 5.5 5.66 32.813 1.2 5.1 Performance over Absolute (%) Relative to KSE100 1M -1% 0% 3M -3% 2% 12M -28% -31% Avg.70 (6.4 8.0 121.0 2.47 31.2 Sector 2005 9.0x 12.074 7.409 26.0x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 7.2 2006 9.33 79.0x 6.35 33.93 10.1 2.0% 6.3 8.250 7.21 20.2 4.656 260 - 161.5 0.3 2.0x 10.0 102.0 76.81 13.6 2.52 36.030 160 - Price Multiples (based on current price) Price to Earnings Ratio 14.28 2.3 33.0 26.763 17.3 0.

2007 MARKETWEIGHT Uzma Shah ushah@bmacapital.January 15.8%. KAPCO gas.7%. the sector is facing growing capacity deficit. The security of the IPPs’ cashflows is dependent on the ability of WAPDA to honor payment obligations. IPP’s have to fulfill an annual capacity test and maintain certain level of ‘dependable capacity’ across the year. which covers all their fixed costs and includes an equity-return component.3% based on FY06 payouts. with Hub Power in 1) bidding process for SSGC and its 2) plans to expand by 350MW to 500MW through solicited as well as unsolicited proposals ……………………………………………………………………………………………… HUBCO 51 . Insulated against low operating rate. has been a major factor behind the improvement in the IPPs’ risk profile. proximity of plant to load center and existing supply of gas. ………………………………………………………………………………………………………… Higher utilization levels leading to improved thermal efficiency The stock is expected to factor-in potential growth going forward. Dividend yield for Hubco is 11. The IPPs are guaranteed payments based on a 65% load factor. which consist of shareholders’ dividend. the IPPs are insulated against a low operating rate. whereas for KAPCO it is 19. The proposed 450MW expansion is favorable because of high demand growth and company related factors. coupled with the improvement in the government’s financial position. Demand growth and capacity deficit. KAPCO is also a steady dividend payer. In order to receive capacity payments. the GoP is going to announce a new power policy which is expected to be more favorable and hence will serve to attract investments in the sector. Hub Power Co (Hubco) has been paying out dividends regularly for the past three years. In light of this. With high demand growth for power (ranging 8-10%) in recent years and no significant capacity additions. The improvement in WAPDA’s financial position. High dividend yields. furnace oil and HSD. Both the yields are not only higher compared to any other stock but also surpass the 1-year KIBOR rate of 10. Distinctive advantages going in its favor include: WAPDA ownership of about 44%. Based on the tariff structure of the IPPs and the Power Purchase Agreements with WAPDA. and smaller gestation period and lower cost for KAPCO undertaking expansion than a new company undertaking Greenfield project. MARKETWEIGHT. KEY STOCKS ……………………………………………………………………………………………… Its turbines can be run with any of the three fuels that is.com POWER: BETTER THAN BONDS We are marketweight on the sector in view of potential re-rating lying ahead of capacity expansion and diversification by existing Independent Power Producers (IPPs). WAPDA’s improved financial position bodes well.

9 20.2 36.Earnings / Dividends EPS PKR 1Q07 1.90) 26.0 2.832 181 264 3M 17.780 296 424 12M 34.95 31.80 35.276 571 741 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 32.6 29.910 14.0x 4.0 25.1) 9.0x 7.8 1.49 21.0x 2.0x 6.1 8.9) 19.0 13.122 8.91 1.02 29.0 4.803 - Per Share Data (PKR) EPS DPS Book Value 6.96 4.0x 0.5x 1.4 0.842 6.5x 2005 2004 2003 Balance Sheet Assets Liabilities Equity Paid-up Capital 34.08 1.0 0.0x 5.43 15.730 14.85 19.1 2006 8.27 41 39 37 35 PE times 8.5 16.4 Sector 2005 4.6 1.61 26.0 5.5 Performance over Absolute (%) Relative to KSE100 1M -2% -1% 3M -6% -1% 12M -17% -19% Avg.317 81 - 27.0x 2006 Dividend Yield 25.287 8.0 0.156 20.9 9.Company Snapshot Kot Addu Power Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Power Generation KAPCO 40.0x Dividends Cash - Bonus % - KAPCO vs Power Generation KAPCO 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 6.020 8.76 38.0 8.0x 2006 Price to Book Ratio 2.0% 10.1 22.24 0.63 0.803 32.19 16.0 19.0x 1.803 36.8 0.0x 1.12 (33.443 22.914 880 Jun Power Generation Stock Chart PKR 53 51 49 47 45 43 Shares 9.936 - - Price Multiples (based on current price) Price to Earnings Ratio 8.5 - 2.21 0.9 1.1 (5.5x Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 6.0% 20. Daily Turnover PKR '000' USD '000' Shares '000' 1M 10.0% 15.2 26.66 - 0.4 2005 6.0x 3.9 16.048 80 - 21.0 1.6 0.8 (33.891 18.0% 2006 2005 2004 2003 2005 2004 2003 .833 5.278 14.0 7.75 5.8 16.5 1.0x 0.0 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Millions Most Recent Announcement .564 8.2 2.8 15.1 2.0 8.93) 16.51 1.0% 0.9 1.0 3.20 36.1 (36.0% 5.1 19.19 26.8 16.11 21.0 6.8 16.3 7.1 19.

8 16.985 11.2 25.5 Performance over Absolute (%) Relative to KSE100 1M -7% -6% 3M 6% 11% 12M 9% 6% Avg.1 25.55 0.497 12M 44.636 14.0x 6.0 19.385 39 - 16.0 0.99) (10.91) (43.515 13.0 2006 8.39 (48.3 1.59) 9.7 17.10 (1.8 1.572 46.7 3.530 29.4 0.4x 1.781 22.36 5.688 628 1.0 13.54 0.31 5.964 31.38 64.4 4.9 1.2x 0.4 1.0x 8.4 3.0% 5.6x 0.4 22.4 (48.514 6.23 6.0 14.754 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 27.6) 11.14 18.978 5.0 11.364 3M 40.1 9.Earnings / Dividends EPS PKR 1Q07 0.515 26.36 0.546 29.9 27.1) 9.0% 2006 2005 2004 2003 2005 2004 2003 2005 2004 2003 Balance Sheet Assets Liabilities Equity Paid-up Capital 43.0x 2006 Price to Book Ratio 1.99 0.17 1.82 (32.0% 20.1 0.4 1.72 17.3 5.43 10.54 0.0% 0.9 (1.81) 31.1 (36.0 11.2x 1.47) 34.0x 4.9 16.6 5.4) 14.8x 0.42) 31.7 0.463 32 - 19.2 Sector 2005 5.0% 10.102 54 - Price Multiples (based on current price) Price to Earnings Ratio 12.9 4.801 680 1. Daily Turnover PKR '000' USD '000' Shares '000' 1M 37.1 2.9 9.5 Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 11.00 11.0x 0.25 31.93 0.911 2.74 (17.642 11.0x 0.157 Jun Power Generation Stock Chart PKR 30 29 28 27 26 25 24 23 22 21 20 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 0 4 2 6 10 8 Shares Millions 12 Most Recent Announcement .44 10.4 .572 51.672 11.138 29.92 9.7 3.2 0.572 Per Share Data (PKR) EPS DPS Book Value 2.64 5.31 6.0x 2006 Dividend Yield 25.572 55.003 733 1.003 5.27 23.1 0.9x Dividends Cash - Bonus % - HUBC vs Power Generation HUBC 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 11.0x 2.4x 0.Company Snapshot Hub Power Company Limited Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Power Generation HUBC 27.9 1.8 16.8 15.4 2005 6.532 1.768 31 - 16.0% 15.0x 10.62 PE times 10.0 31.55 0.031 11.

compared to 18% decline in the market. The new telecom operators are gradually making inroads into the captive territory of PTCL. A new earning source.49 million subscribers as on June 2006. the share of PTCL in this traffic dropped to 55. where its wholly owned subsidiary Ufone holds 22% market share with 7. However.3% a year earlier.2 million by 2010 from 36. This is quite evident from the fact that international incoming revenues. PTCL managed to establish an extensive telephony transmission network all over the country and consequently the majority of the new telecom operators are using PTCL network for their LL and LDI services. WLL operations took off well. PTCL started off well its wireless local loop (WLL) business. It is planning to cut the payroll expenses by offering Voluntary Separation Scheme (VSS) to surplus employees. Since.January 15. It has got leadership position in this sector with 60% market share. the majority of the other operators’ calls terminate on the PTCL network. An aggressive roll out plan for WLL network is underway in PTCL and its existing 1. the largest company in the sector. Recent tariff cuts could win over lost market share. 2007 OVERWEIGHT Ovais Siddiqui. which in 2003 accounted for 25. Being the monopoly of decades before 2003. earning handsome rents for the company.3% from 73. especially in its long-distance revenues as they have established their international gateways to attract incoming traffic in the country. especially in long distance traffic. Currently.134 base stations cover 720 cities and small towns in the country.66%. The deregulation produced a new earning source for the company in the form of interconnection charges and leased line rents. According to Pakistan Telecommunication Authority (PTA). Another growth area for PTCL is the cellular market. thus earning termination charges for the company. CFA osiddiqui@bmacapital. However.com TELECOM: RECOVERY ONLINE We are ‘overweight’ on this sector. Hence people will switch to cheaper WLL. 20% and 50% of their transmission network in the first. the overall international incoming traffic in the country showed a growth of 118% in FY05-06. OVERWEIGHT. now make up only 13. if it is made available in those areas. implying a huge growth potential for PTCL. These operators are eating away its margins. This sector underperformed the market over the last nine months as its market cap declined by 29. PTCL still holds 98% market share in fixed telephony.3% of the total revenues of PTCL. another growth avenue. Mobile operators also abolished their national long distance tariffs (which used to be PKR 9 per minute) and 54 . WLL tele-density in the country stands at 0.3%. The cellular tele-density in the country rose significantly during FY05-06 from 8% to 26%. the telecom sector regulator of the country. especially in small towns where people have no alternative to relatively expensive cellular services as PTCL has not yet laid copper or fibre optic network there for giving fixed telephone services.8 million in June 2006. second and third year of their operation. Cellular market. yet the total cellular subscribers are expected to touch 92.1%. The new management of Pakistan Telecommunication Limited (PTCL). we believe that PTCL cannot bank on this earning for too long to make up its loss on other fronts as the new operators are bound to own 10%. is now taking steps to stem the decline in margins and has reduced tariffs to fend off competition. which it launched in May 2005 with CDMA technology.

where it’s wholly owned subsidiary Ufone holds 22% market share. thereby taking away significant long distance traffic from PTCL. which were PKR 58 in 1996. ………………………………………………………………………………………………………… 55 . are now as low as PKR 0. 2007 are now only charging airtime for national long distance calls.January 15. new LDI operators substantially reduced their tariffs. PTCL recently reduced their long distance tariffs by 67% and nationwide by 50%. Another growth area for PTCL is the cellular market. We do expect that this step will help PTCL recoup its lost market share.99 per minute and NWD call is available at PKR 0. The minimum international tariffs. PTCL successful wireless local loop (WLL) business has acquired leadership position in this sector with 60% market share.52 per minute. KEY STOCK ……………………………………………………………………………………………… PTCL recently reduced their long distance tariffs by PTCL 67% and nationwide by 50%. We do expect that this step will help PTCL recoup its lost market share. Similarly.

5 15.1 5.68 0.0% 6.204 15.3 30.014 51.000 130.124 29.0 20.5x 0.0 4.064 100.1 19.63 3.56 8.5 0.2 2.9x Dividends Cash - 45 40 35 Bonus % - PTC vs Tech.112 Financials (PKR mn) Income Statement Revenue Profit after tax Dividend (%) Bonus Issue (%) Right Issue (%) 2006 2005 2004 2003 69.0% 2.9 2.2 2.170 50 - 67. & Comm.0x 0.88 17.0x 2006 Dividend Yield 12.0 21.0% 4.169 12M 852. PTC 2006 Price to Earnings (x) EPS Growth (%) Dividend Yield (%) Price to Book (x) Net Margin (x) Return on Equity (%) 11.35 26.595 32.0 10.76 0.5 .7 2005 7.0x 2.74 20.52 10.240 46.100 Jun Tech.45 9.3 0.7 5.5x 2.0x 1.078 36.9) 10.8) 4.60 0.765 105.0% 0.07 19.856 79.7 Sector 2005 9.14 34.924 5.0x 2.0x 8. & Comm.0x 2006 Price to Book Ratio 3.606 20 - 74.465 7.28 8.5 3.0 26.7 5.01 PE times 11.8 29. PTC 48.3) 4.55 0.35 28.4 1.07) (21.000 136.4 2.Company Snapshot Pakistan Telecommunication Company Basic Data Sector KSE / Bloomberg Ticker Current Price Market Capitalization Shares Outstanding Year-end PKR mn mn Tech.6 5.0x 4.259 14.10 245.65 0.6 2006 10.0x 12.583 11.8 2.8 (21.Earnings / Dividends EPS PKR 1Q07 1.081 35 - Price Multiples (based on current price) Price to Earnings Ratio 14.100 51.91) 30.777 50 - 75.779 50.4 2.5 35.085 20.000 141.16 2.5x 3.70 13.0x 6.60 19.32 27.0% 10.310 5.30 26. Shares 140 120 100 80 60 40 20 0 May-06 Mar-06 Feb-06 Aug-06 Sep-06 Oct-06 Apr-06 Nov-06 Dec-06 Jan-06 Jun-06 Jul-06 Millions Stock Chart PKR 70 65 60 55 50 Most Recent Announcement .0x 0. Daily Turnover PKR '000' USD '000' Shares '000' 1M 327.923 51.0x 10.40 (9.7 Key Ratios Price to Earnings (x) Price to Book (x) Price to Sales (x) Div Yield (%) Revenue Growth (%) EPS Growth (%) Net Margin (%) Return on Equity (%) Return on Assets (%) Equity Turnover (x) Asset Turnover (x) 11.0% 2006 2005 2004 2003 2005 2004 2003 2005 2004 2003 Balance Sheet Assets Liabilities Equity Paid-up Capital 152.02 26.475 51. & Comm.203 23.0 10.40 10.2 2.972 26.38 39.4 4.65 0.9 Performance over Absolute (%) Relative to KSE100 1M 0% 2% 3M 13% 18% 12M -29% -32% Avg.1 0.0 19.8 (8.49 (8.0% 8.79) 35.003 8.4) 7.2 (23.2 (8.3 25.495 109.230 3M 515.000 Per Share Data (PKR) EPS DPS Book Value 4.8 0.0 34.5x 1.0 7.2 0.65 0.9 17.

pointing the finger at low value added products in the Pakistani market as opposed to India and Bangladesh 57 . 2007 MARKETWEIGHT Yasir Shafi yasir. slowdown in demand in key export markets and increased competition. which commences from October and ends in February. The KSE 100 index decreased by 17.com TEXTILE: A STITCH IN TIME We are market weight on the textile sector on account of higher real interest rates. Financial costs damaging. Prices declined by 5.January 15.7% from the beginning FY06-07 to November 2006. This is an important development particularly for spinning units as they buy raw cotton during the cotton buying season. while the Textile Composite index decreased by almost 60%. MARKETWEIGHT.7% since April 06. A UNDP report issued in August 2006 showed that Pakistan was getting the lowest prices for its textile products from the EU and United States. which will put downward pressure on yarn prices. Cotton prices are on the decline.6% on average in the first five months of FY06-FY07 due to higher cost of doing business and increased competition from regional competitors like India. Financial costs in the textile industry are increasing due to higher interest rates. Of the PKR60bn offered. the sector had availed PKR34 Billion by 31st December 2006. Therefore lower cotton prices will reduce raw material costs for these units Export multiplier dampening? Textile exports have declined by 3. The State Bank of Pakistan (SBP) has stated that the sector had taken advantage of its scheme to swap expensive long-term loans for cheaper ones. …but value added still low. The scheme allows the industry to off-load their costly loans from commercial banks and swap them at lower rates. Cotton prices might provide some comfort. This is particularly more marked given the significant degree of leveraged capacity expansion by the textile sector in the last 4-5years. However currency depreciation and Chinese revaluation the currency might prove to be fortuitous events. On a recent note due the current political situation in Bangladesh textile orders have shifted to Pakistan and the local textile industry is taking full advantage as foreign clients are very sensitive about any instability in supplying countries Measures taken to improve competitiveness. The SBP bears the costs of the commercial loans and will swap the textile industry loans taken from January 1 2003 to December 31. which in turn affect company profits negatively. China and particularly Bangladesh. 2006 for import of machinery.shafi@bmacapital.

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