PEST Analysis of Pakistan

The PEST framework is used to analyze the macro-economic factors

which affect the whole economy, some of these factors are severe for
some industry and others are hit less hard. The PEST stands for
• Political (P)
• Economical (E)
• Social (S)
• Technological (T)
• Political (P)
• Pakistan is the democratic country which is headed by president. The political instability
exist in Pakistan which affect the many businesses. The issue of Kashmir escalate the
tension between the India & Pakistan and relationship between the two countries become
non-workable. The government of Pakistan is taking action against the corruption. The
recent U.S Afghan Peace deal is going to conclude which are the results of Pakistan efforts.
• Economical (E)
• Pakistan economy has observed the steady growth after the IMP 2013 credit package.
Pakistan economy faced negative growth of 0.4% in 2020 due to novel Corona Virus.
According to IMF there is growth of 1% in 2021. The Pakistani currency has face massive
deprecation which increases the cost of imports and raises the inflation.
• The unemployment rate has also increased from 2019, it is now at 4.5 %. The pandemic
has increased the unemployment in the country. The inflation rate is around 9.05% and
the interest rate at 7% decrease from 8.5%. The interest rate is quite high as compared to
neighboring countries. The current tax is 29% for large companies but the tax rate for
smaller companies’ decreases by 1%. There is proposed tax legislation for foreign income.
• Pakistan Stock Exchange (PSX) also show a recovery after the decline
from 2019 but due to third wave of Covid-19 the PSX show a downward
trend.
• Social (S)
• Pakistan is at the 5th number in terms of population in world. The
population of Pakistan is 219 million approximately and majority is
dominated by middle class. According to UN, the 64% of the
population is less than 30 years old.
• Technological (T)
• Pakistan has made significant advancement in the field of technology.
The country is covered by high speed internet which give it access to
different online platforms. The entry of Alibaba in Pakistan shows the
potential for online retail store. Zong has tested 5G technology and it
will be soon employed in Pakistan.
• Automobile Sector
• Pakistan Automobile Industry contributes to 2.8% GDP and 30 billion as taxes to national
exchequer. The industry growth is round 171% since 2014 to 2018 and it is the fastest growth
among Asian countries. The Automobile Development Policy 2016-21 encourages the
investment in the auto sector by giving the tax incentive. $50 million annually FDI is made in
the automobile sector and there are 13 listed companies under the automobile sector.
• Porter 5 forces is used to assess the industry attractiveness.
• Porter 5 forces
• The Porter 5 forces is used to assess the industry attractiveness. The industry which is highly
attractive, attracts new player and reduces the profitability which will have the effect on the
share prices of the companies. Automobile industry appears to less attractive due to number
of factors which are discussed below. The 5 forces are
• Bargaining Power of the Customer
• Bargaining Power of the Supplier
• Competitive rivalry
• Threat of New Entrants
• Threat of Substitute
• Bargaining Power of Customer
• The Customer has low ability to negotiate the price
• High switching cost
• Bargaining Power of Supplier
• Low switch cost
• Large number of supplier available
• Standard product
• Competitive Rivalry
• Moderate rivalry
• Different variants of cars manufacture for different consumer market
• Threat of New Entrants
• High capital cost
• Brand loyalty
• Cartel among the existing player
• Lobbying of the current player
• Threat of substitute
• Less substitute product
• High switching cost
• Technical Analysis of Automobile Companies
• The automobile sector is attractive due to growing market and monopoly of the existing
players. However, the Pandemic has a bad impact on the sector, the production drops
due to lockdown and the economic condition of the country results in the few sales as
compared to last years.
• The companies selected are the blue chip companies falling under the KSE 100. These
companies are
• Honda Atlas Cars (Pakistan) Limited
• Atlas Honda Limited
• Indus Motors Company Limited
• Pak Suzuki Motor Company Limited
• Millat Tractors Limited
 The detailed financial analysis of each company is done for five years which include the solvency, liquidity, efficiency ratio analysis.
Atlas Honda Limited

Item Name 2014 2015 2016 2017 2018 2019

Profitability  

Gross profit margin 9.50 10.21 10.26 10.50 10.70 7.95

Net Profit margin 4.50 5.14 5.46 5.81 6.02 3.89

Asset turnover 3.37 3.04 3.04 2.81 2.70 2.58

Return on Assets 15.18 15.60 16.61 16.31 16.23 10.06

Return on equity 27.72 27.41 29.66 30.94 31.88 20.46

Liquidity Ratio  

Current ratio 1.74 1.83 1.66 1.60 1.58 1.44

Quick ratio 1.25 1.43 1.31 1.28 1.29 0.89

Cash to current liabilities 1.16 1.30 1.24 1.23 1.24 0.82

Activity Ratio  

No. of days in inventory 16.76 13.24 12.36 12.01 12.25 22.45

No. of days in receivables 0.29 0.31 0.26 0.21 0.19 0.19

No. of days in payable 26.81 23.01 16.92 16.13 14.99 18.79

Solvency Ratio  

Debt equity ratio 0.82 0.71 0.85 0.93 0.99 1.08

Debt to assets ratio 0.49 0.43 0.52 0.54 0.55 0.52

Interest cover ratio 8991.51 5410.70 11905.30 10575.61 11686.93 1652.24

 Dividend Growth Model

Year Cash Dividend Bonus Dividend Right Shares

2020 150 0 0
2019 200 20 0
2018 270 0 0
2017 185 0 0
2016 145 0 0

Required Return Dividend Value of Share (Dividend Model)

14.44% 150 1,039

The Price of Atlas Honda Limited should be between the 466 based on P/E multiplier and 1039 based on
dividend growth model. Currently the share is trading at 474, if the price fell to 466 it should be purchased
based on the risk averse approach while if we take the dividend value it is quite under stated so it should be
purchased.
Atlas Honda Cars (Pakistan) Limited

Item Name 2014 2015 2016 2017 2018 2019

Profitability  
Gross profit margin 7.30 12.64 15.08 14.52 11.42 7.68
Net Profit margin 2.74 8.37 8.87 9.77 7.10 4.05
Asset turnover 2.85 2.88 2.66 1.86 1.66 2.09
Return on Assets 7.82 24.10 23.60 18.12 11.78 8.47
Return on equity 57.17 84.21 54.45 58.41 43.10 22.20

Liquidity Ratio
Current ratio 0.89 1.21 1.53 1.22 1.29 1.88
Quick ratio 0.24 0.39 0.90 0.80 0.77 0.52
Cash to current liabilities 0.24 0.38 0.88 0.80 0.77 0.44

Activity Ratio  
No. of days in inventory 35.91 53.39 36.51 38.70 32.73 33.27
No. of days in receivables 23.34 19.30 11.36 29.34 44.32 44.72
No. of days in payable 0.00 3.85 8.86 7.24 7.02 6.91

Solvency Ratio  
Debt equity ratio 4.15 1.72 1.04 2.94 2.44 0.82
Debt to assets ratio 0.72 0.67 0.55 1.14 0.76 0.32

Interest cover ratio 129.18 307.86 4321.56 613.17 13639.43 0.00

 Valuation

Earnings Multiplier

5-year 3-year Future

Year 2020 2019 2018 2017 2016 2015 CARG CARG Earning
Earnings Per 4.77 26.97 45.48 42.96 24.9 22.15 -26% 27% 6.06
Share

MV/Share EPS P/E

133 4.77 27.8826

Future Earnings P/E Value of Share

6.06 27.8826 169
The Price of Atlas Honda Cars (Pakistan) Limited should be between the 48 and 169. Currently the share is
trading at 133 and it should be purchased.
• Food Sector
• Food sector is at the 2nd number in terms of largest industry, it
contributes to 16% of the employment in the country. It attracts the
$223 million annually as the FDI. Pakistan adopted its first Livestock
policy in 2007, which provides the incentive for importing the
veterinary equipment. Dairy and Livestock contributes to 11% to GDP
and 30% of the household income is spent on dairy product- Milk.
Most of the food industries are located in Punjab (60%).
Item Name 2014 2015 2016 2017 2018 2019

Profitability

Gross profit margin 28.33 33.14 35.40 36.62 32.16 28.76

Net Profit margin 8.22 8.51 10.54 11.98 9.62 6.34

Asset turnover 1.85 2.04 2.25 2.24 1.92 1.76

Return on Assets 15.25 17.35 23.68 26.83 18.50 11.15

Return on equity 64.76 69.35 110.46 217.78 268.33 205.20

Liquidity Ratio

Current ratio 0.66 0.72 0.59 0.62 0.67 0.59

Quick ratio 0.02 0.02 0.03 0.05 0.08 0.05

Cash to current liabilities 0.01 0.01 0.01 0.03 0.02 0.01

Activity Ratio

No. of days in inventory 36.95 33.58 36.40 45.87 59.61 59.41

No. of days in receivables 0.00 0.18 0.82 1.27 2.10 3.49

No. of days in payable 6.69 16.29 36.28 57.92 75.36 80.03

Solvency Ratio

Debt equity ratio 3.10 2.90 4.76 11.59 15.71 19.05

Debt to assets ratio 0.75 0.73 0.84 0.98 1.01 0.94

 Future Earnings P/E Value of Share
214.80 34.02072 7,308

Year 2020 2019 2018 2017 2016 2015 5-year CARG 3-year CARG Future Earning
Earnings Per Share 162.17 254.57 322.86 261.23 193.18 214.8
195.91 0% 10%

MV/Share EPS P/E

6665 195.91 34.02
Name Year Cash Dividend Bonus Dividend Right Shares

Nestle Pak. 2019 1520 0 0

Nestle Pak. 2018 2480 0 0

Nestle Pak. 2017 3200 0 0

Nestle Pak. 2016 4250 0 0

Nestle Pak. 2015 1900 0 0

CAPM
Nestle share is purchased to achieve the diversification and the trend for frozen product and health wellbeing is increasing due to Covid-19 pandemic.

Market Rate Inflation Beta 6M-TBILLS RP=RM-RF Beta*RP Required Return

15% 9% 0.55 7.68% 7.32% 0.042 11.90%

Required Return Dividend Value of Share (Dividend Model)

11.90% 1520 12,769