KASB 2021 Equity Strategy

Pakistan Equity Market – Annual Strategy 2021
Foundation set for a Sustained Bull Run
KASB Research
8th December 2020

Index
Executive Summary 03
Investment Theme 09
Macro-Economic Outlook 10
Sectors
Cements 26
OMCs 38
IPPs 43
Banks 47
Autos 53
Oil & Gas 62
Chemicals 71
Fertilizers 77
Steel 85
Textile 89
Technology 95
Authors: This report has been written by Mohammad Yusuf Rahman, Asad Ali Shamsi and Ayesha Fayyaz from the Research team of KASB Securities. Yusuf has more
than 7 years of experience in Pakistan’s capital market. Prior to joining KASB, he worked in leading brokerage houses including BMA Capital and Global Securities. He has
a Bachelors degree from SZABIST as has passed all 3 of the CFA exams in 2015.
Asad Ali Shamsi has over 7 years of experience in both Buy-side and sell-side research. He has worked in leading AMCs and Brokerage houses including BMA Capital, JS
Investments, Lakson Investments and Faysal Funds. Asad is a Graduate of SZABIST and has passed the CFA level 1 exam.
Ayesha Fayyaz has over 5 years of experience in Pakistan’s equity markets. She has worked in leading brokerage houses including Shajar Capital and BIPL securities. She
is a graduate of LUMS and has passed the CFA level 1 exam.
Executive Summary: A Bull Run in the Works (1/4)
 We believe Pakistan’s economy has laid the foundation for the post-pandemic KSE-100 vs MSCI EM and FM index
20%
era, during which we expect the equities market to witness the start of another
10%
sustained bull-cycle.
0%

Jul-20
Jul-20
Jan-20
Jan-20
Apr-20
May-20
May-20
Jun-20
Nov-20
Feb-20
Mar-20
Mar-20
Aug-20
Sep-20
Sep-20
Oct-20
External Accounts within limits: The bull run between FY13 and FY17 was cut -10%
short due to the balance of payment crisis. A silver lining to emerge from the -20%
outbreak has been the reduction in global commodity prices, particularly -30%
CYTD Returns
MSCI EM 10%
international oil prices, allowing Pakistan to manage its trade balance. Moreover, -40% MSCI FM -7%
KSE-100 -1%
a fundamental shift towards formal banking channels has increased remittance MSCI EM MSCI FM KSE-100
flows by 27% Y/Y. Consequently, Pakistan’s economy has been able to register 4
consecutive monthly surplus totaling USD 1,160mn since FY21, a far-cry from a Cyclical stocks outperform defensive counterparts
70%
deficit of USD 20bn recorded in FY18.
60%
“Returns were tilted
 Coronavirus relatively under control: While the world has been engulfed in 50% towards cyclical stocks
weathering the pandemic, Pakistan’s outbreak of the virus is relatively under 40% while index heavy-weights
underperformed”
control with only 0.2% of the population being infected. Despite the onset of the 30%
2nd wave, the infection rate remains below the first wave. Moreover, the 20%
eventual vaccine deployment (targeted 2QCY21) will keep the downside limited. 10%
0%
 V-shape recovery witnessed: Pakistan’s economy has bounced back swiftly from -10%
the effects of the virus. This fact is evidenced by several cyclical industries -20%
registering output near to pre-COVID levels. In some instances, due to support -30%
from the stimulus package, certain industries, such as cements, have been able
to post record high numbers.
 Significant progress on the FATF: Pakistan has made considerable progress on Oil prices recovering on Vaccine Hopes
USD/bbl
the FATF front, becoming compliant on 21 out of the 27 action items. Several bills Dubai Crude Index
80
have been passed to ensure full compliance prior to the deadline set at Feb21.
We pin our hopes on the eventual ‘white-listing’ at the next Plenary Meeting and 60
believe that any positive development on this front will catalyze significant 40
foreign inflows to Pakistan’s securities market. 20
 Foreign reserves cross USD 20.0bn: With Pakistan securing funding from Multi- 0
lateral institutions and allied countries, coupled with the aforementioned
Jul-20
Jun-20
Apr-20
May-20
Dec-19
Jan-20
Feb-20
Mar-20
Aug-20
Sep-20
Nov-20
Dec-20
Oct-20
improvement in current account, Pakistan’s reserves have crossed the USD
20.0bn market after a period of nearly 3 years. This scenario has enabled the Pak Market Cap to GDP Ratio
Rupee to strengthen by nearly 5.0% from lows touched during the outbreak. 14.0%
 Interest rates unlocking value: The pandemic cut short the economic 12.0%
stabilization measures prevalent during CY19. In turn, the SBP cumulatively 10.0%
slashed interest rates by 625bps to present levels of 7.0% in a bid to aid 8.0%
economic revival. This cut, coupled with loan deferral schemes, has significantly 6.0%
“Economic Stabilization
cut short by the
improved the cash-flow and profitability situation of several industries, 4.0% Pandemic as interest
particularly cyclical stocks. We believe interest rates will continue to remain on 2.0% rates fall 625bps”
the lower side as the SBP prioritizes economic recovery. Lower interest rates, in 0.0%
turn, are expected to sustain the trend of asset re-shuffling towards equities, in
Jul-18
Jul-19
Jul-20
Jan-18
May-18
Nov-18
Jan-19
May-19
Nov-19
Jan-20
May-20
Nov-20
Mar-18
Sep-18
Mar-19
Sep-19
Mar-20
Sep-20
addition to unlocking value of the equity’s market.
 Fiscal accounts expected to improve: While Pakistan’s budget deficit has risen sharply Historical Twin Deficit Trends remain volatile
USD mn PKR bn
by 69% Y/Y to PKR 484bn, the overall deficit remains largely under control at 1.1% of 8,000 2,100
GDP. Barring mark-up payments, the economy was able to record a surplus of PKR 6,000 1,600
258bn. The anticipated improvement in the economy will assist the FBR in increasing
4,000 1,100
its tax collection. Overall collection will likely be further aided by likely reforms
introduced in FY22’s Federal Budget. Onwards, the impact of lower interest rates will 2,000 600
likely materialize in the coming months, further controlling the overall fiscal deficit. - 100
May-17
Apr-20
Dec-16
Mar-18
Aug-18
Oct-17
Jun-19
Jan-19
Nov-19
Sep-15
Feb-16
Jul-16
Sep-20
 Circular debt control taking center stage: Curbing the PKR 2.3tn circular debt has been (2,000) (400)
the top priority of the IMF program. Both the IMF and the federal government
acknowledge the demerits of the circular debt and have planned out steps to restrict CA Deficit (L.H.S) Budget Deficit (R.H.S)
its proliferation, including a mechanism to clear out the IPPs receivable. Potential KSE-100 Discount to regional indices
resolution of the circular debt can unlock the value of Pakistan’s energy chain, 60% Historical Discount (KSE-100)
including the depressed heavy-weight, E&Ps sector. Present 5yr Avg.
MSCI EM 53% 26%
 Increased focus on digitalization: Pakistan’s economy has recently benefitted from an 40% MSCI FM 41% 18%
increased focus on digitalization in various avenues. Digital initiatives have the
20%
potential to greatly increase Pakistan’s investor base. Moreover, the SBP has
introduced the Roshan Digital Account as an avenue for non-resident Pakistanis to
0%
easily invest in Pakistan, yielding inflows of USD 100mn so far. We expect the program
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
to generate annual inflows of USD 500-600mn once it fully settles in. -20%
 Trading below historical PEs: Despite the recent run-up, the KSE-100 index continues
trading at a 24% discount to multiples witnessed in the previous bull cycle. Moreover, -40% MSCI EM 5yr Avg. (MSCI EM)
Pakistan’s market is also trading at a significant discount to regional peers, trailing the MSCI FM 5yr avg. (MSCI FM)
MSCI EM multiple by 58% and the MSCI FM multiple by 53%.
 Eyeing an index target of 52,378pts: We eye an index target of 52,378pts with Index PE at considerable lows to historical averages
the market offering an upside of 25%. The KSE-100 is projected to witness 15
earnings growth of 13% and offer a dividend yield of 5%. Furthermore, on

10
account of the improving macro-economic backdrop, we anticipate the index to
re-rate near to its 10yr average of 8.0x, from present levels of 7x. 5
 Top Picks to capitalize on the projected rally -
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Stock Target Upside Stock Target Upside
OGDC PKR 173/sh 68% HCAR PKR 420/sh 31% PE 10yr Avg.
CY13-18 Bull Run CY05-08 Bull run
HUBC PKR 139/sh 64% PSMC PKR 282/sh 30% Market trading at lows as a % of GDP
35%
PPL PKR 146/sh 58% MLCF PKR 52/sh 28% 30%
25%
EPCL PKR 67/sh 49% PIOC PKR 120/sh 27% 20%
15%
SYS PKR 521/sh 36% MCB PKR 224/sh 22% 10%
5%
HBL PKR 176/sh 35% LUCK PKR 788/sh 17% 0%
1-Oct-15
3-Oct-16
2-Oct-17
1-Oct-18
1-Oct-19
1-Oct-20
2-Feb-15
1-Jun-15
1-Feb-16
1-Jun-16
1-Feb-17
1-Jun-17
1-Feb-18
1-Jun-18
1-Feb-19
3-Jun-19
3-Feb-20
1-Jun-20
31-Oct-14
Sectors in Brief
Sector Outlook Top Picks
The COVID-19 Vaccines and the eventual recovery in economic activity will keep going oil prices at present elevated
Oil and Gas
levels. Moreover, the extension of OPEC’s planned production cuts will further support prevalent levels. At present, the OGDC, PPL
Exploration
E&P sector is trading at an implied oil price of USD 20/bbl, a discount of ~60% over current oil prices.
Increased focus on clearing circular debt will alleviate the cash-flow concerns of the sector. Furthermore, fundamental
Oil and Gas
changes to the pricing formula to better reflect international prices will help the industry in bypassing potential PSO
Marketing
inventory losses and exchange gains.
Independent Independent Power Producers will benefit significantly from the clearance of circular debt, which has eroded its
Power dividend paying capacity. While the IPPs tariff negotiations will reduce the sector’s profitability potential, we believe the HUBC
Producers improvement in cash-flows will be welcome by the entire industry.
Commercial Banks are expected to benefit from improving macro-economic outlook, a scenario which is expected to keep the
MCB, HBL
Banks sector’s infection ratio in check. Moreover, anticipated recovery in interest rates will bode well for the sector’s NIMs.
The cement sector will benefit greatly from the commencement of the construction amnesty package on account of a
LUCK, PIOC,
Cements substantial increase in construction projects. Higher cement demand has improved the sector’s pricing power, resulting
MLCF
in a 15pps enhancement in the company’s core margins.
Automobile sector is expected to benefit from demand revival amidst recovering economic activity, and a low interest
Automobile
rate scenario. Moreover, margins are expected to pick up due to a timely passing through of inflationary pressures HCAR, INDU
Assembling
emanating from currency depreciation.
The steel sector is also expected to benefit from a revival in construction activity. Moreover, the prevalent low interest
Steel MUGHAL
rate scenario is projected to improve the leveraged sector’s profitability.
A ‘novel’ year nearing its conclusion
 CY20 initially commenced on strong footings with Pakistan’s Economy emerging The KSE-100 witnessed volatile swings throughout the year
Mn shares
out of tough stabilization measures implemented during CY19. Recall that the KSE- 45,000 1,000
100 index had recovered by 41% from its lows seen back in Aug’19 and was well 900
40,000 800
poised to test newer highs in CY20. And then, the outbreak happened! 700
 Pakistan had ventured into uncharted territory. With limited knowledge on the 35,000 600
500
characteristics of the virus, both the federal and provincial government felt 30,000 400
compelled to opt for the most circumspect route and impose a complete 300
25,000 200
lockdown. The lockdown significantly limited nearly all consumer and industrial
100
activities, with most sectors experiencing the brunt of the measure. Consequently, 20,000 0
Jul-20
Jun-20
Jan-20
Apr-20
May-20
Nov-20
Aug-20
Feb-20
Mar-20
Sep-20
Oct-20
this scenario reflected in the KSE-100’s performance, causing the index to lose
33% of its value since the start of the year and reach a low of 27,047pts.
Volumes (R.H.S) KSE-100 (L.H.S)
 To combat the resultant economic slowdown, both the federal government and
the central bank synergized a strategy via key economic measures and stimulus
packages. Despite limited fiscal resources, the federal government announced a KSE-100 index recovers lost grounds
PKR 1.25tn (USD 7.0bn) coronavirus support package, which focused on reducing CY15 CY16 CY17 CY18 CY19 CY20
Return 2.1% 45.7% -15.3% -8.4% 9.9% 0.7%
energy tariffs and providing financial assistance to the affected. Onwards, the
USD Return -2.0% 45.7% -19.6% -26.7% -2.2% -2.3%
federal government introduced a ‘construction amnesty package’ in a bid to
revive the construction sector and its allied industries. Moreover, the central back
cumulatively slashed interest rates by 625bps to 7.0%, signalling an end to the era
of economic stabilization. These measures enabled the KSE-100 index to recoup
lost grounds and post a net return of 0.7% CYTD.
Investment Theme: Post-Stabilization era to drive the bull-cycle
 The economy primed for a bull-cycle: The economic stabilization measures with the aim A consistent trend of boom and bust cycles
of ending Pakistan’s boom-bust cycle have started bearing fruits. External account 60,000
balances have significantly improved with the country’s reserves crossing 3yr high levels. 50,000
Note that the previous bull-cycle between FY13 and FY18 was cut short by the balance of
40,000
payment crisis as the economy’s current account deficit had ballooned to USD 20bn in
FY18. A stable external outlook lays the groundwork for a sustained bull run as it
affords the government to push for growth.
30,000
A B
20,000
 Effective coronavirus vaccines likely in CY21: With several coronavirus vaccines
announced with effectiveness exceeding 90%, we believe CY21 will likely emerge as the
10,000
C D
-
crossroads for global economies. Any positive development on this front will swiftly
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
Jan-18
Jan-20
revive economic activity on a global scale and provide support to Pakistan’s domestic
economic activity and external trade balances.
 The incumbent government all-in on improving exports: The anticipated improvement Era Time-line Characteristics
in exports will likely become the backbone of the eventual bull-cycle. Several incentives The Musharraf Regime focused on growth policies, with GDP
A CY02-CY08
Growth averaging 5.8% during the period.
have been announced for improving Pakistan’s export prospects, including cheaper
electricity, supportive policies and reduction in tariff lines. Overall, the central This period was subject to the fallout of the global financial
B CY08-CY12 crisis. Interest rates and inflation peaked at 15% and 21%,
government has set an annual export target of USD 37bn over the next 5 years, respectively, as economic stabilization became the theme.
implying a 5yr CAGR of 10.5% and outpacing the GDP growth target by over 5pps. The PML-N regime re-introduced growth policies with GDP
C CY12-CY17
growth averaging 4.5% over its tenure.
 Cyclical Stocks are expected to lead the show: In Pakistan’s case, cyclical stocks The 1st half of the volatile period was subject to economic
considerably outperform defensive plays during a bull cycle. We believe Cements and D CY17-CY20 stabilization compelled by the Balance of Payment crisis. The
latter half witnessed the fallout of the global pandemic.
Automobiles are well equipped to capture the improving macro-economic backdrop and
outperform the broader market.
Accommodative monetary policy likely to sustain
 The pandemic cuts short the economic stabilization: In light of the pandemic and SBP depicting comfort with negative real rates
15% 1.5%
the ensuing slowdown in economic activity, the central bank cut short Pakistan’s 14% 1.0%
economic stabilization measures prevalent during CY19 and slashed interest rates 13%
0.5%
12%
by a cumulative 625bps to present levels of 7.0%. 11% 0.0%
10% -0.5%
 Inflationary pressures prevalent: CPI readings continue to overshoot initial 9% -1.0%
estimates, averaging at 8.86% during 4MFY21. Moreover, annual CPI during FY21 is 8%
-1.5%
7%
estimated to register at 8.3% against our initial expectations of 7.0%. Higher food 6% -2.0%
prices resulting from supply-chain disruptions compelled us to revise up our 5% -2.5%
Jun-20
Nov-20
Jul-20
Oct-20
Feb-20
Apr-20
Sep-20
May-20
Aug-20
Jan-20
Mar-20
estimates.
 Economic recovery taking precedence: The State Bank of Pakistan (SBP) has CPI (L.H.S) Interest Rates (L.H.S) RIR (R.H.S)
continuously depicted its comfort over the prevalent negative real rates, in which
Traded value picks up as interest rates fall
the CPI has outpaced the interest rate north of 2%. In light of the pandemic, the
PKR mn
central bank believes that economic recovery should take precedence over 25,000 14.0%
potential inflationary pressures. 20,000 12.0%
10.0%
15,000
 Core inflation remains benign, reinforcing SBP’s comfort over real rates: Barring 8.0%
6.0%
10,000
the food group, core inflation continues to trend downwards, estimated at 3.0% 5,000
4.0%
2.0%
during Nov20. As mentioned, bulk of the inflationary pressures emanated from - 0.0%
1-Apr-15
1-Apr-20
2-Oct-17
1-Mar-18
1-Aug-18
5-Nov-14
1-Jan-19
3-Jun-19
1-Nov-19
1-Sep-15
1-Feb-16
4-Jul-16
1-Sep-20
1-Dec-16
2-May-17
supply disruptions in the food group. Since interest rates have limited control over
supply-induced inflation, we believe the SBP will continue keeping interest rates
accommodative for the near term. We estimate that SBP may commence
Value Traded Interest Rates
monetary tightening from Mar21 once inflation and economic activity pick up.
V-Shape recovery exhibited
 A sharp v-shaped recovery: In contrast to the global landscape, Pakistan’s economy has witnessed a sharp V-shaped recovery in nearly
all sectors affected by the pandemic. The monetary and fiscal stimulus, coupled with the relatively low infection rates enabled most
industries to resume operations near to their pre-COVID levels.
The LSM index exhibits sharp recovery Monthly cement off-take reach record levels
180 “The LSM index Mn MT “With support
LSM Index has recovered by 6.00 Cement Sales from low interest
160 61% from peak 5.50 rates, and the
lockdown levels. 5.00 construction
140
4.50
Current trend amnesty package,
120 4.00
suggests the the cement sector
3.50
100 index will likely was able to
3.00
cross pre-COVID 2.50
register its
80 levels in the highest ever
2.00
Apr-20
May-20
Jun-20
Jan-20
Mar-20
Aug-20
Feb-20
Jul-20
Sep-20 coming months” monthly sales in
Mar-20
Apr-20
May-20
Aug-20
Jan-20
Jun-20
Oct-20
Feb-20
Jul-20
Sep-20
Oct20”
Tax collection picks up with FBR achieving assigned targets Passenger Vehicle sales cross pre-COVID levels
PKR bn “The average tax Units “Automobile sales
450 Tax Collection collection has 15,000 Auto Sales managed to
400
picked up by 43% 12,000 rebound from
from lockdown rock-bottom
350 9,000
levels. Moreover, levels during
the FBR was able 6,000 lockdown to
300
to achieve its 3,000 higher levels
250
assigned tax - witness during
200 collection target the pre-COVID
Apr-20
May-20
Mar-20
Aug-20
Jun-20
Oct-20
Jan-20
Feb-20
Jul-20
Sep-20
Mar-20
Apr-20
May-20
Aug-20
Jun-20
Oct-20
Jan-20
Feb-20
Jul-20
Sep-20
during 4MFY21.” era”

Industrial Package – Another push for the manufacturing segment
 An industrial package to further support the manufacturing segment: TERF Financing Trend
PKR bn
NEPRA has approved the industrial support package announced by Imran 250 400
Khan in a bid to support Pakistan’s industrial sector. The package removes 200
300
the peak hours in tariff billing, essentially reducing effective electricity
150
charges by 5%. 200
 Moreover, incremental consumption of electricity will be charged at a 50% 100
discount for SMEs and a 25% discount for others industries, essentially 50
100
incentivizing higher production for the manufacturing sector.

- -
Apr-20
May-20
Aug-20
Jun-20
Oct-20
Nov-20
Jul-20
Sep-20
 TERF Financing another avenue for growth: The State Bank of Pakistan
(SBP) introduced a Temporary Economic Refinance Facility (TERF) for the Amount (L.H.S) Cases (R.H.S)
purpose of setting up imported machinery for projects. The facility has a
limit of PKR 5.0bn, a tenure of 10 years and a rate of 5% p.a. The scheme is
projected to last till Mar 31’21.
 As of Nov20, it is estimated that 683 applications have been put forward
with a requested amount of PKR 441bn. So far, 335 projects with a financing
need of PKR 193.2bn have been approved.
External Account concerns largely subsided
CA Balance records surplus
 Current account records a surplus for 4 consecutive months: Pakistan’s Current Account Balance has 10.0%
recorded a surplus for 4 consecutive months during FY21, rising to USD 1,160mn during 4MFY21 CAD (% of GDP)
against a deficit of USD 1,419mn recorded during SPLY. This improvement was largely a product of 8.0%
the 27% rise in worker’s remittances amid a controlled trade balance. We believe overall CA deficit 6.0%
will likely hover around USD 4.0-4.5bn (1.5-1.7% of GDP) during FY21.
4.0%
 Remittances rising over shift to formal channels: As mentioned, remittances have risen by 27% Y/Y
2.0%
to USD 9,431mn during 4M FY21, outpacing our initial expectations of a sharp decline. We expected
remittances to fall in view of potential job losses, particularly from the GCC region on account of its 0.0%
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
oil-based economy.
-2.0%
In several cases, expatriates opted for informal channels to avoid high levies when remitting their
salaries. The pandemic, however, hampered these informal networks, resulting in a fundamental
shift towards approved banking channels as a means for remitting income. This scenario has, so far,
been able to offset potential remittances attrition from the pandemic-led job losses. While Reserves cross USD 20bn mark after 3 years
USD mn
remittances will likely fall below present elevated levels as the toll of job losses takes effect, we 25,000 170.0
believe total inward flows will likely surpass previous year’s levels at USD 23.5bn. 20,000 165.0
15,000
 Reserves cross the USD 20bn mark: With CA balances registering a surplus and the government 160.0
10,000
securing funding from several multi-lateral and bi-lateral sources (including allied countries), 155.0
5,000
Pakistan’s foreign reserves climbed to their 3yr high levels and crossed the USD 20bn mark. The SBP
- 150.0
continues to focus on building its buffers to ensure ‘high-quality’ of its foreign reserves.
May-20
Jan-20
Mar-20
Jul-20
Nov-20
Sep-20
 Local currency strengthens: The domestic currency has strengthened by nearly 5% from lockdown
levels aided by the notable improvement in external accounts. We estimate PKR to touch 160 by the Commercial Banks (L.H.S) SBP (L.H.S)
end of CY20 and depreciate by 4% onwards, maintaining the effective exchange rate against the PRK/USD (R.H.S)
USD.
Export growth taking precedence
 Sustainable export growth a key target of the government: As mentioned, the federal government is going ‘all- Sharp Recovery in Global GDP Trade Share
in’ on promoting exports, setting an annual export target of USD 37bn over the next 5 years. The country’s Growth (%) 2020 2021F 3Q Export Import
premiere, Imran Khan, has continuously reinforced his cabinet’s resolve of “extending all possible facilities to USA -3.6% 4.4% 38.0% 18% 6%
exporters”. A 5yr Strategic Trade Policy Framework has been developed with the purpose of broadening the EU -8.7% 5.2% 12.6% 29% 9%
Export’s Horizon to over 26 industries (prior focus was limited to the ‘5 zero-rate sectors’), including Food, China 1.9% 8.4% 4.9% 7% 24%
UAE -5.7% 3.1% n.a 7% 15%
Pharmaceuticals, and Engineering goods.
UK -10.4% 5.7% 15.5% 8% 2%
 Several incentives afforded to the sector: Presently, the export-oriented sector benefits from cheaper modes of Pakistan -0.4% 2.1%
financing with LTFF and EFS rates set at 5% and 3%, respectively. Moreover, export-based sectors are offered
cheaper energy tariffs with electricity and gas charges set at 7.5cents and PKR 786/mmbtu, a discount of 20%
and 23%, respectively, to the industrial rate. These incentives, coupled with the market-determined exchange
rate regime, are expected to improve the competitiveness of Pakistan’s export on the global landscape. Exports largely tilted towards textiles
 Global economic recovery strengthening export outlook: Based on provisional data, exports have declined by 3%
3% 10%
7.6% Y/Y during 5mFY21 to USD 9.5bn on account of the pandemic. Several of Pakistan’s trading partners,
4%
however, are witnessing a sharp recovery in their GDP, evidenced by their recent economic data. Key export
destinations, including the USA and UK, are expected to witness a GDP growth of around 5.0% in 2021 4%
(additional details in the table on the right). Recovering economic and consumer activity within said countries
57%
will likely keep the demand for Pakistan’s goods at elevated levels during 2021. 18%
 The textile sector operating at high rates: In FY20, the textile sector accounted for 57% of the country’s total
exports, with sales of USD 13.7bn. On account of the aforementioned recovery in global economy, coupled with
Pakistan’s low coronavirus infection rates, several export orders are presently being diverted towards Pakistan.
The management of several textile units have conveyed a potential 6mo backlog of export orders on account of a Textiles Agriculture Minerals
sudden increase in demand. Presently, Pakistan’s textile exports are up north of 10% during FY21, with this trend Processed Food Leather Metal
likely to continue for the remainder of the fiscal year. Others
 Overall, we project that exports will likely record a growth of 5% Y/Y to USD 23.6bn during FY21 on account of
the aforementioned factors.
Foreign outflows likely to subside in the coming months
CY20 has been subject to significant foreign outflows
 Investors pulled towards ‘safe havens’ during the pandemic: Since the Pandemic, foreign USD mn
investors have been pulling out their investments from the ‘high-risk’, Emerging Markets and 20 CYTD Outflow: USD 455mn
are focusing on increasing their footholds in safe-havens such as Gold and Developed -
economies. In Pakistan, foreign investors have off-loaded USD 454mn from the equities
Jul-20
Feb-20
Oct-20
Apr-20
Jun-20
Sep-20
Nov-20
May-20
Jan-20
Mar-20
Aug-20
market and USD 2,791mn from the debt market since the pandemic spread back in Mar20. (20)
 Structural changes to facilitate foreign investors: The incumbent government has fully (40)
endorsed the digitalization era, evident even in Pakistan’s capital markets. As mentioned, the
(60)
introduction of the Roshan Digital Accounts has brought in USD 100mn from non-Resident
Pakistanis. Moreover, the stock exchange is focused on introducing new products to cater to a (80)
wider range of investors, including the commencement of ETFs within the market. The
(100)
exchange is also expected to increase the movement cap of an individual stock to 10% to
ensure market efficiency and increased liquidity, traits which are sought after by foreign Foreign outflows tilted towards Banks and E&Ps
USD mn
investors. All these factors are expected to enhance foreign investor participation into
20
Pakistan’s capital markets. -
 MSCI Index and FATF outcome to act as the turnaround point: With an increasing likelihood (20)
(40)
of a positive outcome from the FATF Plenary Meeting and a potential increase of Pakistan’s (60)
weight in the MSCI EM index, we anticipate foreign inflows to resume into Pakistan’s market (80)
particularly after the COVID-19 vaccine becomes widely available. Despite Pakistan’s low (100)
“Outflows tilted towards
weight of 2.23bps in the MSCI EM Index, we estimate that EM tracking funds (AUMs of USD (120)
index heavy-weights”
(140)
1.6tn) can potentially bring in USD 350-400mn into Pakistan’s equities. This figure has (160)
potential upside risks given our assumption of increasing Pakistan’s weight within the index.
MSCI may finally enter the dance
Pakistan MSCI Overview
 Back in CY16, Pakistan’s entry into the MSCI Emerging Index was met with optimism; Weightage USD bn
however, the initial enthusiasm faded quickly once the balance of payment crisis MSCI EM Cap. 6,511
emerged within the economy. Contrary to expectations of significant inflows, foreign MSCI Pakistan Cap. 1.45
investors have cumulatively pulled out USD 1.75bn since the initial upgrade MSCI Pakistan Weight (bps) 2.23
announcement. HBL 0.91
MCB 0.70
 In anticipation of a bull run, we believe Pakistan’s weight in the MSCI EM index is OGDC 0.62
expected to rise from present levels of 2.23bps. Moreover, certain stocks have the Eligibility Criteria
potential to regain their emerging status, including ENGRO, LUCK and PPL. We have Mkt. Cap 1,830
Free Float 915
analyzed the upside required for potential entry into the index based on the latest
Liquidity 15% ATVR
criteria. Any development on this front is likely to catalyze foreign inflows into
Pakistan’s market.
Present and Potential MSCI EM inclusions

Capitalization MSCI EM Requirements Excess (Shortfall) - %
USD mn Total Free Float Mkt. Cap Free Float Mkt. Cap Free Float
OGDC 2,677 402 1,830 915 46% -56%
HBL 1,191 595 1,830 915 -35% -35%
MCB 1,294 453 1,830 915 -29% -51%
Potential Inclusions
LUCK 1,311 524 1,830 915 -28% -43%
ENGRO 1,105 608 1,830 915 -40% -34%
PPL 1,533 375 1,830 915 -16% -59%
Implications of a re-entry into the IMF program
 The USD 6.0bn IMF program has been temporarily suspended in light of the pandemic and the consequent easing of its strict
economic stabilization measures. While re-entry into the IMF program is a probable scenario, certain requisites of the program are
under debate by the federal government on account of the coronavirus outbreak.
1. Hiking the power tariff: The IMF wants Pakistan to hike its general electricity tariff by 25-30% in a bid to reduce subsidies and increase
overall collection. It is estimated that subsidies and delayed tariff adjustments account for 40-45% of the circular debt accumulation.
The federal government, however, is unwilling to raise tariffs on account of the pandemic, highlighting that increasing electricity rates
would hamper the economy’s recently rejuvenated momentum. We believe that the government will likely delay the tariff hike till
the onset of FY22, once the economy normalizes to pre-COVID levels and a COVID vaccine is widely distributed.
2. Autonomy of both OGRA and NEPRA: The program also highlights the need for both OGRA and NEPRA to have autonomous tariff
setting authority. Presently, the tariffs recommended by both OGRA and NEPRA require the approval of federal ministries, opening
room for potential inefficiencies in the prevalent tariff. Autonomy granted to both bodies would likely result in timely passing of the
energy chain’s inefficiencies and losses to the end-consumers, likely resulting in increased power and gas tariffs.
3. New tax reforms: Another key requisite of the IMF program would be to introduce tax reforms to ensure the achievement of FY21’s
tax collection target of PKR 4,900bn. The IMF has proposed a significant reduction in tax concessions and exemptions, which are
presently estimated in excess of PKR 1.0tn. The IMF also suggested a revisit to the prevalent sales tax regime, indicating a need for
higher sales tax collection.
We believe the government would likely focus on limiting tax concessions within the ambit of income tax. The sales tax regime,
however, is likely to remain unchanged to limit potential inflationary impact. A structural overhaul of the taxation regime, including
focus on increasing the taxation base, will likely be withheld till FY22’s Federal Budget.
Circular Debt resolution and its fallout (1/2)
 Circular debt resolution a top priority: The circular debt resolution has been a top priority of the IMF-backed economic program and the federal
government. Circular debt was initially estimated to have constricted Pakistan’s potential GDP growth by 2pps on account of the rampant load-
shedding it caused, limiting industrial output. The circular debt has grown at a 5yr CAGR of 33% with present levels estimated at PKR 2.3tn.
Circular Debt Climbing at a rapid pace
PKR bn FY16 FY17 FY18 FY19 FY20
Overdue (IPPs) 224 288 441 694 994
Overdue (GENCOs) 97 91 102 118 153
PHL Balance 368 439 583 806 1,003
Total Circular Debt 689 818 1,127 1,618 2,150
 Key causes of circular debt proliferation
1) Power Subsidies and Concessions: It was estimated that PKR 318bn worth of subsidies were provided during FY19, falling to PKR 258bn by
FY20. During FY19, only 56% of the subsidy amount was collected while this figure improved to 87% by FY20. This discrepancy in the
provided and collected amount of subsidies is one of the leading causes of circular debt accumulation.
2) Low recovery of DISCOs: During FY20, out of PKR 1,604bn billed to customers, DISCOs managed to recover 88.77% of the amount, resulting
in a discrepancy of PKR 180bn. The collection has fallen from 90.25% recorded during FY19 likely on account of the economic slowdown.
3) Transmission and distribution losses: It was estimated that distribution losses amounted to 17.90% during FY20 while transmission losses
registered at 2.76% within the same time-frame. These losses add towards the average cost of electricity generation and further contribute
towards circular debt accumulation.
4) Delays in tariff adjustment: There is a difference between the notified tariff and the actual cost of procuring electricity. This difference is
generally offset via fuel price adjustments over fixed intervals. Usually, however, there is a delay in said adjustments, creating a discrepancy.
5) Low usage of Power plants: Certain power plants, which are provided a guaranteed return based on their available capacity, are operating at
low utilization rates. The guaranteed returns add to the overall cost of electricity without contributions to the national supply.
Circular Debt resolution and its fallout (2/2)
 Potential solution and its implications PKR bn Receivables Payables ST Debt
1) Hiking the overall power tariff: A hike in the country’s national tariff is the most effective way in E&Ps
curbing circular debt accumulation. This hike can also take a form of a reduction in afforded OGDC 342 66 -
PPL 326 116 -
subsidies. The increase in tariff will converge the difference between the actual cost of procuring
OMCs
electricity and the billed amount, limiting circular debt growth. A higher tariff will generally have an
PSO 196 177 42
inflationary impact, and increase the overall cost of production for the manufacturing sector. The HASCOL 12 46 35
government is likely to delay this measure till the conclusion of FY21 on account of the pandemic. IPPs
2) Autonomy granted to NEPRA in setting tariffs: Another condition of the IMF program is to grant HUBC 109 80 39
autonomy to NEPRA in setting tariff rates. Materialization of this scenario will reduce the delays in KAPCO 125 21 40
tariff adjustments, allowing for the notified tariff to better reflect the actual cost of procuring
“The energy chain companies are
electricity. This measure is also expected to improve the overall collection.
expected to benefit most from any
3) Re-negotiating the IPPs tariff contract: It is estimated that capacity payments are expected to positive developments on the
balloon up to PKR 1.5tn within a period of 2 years. The government is actively re-negotiating the circular debt front. Bulk of the
contracts of said power plants in a bid to keep the overall capacity payments within limits. One companies are facing a severe cash-
measure discussed over potential contract negotiations is the removal of USD-hedge on the crunch, compelling them to limit
guaranteed IRRs. The requisite put forward by the IPPs for successful negotiations include the their cash-payouts, restrict
clearance of past overdue receivables. While this scenario may reduce the overall profitability of the expansion plans, and rely on debt
IPPs, it will significantly improve their cash-crunch on account of the influx of cash payments. to fulfill working capital needs.
Successful control of the circular
4) A large transaction in clearing past overdues: There is an increased likelihood of another Energy debt can lift the aforementioned
Sukuk-esque transaction for clearing the energy chain’s overdue receivables. In light of the signed restrictions and unlock the energy
MoU’s requisite of the clearance of receivables, we believe the government will be afforded IMF’s chains’ true intrinsic value”
permission in increasing the ceiling of government guarantees and raising money to clear said
receivables.
Eventual vaccine deployment to restrict economic downside amidst the 2nd wave
 Pakistan’s handling of the Pandemic has been well publicized on the global
Pakistan infection rate remains one of the lowest
landscape, possessing one of the lowest infection rates. So far, only 0.2% of the
Country Total Cases (mn) % of Pop. Daily Cases (1wk avg.) Death Rate
population has contracted the virus with total infected cases falling just over Pakistan 0.4 0.2% 3,000 2.0%
400,000. Targeted lockdown measures in nearly all facets contained the spread India 9.4 0.7% 45,000 1.5%
during initial months. Such efforts enabled a 95% reduction in daily infection Iran 0.9 1.1% 14,000 5.1%
cases, with total active cases falling to a low of 6,000. Germany 1.0 1.2% 20,000 1.6%
The KSE-100 witnessed volatile swings throughout the year Russia 2.2 1.5% 25,000 1.7%
500,000 8,000 UK 1.6 2.3% 25,000 3.6%
“2nd Wave commences with
400,000 daily cases crossing 3,000”
Italy 1.5 2.5% 28,000 3.5%
“Infection rate peaks 6,000
to 7,000 daily cases” Brazil 6.2 2.9% 35,000 2.8%
300,000
4,000 USA 13.5 4.1% 200,000 2.0%
200,000 “First reported case “Infection rate falls by
on 26th February” 95% aided by lockdown”
2,000
100,000
Peak Daily Coronavirus Cases
- 0 Country 1st Wave 2nd Wave %D
Apr-20
Mar-20
May-20
Aug-20
Jun-20
Oct-20
Nov-20
Feb-20
Jul-20
Sep-20
Poland 1,000 20,000 1900%
France 5,000 65,000 1200%
Italy 3,500 40,000 1043%
Daily Cases (R.H.S) Total Cases (L.H.S)
Belgium 2,000 20,000 900%
UK 5,000 25,000 400%
 Since Oct20, however, Pakistan has been experiencing the 2nd wave of the
Iran 3,000 14,500 383%
outbreak. So far, the daily infection rate hovers at 50% of the rate
Germany 6,000 20,000 233%
witnessed during the 1st wave. Globally, however, the 2nd wave has USA 75,000 200,000 167%
resulted in infection rates several times higher (depicted on the right). This Russia 11,500 27,500 139%
fact suggests that infection rates in Pakistan are likely to rise in the coming Spain 10,000 22,000 120%
days. The eventual vaccine deployment in Pakistan, estimated around 2Q
CY21 will, however, keep the economic downside restricted.
Key events and triggers to watch out for in CY21 (1/2)
Event Implications
Several vaccines have been announced with efficacies north of 90%. While these vaccines are still under trial, there is a
COVID vaccine deployed high probability that a vaccine will be deployed to the global populace during CY21. Moreover, the UK has approved a
large-scale deployment of Pfizer’s vaccines, a development likely to set the tone for the efficacy of the vaccines.
Pakistan is estimated to apply for around USD 1.8bn worth of debt relief from G-20 countries as part of the global relief
G-20 Debt Relief initiative for distressed economies. If the application is successful then Pakistan’s external buffers would improve
considerably, and may likely provide additional support to the Pak Rupee.
A potential re-entry into the IMF program would encompass power & gas tariff hikes, reintroduction of tax reforms and a
Re-entry into the IMF program continuous reduction in the subsidies. We believe the government will likely defer the energy tariff hikes till 1HCY21 to
support recovering economic activity and to keep inflation under control.
The upcoming FATF’s plenary meeting scheduled on Feb21 will further discuss Pakistan’s progress on curbing illegal
financing. The committee will deliberate over potential white-listing by taking into account Pakistan’s progress on the
matter. The last meeting back in Oct20 highlighted that Pakistan’s was found largely compliant on 21 out of 27 action
FATF Plenary Meeting
items. We believe the likelihood of a potential white-listing has increased substantially given Pakistan’s recent efforts in
complying with the Watchdog’s regulations. Any positive development on this front has the potential to catalyze
significant foreign flows into the economy.
We believe Mar21’s monetary policy will act as the crossroads over the direction of the interest rates. While the central
back has depicted comfort over the prevalent negative real interest rates, we believe, from Mar21 onwards, CPI readings
Mar21’s Monetary Policy
will pick pace rapidly and economic activity will continue to normalize. Consequently, we believe the eventual monetary
tightening may commence from Mar21 to balance economic growth and inflationary pressures.
Key events and triggers to Watch out for in CY21 (2/2)
Event Implications
The Central Bank is continuously compelling commercial banks to meet the minimum lending target of 5% towards the
Enhanced Construction-based construction sector in a bid to further revitalize economic activity. With an estimated PKR 270bn still below budgeted
Lending target, we can expect increased construction activity as commercial banks increased their exposures to the construction
industry.
The government has allowed the finance ministry to raise USD 2.5bn from the international markets via Eurobonds,
Eurobond Issuance Sukuks and Chinese Panda Bonds. This move would enable the SBP to further shore up the country’s reserves and increase
its overall reserve buffers.
The IPPs contract negotiations entails the clearance of circular debt in exchange for reduced guaranteed returns. We
IPPs Tariff negotiations believe the potential clearance of the circular debt may allow the energy chain stocks to perform, particularly the
depressed heavy-weights, oil & gas exploration companies.
As mentioned, bulk of the index’s rally found support from retail investors. Onwards, we can witness asset re-allocation
Asset Reallocation from institutional investors where many shift their investments from low-yielding treasury securities towards equities.
Materialization of said scenario may add additional legs to the index’s momentum.
With the AIDP 2016-2021 set to expire in CY21, a new auto policy is in the works. We believe it will likely focus on
incentivizing investments in Electronic Vehicles given their potential for enabling a significant reduction in fuel
Updated Auto Policy
consumption. Nevertheless, we can witness a significant shift in the prevalent automotive landscape based on the
characteristics of the updated auto policy.
Joe Biden is expected to be inaugurated on Jan21 as the next president of the United States. His manifesto during his
Biden’s Inauguration campaign was to increase the United State’s reliance on cleaner fuel sources. Moreover, with OPEC’s planned production
cuts likely to conclude during CY21, we can witness heightened volatility in the global oil markets.
Macro-economic snapshot
FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
GDP (USD bn) 271.0 279.0 305.0 315.0 278.0 264.0 269.0 280.0 293.0
GDP Growth (%) 4.1% 4.6% 5.2% 5.5% 3.3% -0.4% 2.1% 4.0% 4.5%
GDP/Capita (USD) 1,357 1,368 1,465 1,482 1,285 1,199 1,198 1,223 1,254
Exports (USD bn) 24.1 22.0 22.0 24.8 24.3 22.5 23.6 25.0 26.6
Growth (%) -4% -9% 0% 13% -2% -7% 5% 6% 6%
Imports (USD bn) 41.4 41.1 48.0 55.7 51.9 42.4 44.0 47.5 51.0
Growth (%) -1.0% -1.0% 17.0% 16.0% -7.0% -18.0% 3.7% 8.0% 7.4%
Current Account (USD bn) (2.82) (4.96) (12.27) (19.19) (13.43) (2.97) (4.00) (6.50) (7.50)
% of GDP -1.0% -1.8% -4.0% -6.1% -4.8% -1.1% -1.9% -2.3% -2.4%
Remittances (USD bn) 18.7 19.9 19.4 19.9 21.8 22.5 23.5 24.0 25.0
Pak Rupee (PKR/USD) 101.0 104.4 104.8 110.0 137.1 160.4 165.2 171.8 178.7
Depreciation (%) -1.0% 3.3% 0.4% 4.9% 24.7% 17.0% 4.0% 4.0% 4.0%
Inflation (%) 4.5% 2.9% 4.2% 3.9% 6.8% 10.7% 8.3% 6.0% 6.0%
Interest Rates (%) 7.0% 6.3% 6.3% 7.0% 12.8% 7.0% 8.5% 8.0% 8.0%
Real Rates (%) 2.5% 3.4% 2.1% 3.1% 6.0% -3.7% 0.2% 2.0% 2.0%
KSE-100 Events Chart
45,000 Thailand reported a
Jan CPI at14.6% case of Covid-19, the first Pfizer ends Covid-19
recorded case outside of China
Remittances surge by USD/PKR at vaccine trial with 95%
160 success rate
whooping 51% Y/Y to
$2,466mn in Jun’20
40,000
WHO declare USD/PKR at 168
Covid-19 as pandemic
China reported a Policy rate cut by

cluster of cases WHO declares global 1.0% Industrial Support
Policy rate cut by Package announced/
pneunomia health emergency
2.0% / IMF RFI Joe Biden wins US
35,000 in Wuhan approved PM announces presidential elections
construction industry
package
Policy rate cut Policy rate cut by 1% / Cement
by 0.75% LSM contracts by dispatches up 30% Y/Y
10.6%
30,000 Pakistan lockdown
commmences
Global Covid-19
cases cross 1 million
mark
25,000
Feb-20
Feb-20
Sep-20
Sep-20
Jan-20
Jan-20
Jul-20
Aug-20
Jan-20
Jul-20
Jul-20
Aug-20
Oct-20
Oct-20
Mar-20
Mar-20
Dec-19
Dec-19
Dec-20
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Nov-20
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Sectors in-depth
Cements
Cement Sector: Primed to capitalize on economic recovery (1/5)
 The ‘construction amnesty package’ revived sector dynamics: The federal government Capacity utilization hovering close to 100%
mn MT
introduced the ‘construction package’ in a bid to revive Pakistan’s economy. The
6.00 100%
package introduced a de-facto amnesty for new investments into construction projects,
providing avenues for Pakistan’s undocumented economy to whiten its assets. So far, it 5.00 90%
is estimated that nearly PKR 200bn worth of construction projects are in the works
under the amnesty’s umbrella. This package has revived cement sector dynamics with 4.00 80%
record high cement demand and a significant improvement in the sector’s pricing 3.00 70%
power.
2.00 60%
 Cement demand to sustain record levels: Cement demand has picked up substantially 1.00 50%
from lockdown levels, nearly doubling to record high levels of 5.74mn MT during Oct20
(implying utilization levels of 99%). This recovery has been a product of: 1) the - 40%
Apr-20
May-20
Jan-20
Mar-20
Aug-20
Jun-20
Oct-20
Feb-20
Jul-20
Sep-20
aforementioned construction package, 2) lower interest rates and SBP’s directive
(mandatory lending of 5% advances) pushing construction financing, 3) sharp economic
recovery, 4) a 27% Y/Y rise in worker’s remittances and 4) improving farm economics. Local Exports Utilization
Moreover, the commencement of large-scale development projects will likely keep the
industry’s utilization at higher levels. The federal government’s signature ‘Naya Pakistan
Housing Scheme’ involves the construction of 5 million low-cost housing units. We
estimate that the construction of an additional 1 million units generates ~15mn MT of
cement demand. In addition, the planned construction of the Diamer Bhasha Dam has
the potential to generate 15mn MT of cement demand spread over 7 years. Overall, we
project local dispatches will exhibit growth of 17% during FY21 and 7% onwards.
Construction Package Highlights Demand Sensitivity to the Amnesty
Incentives Impact Amnesty Availed Demand Increase Proportion to Capacity
We believe the main highlight of the construction package is USD bn mn MT %
the exemption from section 111 of the income tax ordinance. 2.00 1.45 2.10%
Exemption from Section
As this section focuses on the sources of investment, any 3.00 2.18 3.15%
111 of the income tax
construction undertaking will not be subject to declaring its 4.00 2.91 4.20%
ordinance
sources of investments. This incentive can essentially be 5.00 3.64 5.25%
considered an amnesty for whitening undocumented assets.
6.00 4.36 6.31%
The package aims to reduce the rate of Capital Gains Tax
(CGT) as the value of the property goes up. In addition, the
Reduction/exemption construction/sale of an individual’s first house will be exempt
in taxes from all taxes. All these factors in addition to a reduction in Proposed Dam Projects
duties and fees are expected to incentivize construction Size (MW) Cost (USD bn) Estimated Demand (mn MT)
activity by reducing the industry’s taxation levy. Diamer Bhasha Dam 4,500 15.0 15
The package also aims to offer cheaper financing options Bunji Dam 7,100 8.1 10
with interest rates as low as 7% for greenfield projects. Dasu Dam 4,320 5.0 12
Moreover, mortgage rates for low-cost housing will be Thakot Dam 4,927 5.0 8
Cheaper financing
offered at 6% in addition to a potential subsidy for reducing Mohmand Dam 800 2.2 5
options
overall costs. Lower interest rates have the capacity to induce Karot Dam 720 1.5 3
construction financing, potentially lifting cement and steel
Kohala Dam 1,100 2.5 3
demand from the private sector.
The construction package also focuses on enhancing the ease
Ease of doing business of doing business by aiming to reduce project approval time
or lowering the required set of documentations.
 Sharp recovery in pricing power: The cement sector’s pricing is the key factor Pricing in the North inching higher
determining the industry’s profitability. In light of the increase in cement demand, the PKR/bag
sector has witnessed a sharp recovery in its pricing power. Cement prices in the 700
northern region have picked up by 10% from lows seen back in Jun20 to present levels 650
of PKR 550/bag. In tandem with the PKR 25/bag reduction in FED, overall cement 600
retention prices have increased by 28% to PKR 320/bag. This scenario was evident by 550
the 15pps Q/Q improvement in gross margins to 19% during 1QFY21. Onwards, we 500
estimate cement prices to touch PKR 600/bag in the northern region by the end of 450
Jul-20
Jun-20
Jan-20
Apr-20
May-20
Nov-20
Aug-20
Feb-20
Mar-20
Sep-20
Oct-20
FY21, further supporting the industry’s core margins.
North (PKR/Bag) South (PKR/Bag)
 The “2nd wave” of the 3rd expansion cycle: As mentioned, the cement industry’s
utilization levels nearly touched 100% during Oct20 prior to the commencement of the
aforementioned ‘large-scale projects’. With cement demand expected to grow sharply
once said projects commence, several cement manufacturers have announced their
intentions of further enhancing their production capacities. So far, around 20mn MT of
expansion plans have been announced within the cement industry, likely enhancing the
industry’s capacity by 34% over the next 2-3 years. We project that the cement demand
will likely keep utilization at comfortable levels, allowing the industry to maintain its
pricing power.
 Anti-dumping expiring on Dec20 on exports to South Africa: The anti-dumping duty The South’s price levels declining
imposed on the exports of cement to South Africa is expected to be concluded by mid- PKR/bag
680 80%
Dec20. Back in CY15, the government of South Africa imposed dumping duties ranging
670 70%
between 14% and 77% on Pakistan’s cement imports for a period of 5 years. After the duty
660 60%
imposition, Vietnam and China entered the fray and substituted Pakistan’s cement imports.
650 50%
At its peak back in FY14, cement exports to South Africa comprised 16% of Pakistan’s total
640 40%
cement exports and 32% from the southern region. Presently, cement imports within South
630 30%
Africa have reached 7yr high levels (0.18mn MT during Sep20) due to lifting of lockdown
620 20%
restrictions with estimates of annual imports touching 1.5mn
610 10%
 South Africa’s cement industry officials are lobbying from re-imposition of dumping duties, in 600 0%
addition to imposing similar duties on other countries (Vietnam and China). They highlight
Feb-20
Apr-20
Sep-20
Jan-20
Mar-20
May-20
Aug-20
Oct-20
Nov-20
Jun-20
Jul-20
that the South African Cement industry, with an estimated annual production capacity of
20mn MT, is well equipped to cater to the country’s cement demand. The industry, however, Local Utilization (R.H.S) South Price (L.H.S)
is operating at 65% utilization rates as imported cement undercuts domestic retail prices by
~45%. While the potential removal of duties will allow Pakistan to restore its footing in South “ Cement prices in the South have recently come under
Africa’s cement market, there is a likelihood that prevalent duties may be restored to protect pressure on account of low domestic demand, compelling the
industry to rely on exports to keep utilizations high. With the
the domestic South African industry. expiration of anti-dumping duties nearing, cement exports
from the Southern region can increase further and enhancing
Trend of Exports to South Africa (Duty Imposed 2HFY16)
the region’s pricing power. In turn, we can expect a potential
USD mn FY13 FY14 FY15 FY16* FY17 FY18 FY19 FY20
recovery in cement prices in the coming months, particularly
Value of Exports 56,793 76,605 58,481 20,737 2,736 6,700 7,990 5,465
during the Rabi harvesting season scheduled Apr-May21.
% of Total Exports 11% 16% 14% 6% 1% 3% 3% 2%
% of South Exports 26% 32% 28% 14% 3% 9% 5% 3%
* Duty Imposed in 2HFY16
 The Competition Commission of Pakistan’s (CCP) penalty re-emerges: Back in CY09, the Impact on companies if penalty is paid
Penalty EPS Impact Impact / Price
cement industry was penalized PKR 6.3bn over alleged anti-competitive practices, including PKR mn PKR/sh %
pricing collusion. The conclusion of the investigation continues to remain uncertain since the LUCK 1,272 2.79 0.4%
BWCL 1,041 1.24 0.8%
initial allegation. DGKC 933 1.51 1.4%
MLCF 586 0.38 0.9%
 The CCP revived investigations against the cement sector over cartelization practices ACPL 374 1.93 1.3%
regarding a PKR 50/bag hike in domestic cement prices in May20. Recently, the CCP has also PIOC 364 1.14 1.2%
DCL 345 0.51 5.2%
been conducting raids in cement offices to gather evidence of collusion, even claiming that it FCCL 266 0.14 0.6%
has gathered substantial evidence to prove their allegations. The cement sector has CHCC 262 0.96 0.7%
FECTC 174 2.46 7.1%
defended its price hikes, citing record low profitability during FY20 evidenced by gross KOHC 103 0.36 0.2%
margins falling to lows of 4%. POWER 87 0.06 0.6%
DNCC 42 0.31 3.4%
 While the case is still pending, we believe the ongoing investigation will limit the cement GWCL 39 0.07 0.2%
sector’s pricing power in the coming months. Nevertheless, we believe the industry will hike DBCI 28 0.20 6.5%
FLYNG 12 0.05 0.5%
cement prices in spaced intervals to pass through recent inflationary pressures.
Historical Trend of EV/MT
 The industry continues trading at attractive multiples: Presently, the industry is trading at FY17 Present Discount
an EV/MT of USD 70, a 30% discount to its replacement cost. During its peak valuations in LUCK 194 87 55%
DGKC 140 73 48%
the midst of a bull cycle back in CY16, the sector was trading at multiples 1.5x its KOHC 89 62 30%
replacement cost. Consequently, the sector offers considerable room for upside. ACPL 126 62 51%
FCCL 168 58 65%
MLCF 136 74 46%
CHCC 169 63 63%
PIOC 108 66 38%
Lucky Cement: Evolution into a full-fledged conglomerate – TP: PKR 788/sh
 The most cost-efficient player in the industry: Lucky Cement (LUCK) remains one of the LUCK Overview
most efficient cement plant in the industry, primarily relying on the in-house generation to Target Price (PKR/sh) 788
fulfill its electricity needs. The company benefits from a steady supply of gas, enabling it to
Current Price (PKR/sh) 670.26
produce electricity at an estimated 50% discount to the national grid. Moreover, LUCK has
Upside (%) 18%
invested heavily in alternative efficiency measures including the installation of Waste Heat
Recovery plants (45MW). In turn, the company is able to enjoy the highest primary margins Stance Buy
within the industry, outpacing the sector’s average by 9pps (gross margins of 28% during Mkt. Cap. (PKR bn) 217
1QFY21). Mkt. Cap. (USD mn) 1,354
 KIA Motors set to become Lucky’s ‘Star’ investment: KIA’s reception of its offerings, Volumes – 1yr avg. (mn shares) 1.01
particularly the Sportage (Mid-size SUV), has surpassed our initial expectations. The ADTV (USD mn) 3.5
company sold 5,500 units of Sportage during FY20 and is presently managing to off-load
4,000 units each quarter. On account of the high demand, the company is compelled to rely
on a 2nd shift to meet production targets. We anticipate the company to sell north of
21,000units (Sportage: 16k Units; Picanto: 5k units) during FY21 and register top-line of
PKR 88.6bn. Moreover, on account KIA’s duty advantage of 20pps over its counterparts, we
anticipate the company to record gross margins of 15% and record bottom-line of PKR
5.1bn (EPS: PKR 15.7). We estimate KIA motors to contribute PKR 100/sh towards LUCK’s
valuations.
 Lucky Electric a stable cash-cow: LUCK’s investment in the 660MW coal-fired power plant
is set to become its stable cash-cow. Presently, the project benefits from a minimum
guarantee USD-hedged ROE of 27.2%, allowing it to contribute PKR 36.26/sh towards
LUCK’s bottom-line during FY22. Moreover, the project is estimated to contribute PKR
180/sh towards LUCK’s valuations.
Lucky Cement Financial Snapshot
Income Statement LUCK Valuation Breakup
PKR mn FY21E FY22E FY23E FY24E Cement 340
Sales 63,897 65,566 74,231 83,955
Cement – International 54
Gross Profit 18,715 21,073 25,369 30,804
ICI Pakistan 87
GP Margin (%) 29.3% 32.1% 34.2% 36.7%
Lucky Electric 180
Profit After Tax 10,914 12,591 14,929 18,469
EPS (PKR) 33.75 38.94 46.17 57.11 KIA Motors 100
EPS (Consolidated) – PKR Others 27
DPS (PKR) 5.00 10.00 15.00 15.00 SOTP Value 788
Balance Sheet Lucky Cement (LUCK) CY20 Price Performance

PKR mn FY21E FY22E FY23E FY24E 80%
Cash & ST Investments 14,434 21,023 23,549 33,923 60%
Total Current Assets 31,367 38,397 43,220 56,182 40%
PP&E 60,181 59,237 58,293 57,349
20%
Total Assets 137,337 147,848 151,727 163,745
0%
Equity 105,504 114,862 126,233 140,498
Apr-20
May-20
May-20
Dec-20
Jan-20
Jan-20
Mar-20
Mar-20
Aug-20
Jun-20
Oct-20
Nov-20
Feb-20
Jul-20
Jul-20
Sep-20
Sep-20
-20%
Total Equity and Liabilities 137,337 147,848 151,727 163,745
-40%
KSE-100 LUCK
Maple Leaf Cement (MLCF): Focus on efficiency and growth – TP: PKR 52/sh
 Timely expansion to cater to the expected increase in demand: Maple Leaf Cement (MLCF) MLCF Overview
expanded its capacity by 70% (to present levels of 5.7mn MT) at an opportune time, Target Price (PKR/sh) 52
benefitting from the increase in cement demand. MLCF’s local cement sales, in turn,
exhibited a 2yr CAGR of 26% since the expansion came on line. Overall, the company
Upside (%) 29%
managed to record a market share of 10% and a capacity share of 8%.
Stance Buy
 Cost-cutting efficiencies a top priority: Maple Leaf Cement has increased in focus on
Mkt. Cap. (PKR bn) 44
introducing cost-cutting technologies to its production facility. The company has plans to
enhance the capacity of its Waste Heat Recovery (WHR) system to 25MW, with the Mkt. Cap. (USD mn) 275
potential for covering 34% of its total electricity requirements (estimated at 73MW). Volumes – 1yr avg. (mn shares) 15.40
Moreover, MLCF has also installed a 40MW coal-fired captive power plant, enabling the ADTV (USD mn) 2.8
company to reduce its electricity costs by ~57% over the national grid tariff. Consequently,
these efficiencies enabled MLCF to post one of the industry’s highest cash margins (ex-
depreciation) of 31.4%. Moreover, with recent improvement in pricing power, we estimate
the company’s cash margins to further enhance to 34% in FY22.
 Large gains from the monetary easing cycle: In order to fund its expansion facility and the
aforementioned efficiency units, the company relied primarily on debt. Consequently, it’s
outstanding debt has risen to PKR 16.9bn as of Sep 30’20. With the 625bps decline in
interest rates, the company’s savings are estimated at PKR 750mn. This benefit is expected
to be fully reflected in the company’s financial performance from 3Q onwards once the
floating rate loans are rolled over.
Maple Leaf Cement Financial Snapshot
Income Statement
PKR mn FY21E FY22E FY23E FY24E
Sales 36,212 46,082 52,623 57,308
Gross Profit 5,969 12,847 17,508 20,460
GP Margin (%) 15.8% 27.0% 32.3% 34.7%
Finance Cost 2,222 1,648 1,263 1,093 Maple Leaf Cement (MLCF) CY20 Price Performance
Profit After Tax 2,723 6,403 9,380 11,390 100%
EPS (PKR) 2.48 5.83 8.54 10.37 80%
DPS (PKR) - 0.5 2.00 5.00 60%
40%
20%
Balance Sheet
0%
Apr-20
May-20
May-20
Dec-20
Mar-20
Mar-20
Aug-20
Oct-20
Jan-20
Jan-20
Jun-20
Nov-20
Feb-20
Jul-20
Jul-20
Sep-20
Sep-20
Cash & ST Investments 7,275 3,198 5,836 9,696 -20%
Total Current Assets 21,622 20,411 25,059 30,395 -40%

PP&E 42,922 42,022 41,648 41,274 -60%
Total Assets 69,657 67,546 71,819 76,781 KSE-100 MLCF
ST & LT Debt 20,254 13,630 12,331 10,131
Equity 30,050 33,632 38,615 45,196
Pioneer Cement (PIOC): Efficiency measures to enable sales growth – TP: PKR 120/sh
 Increased focus on efficiency: Similar to industry trends, Pioneer Cement has also PIOC Overview
increased its focus on improving its production efficiency by installing cost-cutting Target Price (PKR/sh) 120
technologies. The company is enhancing its Waste Heat Recovery (WHR) by 100% to
24MW with the aim of reducing its reliance on the national grid. We estimate the WHR
Upside (%) 28%
facility will likely yield savings of PKR 1,421mn (EPS: PKR 4.44) based on the present grid
tariff. Moreover, the company’s 24MW coal-fired power plant is also estimated to come Stance Buy
online by the end of CY20. Coal boilers yield savings of ~57% over the national grid’s Mkt. Cap. (PKR bn) 21
tariff, allowing PIOC to further enhance its margins. As a result of these measures, we Mkt. Cap. (USD mn) 133
estimate PIOC’s gross margins to improve to 27% during FY22, an improvement of
Volumes – 1yr avg. (mn shares) 3.30
29pps over FY20’s margins.
ADTV (USD mn) 1.13
 Plans to broaden market base once efficiency measures come online: Historically,
PIOC’s capacity utilization has remained on the lower side, averaging 68% between
FY13 and FY19, against industry average of 81% within the same time-frame. PIOC
generally caters to markets near its proximity in a bid to keep freight costs under
control; thereby, limiting its potential markets including export destinations. According
to the company’s management, PIOC will commence catering to new markets once the
aforementioned efficiency units come online due to the potential savings offered.
Consequently, we believe the company’s utilization levels will rise to 80% from FY23.
 Monetary easing cycle to further enhance bottom-line: PIOC utilized debt financing to
fund its expansion plans and the aforementioned efficiency measures. Consequently,
PIOC’s debt levels rose to PKR 27bn as of Sep 30’20. The 625bps cut in discount rate is
estimated to yield annual savings of PKR 1.2bn (PKR 5.28/sh), with its affect being fully
realized from 3QFY21 onwards.
Pioneer Cement Financial Snapshot
Income Statement
Sales 20,004 23,699 27,734 32,395
Gross Profit 4,552 6,092 7,556 9,334
GP Margin (%) 26% 27% 29% 30%
Pioneer Cement (PIOC) CY20 Price Performance
Finance Cost 2,461 2,291 2,066 1,724
250%
Profit After Tax 1,011 2,135 3,195 4,547
EPS (PKR) 4.45 9.4 14.07 20.02 200%
DPS (PKR) - 1.00 3.00 6.00
150%
100%
Balance Sheet
50%
Apr-20
Mar-20
Mar-20
Dec-20
May-20
May-20
Aug-20
Oct-20
Jan-20
Jan-20
Jun-20
Nov-20
Feb-20
Jul-20
Jul-20
Sep-20
Sep-20
PP&E 42,532 42,596 42,660 42,724
Total Assets 49,796 50,159 50,368 50,527 KSE-100 PIOC
ST & LT Debt 27,041 25,174 22,704 18,941
Equity 14,332 16,467 19,435 23,527
Oil and Gas Marketing Companies
OMCs: Key developments to offer respite (1/2)
 Circular debt control in the limelight: The government remains adamant in pushing for
means to control the circular debt, which increased by an estimated PKR 538bn during
FY20 and has since ballooned to PKR 2.3tn. The prime reasons for proliferating circular OMC Sales picking up after lockdown
debt include DISCO inefficiencies, line losses, power subsidies, financial charges on mn MT
2,000
overdue payables, and delays in tariff adjustments. The launch of the Energy Sukuk-II
raised PKR 200bn to alleviate the cash-flow crunch of the energy sector, and also 1,500
reduced the overall financial burden emanating from the circular debt (interest rates of
1,000
Sukuk-II were KIBOR – 0.1% vs. overdue penalties of KIBOR + 2.5-4.0%).
500
 Receivable clearance a key condition of the IPPs tariff negotiations: The government
-
has taken active steps to renegotiate the IPPs tariff contracts in a bid to reduce the
Apr-20
May-20
Jan-20
Mar-20
Aug-20
Jun-20
Oct-20
Jul-20
Nov-20
Feb-20
Sep-20
sector’s capacity payments, and eventually, the power tariff. One key condition laid
down by the IPPs for successful negotiations involves the clearance of past receivables.
MS HSD FO Others
As bulk of the OMC industry’s receivables originates from the power sector, any
material development on this front will improve the industry’s cash-flow situation,
allowing the sector to reduce its debt liabilities and potentially enhance payouts.
 Revival of economic activity a catalyst for recovering growth: OMC sales have a very
high correlation with economic activity, particularly HSD sales. With the economy
nearly fully opened post the lockdowns, Pakistan’s OMC sales have begun reflecting the
recent economic recovery. We note that recent months have registered sales similar to
pre-COVID levels with total OMC sales averaging 1.63mn MT/month between Jul20 and
Nov20, up by 58% compared with an average of 1.03mn MT/month registered during
lockdown months (Mar20-Apr20). Moreover, recent sale figures have also outpaced
CY20’s average monthly sales by 9% (1.49mn MT/month).
OMCs: Key developments to offer respite (2/2)
 Fortnightly pricing to insulate volatility: Oil and Gas Regulation Authority (OGRA) has
switched the pricing mechanism for petroleum from Sep 01’20 whereby domestic
Oil price volatility reflected in domestic OMC prices
pricing will be revised fortnightly. The new pricing mechanism is projected to provide
considerable cushion against inventory losses as domestic prices will better reflect PKR/ltr
international trends. Consequently, shorter intervals between pricing revisions will 100
enable OMC players to better insulate themselves from oil price volatility. 80
60
 Pricing to better reflect prevalent exchange rates: The change to pricing mechanism is 40
also expected to better reflect the prevalent exchange rates, notably at the time when 20
the oil import LC is cleared. This methodology will enable a better reflection of the -
actual cost of importing oil in domestic oil prices and will provide considerable shield
Apr-20
Mar-20
May-20
Aug-20
Oct-20
Jan-20
Jun-20
Nov-20
Feb-20
Jul-20
Sep-20
against exchange losses.
HSD MS
 Potential deregulation addresses majority of the sector’s concerns: Deregulation of
the sector entails that OMCs would be able to determine their own selling price and
product margins with minimal intervention from the government, which would only
have jurisdiction over setting levies and taxation. Deregulation would essentially allow
OMC companies to minimize inventory/exchange losses by pricing their products
accordingly.
Introduction of a deregulated pricing mechanism may also result in improved core
margins for regulated petroleum products. Case in point, India’s OMC industry was fully
deregulated in CY14 and was able to witness an ~50% improvement in its core margins.
Pakistan State Oil (PSO): Emerging as winner of recent developments – TP: PKR 242/sh
 Pakistan State Oil (PSO) likely to emerge as key winner: Bulk of the developments PSO Overview
discussed in this would greatly benefit PSO’s profitability outlook, including the Target Price (PKR/sh) 242
updated pricing mechanism, developments on the circular debt front, and even
potential deregulation. PSO’s profitability has been greatly affected by inventory &
Upside (%) 20%
exchange losses, none more so visible than on its sales during 4QFY20. It is estimated
that PSO was incurring losses of over PKR 20/liter on its off-take due to the pricing Stance Buy
disparity between global and domestic prices, As such, a conversion to fortnightly Mkt. Cap. (PKR bn) 95
pricing may assist PSO in mitigating inventory losses while a switch over to complete Mkt. Cap. (USD mn) 593
deregulation would potentially eliminate these losses.
 PSO’s debt levels plummet post the Energy Sukuk-II: As mentioned, PSO’s trade ADTV (USD mn) 2.23
receivables fell by 12% QoQ to PKR 197bn while its debt levels plummeted by 55% QoQ
to PKR 42bn as of Sep 30’20 post the receipts of the Energy Sukuk-II and a sharp
improvement in collection post the easing of lockdown restrictions. This decline in
borrowings may potentially support PSO’s bottom-line line by ~PKR8.0/sh if these levels
continue. Moreover, any material development on the IPPs tariff negotiation and the
consequent clearance of trade debts will allow PSO to further improve its cash flow
position and reduce its financial burden.
 Payouts to improve if the circular debt recedes: Prior to the circular debt (which began
from the onset of FY09), PSO was maintaining a payout ratio of around 80%. Post the
circular debt, PSO’s payout ratio fell to around 10% while it has since improved to ~40%.
With anticipated improvement in cash-flows, we believe PSO’s dividend payouts will
improve sharply.
Pakistan State Oil Financial Snapshot
Income Statement
PKR bn FY20 FY21E FY22E FY23E
Sales 1,108 1,212 1,254 1,313
Gross Profit 12.2 35.9 38.2 43.5
GP Margin (%) 3% 3% 3% 3%
Pakistan State Oil (PSO) - CY20 Price Performance
Finance Cost 13.5 6.3 6.0 5.7
20%
Profit After Tax (6.5) 11.1 13.7 16.6
EPS (PKR) (13.77) 23.59 29.24 35.37 10%
DPS (PKR) - 5.00 10.00 12.00
0%
Apr-20
May-20
May-20
Dec-20
Jan-20
Jan-20
Mar-20
Mar-20
Aug-20
Jun-20
Oct-20
Nov-20
Feb-20
Jul-20
Jul-20
Sep-20
Sep-20
-10%
Balance Sheet
-20%
Cash & ST Investments 7,822 9,336 18,682 20,644 -30%

PP&E 39,544 68,042 72,897 78,099
-50%
Total Assets 379,877 396,019 403,169 403,045
KSE-100 PSO
ST & LT Debt 58,232 47,624 40,225 35,024
Equity 130,473 138,686 148,599 160,562
Independent Power Producers
Independent Power Producers: At the cusp of recovery
 Tariff re-negotiation the theme of the year: As mentioned, the government is Net Cash Position of IPPs Net Position Stock Price
actively looking at avenues to bring down the burden of capacity payments PKR mn Receivables Payables ST Debt Total PKR/sh PKR/sh
and reduce the overall cost of procuring electricity. Presently, IPPs under the HUBC 109,043 79,865 38,553 (9,376) (7.23) 84.76
umbrella of both the 1994 policy and the 2002 policy have signed MOUs with KAPCO 125,836 21,468 39,750 64,618 73.41 29.05
the government to alter their tariffs. NCPL 20,770 987 10,293 9,489 25.83 13.50
NPL 19,620 1,062 5,345 13,213 37.32 22.90
 For IPPs under the 2002 policy, key developments so far include reducing the
PKGP 22,327 1,084 9,047 12,196 32.78 18.10
USD-IRR to 12% (previous: 15%) for foreign investments into the power
LPL 20,073 1,034 12,147 6,891 18.14 12.60
projects, while revoking the USD-hedge and increasing to IRR to 17% for local
investments.
 For IPPs under the 1994 policy, payments will be reduced by 11%; however,
the payments will retain 50% of their USD and US-CPI indexation. Cash pay-out ratio plummets as circular debt rises
 Overall, we estimate earnings potential for IPPs under the 2002 policy will fall 120%
by 12% and 10% for IPPs under the 1994 policy.
100%
 Circular debt resolution to revive valuations: As mentioned, circular debt
80%
resolution is the top priority of the IMF-led economic program. The entire IPPs
sector has been affected by a significant cash-flow crunch resulting from the 60%
PKR 2.3bn circular debt. Consequently, the pay-outs of the once high yielding Pricing
40% in the North inching higher
sector has fallen to rock-bottom levels. Moreover, the sector is trading at one
20%
of the lowest Price/Earnings multiples of 1.8x.
 With an improving circular debt scenario expected to alleviate the sector’s 0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
cash-crunch, we can anticipate eventual normalization of the sector’s payouts.
Consequently, its intrinsic valuations will likely be realized onwards.
Hub Power (HUBC): A growth story with improving outlook - TP: PKR 139/sh
 Sell-off of the base plant proposed: According to news reports, the CEO of HUBC has HUBC Overview
proposed the government to buy-off its base plant for PKR 65bn including its future Target Price (PKR/sh) 139
capacity payments. We estimate that expected capacity payments (assuming the base
tariff remains unchanged) would amount to PKR 170bn till FY27, resulting in a net
Upside (%) 64%
present value of PKR 104bn (PKR 80.4/sh). The proposal, however, nets to a value of
PKR 50.1/sh, resulting in net attrition of PKR 30.3/sh for HUBC’s valuations. If we Stance Buy
assume the updated tariff based on the MoU signed back in Aug20, capping the stock’s Mkt. Cap. (PKR bn) 110
indexation to the USD, then the net present value of the future capacity payments Mkt. Cap. (USD mn) 686
amounts to PKR 72.5/sh, implying an attrition of PKR 22.4/sh towards HUBC’s
valuations.
ADTV (USD mn) 1.49
 MoU negotiations to restrict profitability but unlock value: HUBC has investments in
power plants ranging from pre-1994 policy (base plant), 2002 policy (Narowal), and the
2015 policy (CPEC). While the tariff of CPEC based projects remain unchanged, the
Impact of HUBC's Proposal PKR mn
MoUs signed for the updated tariffs for HUBC’s base and Narowal plants can potentially Proposed Selling Price 65,000
reduce its EPS by 11% by FY24. per share (PKR/sh) 50.11
 The key benefit for HUBC, however, would stem from the potential clearance of Base Plant Overview
receivables, netting to PKR 29,178mn (EPS: PKR 22.5). The clearance would significantly Present Tariff
improvement HUBC’s prevalent cash-crunch, allowing for sustained payouts. PV of Capacity Payments 104,334
per share (PKR/sh) 80.43
 Sustained payouts from FY22 onwards: Base on our estimates, HUBC will have a Value Attrition (PKR/sh) 30.32
dividend paying capacity of PKR 10/sh during FY22 assuming CPHGC announces cash Net Receivables 29,178
dividends by FY21 onwards. The present PKR 4.0/sh interim dividend during 1QFY21, Debt Levels 91,629
however, was a reflection of improvement collection post the easing of lockdown Updated Target Price 108.68
restrictions and the energy Sukuk-II
The Hub Power Financial Snapshot
Income Statement HUBC Sensitivity Analysis
PKR/sh FY21F FY22F FY23F FY24F
Sales 48,342 64,415 72,320 75,032
Finance Cost 9,213 7,232 6,454 6,001 Base 23.31 24.45 27.98 31.86
Profit After Tax 30,238 31,714 36,294 41,333 Change to base policy (0.32) (1.07) (1.98) (3.06)
EPS (PKR) 23.31 24.45 27.98 31.86
Change to 02 Policy (0.25) (0.33) (0.40) (0.49)
DPS (PKR) 4.00 10.00 12.00 15.00
New EPS 22.74 23.05 25.60 28.31
Change (%) -2% -6% -9% -11%
Balance Sheet The Hub Power Company (HUBC) CY20 Price Performance
PKR mn FY21E FY22E FY23E FY24E 20%
Apr-20
May-20
May-20
Mar-20
Mar-20
Dec-20
Aug-20
Jun-20
Oct-20
Jan-20
Jan-20
Nov-20
Feb-20
Jul-20
Jul-20
Sep-20
Sep-20
PP&E 76,234 77,214 78,624 79,236 -10%
Total Assets 280,324 310,324 324,556 324,684 -20%

-30%
ST & LT Debt 89,430 82,103 74,523 68,632
-40%
Equity 104,423 130,334 150,324 171,320
-50%
KSE-100 HUBC
Commercial Banks
Banks: Monetary tightening to once again come into play
 The 150bps hike in CY21 to enhance the sector’s profitability: SBP is
expected to resume monetary tightening from Mar21. we expect policy Banks trading at depressed valuations compared to historical multiples
rate to increase by 150bps to 8.5%. As the investment base is 2017 2020
increasingly tilted towards floating rate instruments, we anticipate P/B ROE P/E P/B ROE P/E
sector’s NIMs to remain stable despite maturity of fixed rate high HBL 1.17 4% 24.41 0.72 12% 6.01
yielding PIBs. Overall, we expect the Bank’s to register earnings growth MCB 1.40 14% 9.25 1.22 17% 7.19
of 13% during CY21. the sector is trading at attractive P/B of 0.8x with UBL 0.87 15% 5.80 0.77 10% 7.27
ROE of 15% BAFL 0.92 13% 7.21 0.67 12% 5.78
 NPLs expected to remain low: In order to provide relief to businesses MEBL 3.94 18% 21.18 1.94 32% 6.14
suffering from the impacts of COVID19, SBP allowed banks to defer ABL 0.89 12% 7.43 0.74 13% 5.81
principal payment for the period of one year(till Jun’20). Banking sector
has thus far deferred PkR650bn worth of loan and restructured another
PkR200bn. The infection ratio of sector currently stands at 9.5% with a
healthy coverage of 92%. We believe due low ADRs(48%) and low
interest rate scenario, the likelihood of an infection surge is minimal.
Moreover, the bank have booked adequate general provision to cater to
cater for any potential NPLs.
 High-quality deposit growth: The banking sector has been witnessed a
healthy deposit growth of 17% during LTM with a healthy CASA mix of
75% largely driven by increase in remittances. We believe, low-cost
deposit will help preserve NIMs of the sector and support profitability in
CY21.
Habib Bank Limited (HBL) – Controlled cost to drive earnings growth - TP: PKR 176/sh
 Closure of NY branch program to constrict OPEX: HBL surrendered its license and HBL Overview
closed its New York branch with effect from Mar20. The bank incurred USD 30mn in Target Price (PKR/sh) 176
closure related costs in 1QCY20 with these costs winding down to USD 5.0mn the Current Price (PKR/sh) 130.33
subsequent quarter. We expect these costs to conclude with the onset of CY21. Upside (%) 35%
 Buildup in surplus to provide cushion to bottom-line: As the interest rates and PIB Stance Buy
auction yields peaked during 3Q&4Q19, HBL’s parked significant amount of funds in Mkt. Cap. (PKR bn) 191
fixed rate PIBs and its PIB portfolio witnessed a net increase of PKR168bn (12.2% of Mkt. Cap. (USD mn) 1,194
total investment book). As at Jun’20, HBL’s PIB portfolio stands at PkR732bn (47% of Volumes – 1yr avg. (mn shares) 1.63
the investment book) with a mark to market gains of PkR21.3bn.
ADTV (USD mn) 1.27
 Situation on credit quality front to remain uncertain: HBL has so far deferred
principle payments worth ~PkR85bn (7% of the loan book) under incentive scheme
offered by the central bank to alleviate the economic impact of COVID-19. On the
international front, the bank has taken adequate provisioning to cater for the NPLs
arising from one major client while on the domestic front, challenges may arise over
the next 12-18months. The bank is building its coverage (95% as at 2Q20) by taking
general provisions to cater to any potential NPLs arising when relief measure are
lifted. HBL’s ADR currently stands at merely 46% with majority of the advance lent to
the corporate sector
Habib Bank (HBL) Financial Snapshot
Income Statement Key Ratios
PKR mn CY21F CY22F CY23F CY24F CY21F CY22F CY23F CY24F
Mark-up interest 268,617 290,298 310,652 334,494 CASA 82% 82% 82% 82%
Interest Expense 136,399 155,589 168,262 181,796 ADR 42% 42% 42% 42%
Net Interest Margins 132,217 128,555 142,390 152,519 IDR 65% 65% 65% 65%
Provisions 11,049 5,657 5,969 6,795 Infection Ratio 7.0% 6.7% 6.7% 6.7%
Profit After Tax 32,353 35,468 38,356 42,352 Coverage Ratio 101% 103% 101% 99%
EPS (PKR) 21.62 23.70 25.63 28.30 BVPS 193.9 210.2 224.7 242.1
DPS (PKR) 10.00 12.00 16.00 16.00 P/B 0.67 0.62 0.58 0.54
Balance Sheet Habib Bank (HBL) CY20 Price Performance

PKR mn CY21F CY22F CY23F CY24F 10%
Investments 1,936,974 2,102,414 2,282,075 2,476,483 0%
Apr-20
May-20
May-20
Oct-20
Mar-20
Mar-20
Dec-20
Jan-20
Jan-20
Aug-20
Jun-20
Feb-20
Jul-20
Jul-20
Sep-20
Sep-20
Nov-20
Advances 1,240,648 1,349,088 1,468,492 1,596,392 -10%
Cash 367,599 395,592 421,274 451,840 -20%
Total Assets 3,861,121 4,182,310 4,525,180 4,995,810 -30%
Deposits 2,987,901 3,245,243 3,523,816 3,904,386 -40%
Equity 248,278 272,856 329,598 361,391 -50%
Total Equity and Liabilities 3,861,121 4,182,310 4,525,180 4,995,810 KSE-100 HBL
MCB Bank (MCB) – High quality book to strengthen valuations – TP: PKR 224/sh
 Deposits grow to PKR 1.27tn: Deposits grew to PkR1.27tr largely driven by increase in MCB Overview
Current Account (CA) deposits as expatriates from GCC and other countries parked Target Price (PKR/sh) 224
excess liquidity in case of any layoffs or restrictions on transfer of funds in the future. Current Price (PKR/sh) 181.74
CA proportion currently stands at 39% taking CASA mix to 94%, higher than industry Upside (%) 23%
average of 75%.
Stance Buy
 Investment portfolio in the lime-light: Investments portfolio increased by 21% during Mkt. Cap. (PKR bn) 215
1H2020 largely on account of increase in the PIB portfolio, up 41% to PkR413bn. The Mkt. Cap. (USD mn) 1,346
Bank has fixed rate PIBs worth PkR316bn with weighted average yield of 11.3% and
floaters worth PkR93bn with the yield of 11.7% resulting in overall PIB portfolio yield
ADTV (USD mn) 0.64
of 11.94% and duration of 2.6 years. The surplus on the investment book stands at
PkR30bn with approx. PkR24bn on the fix rated PIBs.
 NPLs coverage improves: NPLs increased by PkR929mn during the 1H2020 with
approx. PkR606mn booked against the international book on account of devaluation.
MCB’s infection ratio deteriorated to 9.9% on account of downward adjustment of
advances during the quarter. However, the coverage has improved to 94% as the bank
has taken additional provisioning surcharge of PkR4bn during 1H2020 to cater for any
potential NPLs.
MCB Bank Financial Snapshot
Income Statement Key Ratios
PKR mn CY21F CY22F CY23F CY24F CY21F CY22F CY23F CY24F
Mark-up interest 122,788 121,880 126,053 132,844 CASA 92% 92% 92% 92%
Interest Expense 48,904 50,918 54,354 57,695 ADR 38% 38% 38% 38%
Net Interest Margins 73,884 70,962 71,699 75,149 IDR 70% 70% 70% 70%
Provisions 9,078 5,739 2,966 4,564 Infection Ratio 9.5% 9.5% 9.3% 9.1%
Profit After Tax 26,831 28,609 29,439 29,223 Coverage Ratio 100% 100% 99% 100%
EPS (PKR) 22.65 24.16 24.86 24.67 BVPS 151.51 153.77 158.16 162.48
DPS (PKR) 20.00 20.00 20.00 20.00 P/B 1.20 1.18 1.15 1.12
Balance Sheet MCB Bank (MCB) CY20 Price Performance

PKR mn CY21F CY22F CY23F CY24F 10%
Investments 1,049,482 1,119,688 1,188,895 1,255,283 0%
Apr-20
Dec-20
May-20
May-20
Jan-20
Jan-20
Mar-20
Mar-20
Jun-20
Oct-20
Aug-20
Nov-20
Feb-20
Jul-20
Jul-20
Sep-20
Sep-20
Advances 567,310 606,595 648,013 686,024
-10%
Operating Fix Assets 71,813 77,733 84,141 91,077
Deposits 1,494,856 1,600,052 1,703,753 1,803,228 -20%
Borrowings 208,816 223,511 237,997 251,892 -30%

Total Liabilities 1,826,782 1,956,821 2,085,992 2,211,253
-40%
Equity 179,446 182,118 187,315 192,442
KSE-100 MCB
Automobile Assemblers
Autos: Underpinning hopes on economic revival (1/2)
 Economic environment for the automobile assemblers sector has undergone a
big change from declining sales to reporting the best quarter in terms of sales in Monthly OEM car sales
a span of two years. 28,000
 We are now seeing volumetric expansion of the industry at a 3-yr CAGR of 21,000
29% through FY23 that is yet to reflect its ripples on the listed. We project 14,000
industry sales to reach 185k/221k/240k in FY21/22/23E.
7,000
 Key themes that support our view on demand expansion stems from 0
Jun-19
Jun-20
Apr-19
Apr-20
Dec-18
Feb-19
Aug-19
Dec-19
Feb-20
Aug-20
Oct-18
Oct-19
Oct-20
1) the rapid recovery of demand in a V-shaped manner that has come on
the back of strong pent-up demand, Passenger Cars LCVs+4x4s
2) a steep decline in interest rate proving an opportune time for car Consumer financing to gear up in low interest rate environment
purchases and 16 275,000
14
225,000
3) a strong fiscal support for industries and sectors focused to translate into 12
10 175,000
activity. 8
6 125,000
 In terms of implied volumes, current market capitalization represents annual 4

2
75,000
vehicle sales of 35k, 30k and 71k for INDU, HCAR and PSMC. We believe there is 0 25,000
Jun-06
Apr-12
Jun-13
Apr-19
Jun-20
Aug-07
Dec-09
Feb-11
Aug-14
Dec-16
Feb-18
Oct-08
Oct-15
more profit-driven upside that extends beyond the next four to six quarters.
DR Car Loans
Autos: Underpinning hopes on economic revival (2/2)
 Biggest influencer to automobile demand is attributable to low interest rate
environment. New car affordability for the population is largely hinged on low Balance Sheet position improving with influx of orders
interest payments since the price of an entry level vehicle hovers from 80,000 80,000
USD7,000-7,500 or 5.7x of GDP per capita. Historically, any expansion in income
60,000 60,000
combined with low interest rates has resulted in surge in demand for
40,000 40,000
automobiles.
20,000 20,000
 Currently, financing penetration stands at 40% of new vehicle sales after
0 0
picking up from under 30% a year ago. This is now evident with an increase in
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
stock of auto loans by 12% on Y/Y basis to PkR242bn (USD1.5bn). In absolute
Vehicles sold (RHS)
terms, auto loans have seen a stark rise of PkR29bn in the past four months. Advances from customers (LHS)
 We believe the low interest rate environment is likely to accelerate car Consumer financing to gear up in low interest rate environment
190
purchases on loans as a function of lucrative vehicle affordability and revival in 170
economic activity to improve incomes (impetus from govt. driven stimuli). Out 150
TP for Indus Motors Company Limited (INDU) at PkR1,924, Honda Atlas Cars 130
(Pakistan) Limited (HCAR) at PkR420 and Pak Suzuki Motor Corporation Limited 110
90
(PSMC) at PkR282 translate to an upside of 59%, 31% and 29%, respectively. 70
50
Dec-19
Apr-20
May-20
Oct-20
Jan-20
Mar-20
Aug-20
Nov-19
Feb-20
Jun-20
Jul-20
Sep-20
INDU PSMC HCAR KSE100
Indus Motor (INDU) – Strong brand loyalty makes way for growth – TP: PKR 1,924
 We see INDU as the prime beneficiary of reviving fundamentals of the automotive INDU Overview
sector. Our liking for INDU emanates from; (i) Yaris establishing its dominance in the
Target Price (PKR/sh) 1,924
1.3L and 1.5L market, (ii) healthy margin trajectory, (iii) strong balance sheet, and (iv)
dissipating threat from new entrants further cementing its position. Current Price (PKR/sh) 1,209
Upside (%) 59%
 In terms of volumes, Yaris is expected to dictate the topline with 36k/40k units sales in
Stance BUY
FY21/22E. Currently, the car makes up over 50% of the order book for INDU with the
company eyeing to ramp up production level to over 6k units (100% utilization) since Mkt. Cap. (PKR bn) 95.0
Jan’21. Mkt. Cap. (USD mn) 593.9
 Upgrade of the 1.8L Corolla with minor changes and unabated demand for Fortuner Volumes – 1yr avg. (mn shares) 0.028
and Hilux should keep the margins of the company robust. All in all, the cash and ADTV (USD mn) 0.2
investment position of the company is expected to help the company deliver the icing
on the cake
 Strong balance sheet further supports our investment case on the company where
absence of debt as compared to other OEMs should help translate topline growth to its
bottom-line. The cash balances and short term investments amounting to PkR66bn are
expected to add to its earnings trajectory.
 We have an Outperform stance on INDU. Our TP of PkR1,924/share is based on DCF
methodology offering 59% upside from current levels. The stock is currently trading at
one-year forward P/E and EV/EBITDA of 5.1x and 2.1x, respectively.
Indus Motors Financial Snapshot
Income Statement Quarterly Vehicle Sales Breakup
PKR mn FY20 FY21E FY22E FY23E 18,000
16,000
Sales 86,167 189,734 217,661 236,734 14,000
12,000
Gross Profit 7,450 27,443 29,034 30,794 10,000
GP Margin (%) 9% 14% 13% 13% 8,000
6,000
Other Income 3,205 4,183 5,568 5,673 4,000
2,000
Profit Before Tax 7,286 24,268 26,342 27,597 -
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Mar-19
Sep-19
Mar-20
Sep-20
Profit After Tax 5,081 17,230 18,703 19,594
EPS (PKR) 64.64 219.21 237.95 249.29
Corolla Fortuner Hilux Yaris
Balance Sheet INDU CY20 Price Performance

PKR mn FY20 FY21E FY22E FY23E 30%
20%
Cash & ST Investments 42,366 69,576 68,688 72,078
10%
PP&E 16,502 15,696 14,852 14,002 -10%
-20%
Total Assets 80,279 112,920 112,368 114,347 -30%
ST & LT Debt 499 0 0 0 -40%
-50%
Equity 41,169 56,041 63,583 70,994
Jul-20
Jul-20
Jan-20
Apr-20
May-20
May-20
Jun-20
Nov-20
Dec-19
Feb-20
Mar-20
Mar-20
Aug-20
Sep-20
Sep-20
Dec-20
Oct-20
INDU KSE100
Pak Suzuki Motor (PSMC) – Undervalued with the auto space – TP: PKR 282/sh
 A surprising gap in valuation has remained under the radar with PSMC. The largest PSMC Overview
automotive capacity of Pakistan is currently priced at USD95mn trading at implied
Target Price (PKR/sh) 282
volumes of 71k units. We see deep value in the scrip owing to its earnings potential
and better margin delivery ahead. Two things that lead our excitement are changing Current Price (PKR/sh) 217
sales mix to high margin vehicles and ability to dominate in the small car segment. Upside (%) 29%
Stance BUY
 Alto has emerged as the savior for the company where the reputation of
Mkt. Cap. (PKR bn) 17.9
underwhelming economy cars has been well addressed. In the past twelve months,
Suzuki Alto has single handedly outsold each model line up across the industry in Mkt. Cap. (USD mn) 111.6
various segments with 29k units sold. The industry is likely to see the economy Volumes – 1yr avg. (mn shares) 0.51
segment flourish after the sizeable drop in interest rate assuring affordability while ADTV (USD mn) 0.65
the absence of imported alternatives remains a boon on the volumetric front.
 Another development that has helped vastly improve the investment case of the
company is the balance sheet that has seen aggressive deleveraging with borrowings
now at ~PkR12bn as compared to ~PkR33bn a quarter ago. This is attributable to
healthy order influx enabling the company to meet its working capital requirements
from advances obtained as well as inventory reduction.
 Consequently, we project PSMC to post an EPS of PKR27/51/55 in CY21/22/23E,

respectively. The stock is currently trading at one-year forward P/E and EV/EBITDA of
6.9x and 3.8x, respectively. We have an Outperform stance on the scrip with TP of
282/sh.
Pak Suzuki Motors Financial Snapshot
40,000
PKR mn CY19 CY20E CY21E CY22E
35,000
Sales 116,548 78,679 117,263 150,897 30,000
Gross Profit 1,985 3,031 7,589 11,452 25,000
20,000
GP Margin (%) 2% 4% 6% 8%
15,000
Other Income 223 261 478 604 10,000
Profit Before Tax -4,974 -3,157 3,116 5,899 5,000
-
Profit After Tax -2,943 -2,305 2,212 4,189
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Mar-19
Sep-19
Mar-20
Sep-20
EPS (PKR) -35.76 -28.00 26.88 50.89
Cultus Ravi Mehran Alto Bolan Wagon-R Swift
Balance Sheet PSMC CY20 Price Performance

PKR mn CY19 CY20E CY21E CY22E 20%

0%
Total Current Assets 58,145 38,424 39,438 40,670
-10%
PP&E 15,686 13,589 11,788 9,958 -20%
Total Assets 77,660 57,124 56,186 55,475 -30%
-40%
ST & LT Debt 32,411 12,956 6,478 0
-50%
Equity 25,951 23,646 25,365 27,907
Jul-20
Jul-20
Jan-20
Apr-20
May-20
May-20
Jun-20
Nov-20
Dec-19
Feb-20
Mar-20
Mar-20
Aug-20
Sep-20
Sep-20
Dec-20
Oct-20
PSMC KSE100
Honda Atlas – Recovering margins amidst high growth – TP: PKR 420/sh
 We contend for earnings growth from the recovery of margins and uptick in volumes HCAR Overview
coupled with prospective launch of Honda City model. While details are sketchy, Target Price (PKR/sh) 420
grapevine suggests the company has been striving to replace the outdated Honda City
Current Price (PKR/sh) 316
with 6th Generation Honda City. So far the company has been working closely with its
vendors for a timely rollout. Taking precedence from earlier model launches for the Upside (%) 31%
company and the industry, we eye an incubation period of over a year before the first Stance BUY
6th Gen CKD is rolled out. Mkt. Cap. (PKR bn) 45.1
 We reinitiate our coverage of Honda Atlas Cars (Pakistan) Limited (HCAR) after Mkt. Cap. (USD mn) 282.1
aligning our earnings estimates with tangible recovery in automobile sales as well as Volumes – 1yr avg. (mn shares) 0.35
industry dynamics. To recall, the company managed to report bottom-line of PKR4.8/sh ADTV (USD mn) 0.60
for the year ending MY20 after sales slowed down by 42% YoY from 54% drop in sales.
Key developments that inspire our new estimates are 1) Honda City model launch
targeted for MY22, 2) Honda Civic launch prospect increased and accounted for in
MY23 after international model tease and iii) unfazed sales in face of competition.
 On account of volumes, City can bolster volumes towards 15k/27k units sales in
MY21/22E. Upgrade of the 11 year old City model is expected to attract demand from
all corners and likely to garner large interest. The timing is likely to fit industry upcycle
ultimately helping the company retain its margin trajectory. The stock is currently
trading at one-year forward P/E and EV/EBITDA of 7.4x and 3.3x, respectively.
 We now project HCAR to post an EPS of PKR20.6/39.1/65.5 in MY21/22/23E,
respectively. We re-iterate our Outperform stance on the scrip DCF-based TP of 420/sh,
offering a 31% upside from current levels.
Honda Atlas Financial Snapshot
16,000
PKR mn MY20 MY21E MY22E MY23E
14,000
Sales 55,046 78,499 120,542 151,217 12,000
Gross Profit 4,091 6,763 9,217 14,185 10,000
8,000
GP Margin (%) 7% 9% 8% 9%
6,000
Other Income 639 447 1,156 2,715 4,000
Profit Before Tax 1,547 4,920 7,862 13,182 2,000
-
Profit After Tax 682 2,952 5,582 9,359
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Mar-19
Sep-19
Mar-20
Sep-20
EPS (PKR) 4.77 20.67 39.09 65.54
City Civic BR-V
Balance Sheet HCAR CY20 Price Performance

PKR mn MY20 MY21E MY22E MY23E 80%
40%
20%
PP&E 4,519 3,976 5,857 7,545 0%
Total Assets 31,842 36,395 52,628 62,098 -20%
ST & LT Debt 2,332 0 0 0 -40%
-60%
Equity 16,557 17,938 20,664 25,311
Jul-20
Jul-20
Jan-20
Apr-20
May-20
May-20
Jun-20
Nov-20
Dec-19
Feb-20
Mar-20
Mar-20
Aug-20
Sep-20
Sep-20
Dec-20
Oct-20
HCAR KSE100
Oil and Gas Exploration
Oil and Gas Exploration Sector – Banking on global recovery (1/2)
 One sector which sits on a sweet spot in regards to emerging dynamics of the
oil market and Pakistan’s economy is the E&P sector. Both higher oil prices and Pakistan Oil and Gas Production
rupee devaluation work in the industry’s favour. However, current stock price 95,000 4,150
prices of the listed E&Ps amply reflect prominent concerns on circular debt pile 90,000
4,100
85,000
up, jittery cash flows and truncated CAPEX. 80,000 4,050
75,000 4,000
 We believe the commitment of the incumbent government to address the 70,000
65,000 3,950
circular debt has yet to show any meaningful premium to positive earnings 60,000 3,900
55,000
outlook for the sector. 50,000
3,850
45,000 3,800
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
 Domestic hydrocarbon production has failed to pick up despite the resurgence
in oil demand and economic activity. Oil production has remained lull falling by
Oil - RHS (bpd) Gas - LHS (mmcfd)
5% Y/Y during 4MFY21 averaging at 75k bpd as compared to the same period Oil prices recovery remained breif
last year. Lower production from Nashpa, Kunnar, and fields located on the 140
South belt have contributed to the decline so far. 120

100
 Natural gas production has witnessed a drop of 3% Y/Y during 4MFY21 amid 80
lower output at Mari, natural decline at Sui and overall lower offtakes at 60
Qadirpur, KKPD and Adhi. Average production has been noted at 3,568mmcfd 40
for the period. 20
0
Jun-14
Jun-15
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Oil and Gas Exploration Sector – Banking on global recovery (2/2)
Company –wise earnings sensitivity
 The outlook for oil prices next year is clearly positive, with prices seen OGDC
rebounding from multi-year low levels in 2020 as fast-tracked vaccines enable a USD/bbl FY21E FY22E TP
return towards potential mobility. We build in crude prices averaging at 35 16.1 16.3 158
40 17.3 17.6 165
USD45/bbl in line with EIA estimates. 45 18.5 19.0 173
50 19.7 20.3 180
 Globally, the International Energy Agency (IEA) is expecting demand to grow 55 20.9 21.5 187
by +5.5mbpd to 97.2mbpd vs. 91.7mbpd in 2020. Meanwhile, supply is 60 22.2 22.7 192
expected to rise by +1.6mbpd in 2021, higher than demand which is within our PPL
expectations as well. We opine that 2021 will be a year where oil producers will USD/bbl FY21E FY22E TP
have to work at balancing both growth and sustainability in the face of adversity 35 14.8 15.2 142
40 16.3 16.8 153
– which could continue to stall demand recovery. 45 17.6 18.3 163
50 18.9 19.8 172
 News flow of frontier play proving to offer reserves of over 1tcf has put PPL in 55 20.4 21.3 181
limelight. While the company remains tight lipped on the reserve size and 60 21.9 22.8 191
conformation of potential, our channel checks do confirm the company remains POL
active in the frontier region and has attained new data from the Margand field. USD/bbl FY21E FY22E TP
35 39.2 38.0 386
We await clarity from the management to incorporate the same in our
40 44.3 43.1 427
estimates. Our back of the envelope calculations suggest EPS impact of 45 49.5 46.9 468
PKR11.3/sh at peak production. 50 54.6 50.2 506
55 61.4 55.7 543
60 66.5 60.5 581
Oil and Gas Development Company (OGDC) – A mix of growth and value – TP:
PKR 173/sh
 Oil and Gas Development Company (OGDC) continues to enjoy a distinct OGDC Overview
advantage over its peers in terms of i) aggressive exploration efforts, ii) least Target Price (PKR/sh) 173
sensitivity to oil prices amid capped gas fields and a balanced product mix, and iii) Current Price (PKR/sh) 101
vast exposure to exploration assets in Pakistan.
Upside (%) 71%
 OGDC boasts production mix that shields it from major volatility in crude prices Stance BUY
as gas and oil each contribute 45% towards its revenue. Further, the geographic Mkt. Cap. (PKR bn) 433.4
diversification of major production fields like Adhi, Nashpa, Kunnar, Qadirpur in
Mkt. Cap. (USD mn) 2,709
Punjab, KPK, and Sindh allay risk of any unforeseen production halts.
 Going forward, with average success ratio of over 33% since FY17, we expect
ADTV (USD mn) 2.4
momentum to shift in favor of OGDC with focus on reserve replenishment that
should help improve the production base. Long term prospects of the stock
remain enticing.
 We highlight our BUY stance on OGDC with our Dec’20 target price of PkR173/sh
using reserve based valuation methodology whereby the scrip offers 71% return.
OGDC is currently trading at a FY21E P/E of 5.5x and implied oil price of
USD13/bbl compared to current oil price of USD47/bbl.
Oil and Gas Development Company Financial Snapshot
Income Statement
PKR mn FY20 FY21E FY22E FY23E
Sales 244,857 226,680 243,245 239,916
Gross Profit 149,078 124,674 144,328 139,959
GP Margin (%) 61% 55% 59% 58%
Other Income 3,011 3,686 4,142 4,654 OGDC CY20 Price Performance
Profit Before Tax 143,065 123,735 133,486 136,490 20%
Profit After Tax 100,082 80,070 88,188 90,173 10%
0%
EPS (PKR) 23.27 18.62 20.51 20.97 -10%
-20%
-30%
-40%
Balance Sheet -50%
PKR mn FY20 FY21E FY22E FY23E -60%
Jul-20
Jul-20
Jun-20
Jan-20
Apr-20
May-20
May-20
Nov-20
Dec-19
Feb-20
Mar-20
Mar-20
Aug-20
Sep-20
Sep-20
Dec-20
Oct-20
OGDC KSE100
PP&E 116,355 125,501 130,176 136,225
Total Assets 861,464 924,202 959,974 1,023,865
ST & LT Debt 0 0 0 0
Equity 688,858 750,437 807,461 865,394
Total Equity and Liabilities 861,464 924,202 959,974 1,023,865
Pakistan Petroleum Limited (PPL) – Improving circular debt to unlock value
– TP: PKR 156/sh
 PPL’s fundamentals remain overshadowed by concerns on pile up of circular PPL Overview
debt. Stock of circular debt stood at stood at PkR326bn as of 30th Sept’20. The Target Price (PKR/sh) 156
profound accumulation has exhausted the funds with the company to finance its Current Price (PKR/sh) 91
exploration activities. Resultantly, the company drilled 14 development wells and Upside (%) 71%
5 exploratory wells, a multi-period low. Stance BUY
 While efforts of the company to stem natural depletion of Sui, its largest asset Mkt. Cap. (PKR bn) 246.3
currently are visible with production decline from the field truncated at 4% Mkt. Cap. (USD mn) 1,539.4
against its natural depletion rate of over 7%. Nonetheless, the company is slated
to deliver flattish production growth with upside risk from resumption of offtakes
ADTV (USD mn) 2.8
from Kandhkot.
 One kicker to valuations may emerge from on-going exploration efforts in the
frontier region where find is currently under testing to assess the size of the
reserves. News flows have highlighted on reserve size of over 1tcf. We await
clarity from the management to incorporate the same in our estimates. Our back
of the envelope calculations suggest EPS impact of PKR11.3/sh at peak
production.
 We highlight our BUY stance on PPL with our Jun’21 target price of PkR156/sh
using reserve based valuation methodology whereby the scrip offers 71% return.
PPL is currently trading at a FY21E P/E of 5.4x and implied oil price of USD18/bbl
compared to current oil price of USD47/bbl.
Pakistan Petroleum Financial Snapshot
Income Statement
Sales 157,593 136,549 142,032 145,222
Gross Profit 91,034 74,026 78,117 79,872
GP Margin (%) 58% 54% 55% 55%
Other Income 1,070 1,013 1,052 1,092 PPL CY20 Price Performance
Profit Before Tax 70,485 64,791 68,917 72,184 20%
10%
Profit After Tax 50,256 46,649 49,620 51,973
0%
EPS (PKR) 18.47 17.14 18.24 19.10 -10%
-20%
-30%
-40%
Balance Sheet
-50%
PKR mn FY20 FY21E FY22E FY23E -60%
Jul-20
Jul-20
Jun-20
Jan-20
Apr-20
May-20
May-20
Nov-20
Dec-19
Feb-20
Mar-20
Mar-20
Aug-20
Sep-20
Sep-20
Dec-20
Oct-20
PP&E 158,659 152,845 152,184 151,577 PPL KSE100
Total Assets 541,902 525,344 564,312 601,550

Equity 344,598 363,630 394,203 425,769
Pakistan Oilfields Limited (POL) – Recovering oil prices to bolster profitability – TP:
PKR 506/sh
 We expect FY21 and onwards to fare better where firm recovery in oil prices and POL Overview
stability in production can help deliver sustainable earnings. POL trades at the Target Price (PKR/sh) 506
highest implied oil prices of USD32/bbl vs an average of USD16/bbl for PPL and Current Price (PKR/sh) 404
OGDC. Upside (%) 25%
 We believe the valuation premium is largely attributable to company’s higher Stance BUY
earnings sensitivity to oil prices. This may continue to expand with lowest Mkt. Cap. (PKR bn) 114.7
exposure to circular debt.
Mkt. Cap. (USD mn) 716.8
 Exploration activity is expected to remain elevated for the company with Volumes – 1yr avg. (mn shares) 1.0
expected tie-in of Mamikhel and resumption of normalized flows from TAL is
ADTV (USD mn) 0.45
likely to keep oil production over 7% compared to FY20. Overall, POL is set to post
a decent 3-yr FY21F-FY24F earnings CAGR of 4%.
 POL is likely to stand out in E&P sector with its dividend yield that remains
strong at 11%. Given outlook of stability in earnings profitability and relative
immunity against circular debt, cash flow generation of the company will remain
strong. We foresee payout of the company to remain healthy at PKR46/sh and
PKR49/sh in FY21F and FY22F, respectively.
Pakistan Oil Fields Financial Snapshot
Income Statement
Sales 38,196 39,606 40,882 41,868
Gross Profit 22,368 20,199 21,259 21,772
GP Margin (%) 59% 51% 52% 52%
POL CY20 Price Performance
Finance Cost 2,212 1,620 1,587 1,692
10%
Profit Before Tax 21,734 20,376 21,587 22,663
0%
Profit After Tax 16,376 15,282 16,190 16,997
-10%
EPS (PKR) 57.69 53.84 57.04 59.88
-20%
-30%
-40%
Balance Sheet
-50%
Jul-20
Jul-20
Jun-20
Jan-20
Apr-20
May-20
May-20
Nov-20
Dec-19
Feb-20
Mar-20
Mar-20
Aug-20
Sep-20
Sep-20
Dec-20
Oct-20
POL KSE100
PP&E 7,542 7,661 7,325 7,058
Total Assets 91,596 101,579 107,904 110,983
Equity 40,267 41,593 43,803 45,685
Chemicals
Pakistan Chemicals Sector – Margins on the rise
 Divergent dynamics have prevailed in the Pakistan Chemicals sector so far largely USD/ton
700
influenced by downstream product demand and pandemic outbreak. To recall, in
600
11MCY20 the chemical industry business climate was largely dampened by COVID-19
500
and falling oil prices, before bottoming out amid resurgence of domestic activity. With
400
recent vaccine breakthroughs, expectations for demand recovery abroad are building
300
up in product prices.
200
 On the supplies front, capacity addition has resumed its pace in certain chemicals 100
while the elimination of uncompetitive capacities has accelerated on the back of -
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Mar-19
Sep-19
Mar-20
Sep-20
unsustainable primary deltas. Return of oil prices to a balanced level may likely bode
well for chemical prices.
PVC-Ethylene Margin Average
 PVC-Ethylene: PVC-Ethylene margins have witnessed a trailing 3M delta residing at 225
USD597/ton. Disruptions in PVC supply in the region as well as a better than expected 205
rebound in demand have sent PVC prices galloping to USD1,120/ton, up by 15% from 185
165
QTD. On the other hand, ethylene prices are likely to remain under pressure from 145
capacity additions of 11.8mn TPA, of which ~60% is from China. 125
105
 PTA-PX: PTA prices have remained sticky at USD470/ton average in the past 11 months 85
and continue to be influenced by reduced PTA demand in the region. This is a result of 65
45
outdated polyester producers being eliminated at an accelerating pace. PX supply has 25
remained sufficient amid slowdown while prices have closely tracked crude rates so far.
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Mar-17
Sep-17
Mar-18
Sep-18
Mar-19
Sep-19
Mar-20
Sep-20
PTA-PX margins may resultantly witness a drag at current levels of USD100/ton.
PTA-PX margin Average
Engro Polymer and Chemicals (EPCL) – Expansion plans coupled with record
margins to boost bottom-line – TP: PKR 67/sh
EPCL Overview
 A strong 3QCY20 result accompanied with outgoing supply chain issues have led Target Price (PKR/sh) 67
us to reconsider earnings trajectory going forward. The company realized core Current Price (PKR/sh) 46
delta of USD550/ton that has since then escalated to levels of USD666/ton QTD.
Upside (%) 46%
We now see earnings expansion from core delta and PVC III commissioning to
Stance BUY
dictate the upside.
Mkt. Cap. (PKR bn) 41.8
 EPCL’s PVC line III expansion of 100k tons per annum is expected to commence
Mkt. Cap. (USD mn) 261.6
commercial operations by end of 1QCY21. The said expansion comes at a time
when regional PVC demand has escalated while supply constraints emanating Volumes – 1yr avg. (mn shares) 3.7
from plant closures and COVID-19 induced disruptions have dictated a run-up in ADTV (USD mn) 0.8
PVC prices as well as lucrative primary delta.
 We believe the company is likely to target the export market with the said
expansion. This is expected to double the EBITDA of the company to PkR10.9bn
from PkR5.7bn in CY19.
 We highlight our Outperform stance on EPCL with our Jun’21 target price of
PkR67/sh representing an upside of 46% from last close trading at a P/E of 5.5x
vis-à-vis index multiple of 6.9x
Engro Polymer and Chemicals Financial Snapshot
Income Statement Fundamentals Snapshot
60,000 30.0%
Sales 37,837 35,067 48,875 53,597 50,000 25.0%
Gross Profit 8,106 9,286 10,900 10,374 40,000 20.0%
GP Margin (%) 21% 26% 22% 19% 30,000 15.0%
Other Income 1,786 1,991 1,803 1,426 20,000 10.0%
Profit Before Tax 5,043 6,747 8,377 7,661 10,000 5.0%

Profit After Tax 3,704 4,790 7,307 6,748 - 0.0%
EPS (PKR) 4.07 5.27 8.04 7.42 CY18 CY19 CY20E CY21E CY22E
Revenue GP Margin (%)
Balance Sheet EPCL CY20 Price Performance

40%
10%
PP&E 31,433 35,977 36,879 36,787 0%
Total Assets 57,836 63,078 61,218 63,515 -10%
-20%
ST & LT Debt 21,499 18,511 17,131 16,146 -30%
-40%
Equity 17,731 23,692 25,466 29,669
Jul-20
Jul-20
Jan-20
Apr-20
May-20
May-20
Jun-20
Nov-20
Dec-19
Feb-20
Mar-20
Mar-20
Aug-20
Sep-20
Sep-20
Dec-20
Oct-20
EPCL KSE100
Lotte Chemicals Pakistan (LOTCHEM) – Subdued margins to limit upside – TP:
PKR 14/sh
 COVID-19 led disruptions of earnings and operations are yet to subside for the LOTCHEM Overview
PTA manufacturer. While downstream polyester segment has managed to Target Price (PKR/sh) 14
resurface to operating levels of 75%. This transpires into improved utilization Current Price (PKR/sh) 13
levels, the company’s profitability is expected to remain marred from Upside (%) 7%
underwhelming primary margins. Stance Neutral
 PTA prices have so far hovered at USD442/ton down by 30% Y/Y during the same Mkt. Cap. (PKR bn) 19.7
period. PX has traded at an average of USD517/ton, down by 34% Y/Y on QTD Mkt. Cap. (USD mn) 123
basis. As a result primary delta has suffered restricting at USD98/ton.
 Noticeable improvement in fundamentals is unlikely in the near term for the ADTV (USD mn) 0.38
company with earnings likely to remain depressed under current margin regime.
 We have a Neutral stance on LOTCHEM with our Jun’21 target price of
PkR13.9/sh representing an upside of 5% from last close trading at a P/E of 13.0x.
Lotte Chemicals Financial Snapshot
Income Statement Fundamentals Snapshot
70,000 14.0%
60,000 12.0%
Sales 60,540 34,400 40,636 42,261
50,000 10.0%
Gross Profit 7,876 2,097 3,312 3,610 8.0%
40,000
GP Margin (%) 13% 6% 8% 9% 6.0%
30,000
4.0%
Other Income 1,229 946 833 998 20,000 2.0%
Profit Before Tax 7,779 2,238 3,218 3,614 10,000 0.0%
Profit After Tax 5,542 1,533 2,349 2,674 - -2.0%
EPS (PKR) 3.66 1.01 1.55 1.77 CY15 CY16 CY17 CY18 CY19 CY20E CY21E CY22E
GP Margin (%) Revenue
Balance Sheet LOTCHEM CY20 Price Performance


-20%
PP&E 4,776 5,312 4,521 4,128
-30%
Total Assets 27,526 23,387 25,233 26,591
-40%
-50%
Equity 15,792 16,568 17,782 19,321
Jul-20
Jul-20
Jan-20
Apr-20
May-20
May-20
Jun-20
Nov-20
Dec-19
Feb-20
Mar-20
Mar-20
Aug-20
Sep-20
Sep-20
Dec-20
Oct-20
LOTCHEM KSE100
Fertilizers
Pakistan Fertilizer – A safe bet with consistent yields
Urea price moves with inventory level
 GIDC to be paid in 48 equal installments instead of 24 installments will V Mn MT
significantly reduce the annual cash outflow for the companies In this regard, 2,000 1.2
1.0
the companies would liquidate cash and ST investments first and partially 1,500
0.8
receive dues from the government to clear the GIDC dues. 1,000 0.6
PkRmn GIDC Cash + Investment Subsidy + Sales Tax Receivable CF impact/sh 0.4
500
0.2
FFC 62,643 66,002 18,144 12.31
0 0.0
EFERT 18,944 20,760 8,343 3.55 2015 2016 2017 2018 2019 2020
FFBL 22,200 8,299 7,963 4.31
Local urea price (PkR/bag) Urea inventory
FATIMA 5,822 3,090 10,036 0.69
Local DAP prices correlated with international prices
 As a result of resumption of RLNG plants till Nov’20, we expect the inventory
USD/MT
to close at ~0.3mn tons in CY20 while forecasted urea demand would be 4000 500
~6.0mn MT. 3500
400
3000
2500 300
 Affordable urea prices and materialization of DAP subsidy would keep the 2000
200
demand strong going forward. Furthermore, tractor subsidy could also provide 1500
1000
an impetus to the demand. 500
100
0 0
 With the monetary easing during CY20, the dividend yield of Fertilizer sector 2015 2016 2017 2018 2019 2020
has become more attractive. In this regard, FFC and EFERT are offering Local DAP price (PkR/bag)
attractive dividend yields of 10% and 15%, respectively. International DAP price (USD/MT)
Fauji Fertilizer Company (FFC) – A safe bet in a volatile landscape – TP: PKR 125/sh
FFC Overview
 FFC is one of the premier brands of urea a having total capacity of 2.05mn tons Target Price (PkR/sh) 125
and a market share of over 40%. Higher offtake and better gross margins will Current Price (PkR/sh) 101.29
lead to better earnings growth and more stable dividend stream in future in Upside (%) 23%
comparison to peers.
Stance BUY
 The company has a huge pile of cash ~PkR66bn as at 3QCY20 that contributed Mkt. Cap. (PkR bn) 129
30% to the pre-tax profits. However, after GIDC decision we expect the Mkt. Cap. (USD mn) 807
company’s other income to come under pressure and reduce earnings on a Volumes – 1yr avg. (mn shares) 1.21
recurring basis, going forward. To highlight, FFC’s GIDC payable stands at ADTV (USD mn) 0.80
PkR62.6bn as per the latest accounts.
 Thar Energy Limited (FFC stake: 30%) is likely to commence its operations
which is anticipated to contribute PkR0.9/sh towards FFC’s earnings from CY22.
 The scrip offers an attractive dividend yield of 10% and a capital upside of 24%
at our Dec21 TP of PkR 125/sh, with the stock trading at a CY23 PE of 7.9x.
Fauji Fertilizer Company Financial Snapshot
Income Statement Urea price increase drives FFC’s topline
PkR mn CY20E CY21E CY22E CY23E 1900 120,000
Sales 96,941 107,523 113,141 117,563
1800
Gross Profit 33,522 32,307 32,405 33,002 110,000
1700
GP Margin (%) 34.0% 30.1% 29.3% 28.2% 100,000
1600
Finance Cost 2,192 1,948 1,184 1,120
90,000
Profit Before Tax 25,467 23,451 23,654 23,458 1500
Profit After Tax 18,266 16,888 17,067 16,945 1400 80,000

2019 2020 2021 2022 2023
EPS (PkR) 14.36 13.08 13.32 13.15
Urea price (PkR/bag) Revenue (PKRmn)
Balance Sheet FFC CY20 Price Performance

PkR mn CY20E CY21E CY22E CY23E 20%
PP&E 22,787 22,787 22,787 22,787

-20%
Total Assets 154,174 141,451 145,260 148,682
ST & LT Debt 31,529 14,307 13,557 12,807 -40%
Apr-20
Oct-20
Mar-20
Jan-20
Jun-20
Aug-20
Jul-20
Dec-19
Feb-20
May-20
Sep-20
Dec-20
Nov-20
Equity 40,092 42,350 46,060 49,329
Total Equity and Liabilities 154,174 141,451 145,260 148,682 FFC KSE100 Index
Engro Fertilizer – One of the highest yields on offer – TP: PKR 72/sh
EFERT Overview
 Recent stay order from High Court on concessionary gas bodes well for the
company. However, for the payment of GIDC dues on non-concessionary gas Target Price (PkR/sh) 72
~PkR18.9bn, EFERT has: Current Price (PkR/sh) 60.49
 Ample buffer of cash and short term investments worth PkR20.7bn that Upside (%) 18%
would reduce the other income of company going forward by PkR0.73/sh Stance BUY
and Mkt. Cap. (PkR bn) 82
 Possibility of settlement of dues via receivables from govt valued at Mkt. Cap. (USD mn) 510
~PkR8.3bn. Volumes – 1yr avg. (mn shares) 2.80
ADTV (USD mn) 1.10
 Furthermore, expiry of EFERT’s concessionary gas remains debatable between
CY21 and CY23. We have assumed it from CY23 that decreases the gross
margins of company from 33% in 9MCY20 to 22% in CY23.
 The scrip offers an attractive dividend yield of 15% as opposed to 3yr/10yr PIB
of 8.3%/10%. However, EFERT’s core earnings and payouts are at a risk due to
suspension of concessionary gas.
 Our Dec21 TP for the share stands at PkR 72/sh, with the stock trading at a
CY23 PE of 5.2x.
Engro Fertilizer Financial Snapshot
Income Statement Urea price increase drives EFERT’s topline
PkR mn CY20E CY21E CY22E CY23E 140,000 2000
Sales 116,211 126,300 132,065 138,107
130,000 1900
Gross Profit 34,223 35,145 36,150 37,151
1800
GP Margin (%) 29% 28% 27% 27% 120,000
Finance Cost 3,485 2,800 2,672 2,417 1700
110,000 1600
Profit After Tax 14,599 14,668 15,295 15,768 100,000 1500
EPS (PkR) 10.92 10.98 11.45 11.81 2019 2020 2021 2022 2023
Revenue (PKRmn) Urea price (PkR/bag)
Balance Sheet EFERT CY20 Price Performance

0%
PP&E 65,924 65,924 65,924 65,924 -20%
Total Assets 117,977 128,177 130,207 131,831
ST & LT Debt 32,938 32,938 29,938 26,938 -40%
Mar-20
Apr-20
Oct-20
Jan-20
Jul-20
Jun-20
Aug-20
Dec-19
May-20
Dec-20
Feb-20
Sep-20
Nov-20
Equity 37,157 42,144 45,087 47,502
EFERT KSE100 Index
Fauji Fertilizer Bin Qasim (FFBL) – Rising DAP prices bolsters profitability – TP: PKR
26/sh
 Following SC’s ruling on GIDC, the company would settle the dues via i) FFBL Overview
issuance of rights (PkR5.0bn), ii) cash and ST investments (PkR8.3bn) and iii) Target Price (PkR/sh) 26
receivables from govt. Furthermore, the company is also considering to divest Current Price (PkR/sh) 20.78
its stake in Foundation Wind Energy I and II to raise funds. Upside (%) 25
Stance BUY
 FFBL witnessed a turnaround in core fertilizer business in 3QCY20 as a result of
Mkt. Cap. (PkR bn) 19,410
reversal in international DAP price (up 20%FYTD to USD370/MT) translating into
Mkt. Cap. (USD mn) 121
higher local prices (PkR4,000/bag in Oct’20). Based on our back of the envelop
calculations, increase of PkR100/bag expands earnings by PkR0.92/sh. Volumes – 1yr avg. (mn shares) 4.23
ADTV (USD mn) 0.53
 Having posting a double digit volumetric growth of 37%CYTD for DAP,
materialization of recently announced DAP subsidy would keep the offtakes
elevated ahead.
 Higher DAP price, removal of GIDC on feed and international coal prices on a
lower side would keep the gross margins at a comfortable level of 12% going
forward.
CY23 PE of 9.5x.
Fauji Fertilizer Bin Qasim Financial Snapshot
Income Statement DAP price increase drives FFBL’s topline
PkR mn CY20E CY21E CY22E CY23E 120,000 6000
Sales 76,246 87,910 97,696 100,569 100,000 5000
Gross Profit 10,523 11,383 12,325 11,160 80,000 4000
GP Margin (%) 14% 13% 13% 11% 60,000 3000
Finance Cost 4,818 3,970 3,311 2,490
40,000 2000
20,000 1000
Profit After Tax 2,788 3,268 4,052 3,669
- 0
EPS (PkR) 2.16 2.53 3.14 2.84 2019 2020 2021 2022 2023
Revenue (PKRmn) DAP price (PkR/bag)
Balance Sheet FFBL CY20 Price Performance

0%
-20%
PP&E 11,108 11,789 12,469 13,149
Total Assets 97,764 103,203 104,314 92,839 -40%
ST & LT Debt 45,310 41,560 36,356 22,227 -60%
Mar-20
Apr-20
Oct-20
Jan-20
Jun-20
Jul-20
Aug-20
Dec-19
Feb-20
May-20
Sep-20
Dec-20
Nov-20
Equity 13,687 16,956 18,426 18,867
FFBL KSE100 Index
Pakistan Long Steel
Long Steel – Banking on improving construction activity
 Construction Package to generate demand: Pakistan has a very large Sales to grow rapidly
undocumented shadow economy. In order to direct funds from the PKR bn Sales-ASTL Sales-MUGHAL
60,000 Growth(%) 80%
undocumented sector, the government waived provision of showing the
50,000
source of funds in case of the purchase or construction of residential or 60%
40,000
commercial buildings. Moreover, the government plans to build low cost 40%
30,000
housing units under the “Naya Pakistan Housing Scheme” for which tax 20%
20,000
incentives and loans at lower interest rate will be provided. All the initiatives
10,000 0%
will generate activity in the construction sector that will spur demand for long
0 -20%
steel.
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
 Sharp monetary easing to lower finance cost: In a bid to offer relief to
businesses and counter economic slowdown due to COVID19, SBP has cut the Debt to Asset Ratio Rising
interest rate by 625bps in the last three months. Moreover, banks are being 60%
asked by the central bank to defer principle payments for one year. Sharp
50%
monetary easing would provide relief to long steel player in the form of lower
finance cost as they are highly leveraged. 40%
30%
 Duty protection improves pricing power: Duties imposed on import of long 20%
steel provide protection to the local steel industry. Currently duties amounting
10%
to 50%-60% are imposed on the import of different long steel products. This
provides pricing power to local players against imported products. Moreover, 0%
2016 2017 2018 2019 2020
recent reduction in valuation of imported scrap (from USD360/ton to
301/tons) for determination of customs tariff will support margins by reducing ASTL MUGHAL
overall import cost of raw material
Mughal Steel (MUGHAL): Primed to capitalize on recovering demand – TP: PKR 84/sh
 New furnace capacities bridging the gap between re-rolling and melting: Due to MUGHAL Overview
capacity constraints in the past owing to the non-availability of power, MUGHAL used Target Price (PKR/sh) 84
to purchase billets to partially meet it rebar production demand. This led to lower
margins as compared to its peers. With the installation of new furnaces, the gap
Upside (%) 25%
between melting and re-rolling capacity has reduced. Moreover, MUGHAL also
enhanced its sanctioned load from 19.99megawatts to 79.99megawatts. At present, Stance Buy
MUGHAL can significantly improve its margins by maximizing in house billet production Mkt. Cap. (PKR bn) 17
and take advantage of declining international scrap prices. Mkt. Cap. (USD mn) 106
 Surge in demand expected: With the construction of the Diamer Bhasha Dam Volumes – 1yr avg. (mn shares) 1.06
commencing, we can expect MUGHAL to benefit from a sudden surge in demand ADTV (USD mn) 0.35
emanating from the project. We estimate the construction of the dam to require
~15mnMT of cement and 1.6mnMT of steel spread over a period of 7 years; thereby
enhancing annual steel demand by ~230,000MT (~4.6%of industry capacity). Moreover,
MUGHAL is the only quality rebar supplier in the region where the dam site is located,
further supporting the company’s prospects over the dam’s construction.
 MUGHAL is highly efficient in terms of distribution and Admin expenses: Its
distribution and admin expenses as a percentage of sales stand at 1.9% compared to
4.5% of ASTL. The difference largely arises from MUGHAL's lower transportation cost,
salaries, and marketing expenses. MUGHAL's plant is located in Lahore which is close to
numerous public social development projects. Moreover, the majority of the rural
population of Pakistan resides in North that is rapidly moving to cities like Lahore,
Islamabad ,and Multan triggering initiation or expansion of mega residential projects
like Bahria town, DHA and Askari.
Mughal Steel Financial Snapshot
Income Statement
Sales 26,580 33,199 38,732 45,162
Gross Profit 2,791 3,532 4,283 5,163
GP Margin (%) 10% 11% 11% 11%
Finance Cost 1,037 1,024 1,169 1,335 Mughal Steel (MUGHAL) - CY20 Price Performance
Profit After Tax 782 1,259 1,633 2,075 80%
EPS (PKR)
60%
DPS (PKR) 2.00 3.00 4.00 5.00
40%
20%
Balance Sheet 0%
Apr-20
Mar-20
Mar-20
Dec-20
May-20
May-20
Aug-20
Jun-20
Oct-20
Jan-20
Jan-20
Nov-20
Feb-20
Jul-20
Jul-20
Sep-20
Sep-20
PKR mn FY21E FY22E FY23E FY24E -20%
Cash & ST Investments 646 307 769 1,325 -40%
PP&E 8,161 8,382 8,090 7,799
KSE-100 MUGHAL
Total Assets 22,911 25,133 27,987 31,365
ST & LT Debt 12,204 11,306 13,241 14,325
Equity 7,887 8,392 9,021 9,842
Textile Composites
Pakistan Textile Sector – Global recovery improving demand outlook
Textile Exports Rising
 Textile policy 2020 – 2025; awaits ECC’s approval
14.00 200
 Concessionary rate – electricity rate @ 9.0 cents, RLNG @
13.00 150
USD6.5/mmbtu, domestic gas @ PkR786/mmbtu
 Continuation of LTFF and EFS at 5% and 3%, respectively 12.00 100
 Rationalization of duty on the textile value chain 11.00 50
 Establishment of 3 more garment cities to promote value added textile 10.00

FY15 FY16 FY17 FY18 FY19 FY20
-
 Local cotton production is expected to decline to 7.0mn bales this year owing Textile exports (USDbn) USDPKR
to monsoon rains and pest attacks. Prices in local market touched a peak of Reduction in cotton production over the years
PkR10,100/maund. 3.5 16
3.0 14
 Amid ease in lockdowns globally, there has been influx of orders due to 2.5 12
worsening COVID situation in India and potential order diversions led by the 2.0
10
8
US/China trade war. Consequently, order book for all leading companies is 1.5
6
lined up till Mar’21. 1.0 4
0.5 2
 In the long run, Biden’s focus on sustainable long term strategy with China 0.0 0
FY15 FY16 FY17 FY18 FY19 FY20
could diminish the trade tensions between the two leading to rebound in
Cotton area (mn HA) Cotton production (mn bales)
textile orders from China.
 However, 2nd wave of COVID would continue to impact the readymade

garments.
Nishat Mills Limited (NML) – Investments offering support – PKR 125/sh
NML Overview
 NML is one of the largest and well diversified conglomerates that has
investment in Power, Cements, Banks, Auto, Textile, Insurance and Dairy Target Price (PkR/sh) 125
sectors. Our calculation suggests a portfolio value of PkR 103/sh, after a Current Price (PkR/sh) 93
discount of 30%. Upside (%) 35%
Stance BUY
 NML’s first phase of terry segment with a capacity of 10tpd is expected to
Mkt. Cap. (PkR bn) 33
achieve normal operations from Jan’21 which would be enhanced to 30tpd in
the future. Assuming gross margin of 20%, this segment adds PkR 0.45/sh.
 Hyundai Nishat Motor (Private) Limited would start generating return after ADTV (USD mn) 0.80
2/3yrs. Given NML’s stake of 12% and assuming net margin of 5%, we expect
the auto business to add EPS of PkR 0.9.
 In light of recovering global economic activity and the pent up demand, NML’s
order book is lined up till Mar’21. However, we believe future orders would
come under uncertainty in light of change in Biden’s policy towards China and
extent of 2nd wave of COVID.
 Approval of subsidized rates on gas would benefit the company having an EPS
impact of PkR 0.35/sh.
FY23 PE of 6.6x.
Nishat Mills Financial Snapshot
Income Statement NML Valuation break-up (PkR/sh)
PkR mn FY21E FY22E FY23E FY24E Textile 22
66,470 69,747 72,115 74,580 NPL 7
Sales
MCB 37
Gross Profit 7,975 8,450 8,723 9,036
DGKC 36
GP margin (%) 12.0% 12.1% 12.1% 12.1%
NCL 3
Other Income 3,562 3,695 3,896 3,931 LPL 3
Profit Before Tax 5,752 6,375 6,989 7,447 PKGP 3
Net Profit 4,499 5,060 5,630 6,042 Others 14
EPS (PkR) 12.80 14.39 16.01 17.18 SOTP value 125
Balance Sheet Nishat Mills (NML) - CY20 Price Performance

PkR mn FY21E FY22E FY23E FY24E 20%
Current Asset 44,185 46,493 48,496 49,804 0%

Long term Asset 69,725 69,354 69,021 68,721
-20%
Total Asset 113,910 115,847 117,516 118,525
29,357 27,246 24,411 20,587 -40%
Current Liabilities
Non current Liabilities 9,525 9,525 9,525 9,525 -60%
Mar-20
Apr-20
Oct-20
Jul-20
Jan-20
Jun-20
Aug-20
Dec-19
May-20
Dec-20
Feb-20
Sep-20
Nov-20
Total Liabilities 38,882 36,771 33,937 30,112
Total Equity 75,027 79,076 83,579 88,413
NML KSE100 Index
Nishat Chunian (NCL) – Focusing on high growth – TP: PKR 45/sh
 The company recently installed 3 printing machines for its home textile NCL Overview
division that contributes 29% sales to the total revenue and ~90% of sales are Target Price (PkR/sh) 45
export oriented. NCL is reaping benefits from this segment during the times of Current Price (PkR/sh) 38
COVID and the order book is lined up till Apr’21. Upside (%) 18%
Stance BUY
 The spinning segment accounted for 57% of NCL’s total revenue in FY20 and is
Mkt. Cap. (PkR bn) 9
operating near its rated capacity for the past few years and may face capacity
constraints.
 Additionally, NCL’s fuel and power mix puts it an advantage since coal is one of ADTV (USD mn) 0.21
the cheapest sources of power generation.
 Since its power subsidiary (NCPL) is facing liquidity issues, we saw dividend
constraints in prior quarters. However, NCPL could potentially pay a bumper
dividend should the MoU goes through. After a discount of 30%, this adds
PkR13/sh to our TP.
FY23 PE of 5.9x.
Nishat Chunian Financial Snapshot
Income Statement Currency depreciation drives NCL’s topline
PkR mn FY21E FY22E FY23E FY24E
50,000 200
Sales 39,518 44,302 47,530 50,577
40,000 190
Gross Profit 5,238 5,921 6,252 6,368
180
GP Margin (%) 13.3% 13.4% 13.2% 12.6% 30,000
170
Other Income 443 392 431 472 20,000
160
10,000 150
Profit After Tax 1,474 1,511 1,546 1,652
- 140
EPS (PkR) 6.1 6.3 6.4 6.9
FY20 FY21 FY22 FY23 FY24
Revenue (PkRmn) USDPkR
Balance Sheet Nishat Chunian (NCL) - CY20 Price Performance

PkR mn FY21E FY22E FY23E FY24E 40%
Cash & ST Investments 342 890 1,063 1,702 20%
PP&E 15,952 15,136 14,378 13,685
-20%
Total Assets 49,613 52,106 52,968 54,105
-40%
ST & LT Debt 29,357 30,061 29,275 28,675
-60%
Equity 14,817 16,026 17,263 18,585
Mar-20
Apr-20
Oct-20
Jul-20
Jan-20
Jun-20
Aug-20
Dec-19
May-20
Dec-20
Feb-20
Sep-20
Nov-20
NCL KSE100 Index

Technology
Technology: A fundamental shift towards ‘digitalization’ is materializing
 Digitalization in full throttle: A silver lining to emerge from the COVID-19 outbreak was that it highlighted
8 of the 10 largest companies globally are
the importance of digitalization towards the long-term success of any country, particularly Pakistan. The technology-based
pandemic fast-tracked the switch towards a digital medium suggested by an ever-increasing acceptance of Rank Stock Capitalization (USD bn)
digital avenues amongst the general population. 1 Apple 1,984
 Case-study analysis of digitalization efforts in global economies highlights a significant improvement in 2 Microsoft 1,617
3 Amazon 1,598
operational efficiency evidenced by an increased output amidst lower utilization of resources. It was
4 Google 1,196
estimated that within the United States, companies were able to annually save over USD 15,000 per
5 Facebook 785
employee with recent digital initiatives, such as remote-working policies. 6 Alibaba 751
 We think a similar shift will happen in Pakistan over the next ten years. This will be driven by both growth 8 Tesla 544
in the market caps of existing companies as well as new IPOs of digital businesses. To facilitate the access 10 Visa 450
of capital to growth companies, the Securities and Exchange Commission of Pakistan (SECP) and Pakistan
Stock Exchange have launched a junior board, Growth Enterprise Market. The GEM has easier listing
requirements and lower cost of going public. We think it could match for Pakistan what other junior boards
such as AIM in the UK, Star in China and Nasdaq in the US have achieved.
 We think Technology companies listed in Pakistan are attractively mis-priced. It remind us of early 2004,
when Pakistani banks used to trade at less than book value, while regional banks were trading at an
average of 4x Book value.
 All numbers show growth: Internet penetration has grown from 24m in 2014 to 87m by November 2020.
IT exports increased by 20% in 2019 to $1.2bn. According to a survey by Pakistan Association of Software
House (PASHA), revenues of their 180 members were expected to grow by 19% in 2019. We expect the
actual growth was much larger. The start-ups are mushrooming. According to some estimates there are
9000+ IT/tech related companies. Around 600 are members of PASHA. Post COVID the shift to digital has
accelerated and more than 1000 start ups were set up in 2020.
Systems Limited (SYS): Strong growth imminent – TP: PKR 521/sh
 Systems is still the largest IT services company in Pakistan with revenues SYS Overview
estimated to reached $58m in 2020. It was the top IT exporter in Pakistan in 2019 Target Price (PKR/sh) 521
and the number 3rd in 2018. Its Revenues have grown at 31% CAGR since the IPO Current Price (PKR/sh) 386.99
in 2014. We think the market has grown at an annualized rate of around 20% over Upside (%) 35%
this period, which implies that Systems has gained market share.
Stance Buy
 Systems can benefit from a sustained revenue growth over the next ten years. Mkt. Cap. (PKR bn) 48
Very few companies, if indeed any other company in Pakistan has such strong
tailwind. We estimate market growth of 25% CAGR over the next 5 years and
expect Systems to sustain its trend of 30% revenue growth over this period.
Around 90% of its revenues are recurring. 80% of revenues and 90% of the profits ADTV (USD mn) 0.36
are derived from IT exports, primarily to the US. Since the costs are mostly in PkR,
Systems Limited (SYS) - CY20 Price Performance
the currency exposure provides a good tailwind to the company from PkR
250%
depreciation.
200%
 Financial Estimates: We expect revenues to increase from PkR9.8bn in 2020e to 150%
PkR16.7bn in 2022e. We think this will be driven by a shift to higher margin 100%
50%
business in the US especially in the retail sector. We are expecting slight 0%
improvement in operating margins from 19.8% in 2019 to 23.1% in 2022e. This
Mar-20
Dec-20
Apr-20
May-20
Aug-20
Jun-20
Oct-20
Jan-20
Nov-20
Feb-20
Jul-20
Sep-20
-50%
leads to 30% growth in Net Income from PkR1.58bn in 2019 to PkR2.98bn in
2023. The company currently has net cash of PKR1.2bn. In our valuation, we are KSE-100 SYS
estimating $20m valuation for OneLoad based on private market peer multiples.
For more details and our views on
investing in Pakistan, contact:
KASB Research
research@kasbsec.pk
www.kasb.com
Karachi Lahore London Hong Kong Washington DC

Corporate Office COLABS, 31 Emperors Gate, Level 19, Two 11432 Rowley
Bukhari Tower, 16-C, Gurumangat Road London, SW7 4JA International Finance Road, Clarksville,
Main Khayaban-e- +44 788 776 1538 Centre 8, Finance MD 21029
Bukhari, Street, Central +1 804 615 7161
Phase VI, DHA, +852 3589 6535
PSX Office: Room 101 &
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KASB 2021 Equity Strategy

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Pakistan Equity Market – Annual Strategy 2021

Foundation set for a Sustained Bull Run

8th December 2020

the market offering an upside of 25%. The KSE-100 is projected to witness 15

earnings growth of 13% and offer a dividend yield of 5%. Furthermore, on

 Top Picks to capitalize on the projected rally -

prices resulting from supply-chain disruptions compelled us to revise up our 5% -2.5%

Sep-20 coming months” monthly sales in

during 4MFY21.” era”

incentivizing higher production for the manufacturing sector.

Present and Potential MSCI EM inclusions

China reported a Policy rate cut by

Balance Sheet Lucky Cement (LUCK) CY20 Price Performance

Total Current Assets 21,622 20,411 25,059 30,395 -40%

Total Current Assets 329,742 313,436 300,304 301,911 -40%

Change (%) -2% -6% -9% -11%

Total Assets 280,324 310,324 324,556 324,684 -20%

Balance Sheet Habib Bank (HBL) CY20 Price Performance

Balance Sheet MCB Bank (MCB) CY20 Price Performance

Borrowings 208,816 223,511 237,997 251,892 -30%

 In terms of implied volumes, current market capitalization represents annual 4

Balance Sheet INDU CY20 Price Performance

 Consequently, we project PSMC to post an EPS of PKR27/51/55 in CY21/22/23E,

Balance Sheet PSMC CY20 Price Performance

Cash & ST Investments 3,268 5,979 7,556 7,041 10%

Balance Sheet HCAR CY20 Price Performance

South belt have contributed to the decline so far. 120

Total Assets 541,902 525,344 564,312 601,550

while the elimination of uncompetitive capacities has accelerated on the back of -

Gross Profit 8,106 9,286 10,900 10,374 40,000 20.0%

GP Margin (%) 21% 26% 22% 19% 30,000 15.0%

Other Income 1,786 1,991 1,803 1,426 20,000 10.0%

Profit Before Tax 5,043 6,747 8,377 7,661 10,000 5.0%

Revenue GP Margin (%)

Balance Sheet EPCL CY20 Price Performance

GP Margin (%) Revenue

Balance Sheet LOTCHEM CY20 Price Performance

Cash & ST Investments 8,058 11,429 9,462 11,117 0%

Total Current Assets 22,006 17,331 19,968 21,719 -10%

Profit After Tax 18,266 16,888 17,067 16,945 1400 80,000

Balance Sheet FFC CY20 Price Performance

PP&E 22,787 22,787 22,787 22,787

Balance Sheet EFERT CY20 Price Performance

Balance Sheet FFBL CY20 Price Performance

 Rationalization of duty on the textile value chain 11.00 50

 Establishment of 3 more garment cities to promote value added textile 10.00

 However, 2nd wave of COVID would continue to impact the readymade

Balance Sheet Nishat Mills (NML) - CY20 Price Performance

Current Asset 44,185 46,493 48,496 49,804 0%

Balance Sheet Nishat Chunian (NCL) - CY20 Price Performance

NCL KSE100 Index

Karachi Lahore London Hong Kong Washington DC

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