05 Jan Bma

Pakistan
Market Strategy
5 Jan 2015
Pakistan Equity Market
Priced on: 1-Jan-15
Strategy 2015
Stage set for a strong re-rating!
KSE100 Dec15 target: 41,400

KSE100 Index: 32,480
Macro improvements continue as a blend of political and economic developments lend

credence to bullish momentum at the KSE where we foresee the KSE-100 racking up
another 27% gain over CY15F. Our blended index target of 41,400 points for Dec15
incorporates an earnings growth of 8%YoY and dividend yield of 6%, while the market is
likely to re-rate by 10%+ backed by continued monetary easing, ample local and foreign
liquidity and narrowing discount between KSE-100 and the region. KSE-100 currently
trades at a CY15F P/E of 8.9x compared to regional average of 13.7x and MSCI FM 100 at
9.7x. At the same time, Pakistan markets dividend yield at 6% is significantly above the
regional average of 3% and MSCI FM 100 yield of 4%. Improved economic metrics
particularly in light of declining global oil prices (inflation, CAD), continued privatization
process (fx reserves) and economic reforms are likely to form key check points for price
discovery in the market. Growth in FDI over a longer horizon particularly in light of recent
agreements with China and Russia should also aid sentiment while increased political
consensus as well as a decisive operation against militants constitute upside to our
estimates. Preferred plays include Cements (MLCF, LUCK, FCCL) while we also like
Fertilizers (ENGRO), Banks (UBL, BAHL) and Textiles (NML). With market having already
priced in global oil price declines, we continue to like E&Ps (POL, OGDC) on
developmental projects in CY15. Falling oil prices also lead to a bullish outlook on PSO
as circular debt accretion slows.
Upside: 27%
KSE Market Capitalization

PKR7.4tn (USD73.6bn)
KSE100 Market Capitalization

PKR6.4tn (USD63.4bn)
12M KSE100 ADT Value

PKR7.8bn (USD78.3mn)
Political consensus as attention shifts to the economy: With opposition protests a back
page story, we believe the governments focus is likely to once again shift towards economic
reforms. Lower inflation levels (FY15: 6.0%-6.5%) against a backdrop of declining global oil
prices should allow the government to gradually lower energy subsidies. We believe FY15 will
witness broad improvements with a sustained Balance of Payment (BoP) surplus at USD4.1bn,
CAD at 0.9%-1.0%, GDP growth at 4.5% and fiscal deficit at 5.3%. At the same time, continued
privatization will likely capture headlines with a key distinction in CY15 being the privatization of
inefficient entities.
BMA Universe Valuation Summary

CY14
CY15F
CY16F
18
P/E (x)
10.1
8.9
8.1
P/B (x)
2.1
1.9
1.7
D/Y (%)
E/Y (%)
10
11
12
ROE (%)
21
21
21
ROA (%)
EPS Chg (%)
Eyeing 41,400 points by Dec15! Our Dec15 KSE-100 index target of 41,400 points implies an
upside of 27%. We expect the market to re-rate by 10%+ backed by monetary easing as well as
reversion to mean historical differential between PIB and earnings yields. At the same time,
continued ample liquidity on the local and foreign investor front as well as a potential peace
dividend from a successful Operation Zarb-e-Azb may result in market beating our target. Any
deterioration in law & order (particularly a terrorist retaliation) forms a key downside risk.
*All metrics based on current prices
Several economic indicators are comparable to CY06; a time of peak multiples: The KSE100 peaked at a P/E of 13.8x in Apr06 while similarities between economic measures then
(CPI: 8.9%; DR: 9.0%; SBP Reserves: USD10.6bn) and now (Average CPI: 6.1%; DR: 9.5%;
SBP Reserves: USD10.3bn) are striking and support our view of an upward re-rating from CY15
P/E of 8.9x. Another key thesis for markets re-rating is the contracting P/E to regional
economies where Pakistan currently trades at a discount of 35% to regional markets.
KSE100 Index & Volume Chart

Vol mn sh.
KSE100 Index
34,000
600
32,000
500
Conviction Calls: Declining energy costs despite anticipated tariff pass-through in Jan15 form
the basis of our preference for Industrials. We continue to like Cements where our top picks
include LUCK, MLCF and FCCL. We also like Textiles (NML) where declining energy costs will
likely be complemented by lower raw material costs. Despite declining interest rates, we
continue to like Banks (UBL, BAHL) owing to high PIB accretion and growth in non funded
income. ENGRO makes our cut due to positive group developments while we also like Oil &
Gas (OGDC, POL, PSO) as negatives from lower oil prices are already priced in.
400
30,000
300
28,000
200
100
24,000
0
Jan-14
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
26,000
BMA Research
research@bmacapital.com
+92 111 262 111
www.bmacapital.com
Pakistan
Market Strategy
Table of Contents
5 Jan 2015
Timeline: Events Chart CY14 .....
Key Charts .
Pakistan Market: Targeting 41,400 by Dec15! ................................................................
BMA Conviction Portfolio......
Pakistan Politics: A United Front! ...
10
Pakistan Economy .
12
Sectors...
17
Oil & Gas: Exploration and Production.
18
Oil Marketing Companies..........
20
Banks.........
23
Cements ...
26
Textiles...
28
Chemicals (Fertilizer) ......
30
Conviction Calls..
32
OGDC: Developments meriting a second look! ....
33
POL: Negatives already priced in! ...
35
PSO: Gaining momentum on recovery in energy chain....
37
UBL: Banking on diversified revenue base......
39
BAHL: The Safe Banking Haven ......
41
LUCK: The emerging conglomerate!
43
FCCL: Yielding higher returns
45
MLCF: De-risking with growth.
47
NML: Core operations turning the corner...........
49
ENGRO: Gaining traction!.......
51
Pakistan
Market Strategy
Events Chart CY14
34000
32000
SBPreserves
slipto13
yearlow
30000
FY15Budget
announced
MSCIdoubles
Pakistanweight
to8.4pc
PTI andPATsit
instarted
Flood inflicts
Rs240bnlossto
agrieconomy
OGDCSPO
Cancelled
PTI callsoff
dharna
DR endby50bps
Sukuk5times
oversubscribed
28000
OperationZarb
eAzblaunched
26000
24000
Moodys
changesoutlook
forfivebank
Forexreserves
crosses$13bn
mark
USD2bnEuro
bondslaunched
IMFsecessful
review
GIDCordinance
signedby
President
Moody's
providepositive
creditoutlook
22000
20000
18000
5Jan2015
Dec14
Dec14
Nov14
Oct14
Sep14
Aug14
Jul14
Jun14
May14
Apr14
Mar14
Feb14
Jan14
Jan14
16000
Pakistan
Market Strategy
Key Charts
Figure 2: Forward Regional Dividend Yield (%)
Figure 1: Forward Regional P/E (x)
India
Pakistan
16.7
Malaysia
Malaysia
15.7
Vietmam
12.3
MSCI FM100
China
12.3
Vietmam
Sri Lanka
MSCI FM100
9.7
Sri Lanka
Pakistan
8.9
India
10
4.4
4.3
3.6
China
11.3
6.2
15
2.7
2.5
1.6
0
20
Source: Bloomberg, BMA Research
Figure 4: P/E vs. Reserves
Figure 3: Average PIB and E/Y differential

Earnings Yield
18%
SBP Forex Reserves (USDbn)
10yr PIB yield
KSE100 PE (RHS)
16%
14%
12%
10%
8%
6%
19-Nov-14
29-Jan-14
16-Jan-13
15-Feb-12
15-Feb-11
18-Feb-09
6-Mar-07
4%
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
CY10
CY11
CY12
CY13
CY14
Source: KSE, SBP, BMA Research
Figure 6: BOP Composition (USDmn)
Figure 5: CPI vs DR
CPI
DR
15,000
14.00%
10,000
12.00%
5,000
10.00%
Current Account Bal
Capital Account
8.00%
6.00%
(5,000)
4.00%
(10,000)
2.00%
(15,000)
FY15F
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
(20,000)
FY04
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Nov-14
Feb-15
May-15
0.00%
FY03
16.00%
Source: SBP, BMA Research
5 Jan 2015
Pakistan
Market Strategy
PakistanMarket
5 Jan 2015
Pakistan
Market Strategy
Market Outlook: Targeting 41,400 by Dec15!
Pakistan Equities look geared for another year of stellar returns where our KSE-100
BMAtargetstheKSE100
Index target of 41,400 points offers an upside of 27% from current levels. At the
toreach41,400byCY15
same time, the market continues to offer a dividend yield of 6%, the highest amongst
the regional markets. KSE-100 P/E of 8.9x at CY15 earnings is at a considerable
end.
discount to historic peak of 13.8x in CY06 while similarities in macroeconomic
indicators then and now are striking. Equities are supported in our view by five
tailwinds of i) continued macroeconomic de-risking as economic indicators improve

CurrentmarketP/Eat
and privatization process remains on track, ii) reduction in policy rate by the SBP
8.9xisaconsiderable
where BMA expects a cut of 150bps in CY15, iii) ample local and foreign liquidity, iv)
political stability as all parties front a unified stand in the wake of recent terrorism
discounttohistoricpeak
and v) attractive relative valuations with the KSE continuing to be the cheapest
of13.8x
market in the region.
Figure 8: Forward Regional Dividend Yield (%)

Figure 7: Forward Regional P/E (x)
India
16.7
Pakistan
6.2
Malaysia
15.7
Malaysia
4.4
Vietmam
12.3
MSCI FM100
4.3
China
12.3
Vietmam
3.6
Sri Lanka
11.3
China
2.7
9.7
Sri Lanka
2.5
MSCI FM100
Pakistan
8.9
India
1.6
0
5
10
15
20
0
2
4
6
8
KSE-100's upward journey to continue in the wake of macro de-risking: In

continuation with the economic theme in our strategy report released in Oct14, we believe
Pakistans macro de-risking remains on track. The end of protests by the opposition parties
marks a prominent moment for the incumbent PML(N) government where we believe focus
will shift back to economic reforms. In its recent meeting with the IMF, the GoP has outlined
continued privatization of State Owned Enterprises (SOEs) with a key distinction in CY15
being the privatization of inefficient entities. At the same time, reduction in global oil prices
Macroderiskingto
will help Pakistan sustain its Balance of Payment (BoP) surplus to USD4.1bn with CAD
remainontrackamid
improving to 0.9%-1.0% of GDP in FY15 from 1.2% in FY14. GDP growth is expected at
politicalstability.
4.5% (FY14: 4.1%) while fiscal deficit is expected at 5.3% (FY14: 5.5%) with slippages on
account of non-collection of GIDC as well as lower than targeted tax collection.
Attention will also turn to the outcome of Operation Zarb-e-Azb where the recent terrorist
attacks have brought politicians, public, religious scholars and the military on one page with
regards to the future course of action. News flow regarding success of the operation may
unlock further foreign flows in the form of peace dividend along the same lines as
Decisiveactionagainst
Operations Rah-e-Nijat and Rah-e-Rast in FY09-FY10.
terroriststounlockpeace
Dec15 Index target of 41,400! Our Dec15 index target of 41,400 offers an upside of 27%
dividend
from current levels. Target index calculation is premised on a combination of i) earnings
growth at 8% and dividend yield of 6% and ii) coverage universe target price mapping
accounting for 150bps easing. The resultant index target incorporates a re-rating by 10%+.
5 Jan 2015
5 Jan 2015
Index target calculation & regional valuation

Index Target Dec'15
Current Index
32,480
Earnings Growth & D/Y
40,398
TP Mapping
42,413
Blended Index Target
41,400
Upside to Index Target
Country
Pakistan
India
China
Malaysia
Vietnam
Sri Lanka
MSCI FM100
27%
P/E (x)
8.9
16.7
12.3
15.7
12.3
11.2
9.7
D/Y (%)
6.2
1.5
2.7
4.4
3.6
2.5
4.2
ROE (%)
21.0
15.9
13.5
12.6
15.5
12.3
16.1
Source: BMA Research
Re-rating the key theme for CY15: Monetary easing is likely to be one of the main driving
forces behind market performance in CY15 where our economist estimates a 150bps cut in
the discount rate during the year. Every 50bps cut in the discount rate increases valuations
by an average of 5%. At the same time, current differential between earnings and PIB
yields stands at a level of 0.1% against an average of 1.6% during the period CY07ACY14A, indicating the need for earnings yields to decline. Assuming convergence to mean
differential, the market should ideally trade at a CY15 P/E of 9.9x compared to current 8.9x,
translating into a potential re-rating by ~11%.
Figure 9: Average PIB and E/Y differential
Earnings Yield
18%
10yr PIB yield
16%
Current PIB yields have

been artificially inflated
given GoPs need for reprofiling of debt
14%
12%
10%
8%
Transition towards
normalized rates as well
as monetary easing in
CY15 will likely take PIB
yields significantly lower
than CY15 E/Y
6%
4%
2%
19-Nov-14
17-Jul-13
15-Feb-12
0%
3-Feb-10
MonetaryEasingthe
keydrivingforcebehind
KSE100reratinginCY15
Economicsimilarities
betweenCY06andCY15
furtherstrengthens
confidenceonmarketre
rating
6-Mar-07
Pakistan
Market Strategy
Source: SBP, Bloomberg
Historical Precedence Comparison with CY06: While current forward market P/E
stands at an undemanding 8.9x, the KSE-100 peaked in Apr06 when market P/E went as
high as 13.8x. Similarities in macroeconomic indicators during the two periods are striking
and certainly merit a revisit on market multiples.
Comparison - Key Metrics
Dec'14
Apr'06
10.3
10.6
CPI (%)
4.3
8.9
Discount Rate (%)
9.5
9.0
Market P/E (x)
8.9
13.8
SBP Reserves (USD bn)
Source: SBP, KSE, Bloomberg
Current policy rate stands at 9.5% with further easing expected while SBP reserves have
increased to USD10.3bn. At the same time, average CPI for FY15 is expected in the range
of 6.0%-6.5% while Dec14 CPI stood at just 4.3%. In CY06, the economic situation was
somewhat similar, with the policy rate then at 9.0% while SBP reserves stood at
Pakistan
Market Strategy
5 Jan 2015
Figure 11: P/E vs. Reserves

SBP Forex Reserves (USDbn)
DR
KSE100 PE (RHS)
16.0%
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
Dec-14
Dec-13
Dec-12
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
CY10
CY11
CY12
CY13
CY14
Source: Bloomberg, SBP, BMA Research
Liquidity to remain ample! Market liquidity remains ample where Pakistan equities have
continued to attract significant inflows. Total CY14 inflows stood at USD457mn, up
15%YoY while foreign holding as a percentage of free float has increased to ~35% from
31% in Jun12. Moving into CY15, we believe foreign inflows are likely to continue given
attractive valuations for the Pakistani market (P/E: 8.9x, P/B: 1.9x, Earnings growth: 8%,
D/Y: 6%) as well as the initiation of quantitative tightening in the US, widely expected in
2HCY15 and coinciding with a period of easing in Pakistan.
Figure 12: FIPI and Market Performance
FIPI USD mn
Market Performance (RHS)
Market returns have

historically tracked FIPI
inflows
60%
700
600
500
400
300
200
100
0
-100
-200
-300
50%
40%
Inflows are expected to

continue in CY15 given
attractive valuations
30%
20%
Tightening in the US
coinciding with easing in
Pakistan could unlock
further foreign flows
10%
FY15TD
FY14
FY13
FY12
FY11
0%
FY10
Dec-11
0.0%
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Figure 10: P/E vs. DR
PE
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Foreigninvestmentto
remainsteadyon
attractivevaluationsand
strongfundamentals
Continuedmonetary
easingplusamplecashto
drivelocalliquidityinthe
market
USD10.6bn. Inflation in Apr06 stood at 8.9%, significantly higher than the current level.
Given comparable economic indicators as well as a 35% discount to peak market multiple,
we believe there exists a strong case for market to re-rate in CY15 by 10%+.
Source: KSE, Bloomberg
Outlook for local liquidity remains favorable given i) continued monetary easing resulting in
a shift from fixed rate investments to equities and ii) spare cash with locals as costs of
doing businesses decline given falling interest rates and input costs (fuel, raw material). A
quick and easy guide to increasing local liquidity would be the current ratios of domestic
businesses where the Textile sectors current ratio has improved by 38% in just 3 years,
Pakistan
Market Strategy
while the same for Cement and Auto manufacturers has improved by 2.3x and 20%,
respectively.
CY14 market performance recap: Despite consolidation in the latter half of CY14 as
political disruptions came to the fore, the KSE-100 performed admirably, returning 24% in
TheKSE100yielded33%
PKR terms and 33% in USD terms during CY14. In the process, the KSE-100 became the
inUSDtermsinCY14,
third best performing market in the world, trailing only China and Venezuela. At the same
becomingthethirdbest
time, the Pakistan market also outperformed the MSCI FM100 index which remained flat
(+1.1% YoY).
marketintheworld
Figure 13: Regional Market Performance in CY14

Figure 14: Regional Market Performance in 2HCY14
China
58%
China
49%
Sri Lanka
14%
Pakistan
33%
Pakistan
6%
India
27%
India
3%
Sri Lanka
23%
Vietmam
-6%
Vietmam
7%
MSCI FM100
-7%
MSCI FM100
1%
Malaysia
-14%
Malaysia -12%
-20%
0%
20%
40%
60%
80%
-20%
0%
20%
40%
60%
Market Strategy: Preferred plays include leveraged sectors with particular liking for
Cements (FCCL, MLCF, and LUCK) as well as selective Fertilizers (ENGRO). The Cement
sector is also expected to benefit from a growing local appetite as well as reducing costs as
coal and FO prices come off. ENGRO will likely benefit from i) continuation of gas supply to
BMAConvictionideas:
both of its fertilizer plants, ii) potential initiation of chargeability of the concessionary gas, iii)
FCCL,MLCF,LUCK,
improving margins of food subsidiary Engro Foods given recent increase in retail milk
prices, iii) cash induction from a secondary offering of EFERT and iv) initiation of the LNG
ENGRO,NML,PSO,UBL,
project by Feb14.
BAHL,OGDC,POL
Despite the fall in oil prices, we continue to like the Energy chain with top picks being POL,
OGDC and PSO. Falling interest rates should somewhat benefit Banks this time given AFS
gains on PIB portfolio with our top pick being UBL, which offers an exposure to a blend of
Pakistan and Middle East. Lower cotton costs and interest rate benefits result in our liking
for Textiles with NML being our top pick. Rising power and gas costs, as agreed with the
IMF recently, however, could result in some volatility at the start of the year. Long term
fundamentals, however, merit a bull stance on Pakistan Equities!

Webelievethemarkethas
Oil and Gas Exploration & Production: The market already appears to have factored in
alreadypricedinthe
the negative impact of declining oil prices in current valuations, thus providing for an
negativeswithinE&Ps
attractive entry point. Our conviction on the sector is based on i) steady volumetric
additions (3 year oil production CAGR of 10%), ii) more than 100% reserve replacement
owing to drilling in high impact areas, iii) strong FCFE generation (up by 15%YoY to
PKR51.7bn in FY15F) and iv) undemanding sectoral valuations of 7.7x (P/E) and 4.5x
(EV/EBITDA), depicting a marked discount of 37% and 25% over regional peers,
respectively. We flag POL (TP: PKR550/sh) and OGDC (TP: PKR261/sh) as our preferred
plays.
Oil Marketing Companies: The OMC sector is expected to witness a better CY15 driven
by i) strengthening petroleum sales, ii) increasing share of high margin and cash based
5 Jan 2015
Pakistan
Market Strategy
products, iii) declining interest rates and iv) decreasing exposure to circular debt. The
sector is currently trading at a marked discount of 18% over the KSE-100. We re-iterate
PSO (TP: PKR463/sh) as our top pick in the OMC sector.
Banksarelikelytodepict
a5yearearningsCAGRof
20%
Decliningfuelandpower
costtoexpandmarginsof
TextilesandCements
Multipletriggers
strengthenourconviction
onENGRO
5 Jan 2015
Banks: The banking sector will continue to remain in the limelight in CY15 due to robust
yields locked in on the investment portfolio along with a gradual uptick in private sector
credit off-take. As a consequence, BMA Banking Universe is expected to register earnings
growth of 16% in CY15 with an impressive 5yr CAGR of 20%. Within the banking universe,
we reiterate our preference for UBL with a TP of PKR225/sh, reflecting an upside of 29%
from current levels. We also like BAHL with a TP of PKR60/sh, offering an upside of
24%.
Cements: The cement sector backed by 1) declining fuel and power costs, 2) monetary
easing and 3) growing local cement demand is expected to continue its growth streak.
FCCL, MLCF and LUCK remain our top picks with target prices of PKR34/sh, PKR62/sh
and PKR596/sh, translating into upsides of 27%, 33% and 16%, respectively.
Textiles: The sector is all set to post healthy returns in CY15 due to i) 21%YoY decline in
cost of raw material, ii) reduced fuel and power cost on account of 40% FYTD decline in
prices of FO and iii) 17%-31%YoY growth in the exports of value added textile products.
Our top pick from the textile sector is Nishat Mills Limited (NML) with a TP of PKR146/sh,
offering an upside of 25% from current level.
Electricity: In the backdrop of falling yields on fixed income instruments, IPPs will continue
to garner increased investor attention with an attractive dividend yield of 10% and US dollar
based revenue stream. Our investment theme is premised on the sector being i) the
highest yielding sector in the market, ii) hedge against macro volatilities (inflation and
exchange rate depreciation) and iii) potential improvement in liquidity position amid
slowdown in circular debt pile-up.
Chemicals: The fundamentals of the sector will remain critically dependent on stable gas
supply and any imposition of levy by the government on feedstock rates. With falling oil
prices taking its toll on international urea prices, thereby narrowing premium over local
prices, we believe the outlook of the sector remains mixed. Though we advocate a cautious
stance on the sector, we maintain our liking for ENGRO, backed by improving
fundamentals, secondary market cash generation and new risk free business ventures
(note: Engro Elengy).
BMA Conviction Calls:

Conviction Calls
Companies
Price
TP
Upside
DY
Total
Return
P/E
P/B
ROE
(1-Jan-15)
POL
382
550
44%
13%
57%
7.2
2.5
35%
OGDC
206
261
26%
6%
32%
8.0
1.9
24%
PSO
362
463
28%
3%
31%
6.2
1.1
17%
UBL
175
225
29%
7%
36%
8.2
1.8
22%
BAHL
48
60
24%
5%
29%
7.0
2.3
32%
LUCK
513
596
16%
2%
18%
12.2
2.8
23%
FCCL
27
34
27%
7%
35%
10.7
2.2
21%
MLCF
46
62
33%
0%
33%
7.3
1.4
19%
NML
124
146
17%
4%
21%
7.2
0.8
12%
ENGRO
232
272
17%
0%
17%
6.2
1.4
23%
Portfolio Return
31%
Pakistan
Market Strategy
PakistanPolitics
5 Jan 2015
5 Jan 2015
5
Pakistan Politiics A United Front!

The
e onset of a terrorist
t
attac
ck on school children has united Pakis
stan with poliiticians
settting differences aside an
nd putting a united front. In the proce
ess, the opposition
stre
eet protests which starte
ed on Aug 14
414 have be
een called offf and a subs
stantial
ma
ature reaction
n has been depicted
d
by politicians w
with the ruling PML-N tak
king all
ma
ajor parties including th
he protesting
g PTI on b
board with its
i
decisions
s. The
dev
velopment is
s likely to re
esult in a tw
wo pronged benefit with
h the first being
b
a
con
nclusive actio
on against th
he terrorists with
w
both the
e Pakistan Army and the Civilian
C
Gov
vernment on the same pa
age. Secondly
y, with the prrotests done away with, th
he GoP
will again be able to focus on economic reforms
r
wherre the decisio
on makers are
e likely
n economic reforms and
d populist de
ecisions. Reducing
to walk a fine line between
glo
obal oil and commodity
c
prrices have ce
ertainly proviided the GoP
P space for meeting
m
som
me of its quantitative targets including
g pass-throug
gh of subsidie
es.
Operation Zarb
b-e-Azb Th
he end game
e? The recen
nt brazen attack on a school of
erved to galva
anize support for the ongoin
ng Operation Zarb-e-Azb, bringing
b
Pesshawar has se
poliitical parties as
a well as the
e general pub
blic to one pla
e of the
atform. As a consequence
atta
ack, the protessting PTI calle
ed off its coun
ntry wide strike
e and has bac
cked the gove
ernment
in its
i fight again
nst the terrorrists. Also com
mforting is th
he current Prime Minister Nawaz
Sha
arifs determin
ned address to
t the nation with regards to the fight against
a
the terrorists.
The
e army action
n against milittants has now
w expanded beyond North
h Waziristan with
w
air
strikkes in Khyberr Agency as well
w as widenin
ng the scope to surgical op
perations in th
he main
mettropolitan citie
es of the coun
ntry. Since falling to a low of 17% in Se
ep13 post Op
peration
Rah
h-e-Rast, terro
orist deaths now
n
constitute 67% of total terror related
d casualties (a
average
sincce Jun14), ind
dicating the su
uccess of the military.
Pakkistan has alrready obtaine
ed regional su
upport for its operations with
w
fruitful meetings
betw
ween the milittary heads of Pakistan and Afghanistan, rrespectively. The
T military offfensive
hass also been viewed
v
favorably globally where
w
we beliieve a succes
ssful outcome
e of the
ope
eration may unlock
u
future foreign flows ala peace d
dividend, similar to the casse after
Ope
erations Rah-e-Nijat and Ra
ah-e-Rast in FY09-FY10.
F
R
Recall that Ra
ah-e-Rast and Rah-eNija
at resulted in inflows of US
SD300mn and USD219mn, respectively in
i the immediate 5-6
months following
g their conclu
usions. Taking
g cue, we be
elieve a succe
essful comple
etion of
Zarrb-e-Azb could
d lead to incre
eased foreign flows within tthe market with the potential for a
sna
ap rally following its success
sful conclusion
n.
Fig
gure 15: Foreiign Participattion (USDmn)) during & aftter Operation
ns
FIPI
KSE100- Index
35,000
20,000
15,000
Zarbe Azb
Rah -e- Nijat
25,000
Rah -e- Raast
30,000
10,000
5,000
30
25
20
15
10
5
(5)
(10)
(15)
(20)
(25)
31 D 14
31-Dec-14
30-Jun-14
31 Dec 13
31-Dec-13
30-Jun-13
31 Dec 12
31-Dec-12
30-Jun-12
31 Dec 11
31-Dec-11
30-Jun-11
31-Dec-10
30-Jun-10
31-Dec-09
31
Dec 09
Ma
aturitydepictedby
Sta
ateInstitutiions
parrticularlynon
inteerferenceby
bythe
PakkistanArmyywillallay
fearsofafuturemilitary
cou
up
uccessfulO
As
Operation
rbeAzbco
Zar
ouldleadto
reasedforeeignflows
inc
thinthema
wit
arket
n,we
Intthelongrun
hig
ghlighttherretobea
pottentialdisco
onnect
bettweenpolitiicsand
onomicpoliicy
eco
30-Jun-09
Pakistan
n
Market Strategy
S
S
Source: KSE, NC
CCPL & BMA Research
R
10
Pakistan
Market Strategy
Withstableinternal
politics,thefocuswill
nowshifttoregional
strategicrelationships,
unlockingpotentialFDI
Politics takes a back-burner; focus likely to shift on economic policy: The end of the
protests marked a triumphant moment for the incumbent PML-N where we believe attention
will once again shift towards economic decision making. The Governments decision to sit
with the opposition for forming a committee to look into the alleged rigging in CY13
elections is a big positive and will likely further strengthen the democratic set-up in the
country. A key positive is also the continued non-interference of the military despite several
hiccups.
Given the backdrop of improving political situation within the country, the government has
started focusing on regional relationships and attracting investments. Recent successes in
this regard include
i)
the recently signed USD1.7bn energy deal with Russia for laying a liquefied
natural gas (LNG) pipeline from Karachi to Lahore
ii)
the USD3.0bn Gwadar LNG pipeline and terminal project with China
iii)
the USD45.6bn China-Pak Economic Corridor project.
5 Jan 2015
11
Pakistan
Market Strategy
PakistanEconomy
5 Jan 2015
12
Pakistan
Market Strategy
Inflation - CPI to remain under 7.0% owing to lower commodity prices

We expect FY15 CPI inflation to average 6.0%-6.5% (FY14: 8.6%), lower than the IMF and
SBP estimates of 8.0% and 6.5%-7.5%, respectively. We foresee a high likelihood of lower
inflation to continue and expect FY16 CPI in the range of 7.0%-7.5% even if global oil
prices rebound to USD70/bbl. We do not foresee a bull run in oil prices given surplus
supplies and a weakening global demand. While oil has a weight of 3.03% in the CPI
basket, spending on oil comprises 6.2% of Pakistan's GDP and 46% of Manufacturing
Sector's GDP. As such, in the absence of any sharp rebound in oil price levels, price
pressures within the economy would remain muted in the medium term. Lower oil prices
are likely to more than offset the impact of increasing power (already up 4%) and gas tariffs
(expected: 14%) as current spending on gas comprises 1.8% of GDP while spending on
electricity comprises 3.5% of GDP.
Recent inflation figures are highly encouraging
Moderation in commodity prices coupled with freefall in global crude prices resulted in CPI
declining to 4.3% in Dec14 (Nov14: 3.96%) from 9.2% in Dec13. This has dragged
average inflation for 6MFY15 to 6.1% from 8.9% recorded during the same period last year.
Further, NFNE (Non Food Non Energy inflation), a close proxy of core inflation, has also
moderated to 6.7%YoY in Dec14 from 8.2% in Dec13. We expect headline inflation to
remain on the lower side during 2HFY15 as well given i) benign food prices along with ii)
the recent decline in fuel prices.
CY15 to be a year of monetary easing; expect another 150 bps cut in policy rate
We expect a cut of 150 bps during CY15, given expanding real interests. 2HFY15 expected
CPI at 6.3% yields a positive real interest rate of 3.2% against previous 5 year average of
1.5%, underpinning our expectation of monetary easing.
Figure 17: CPI, Food and Non Food
DR
25
CPI
Food Index
NFNE
20
15
10
0
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
May-15
Jul-14
Dec-14
Feb-14
Apr-13
Sep-13
Jun-12
Nov-12
Jan-12
Aug-11
Oct-10
Mar-11
May-10
Jul-09
5 Jan 2015
Dec-09
CPIisexpectedtoremain
intherangeof6.5%7.5%
duringFY15&FY16
Weexpectcumulative
easingof150bpsgiven
lowerCPIandwidening
realinterests
Figure 16: Inflation vs. DR
CPI
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
DisbursementofIMF
tranchetounlockfurther
flowsfromother
multilateralagencies
External Account; Strong financial flows to strengthen BoP position

We expect the external account to remain in surplus in FY15, owing to an expected decline
in CA deficit and accretion in financial account. A successful conclusion of discussions
(fourth and fifth reviews) with the IMF has already augmented the forex reserves by
USD1.05bn. This will likely pave the way for additional inflows from other lending agencies
including World Bank, ADB etc. In addition, the GoP witnessed an overwhelming investor
interest in its recent sovereign global Sukuk offering, raising USD1.0bn against an
oversubscription of USD2.3bn. Timely realization of these flows has strengthened the
external position of the country while increasing total fx reserves to USD14.9bn (SBP
Reserves: USD10.3bn).
13
Pakistan
Market Strategy
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY15F
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
With a likely policy shift towards economic reforms, we believe FDI may also witness an
CADeficittoGDPinFY15
improvement in FY15F to USD2.0bn, up 23%YoY particularly within the Energy & Telecom
tonarrowdownto0.9%
sectors. Incorporating lower import bill along with robust remittances (up 10%), we expect
CA deficit in FY15 to clock in at USD2.7bn (1.0% of GDP). Consequent to our expected
1.0%
financial flows as well as a reducing CAD, we expect overall BoP to post surplus of
USD4.1bn in FY15F, taking SBP reserves likely above USD13.3bn. Continued strength in
SBP reserves also makes a case for a stable PKR vis a vis the greenback.
Are we ready for the next FDI spurt?
As stated above, FDI in 5MFY15 stood at USD423mn while full year FY15 FDI is expected
TheGoPhasalready
at USD2.0bn, up 23%YoY contingent on investment flow within the Telecom and Energy
signeddealswithRussia
sectors. Despite the improvement, expected FDI in FY15 is significantly lower than average
(USD1.7bnenergydeal)
FDI of USD4.0bn recorded during the period FY07A-FY10A but in-line with the insipid
andChina(USD3.0bn
USD1.4bn averaged during the past 4 years (FY11-FY14).
GwadarLNGPipeline;
We believe Pakistan is primed for a spurt in FDI over the next few years where the next leg
USD45.6bnChinaPak
is likely to be led by investment in the Energy sector (primarily Power) while the previous
leg (FY07-FY10) was led by the Telecom sector. In this regard, as already mentioned
EconomicCorridor)
earlier, the GoP has put ink to paper on deals with Russia (USD1.7bn energy deal) and
China (USD3.0bn Gwadar LNG Pipeline; USD45.6bn China-Pak Economic Corridor).
Figure 18: BoP Composition (Units USDmn)

Figure 19: Mix trend FDI and FIPI (USDbn)
15,000
Current Account Bal
Capital Account
FDI FIPI
Financial Account
10,000
9.00
8.00
5,000
7.00
6.00
5.00
(5,000)
4.00
(10,000)
3.00
2.00
(15,000)
1.00
(20,000)
0.00
-1.00
On-track reform process to bear fruits:
Renewed commitment towards reforms and resultant conclusion of fourth and fifth IMF
reviews has unlocked cumulative USD1.05bn tranche, pushing FX reserves near the
psychological barrier of USD15bn. Moreover, the economy has shown significant signs of
recovery as evident from 4.1% increase in GDP where GoP expects it to further augment to
5.1% and 6.0% in FY15 and FY16. In addition, fiscal deficit was restricted to 5.5% of GDP
in FY14 where expenditure rationalization together with expansion in revenue base will
further improve fiscal deficit to 4.9% and 4.0% in FY15 and FY16, respectively. The
FY15andFY16GDP
comprehensive energy sector reforms are planned for resolving administrative constraints
growthisestimatedat
in energy companies and price distortion where GoP will reportedly increase gas tariffs by
10% to 63%.
5.1%and6.0%
The government has successfully launched its privatization initiative and divested its stakes
in UBL, PPL (partially) and ABL and raised a total of USD680mn out of which 71% was
subscribed by foreign investors. GoP failed to conduct a 10% stake sale in OGDCL due to
5 Jan 2015
14
Pakistan
Market Strategy
Privatizationprocessto
remainontrackwith
focusshiftingtowards
divestmentofGoPstake
inlossmakingentities
FiscalDeficitwillimprove
to5.3%inFY15
comparedtolast5year
averageof7.1%
a sudden plunge in oil prices around the time of OGDCL offering. GoP is planning to offload
42% stake in HBL in 3QFY15 which will likely raise USD1.2bn. Besides capital market
offerings, GoP has successfully raised USD2.0bn through Euro Bonds and USD1.0bn
through International Sukuks in CY14. Unlike CY14 where the divestment plan was focused
on shoring up reserves, we believe CY15 will mark the strategic sale of governments stake
in inefficient entities (see table).
Privitazation of Public Sector Entities in CY15
Public Sector Entities
Transaction Type
GoP Stake
Timeline
National Power Construction Corporation
Strategic and Asset Sale
100.0%
End Mar 2015
Habib Bank Limited
Capital Market Transaction
42.0%
End April 2015
Faisalabad Electric Supply Company (FESCO)
Strategic Sale
100.0%
End Aug 2015
Northern Power Generation Company (NPGCL
Strategic Sale
100.0%
End Aug 2015
Islamabad Electricity Company (IESCO)
Strategic Sale
100.0%
End Oct 2015
Lahore Electric Supply Company (LESCO)
Strategic and Asset Sale
100.0%
End Oct 2015
Source : IMF
Fiscal Account: Fiscal consolidation to continue

Fiscal consolidation measures opted by the government are in the right direction, in our
view. That said, further stringent measures are required on both the revenue and
expenditure side for attaining an envisaged fiscal deficit target of 4.9% and 4.0% in FY15
and FY16, respectively. The fiscal position improved remarkably in FY14 where fiscal
deficit reduced to 5.5%, lower than 8.2% in FY13. The improvement in FY14 fiscal deficit
was driven by 22% growth in total revenue along with a controlled expansion in expenditure
by 9.2%.
FY15 will be a challenging year as revenue collection is likely to fall below GoPs target of
24% growth in tax collection to PKR2.8tn, primarily on account of oil related sales tax
collection. To note, oil comprises 40% of overall sales tax collection. However, growth in
1HFY15 tax collection was below target at 12% (GoP target: 24%), indicating subpar
performance on overall revenue enhancing efforts. The applicability of Gas Infrastructure
Development Cess (GIDC) is in doldrums where GoP expects PKR145bn (0.5% of GDP)
collection under GIDC. GoP is aiming to boost tax to GDP ratio to 11.5% in FY15 and
12.1% in FY16 from 10.6% in FY14. While on the expenditure side, the government ought
to take stringent measures for achieving expenditure to GDP target of 19.4% in FY15
however bourgeoning expenditures in the wake of defense spending (considering on-going
military operation) and additional funding for rehabilitation of IDPs and flood victims may
swell expenditures.
Figure 21: Improving Fiscal Deficit to GDP Ratio
Figure 20: Tax Revenue Budget vs. Revised

Revised
Fiscal Deficit to GDP
FY15F
FY14
FY13
FY12
FY11
FY15B
FY14E
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
8.0%
FY10
8.5%
FY09
9.0%
FY08
9.5%
FY07
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
FY06
10.5%
FY05
Budget
5 Jan 2015
15
Pakistan
Market Strategy
Schedule of Performance Reviews & EFF Tranches

SDRsmn
USDmn
Percent of
Quota
September 4, 2013*
360
522
35
December 2, 2013*
360
522
35
First review and end-September 2013 performance/continuous criteria
Date
Conditions
Approval of arrangement
March 2, 2014*
360
522
35
Second review and end-December 2013 performance /continuous

criteria
June 2, 2014*
360
522
35
Third review and end-March 2014 performance /continuous criteria
September 2, 2014*
360
522
35
Fourth review and end-June 2014 performance /continuous criteria
December 2, 2014*
360
522
35
Fifth review and end-June and end-September 2014 performance

/continuous criteria
March 2, 2015
360
522
35
Sixth review and end-December 2014 performance /continuous criteria
June 2, 2015
360
522
35
Seventh review and end-March 2015 performance /continuous criteria
September 2, 2015
360
522
35
Eighth review and end-June 2015 performance /continuous criteria

Ninth review and end-September 2015 performance/continuous
criteria
Tenth review and end-December 2015 performance /continuous
criteria
December 2, 2015
360
522
35
March 2, 2016
360
522
35
June 2, 2016
360
522
35
Eleventh review and end-March 2016 performance /continuous criteria
August 1, 2016
73
106
Twelfth review and end-June 2016 performance /continuous criteria
4,393
6,366
425
Total
*( Amount Received)
Source: IMF
Benchmarks
S.No Structural Benchmarks
Time Frame (by End of Period)
Fiscal sector
1
Enact amendments to the relevant tax laws (as defined in the TMU) and submit amendments to the Anti-Money
Laundering Act (AMLA) to Parliament.
Approve an administrative order to consolidate the responsibilities of public debt management in the debt
management office.
December 2014
Partially met
Monetary sector
Enact the amendments to the SBP law to give SBP autonomy in its pursuit of price stability as its primary
objective, while strengthening its governance and internal control framework, in line with Fund staff advice.
June 2015
Financial sector
4
Enact the Securities Bill, in line with Fund staff advice.
June 2015
Enact the Deposit Protection Fund Act, in line with Fund staff advice.
June 2015
Structural Policies
6
Privatize 26 percent of PIA's shares to strategic investors.
December 2015
New Structural Benchmarks

7
Draft legislation that will permanently prohibit the practice of issuing SROs that grants exemptions and loopholes.
Announce a time-bound plan to improve the SBP's interest rate corridor by setting the policy rate between the
floor and ceiling rates of the corridor.
Improve the internal operations of the SBP by the following measures: (i) the Investment Committee of the SBP
Board will begin regular (at least four times per year) oversight and approval of the reserves management strategy
and risk practices; and (ii) the authorities will provide confirmation that in line with standard IMF safeguard
procedures, the Internal Audit Department will conduct reviews of the program monetary data reported to the IMF,
within two months after each test date, for accuracy and compliance with the TMU and share the findings with IMF
staff.
10
Reorganize the Debt Policy Coordination Office as a middle office responsible for updating the MTDS and
monitoring its implementation, coordinating the credit risk management functions.
11
Conduct a review to reduce the number of existing processes and forms for paying sales and income taxes.
5 Jan 2015
March 2015
February 2015
February 2015
March 2015
March 2015
Source: IMF
16
Pakistan
Market Strategy
Sectors
5 Jan 2015
17
Pakistan
Market Strategy
Oil and Gas: Exploration & Production

The sharp decline in oil prices has already taken its toll on the Exploration and
Production (E&P) sector leading to 28% underperformance by the sector against
KSE-100. E&P sector is currently trading at an undemanding P/E of 7.7x against 8.9x
for KSE-100, an unusual discount of 13% as opposed to an average premium of 7%
in last 5 years. We believe the sector has absorbed the impact of reduced oil prices.
As per our estimates, closing prices have priced in oil at between USD50-55/bbl.
Pakistan E&Ps have an aggressive development program with 3-year CAGR of 10%
for oil and 3% for gas during FY15-17. Given huge exposure to largely untapped high
potential blocks, the sector offers a high exploration upside. E&Ps remains
unleveraged with strong cash generation. We believe the ramp-up of exploration
activity in high priced new concessions offer further upside to valuations in the form
of discoveries and reserve upgrades. Pakistan E&Ps trade at a discount of 37% and
25% over regional peers on P/E and EV/EBITDA respectively. We flag OGDC and POL
as our preferred picks in the sector with TPs of PKR261/sh and PKR550/sh,
translating into total returns of 32% and 57%, respectively. PPL follows with a TP of
PKR228/sh.
Upbeat on rising production: The healthy trend in volumetric growth of E&P companies is
expected to continue as we foresee a 3-year production CAGR of 10% in oil and 3% in gas
during FY15-17. While expected growth in gas production is low due to declines in
production in large maturing fields, 2.0x-3.0x higher prices offered on new discoveries will
continue to keep gas sales on the uptrend. Consequently, we expect the sector to post
decent FY15F-FY18F earnings CAGR of 5% despite falling oil prices. Robust volumetric
growth coupled with i) an expanding reserve base on accelerated exploration efforts, ii)
lower lifting costs and iii) hedge against PKR depreciation under pins our investment case
for the sector.
Figure 22: Oil and Gas Production Trend
Oil Production (bpd)
Figure 23: TAL and Nashpa to lead the growth (bpd)
Gas Production (mmcfd)
Total
Nashpa
TAL
30,000
120,000
4,600
120,000
4,400
4,200
100,000
4,000
80,000
3,800
80,000
20,000
60,000
15,000
40,000
40,000
10,000
20,000
20,000
5,000
60,000
3,600
3,400
3,200
3,000
FY12 FY13 FY14 FY15F FY16F FY17F
25,000
100,000
0
FY12 FY13 FY14 FY15F FY16F FY17F
Source: PPIS, Company Reports, BMA Research
Reserve accretion to continue on aggressive exploration: The E&P companies

managed to drill an impressive 50 exploratory wells in FY14, up 53%YoY, despite
reemergence of circular debt. We believe the momentum in exploration is set to continue
going forward, given an aggressive drilling target of 50 exploratory wells in FY15F
compared to last 5 year average of 30 wells. Moreover, the pickup in exploration efforts and
pilot projects in new concessions and shale formations will further bolster reserve accretion.
The drilling will remain concentrated in hydrocarbon rich Sindh and Baluchistan regions.
5 Jan 2015
18
Pakistan
Market Strategy
Figure 25: Smooth CAPEX on strong cash flows
Figure 24: Drilling Trend (wells)

Exploratory
62
Operating Cash (PKRbn)
Development
50
57
54
60
36
34
16
21
FY11
FY12
35
50
53
50
56
CAPEX (PKRbn)
180
90
160
80
140
70
120
60
100
50
80
40
60
30
40
20
20
10
0
FY13
FY14
0
FY11 FY12 FY13 FY14 FY15F FY16F FY17F
FY15F FY16F FY17F
Source: PPIS, BMA Research
Dollar hedged revenue streams: Given the USD denominated revenues, E&Ps provide a
perfect hedge against PKR depreciation. As per our estimate, 1% depreciation in PKR
against the greenback translates into annualized earnings impact of 1%-2% on the E&P
sector.
Attractive yields on robust cash generation: The cash flows of the sector continue to
remain strong as evident from 37% growth in operating cash flows of the sector in 1QFY15
to ~PKR50bn despite the resurgence of circular debt. Robust earnings and reduced
intensity of circular debt will continue to keep cash flows strong in FY15 as well. We expect
FCFE generation of the sector to improve by 15%YoY to PKR51.7bn in FY15F. POL will
continue to offer highest yield of 13% in the E&P space followed by OGDC and PPL with
5% and 7%, respectively. The cash rich and unleveraged balance sheets of the exploration
companies further strengthens our conviction on the sector.
Figure 26: Dividend Yield
Figure 27: Robust FCFE on Steady Profitability (PKRbn)

13%
PAT
250
FCFE
80
70
200
60
50
150
7%
6%
40
100
30
20
50
10
0
0
OGDC
PPL
POL
FY12
FY13
FY14
FY15F FY16F FY17F
Source: Company Accounts, BMA Research
Declining oil prices negatives overplayed: 51% decline in oil prices since Jun-14 has
led Exploration and Production (E&P) sector to shed 19% of its value as the sector
underperformed KSE-100 by 28%. E&P sector is currently trading at an undemanding P/E
of 7.7x against 8.9x for KSE-100, an unusual discount of 13% as opposed to an average
5 Jan 2015
19
Pakistan
Market Strategy
premium of 7% in last 5 years. We believe the sector has absorbed the impact of tumbling
oil prices and is pricing in an oil price of USD50-55/bbl. Any further dip in stock prices on
account of weak 2QFY15 results shall provide an attractive entry point for the investors. We
have kept our long term oil price assumption at USD75/bbl. Even in a bear case scenario
(USD65/bbl long term oil price assumption) the sector still offers a total return of ~22%
against current market prices.
Figure 28: Production driven Sales growth
Sales (PKR bn)
Figure 29: Profitability Trend (PKR bn)

EBITDA
Production (mn boe)
450
400
350
300
330
250
320
200
310
250
NPAT
350
300
250
150
200
100
150
300
200
150
290
100
280
50
0
270
FY12
FY13
FY14
FY15F FY16F FY17F
100
50
50
0
FY12
FY13
FY14
FY15F FY16F FY17F

Source: PPIS, BMA Research
Attractive valuations: The recent bearish trend in the E&P sector on account of dwindling
oil prices has led to considerable undervaluation of E&P stocks, trading at an 37% discount
to regional peers. We are upbeat on long term prospects on account of significant
volumetric additions and upside in reserves due to aggresive exploration. Current preferred
plays include OGDC and POL with TPs of PKR261/sh and PKR550/sh, which translates
into total returns of 32% and 57%, respectively. PPL follows with a TP of PKR228/sh.
Oil Marketing Companies
CY15 will mark a period of recovery in the Oil Marketing Sector (OMC) owing to
growing petroleum sales and easing liquidity position on the back of 51% reduction
in oil prices during 2HCY14. The sector witnessed a dull CY14 on account of i) heavy
inventory losses, ii) resurfacing of circular debt and iii) weakening FO margins.
Though aforementioned variables may keep the sector in pressure in the near term,
we believe long term fundamentals remain strong. Our bull case on OMCs is based
on likely robust sales of high margin motor fuels on the back of considerable
reduction in differential over CNG alternative amid declining MOGAS and HSD
prices. Improved liquidity of IPPs would help steady FO sales. Falling interest rates
would help reduce finance cost while lower oil prices will also reduce the pace of
accumulation in circular debt. Long awaited restructuring and privatization of
DISCOs in 2HCY15 will remain the key to the resolution of circular debt. OMCs are
trading at an attractive P/E of 7.3x (18% discount over KSE100) thus providing an
attractive entry opportunity at current levels. PSO, the main beneficiary of easing
liquidity position in energy chain, is our top pick and currently trades at an attractive
P/E of 6.2x with an upside of 28%. We also like APL which offers an upside of 23%
along with a dividend yield of 10%.
Attractive entry opportunity as the worst is almost behind us: OMC sector remained
under pressure in CY14 as earnings will likely fall 21% YoY in FY15 on account of
inventory losses caused by a 51% plunge in oil prices and lower recovery of interest
income on receivables during 1HFY15. That said, we believe the sector has priced in the
negatives given the recent underperformance of 15% wrt to KSE-100 FYTD. With oil prices
having stabilized around USD55/bbl, we believe the focus shall soon shift to the resulting
stronger outlook on increased motor fuels volumes and improvement in circular debt. Long
5 Jan 2015
20
Pakistan
Market Strategy
awaited restructuring and privatization of DISCOs in 2HCY15 would be a key sign post to
watch. OMCs are trading at an attractive P/E of 7.3x (18% discount over KSE100) thus
providing an attractive entry opportunity. We continue to flag PSO as our preferred play in
the OMC sector currently trading at an attractive P/E of 6.2x, a discount of 31% over local
peers. We also like APL due to its strong cash generation and highest yield in the sector.
Figure 30: Sales Trend
Sales (PKR bn)
Figure 31: Profitability Trend (PKR bn)

Volumes (mn tons)
1,800
EBITDA
30
1,600
25
1,400
1,200
1,000
800
600
400
200
0
FY12
FY13
FY14
45
25
40
35
15
25
20
30
15
20
10
15
10
FY15F FY16F FY17F
30
50
20
10
NPAT
0
FY12
FY13
FY14
FY15F FY16F FY17F
Source: Company Reports, BMA Research
Increasing share of cash based and high margin products: We expect OMC volumes
to grow at a 3 year CAGR of 7% during FY15-FY17 while core earnings will likely grow at a
CAGR of 10% during the same period. The growth in volumetric sales will continue to be
driven by MOGAS and HSD fuels further supported by growth in non-fuel segment
(particularly Lubricants and Asphalt). The increase in sales of MOGAS (3 year CAGR of
14%) will be primarily driven i) narrowing premium over CNG (down to 6% from 45% three
months back) and ii) continued expansion in outlets by OMCs. Moreover, expected growth
in the sales of Asphalt and Lubricants coupled with increase in margins on HSD and
MOGAS by 5% and 26% respectively, will increase the share of high margin and cash
based products in the profitability.
Figure 32: Volume mix to skew in favor of cash based
products
FO
56%
57%
56%
Figure 33: Share in Gross Profit
Others
56%
HSD+MOGAS
57%
23%
21%
21%
41%
42%
40%
58%
FO
others
17%
19%
20%
39%
37%
38%
44%
43%
44%
44%
43%
42%
35%
37%
38%
44%
43%
42%
FY12
FY13
FY14
FY15F
FY16F
FY17F
FY12
FY13
FY14
FY15F
FY16F
FY17F
Source: OCAC, BMA Research
5 Jan 2015
21
Pakistan
Market Strategy
Figure 35: PSO Sales Trend (mn tons)
Figure 34: APL Sales Trend (mn tons)

Total
Total
MOGAS
3.0
0.5
2.5
15.0
3.0
14.5
0.4
2.0
MOGAS
2.5
14.0
2.0
13.5
0.3
1.5
13.0
0.2
1.0
12.5
1.0
12.0
0.1
0.5
1.5
0.5
11.5
0.0
-0.1
FY12
FY13
FY14
11.0
FY15F FY16F FY17F
0.0
FY12
FY13
FY14
FY15F FY16F FY17F

Source: OCAC, BMA Research
Improved GDP growth to help lift volumes; lower interest rates to curb finance cost:
Recent cut in interest rates by 50bps along with a likelihood of further decline in 1HCY15
will help reduce borrowing cost for OMCs especially PSO. Pakistan's GDP growth is on the
uptrend and likely to improve to 6% in FY16 (FY13: 3.5%) which will provide additional
impetus to the sales of HSD and FO.
Figure 36: Break up of volume growth story (mn tons)
Total
HSD
MOGAS
Figure 37: OMC wise sales trend (mn tons)

PSO
FO
12
30
10
25
20
15
APL
14.8
14.2
10
0
FY12
FY13
FY14
FY15F
FY16F
FY17F
12.3
1.8
FY12
12.6
1.8
FY13
13.1
2.1
FY14
13.4
2.6
2.3
FY15F
2.4
FY16F
FY17F
Continuation of reforms to alleviate pressure on liquidity: In order to curtail the burden

of energy sector subsidy, the government plans to improve the recoveries and collections in
the power distribution sector through privatization/restructuring of DISCOs in 2HCY15. The
elimination of inefficiencies post restructuring in the downstream sector will eventually
assist the government in resolving the menace of circular debt. Falling oil prices will also
reduce circular debt through i) reduction in absolute value of the lost electricity units and ii)
bridging the gap between cost of generation and consumer tariffs. Furthermore, another
cash injection by the government aimed at full settlement of circular debt is also possible
amid overall improvement in fiscal position which can potentially turn the tides in favor of
OMCs where key beneficiary shall be PSO.
5 Jan 2015
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Pakistan
Market Strategy
Figure 39: PSO mounting receivables kept payout

under pressure
Figure 38: Dividend Yield
11%
Receivables (PKR bn)
FY15 DY
DPS (PKR)
25.0
250.0
20.0
200.0
15.0
150.0
10.0
100.0
5.0
50.0
7%
4%
3%
0.0
APL
HASCOL
SHEL
PSO
0.0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Banks
Pakistan Banks' earnings are likely to grow by 20% in CY14 and the momentum shall
continue with an expected CY15 earnings growth 16% despite an expected decline in
interest rates. We expect another 150bps cut in interest rates in CY15 following a
50bps cut in Nov-14. Though this may potentially dent investor sentiment in the
short term, the massive PIB accumulation in CY14 has helped banks lock in higher
yields which will continue to support NIMs in the near term. The sector may also
book gains on partial liquidation on PIB portfolios as yields have already come down
markedly. PIB gains will likely buoy the sector's equity by 5%. The asset quality of
the banking industry remains impressive with NPL ratio expected to remain ~9% and
coverage ratio around 90%, driven by cautious lending policies and inclination
towards risk-free government treasuries. Also, the non-funded income of the
banking industry will also witness a healthy growth of ~12% in CY15F which is
expected to further support the sector's profitability. Within Banking space, we
recommend a BUY call on UBL and BAHL with TPs of PKR225/sh and PKR60/sh
offering total returns of 36% and 29%, respectively.
Higher investment yields to support profitability: The yields on investments are likely to
stay on the higher side during CY15 despite monetary easing as banks have piled up
massive stocks in PIBs at an average yield of 12.6%. Banks have expanded PIB portfolios
by PKR1.8tn, up 3.4x CYTD, to PKR2.5tn in Nov14. Furthermore, non-funded income is
likely to grow by 12%, which, along with lower provisioning and operating cost, is likely to
expand sector profitability by 16% in CY15F. Further, we expect 5 year earnings CAGR to
clock in at 20%.
5 Jan 2015
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Pakistan
Market Strategy
Figure 41: ROE
Figure 40: Earnings (PKRbn)
CY14F
Earnings
200.000
180.000
160.000
140.000
120.000
100.000
80.000
60.000
40.000
20.000
-
CY15F
30.0%
25.0%
20.0%
15.0%
10.0%
CY17F
CY16F
CY15F
CY14F
CY13
CY12
CY11
CY10
5.0%
0.0%
HBL UBL NBP MCB ABL BAFL BAHL AKBL
Upbeat organic growth in the offing: The banking sector assets have been on the rising
trajectory as total assets registered a CAGR of 13% in past four years. The robust growth
in assets is a function of robust CAGR of 15% in industry deposits due to growing monetary
base (average M2 growth of 14.2% in past four years). Going forward, we have assumed
industry deposits to grow by 14%-15% CY15F-CY18. While we have continued to assume
an equal allocation to advances and treasury investments (stable ADR & IDR) till CY15,
we expect ADR to start rising from CY16 onwards due to revival in credit demand owing to
resolution of energy and security concerns.
Figure 42: Deposits (PKR bn)
Figure 43: Deposit Share
Deposits (PKRbn)
14,000
20.0%
CY14F
18.0%
12,000
16.0%
10,000
14.0%
8,000
12.0%
10.0%
6,000
8.0%
4,000
6.0%
4.0%
2,000
2.0%
AKBL
BAHL
BAFL
ABL
MCB
NBP
UBL
0.0%
HBL
CY17F
CY16F
CY15F
CY14F
CY13
CY12
CY11
CY10
Economic recovery to revitalize credit cycle: Macro-economic indicators are

consistently showing signs of recovery as evident from i) softening inflation, ii) improving
energy supply and iii) exchange rate stability. This has resulted in improvement in private
sector credit appetite as advances registered a growth of 12%YoY as of Sep'14. On the
backdrop of economic recovery and expected lower DR, we expect a gradual uptick in
private sector credit demand in CY15 and onwards where we have assumed gross
advances to grow by 16% in CY15F-CY18F.
5 Jan 2015
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Pakistan
Market Strategy
Figure 45: ADR & IDR
Figure 44: Growing Advances (PKR bn)

6,000
ADR
IDR
70%
5,000
60%
4,000
50%
3,000
40%
30%
2,000
20%
1,000
10%
CY17F
CY16F
CY15F
CY14F
CY13
CY12
CY11
CY17F
CY16F
CY15F
CY14F
CY13
CY12
CY11
CY10
CY10
0%
Risk aversion to continue propping up asset quality: Despite credit expansion, we

expect asset quality of the banking sector (particularly top tier banks) will remain strong
owing to stringent risk management policies which is further validated by 130bps decline in
NPL ratio to 13.0% in Sep14 from 14.3% in Sep13. We belive bulk of the credit expansion
in the early stage of economic recovery shall be of high quality and thus the next NPL cycle
is atleast five years away. Going forward, we expect BMA banking space to post NPL ratio
9.4% and 8.7% in CY14F and CY15F, respectively. Also, we expect NPL coverage will
remain elevated at ~89%.
Figure 46: Infection Ratio & Coverage
Coverage
Infection Ratio
75.0%
80%
4.0%
60%
0.0%
CY17F
CY16F
CY15F
CY14F
CY13
CY12
CY11
CY10
12%
100%
6.0%
2.0%
70.0%
14%
10%
8%
6%
40%
4%
20%
2%
0%
0%
AKBL
80.0%
120%
BAHL
85.0%
16%
BAFL
8.0%
140%
ABL
10.0%
18%
MCB
90.0%
Infection Ratio
160%
NBP
12.0%
UBL
95.0%
HBL
Coverage
Figure 47: Bank wise Asset Quality (CY14E)
Diversified income base to support non interest income: Consistent growth in

branchless banking and expected increase in trade and remittances (foreign and domestic)
will likely expand fee income where we have incorporated fee income growth of 14% and
15% in CY14 and CY15, respectively. Furthermore, banks are sitting on large stocks of
unrealized capital gains on stock market investments which is likely to support earnings
going forward. Thus we expect non-interest income of BMA's Banking Universe to register
a growth of 12% and 11% in CY14 and CY15, respectively.
5 Jan 2015
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Pakistan
Market Strategy
Figure 49: Bank wise share in NFI CY14E (PKRbn)
Figure 48: Consistent growth in NFI (PKRbn)
30
Non-Funded Income (PKRbn)
160
28
25
140
21
20
20
15
80
13
11
8
10
60
40
20
-
AKBL
100
BAHL
120
BAFL
ABL
MCB
NBP
UBL
HBL
CY17F
CY16F
CY15F
CY14F
CY13
CY12
CY11
CY10
Revaluation surpluses on PIBs to augment equity: The banking sector is all set to
register massive revaluation surplus on long duration govt. securities as yields on PIBs
have come down by 1.7% to 12.6% after banks expanded their PIB books by 3.4x from
Dec-13 levels. Cursory calculation reveals that banks should book revaluation surplus of
PKR46bn on PIB portfolio on the back of decline in PIB yields. Consequently, the banking
sector CAR is likely to jump to 18% from ~15% registered in Sep14.
Valuation: The banking sector is trading at Dec15 P/B and P/E multiple of 1.7x and 8.1x,
respectively. Within the banking space we reiterate our conviction on UBL and BAHL with
TPs of PKR225 and PKR60, respectively offering total returns of 36% and 29%,
respectively.
Cements
Cement sector will likely witness a blend of volume growth and margin expansion in
CY15, while falling interest should also help reduce finance cost in selected
leveraged cement companies. Strengthening in private and public sector demand
will help local dispatches to grow at a 3yr CAGR of 6%. Furthermore, reduction in
coal and FO prices along with a decline in power tariffs (due to fuel price
adjustments) are expected to significantly expand the industry margins, going
forward. We expect another 150bps decline in interest rates in 1HCY15 which will
help lower finance cost for leveraged cement plays. As such, the sector will witness
3yr earnings CAGR of 12.5% in FY14A-FY17F. We highlight LUCK, FCCL and MLCF
as our preferred plays in the cement sector with total stock returns of 18%, 35% and
33% respectively.
Margins to expand owing to falling fuel and power costs: We expect the margins of the
industry to expand by 400bpsYoY in FY16, owing to declining in coal prices, drop in power
cost on account of downward adjustments in fuel adjustment factor and commissioning of
WHR. Coal prices are currently hovering at USD67/ton, down 13% from FY14 average of
USD77/ton. We have assumed current and long term coal prices at USD70/ton, which will
likely lead to a 6% decline in per unit coal cost in FY15. Furthermore, decline in power cost
on account of downward revision in fuel adjustment surcharge will lower the cost of
purchased electricity while in-house generation cost will also come down due to lower
furnace oil prices. Furthermore, growing local dispatches amid declining exports would prop
up average margin of cement companies as margins on domestic sales is 41% higher than
exports.
5 Jan 2015
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Pakistan
Market Strategy
Figure 50: COGS per ton vs Coal prices (USD/Ton)
EBITDA/Ton
Coal prices
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
-
500
FY18
FY17
FY18
FY17
FY16
FY15
FY14
FY13
FY12
FY11
FY10
1,000
FY16
20
1,500
FY15
40
2,000
FY14
60
2,500
FY13
80
3,000
FY10
100
3,500
FY12
120
FY11
COGS PER TON
Figure 51: Growing EBITDA (PKR/ton)
Source: Company Reports, BMA Research, Bloomberg
Volume growth driven by domestic sales: The country is experiencing a revival in

cement demand growth as evident from 9.4% growth in domestic dispatches during
5MFY15. While PSDP expenditure has increased only modestly, domestic demand growth
is driven primarily by private sector construction activities. Further improvement in GDP
growth, decline in inflation and interest rates and political stability will further augment
growth in cement demand. We have conservatively assumed growth in domestic
dispatches at 6%. Exports, on the other hand will fall by 2% per annum during FY15-17 and
limit overall dispatches CAGR to 4% during the period.
Figure 52: Dispatch growth vs GDP Growth
Utilization Level
10%
30%
9%
25%
8%
30
20%
7%
25
15%
6%
20
10%
5%
15
5%
4%
0%
3%
-15%
10
5
FY18F
FY17F
FY16F
FY15F
1%
35
FY14A
2%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
40
FY13A
-10%
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
35%
-5%
Dispatches
45
FY12A
GDP Growth
FY11A
Dispatch growth
Figure 53: Utilization (%) vs Dispatches (mn tons)
0%
Source: APCMA, BMA Research
Cement industry is becoming cash rich: The cement industry has been able to
significantly reduce its debt levels on the back sizable margins and improving profitability.
Consequently, major operators like LUCK, PIOC and KOHC have managed to buildup
considerable cash reserves. The strong cash generation has enabled the small players to
undertake cost efficiency projects leading to valuable cost savings while the big players are
diversifying into different industries and beyond local borders. Some companies have also
announced expansion plans to benefit from the next up cycle in domestic demand growth.
Falling interest rates to help lower finance cost: The recent reduction in discount rate
by 50bps along with expectation of another 100bps cut in CY15 will bode well for the
sector. This will significantly decrease financial cost burden on leveraged payers such as
5 Jan 2015
27
Pakistan
Market Strategy
MLCF and FCCL. We expect FCCL's finance cost to fall by 22% in FY15 and 42% in FY16
while that of MLCF will likely fall by 22% in FY15 and 21% in FY16.
Figure 54: Sector FC % of PBT
Figure 55: Cash reserves vs Debt (PKR bn)

Cash Reserves
Sector FC % of pre tax proft
400%
Debt levels
70
90
80
70
60
50
40
30
20
10
-
FY18F
FY14
FY13
FY12
FY11
FY10
FY09
FY08
FY07
0%
10
FY17F
50%
20
FY16F
100%
30
FY15F
150%
40
FY14A
200%
50
FY13A
250%
60
FY12A
300%
FY11A
350%
Textiles
Textile segment is well positioned to witness a better FY15 as several factors are
likely to improve the core textile operations. Cotton has shed 26% FY15TD on
account of abundant supplies in the region, while fuel and power cost which
constitute 1/4th of total COGS will likely fall due to 46% drop in FO prices FY15TD
and reduction in electricity tariffs. Lower interest rates will help reduce finance cost
as BMA's textile universe has an average debt to assets of 48%. A 50bps cut in DR
will result in a positive annualized earnings impact of 3.5% to 7.5% on BMA Textile
Universe. We believe concerns over Pakistan potentially losing GSP Plus status due
to resumption of death penalties are overplayed and expect the GSP plus status to
continue. Finally, as per IMFs directives, GoP might increase the gas tariffs, the
impact of which will depend on the energy mix of individual companies where
companies with higher dependence on gas will be the biggest losers. As per our
calculations, for every 10% increase in gas tariffs, the EPS of NML, NCL and GATM
will have a negative impact of PKR0.33/sh, PKR0.3/sh and PKR1.2/sh. Our TPs for
NML, NCL and GATM currently stand at PKR146/sh, PKR52/sh and PKR76/sh,
offering total returns of 19%-21% on the last closings.
Strong earnings growth on easing cost pressures: We expect gross margins of the
sector to improve by 250bps in FY15F primarily driven by easing raw material and
fuel/power cost. Cotton, the sectors primary raw material, contributing ~25% to the total
cost base has already shed 26%YoY. This is likely to result in the improvement of core
margins, which we expect to clock in around 18%-20% in FY15 as against 9%-14% in
FY14. Moreover, reduction in FO prices as well as cut in electricity rates will help increase
BMA textile universe earnings by 2% to 8% on annualized basis.
5 Jan 2015
28
Pakistan
Market Strategy
Figure 56: Strong margins on PKR depreciation and

declining cotton prices
Figure 57: Fuel Mix of Textiles
Gas
Gross Margins
30%
EBITDA Margins
Net Profit Margins
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
FY13
FY14
Grid
FO
100%
30%
25%
FY12
Coal
FY15E FY16E FY17E
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
NML
NCL
GATM
Source: PPIS, Company Accounts, BMA Research
GSP+ starting to yield benefits: After posting dull exports numbers in the opening months
of FY15, the benefits of GSP+ have started becoming visible, particularly within the value
added segments. Pakistans value added textile exports depicted a growth of 10%-17%YoY
in 5MFY15 which is an impressive performance given FY12A-14A CAGR of 8%-9%. With
strengthening exports of value added products, we believe GATM and NML, with 70% and
75% of their total sales coming from value added segments, are likely to be the key
beneficiaries. NCL, with 45% of its sales comprising of value added segment, will continue
to remain the laggard.
Figure 59: Sales composition of BMA Textile
Universe
Figure 58: Textile exports and growth
Textile Exports
As % of Total Exports
Exports
57.0%
16,000,000
100%
56.0%
14,000,000
90%
12,000,000
55.0%
10,000,000
54.0%
53.0%
52.0%
6,000,000
40%
2,000,000
50.0%
0
CY09 CY10 CY11 CY12 CY13 CY14
0.3
69.2%
65.3%
NCL
GATM
60%
50%
51.0%
0.3
70%
8,000,000
4,000,000
0.2
80%
Local
82.5%
30%
20%
10%
0%
NML
Healthy investment portfolio: BMA Universe companies (NML, NCL) hold a diversified
portfolio of subsidiary companies. The investments not only hedge the textile companies
against textile sector's volatility through healthy dividend income (3 year CAGR of 12%) but
also provide investors an indirect exposure to their respective portfolio companies (NML:
MCB, DGKC, NPL, NCL and NCPL). Improvement in the dividend income (constituting
43%-45% of profitability) will continue to add to the bottom-line growth.
5 Jan 2015
29
Pakistan
Market Strategy
Value added segments to outperform; Prefer NML and GATM: Given low cotton prices
and substantially higher growth in value added segment's exports, we prefer the valueadded textile sector over spinning units. NML is our top pick in the sector as it receives
75% of its sales from the value added segments. Our Dec-15 TP for NML stands at
PKR146/sh, which translates into an upside of 17% along with a dividend yield of 4%.
GATM's TP stands at PKR76/sh, which translates into total return of 19%. Our TP for NCL
stands at PKR52/sh, translating into a total return of 17%.
Chemicals (Fertilizer)
The Fertilizer sector has returned an impressive 23% on average over the past 5
years, however, performance in CY14 remained tepid as the sector returned 17%YoY,
underperforming the market by 10%. Concerns over gas supply and chargeability of
GIDC were the prime reasons for the muted performance. Moving ahead, we portend
earnings growth of 44% in CY15F, primarily led by the growth within the Engro group
companies (ENGRO & EFERT). That said, declining trend in global oil price and its
potential fallout on petrochems, coupled with rising costs in the local market (gas)
may lead to pressure on urea price. While sector dynamics are likely to remain fickle,
we flag ENGRO as an outperformer given group developments.
With Agriculture being the backbone of the country, the Fertilizer sector has historically
been one of the best performing sectors at the Karachi Stock Exchange (KSE). Going
forward, we expect sector profitability to rise by 44%YoY, however, growth remains
contingent on i) continued supply of feed gas to the industry and ii) initiation of
concessionary gas rate for Engro Fertilizer (EFERT).
Figure 60: Relative Performance
Figure 61: Earnings Trend
Fertilizer Sector
KSE100 Index
30%
25%
40,000
40%
10%
30,000
20%
5%
20,000
0%
31-Dec-14
31-Oct-14
30-Nov-14
30-Sep-14
31-Aug-14
31-Jul-14
30-Jun-14
31-May-14
30-Apr-14
31-Mar-14
28-Feb-14
31-Jan-14
31-Dec-13
0%
60,000
50,000
60%
15%
-10%
Growth
80%
20%
-5%
PAT (PKR mn)
100%
10,000
-20%
-40%
0
2011
2012
2013
2014F
2015F
Source: BMA Research, Company reports, KSE, Bloomberg
Local urea players have steadily increased their market share against imported urea as
they offloaded 4.6mn tons urea during 11MCY14 compared to just 394k tons imported urea
(down 55%YoY). The increase came amid increased production owing to improved gas
supply situation to the industry.
5 Jan 2015
30
Pakistan
Market Strategy
Figure 62: Local production vs Imports (000tons)
Figure 63: Sales and EBITDA (PKR mn)

Sales
Imports
6,000
Production
EBITDA
400,000
120,000
350,000
5,000
100,000
300,000
4,000
80,000
250,000
3,000
200,000
2,000
60,000
150,000
1,000
40,000
100,000
11MCY14
CY13
CY12
CY11
CY10
CY09
20,000
50,000
0
0
2011
2012
2013
2014F 2015F
Source: BMA Research, NFDC, Bloomberg
ENGRO stands out as our top pick within the sector with a TP of PKR272/sh. At current
levels, the scrip offers an upside of 17% and trades at undemanding CY15F and CY16F
P/E of 6.2x and 6.0x, respectively. For risk averse investors, we also flag FFC given
continued high dividend with the scrip currently offering a D/Y of 12%. Dividend yield looks
particularly impressive given our view of decreasing interest rates.
Figure 64: Dividend Yields
Figure 65: Steady Margins

Gross Margin
12%
EBITDA margin
45%
8%
40%
8%
35%
4%
30%
25%
20%
FFC
FFBL
FATIMA
EFERT
2010
2011
2012
2013 2014F 2015F 2016F
Source: BMA Research, Company reports
5 Jan 2015
31
Pakistan
Market Strategy
ConvictionCalls
5 Jan 2015
32
Pakistan
Market Strategy
OGDC: BUY
Oil and Gas Development Company (OGDC)
Target Price:
Developments
meriting a second look!
261
Current Price: 206
Oil and Gas Development Company (OGDC) is one of our preferred plays in the E&P
space owing to i) least earnings sensitivity to oil prices on diversified revenue base,
ii) vast exposure to exploration assets in Pakistan and iii) low risk production profile
amid geographically diversified producing assets. Though near term prospects may
remain dim on account of sharp decline in oil prices (down 51%FYTD) leading to
9%YoY decline FY15F earnings; however, long term prospects of the stock remain
upbeat owing to an expected 3-year production CAGR of 7% and potential upside in
reserves on an aggressive exploration program. Thus, we maintain our liking for the
stock with a Dec15 TP of PKR261/sh, translating into a total return of 32% (capital
gain: 27% + dividend yield: 5%). Our conviction on the stock is based on i) an
aggressive development program likely yielding results in 2HFY15, ii) exploration
drilling in high prospect areas, iii) strong cash generation and iv) potential upside
from addition of shale and tight gas. With current market price implying an oil price
of USD55/bbl, we believe OGDC has absorbed the negative impact of oil prices.
Expected 14% growth in oil production and 16% growth in gas production in CY15F
will likely be the key triggers for the stock. Concerns pertaining to oversupply have
now settled due to indefinite postponement in GDR offering. At current levels, the
scrip trades at FY15F and FY16F PER of 8.0x and 8.1x, respectively. BUY
Stock Data
Price (PKR/Share)
Reuters
Bloomberg
OGDC.KA
OGDC PA
52-weeks High/Low (PKR)
Dividend Yield
Market Cap (PKR bn)
Market Cap (USD mn)
Avg Daily Turnover (PKR mn)
Avg Daily Turnover (USD mn)
Shares Outstanding (mn)
KSE-100 Index Weightage (%)
Free Float
206
Website
www.ogdcl.com.pk
272.0 / 200.4
5%
888
8,840
189
2.0
4,301
7.6
15
Share Price Performance

OGDC
KSE100Index
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
50%
40%
30%
20%
10%
0%
10%
20%
30%
40%
Company Description
Oil and Gas Development Company Limited
explores, develops and sells oil and gas
resources in Pakistan. As of July 31, 2013, the
company had 287 exploratory wells drilled; and
379 appraisal wells and development wells. The
company also offers drilling, logistics, and well
services. Oil and Gas Development Company
Limited was founded in 1961 and is
headquartered in Islamabad, Pakistan.
Shareholding Structure
Foreign
Cos.
13%
OGDCL
employess
empower
ment trust
10%
5 Jan 2015
Others
2%
Govt. of
Pakistan
75%
Momentum in production growth to continue: The relentless decline in oil prices

appears to have overshadowed the potential upside in earnings and valuations owing to
materialization of a spree of development projects expected in CY15. The company targets
to lift its production base through i) completion of Phase-II of KPD TAY (by Jan15) and
Sinjhoro, ii) ramp-up of production from Uch-II and iii) Jhal Magsi and Nashpa development
projects (expected in 1HFY16). These projects are estimated to add ~5,600bpd of oil and
~203mmcfd of gas to the production base of the company, depicting an impressive
increase of 14% and 16% over the existing oil and gas production, respectively.
Strong exploration potential: With highest number of exploration concessions (62

licenses) located across the country, OGDC will continue to remain the main beneficiary of
ongoing aggressive exploration activity in the country. The company has highlighted an
aggressive exploration program aimed at drilling 11 new exploratory wells in FY15
compared to 5 wells drilled last year. The company also plans to initiate seismic activity in
new blocks during CY15 with wellhead gas price of USD6.0/mmbtu, 2.0x higher than
current realized gas price of OGDC. Moreover, OGDCs exposure to hydrocarbon rich and
relatively unexplored Baluchistan and Kohat Basin will keep success ratio above 50% and
help achieve +100% reserve replacement, going forward.
Product and fields diversification - low risk to future earnings growth: The balanced
revenue mix (oil: gas revenue mix at 45%:50%) with capped gas prices will continue to
keep OGDC least sensitive in BMA E&P Universe to further slide in oil prices. Moreover,
the companys development leases and exploration licenses are spread across the country
thus providing exposure to the vast untapped hydrocarbon resources in Pakistan. OGDC
has managed to achieve significant geographic diversification in production thus making it
less prone to reserve downgrades in a single field.
Strong cash generation to continue: Despite the resurgence of circular debt, the payout
and capex target of the company remained on track in FY14. Going forward, the cash
generation of the company will further strengthen in FY15F and FY16F owing to reduction
in the intensity of circular debt pile-up and stable earnings. This will enable the company to
smoothly pursue its development and exploration plan thus maintaining the growth in
production. We foresee FY15F and FY16F FCFE at PKR13/sh and PKR14/sh thus allowing
the company to payout PKR11.0 in DPS during both years.
Valuation: Based on our reserve based Dec15 TP of PKR261/sh, the stock offers an
upside of 27% coupled with a dividend yield of 5% translating into a total return of 32%. At
current levels, the scrip trades at FY15F and FY16F PER of 8.0x and 8.1x, respectively.
33
Pakistan
Market Strategy
Profit & Loss
FY12A
FY13A
FY14A
FY15F
FY16F
Net Sales
197,839
223,365
257,014
237,802
240,109
Cost of Sales
65,781
82,314
92,629
90,686
94,735
Operating Profit
132,058
141,051
164,385
147,117
145,374
Other Income Net
9,660
15,799
19,240
21,378
22,440
EBITDA
148,183
162,924
197,106
182,719
182,073
Profit Before Tax
132,996
146,809
172,350
158,127
157,462
Net Profit
96,818
91,273
123,914
110,689
110,224
48,583
49,293
50,390
81,863
85,335
CF from Investing
(14,662)
(28,407)
(25,468)
(26,870)
(29,808)
CF from Financing
Cash Flow
CF from Operations
(30,612)
(33,922)
(27,222)
(45,160)
(47,310)
Net Change in Cash
3,309
(13,036)
(2,301)
9,833
8,217
Ending Cash Balance
55,451
42,415
40,114
49,947
58,164
FCF to Equity
41,313
162,105
22,889
54,993
60,214
Current Assets
214,876
134,329
194,160
217,581
267,155
Long Term Assets
123,445
279,682
302,073
321,856
333,368
Total Assets
338,321
414,011
496,233
539,437
600,522
Current Liabilities
32,214
58,377
48,046
23,780
24,011
Non-Current Liabilities
42,694
43,286
52,516
54,457
56,397
Total Liabilities
74,908
101,663
100,562
78,237
80,408
Total Equity
263,383
312,266
395,671
461,201
520,114
EPS (PkR)
22.5
21.2
28.8
25.7
25.6
DPS (PkR)
7.3
8.3
9.3
11.0
11.0
BVS (PkR)
61.2
72.6
92.0
107.2
120.9
PER (x)
9.2
9.7
7.2
8.0
8.1
Balance Sheet
Key Ratios
Dividend Yield
3.5%
4.0%
4.5%
5.3%
5.3%
P/BVS(x)
3.4
2.8
2.2
1.9
1.7
EV/EBIDTA
5.7
5.2
4.3
4.6
4.7
Asset Turnover
0.6
0.5
0.5
0.4
0.4
27.1%
12.9%
15.1%
-7.5%
1.0%
Sales Growth
5 Jan 2015
Op. Profit Margin
66.8%
63.1%
64.0%
61.9%
60.5%
Net Profit Margin
48.9%
40.9%
48.2%
46.5%
45.9%
EBITDA Margin
74.9%
72.9%
76.7%
76.8%
75.8%
34
Pakistan
Market Strategy
Pakistan Oilfields Limited (POL)
POL: BUY
Target Price:
Negatives already priced in!
550
Current Price: 382

Stock Data
Price (PKR/Share)
Reuters
Bloomberg
PKOL.KA
POL PA
Dividend Yield
Market Cap (PKR bn)
Market Cap (USD mn)
Free Float
382
Website
www.pakoil.com.pk
560.7 /361.9
13%
90
899
134
1.4
237
2.4
46

POL
KSE100Index
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
50%
40%
30%
20%
10%
0%
10%
20%
30%
40%
Company Description
Pakistan Oilfields Limited is engaged in the
exploration, development, and production of
crude oil and gas in Pakistan. It operates nine
development and production leases and a
network of pipelines for transportation of crude
oil. Pakistan Oilfields Limited is a subsidiary of
The Attock Oil Company Limited.
Others
5%
Individuals
12%
Banks &
DFIs
17%
Insurance
Cos
7%
Mutual
Funds
6%
Associated
Cos
53%
5 Jan 2015
We maintain our conviction on Pakistan Oilfields Limited (POL) owing to i) an

attractive yield of 13% coupled with a decent 3-years earnings CAGR of 9% despite
lower oil prices, ii) 3-year oil production CAGR of 11%, iii) robust cash generation
and iv) exploration efforts being concentrated in high impact TAL and Margala
blocks. POLs earnings remain the most vulnerable to oil with every 10% decline in
oil prices trimming EPS by 9% given ~60% contribution of oil sales in total revenue.
However, we believe the stock seems to have already priced in the negative impact
of lower oil prices (down 51%FYTD) as the current market price of POL is factoring in
an oil price of roughly around USD45/bbl. Though FY15F earnings will remain
lackluster (down 3%YoY) on account of continued weakness in oil prices, we foresee
earnings to recover beyond FY15 posting FY16-FY18 CAGR of 9% owing to strong
volumetric additions from TAL block. The growth in production will be mainly driven
by an active development plan concentrated in JV operated TAL block (POL stake:
21%) where the operator has highlighted to drill 3 development wells in high
prospect Makori East and Maramzai fields. Also, the company has planned to keep
its exploration drilling focused in high impact JV operated TAL and Margala &
Margala North blocks (3 wells in drilling/testing phase). We continue to flag POL as
our top pick in the E&P chain with a Dec15 TP of PKR550/sh based on reserve based
DCF valuations. Our long term Arab Light oil price assumption is USD75/bbl. The
stock offers a total return of 57% (capital gain: 44% + dividend: 13%). At current
levels, the scrip trades at FY15F and FY16F PER of 7.2x and 6.9x, respectively.
Strong production additions to keep earnings growth steady: Marked by completion of
ongoing and planned development drilling in partner operated TAL block, POL is all set to
deliver 3-year CAGR of 11% in oil production, highest in the E&P space. Consequently, the
company will deliver decent 3 earnings CAGR of 9% as against mere 4% in FY12A-FY14A,
despite 30%YoY lower average oil prices in next three years. The growth in production and
earnings will be primarily driven by potential output additions from Makori East (ME-4 and
ME-5) and Maramzai (M-3) fields which currently contribute a cumulative ~60% share in
POLs total oil production.
Drilling in high prospect areas bolsters exploration outlook: Given the lackluster
exploration track record of the company in own operated areas, POL has now shifted all its
focus and resources towards exploration drilling in JV operated areas TAL and Margala &
Margala North blocks (operated by MOL). The company is exposed to 3 exploratory wells
MGN-01, Malgin-01 and Mardan Khel-01 wells which are in drilling/testing phase while
another well Makori Deep-1 has also been finalized for drilling in CY15.
Attractive yield of 13% on strong cash flows: In the context of declining interest rates on
fixed income instruments, POL, with an attractive yield of 13%, will continue to attract
increased investors interest going forward. The strong cash generation of the company
owing to steady trend in earnings and immunity against circular debt will allow the company
to maintain its track record of impressive payouts along with timely progress on partner led
development projects. We foresee payout of the company to remain healthy at PKR50/shPKR53/sh in FY15F and FY16F, respectively.
Oil price decline overplayed: The market seems to have overreacted to the recent
decline in oil prices as the current market price of the stock suggest an oil price assumption
of USD45/bbl which is USD10/bbl or 18% lower than prevailing oil prices. Going forward,
we expect notable additions in oil production and a lucrative yield of 13% will bring the
stock back into limelight and trigger price discovery.
Attractive valuation on solid fundamentals: We reiterate our liking for POL with a TP of
PKR550/sh based on reserve based DCF methodology. The stock offers a total return of
57% (capital gain: 44% + dividend: 13%). At last closing, the stock is trading at FY15F and
FY16F P/E of 7.2x and 6.9x, respectively.
35
Pakistan
Market Strategy
Profit & Loss
FY12A
FY13A
FY14A
FY15F
FY16F
Net Sales
28,624
28,878
35,540
32,971
34,144
Cost of Sales
11,811
14,502
18,361
16,677
17,035
Operating Profit
16,813
14,376
17,179
16,294
17,108
Other Income Net
2,547
1,954
1,823
2,113
2,190
EBITDA
19,782
17,269
23,336
20,995
21,503
Profit Before Tax
17,389
14,554
17,207
16,680
17,464
Net Profit
11,860
10,831
12,888
12,453
13,039
CF from Operations
15,268
12,560
18,248
18,596
18,509
CF from Investing
(3,004)
(5,202)
(4,276)
(4,976)
(5,176)
CF from Financing
(9,614)
(12,690)
(10,395)
(12,419)
(12,419)
Net Change in Cash
2,650
(5,332)
3,577
1,201
914
Ending Cash Balance
12,581
7,249
10,827
12,028
12,941
Free Cash Flow to Eq.
12,160
8,208
14,529
13,619
13,333
Current Assets
19,226
16,613
21,098
23,482
26,095
Long Term Assets
33,025
37,026
36,771
34,869
33,186
Total Assets
52,251
53,639
57,869
58,350
59,281
Current Liabilities
6,145
7,938
8,334
8,716
8,962
10,953
12,752
14,339
14,404
14,468
Total Liabilities
17,098
20,691
22,673
23,120
23,431
Total Equity
35,153
32,948
35,196
35,230
35,850
EPS (PkR)
50.1
45.8
54.5
52.6
55.1
DPS (PkR)
52.5
45.0
52.5
50.0
52.5
BVS (PkR)
148.6
139.3
148.8
148.9
151.6
7.6
8.3
7.0
7.2
6.9
13.8%
11.8%
13.8%
13.1%
13.8%
P/BVS(x)
2.6
2.7
2.6
2.6
2.5
EV/EBIDTA
4.0
4.6
3.4
3.8
3.7
Asset Turnover
0.5
0.5
0.6
0.6
0.6
Sales Growth
14.7%
0.9%
23.1%
-7.2%
3.6%
Op. Profit Margin
58.7%
49.8%
48.3%
49.4%
50.1%
Net Profit Margin
41.4%
37.5%
36.3%
37.8%
38.2%
EBITDA Margin
69.1%
59.8%
65.7%
63.7%
63.0%
Cash Flow
Balance Sheet
Key Ratios
PER (x)
Dividend Yield
5 Jan 2015
36
Pakistan
Market Strategy
Pakistan State Oil Limited (PSO)
PSO: BUY
Target Price:
463
Gaining momentum on recovery in energy chain
Current Price: 362
Stock Data
Price (PKR/Share)
Reuters
Bloomberg
PSO.KA
PSO PA
Dividend Yield
Market Cap (PKR bn)
Market Cap (USD mn)
Free Float
362
Website
www.psopk.com
444.5 /295.0
3%
98
979
751
7.8
272
2.7
47

PSO
KSE100Index
Completion of power sector reforms remains the prime trigger: Amid persistent
pressure from IMF to curtail energy sector subsidy, the government is expected to kick start
the second leg of power sector reforms aimed at reducing line losses and power thefts in
CY15, the primary cause behind reemergence of circular debt. To recall, the government
failed to complete the reforms in CY14 as it remained focus on privatization and bond
issues in the international market. Going forward, we expect the government to direct all its
efforts towards improving the financial position of the DISCOs in order to generate
privatization interest in 2HCY15. PSO, being the most affected by circular debt, will emerge
as prime beneficiary with significant improvement in its liquidity position.
50%
35%
20%
5%
Dec14
Oct14
Nov14
Sep14
Jul14
Aug14
Jun14
Apr14
May14
Mar14
Jan14
Dec13
Mar14
10%
Company Description
Pakistan State Oil Company Limited engages in
the procurement, storage, distribution, and
marketing of petroleum and related products in
Pakistan. The company offers motor gasoline,
furnace oil, jet fuel, kerosene and high speed
diesel oil. It operates a retail network of 3,557
outlets; 150 convenience stores; 251 CNG
facilities; 24 mobile quality testing units; and
refueling facilities at 9 airports and 2 sea ports.
Banks &
DFIs
6%
Others
15%
Federal
Govt
26%
Individuals
15%
NIT & ICP

15%
5 Jan 2015
Insurance
Cos
8%
Mutual
Funds
15%
Pakistan State Oil Limited (PSO), the largest oil marketing company in Pakistan, is
expected to witness an eventful CY15 owing to i) potential improvement in liquidity
position due to reduction in circular debt, ii) decline in interest rates, iii) increasing
sales of petroleum products, iv) diversification into LNG import business and v)
upside from higher margins. After witnessing a dismal CY14 with an
underperformance of 16% against KSE-100 FYTD, we forsee CY15 to fare better on
account of reduction in the intensity of circular debt pile-up owing to i) narrowing of
differential between cost of generation and final tariff and ii) improvement in
recovery ratio of DISCOs due to privatization. PSO, being the biggest fuel importer,
will also benefit from a stable PKR/USD in terms of minimal exchange losses.
Moreover, prudent inventory management by the company will further protect the
company against inventory losses, going forward. The companys diversification
plan of venturing into LNG import business is expected to commence from 1QCY15
and will further strengthen the fundamentals of PSO through increased bottomline
and reduced dependence on cash starved FO product. At last closing, the stock is
trading at FY15F and FY16F P/E of 6.2x and 5.5x. Based on our Dec15 of PKR463/sh,
the stock offers a total return of 31% (capital gain: 28% + dividend: 3%) BUY.
Declining FO prices a blessing or just a dent on margins?: The recent decline in FO

prices (down ~40% FYTD) may bode negative in short term due to weakening FO margins;
however, the same would translate into savings for PSO in long term owing to reduction in
exposure to the financial cost of circular debt. The resultant narrowing down of gap
between cost and final tariff will significantly reduce the intensity of pile-up in circular debt
which is currently estimated at PKR11bn-PKR12bn per month, due to decrease in the fuel
component of consumer electricity tariffs. We believe the government may conduct another
cash injection to clear the stock of circular debt given ample fiscal space owing to
privatization and bond proceeds
Improvement in product profile: PSO is also expanding its footprint in the LNG import
business expected to commence from 1QCY15. Though details are not yet revealed, we
believe the venture will further strengthen the earnings and balance sheet position through
reduced exposure to circular debt. This coupled with increased product margins on HSD
and MOGAS will allow PSO to increase its share in cash based products. As per our
estimates, with a 3 year CAGR of 8% in MOGAS sales coupled with 5%-26% higher
margins on HSD and MOGAS, we foresee that the share of cash based products (MOGAS
and HSD) in gross profit will increase to ~43% in FY15 and onwards from last 3 year
average of 36%.
Falling interest rates to help reduce finance cost: With a Debt to Equity of 1.2x, PSO
will stand to significantly benefit from the decline in interest rates as well. As per our
estimates, a 50bps reduction in interest rates translates into an annualized EPS impact of
PKR1.24/sh (2.1% of FY15F EPS).
Attractive valuations: PSO currently trades at an undemanding FY15F P/E of 6.2x,
depicting a notable discount of 32% over its local peers. On P/E basis, the current multiple
reflects a discount of 38% and 30% over pre-circular debt P/E of ~10x and BMA Universe
P/E of 8.9x, respectively. The wide valuation discount over the market and peers provides
ample space for the stock to re-rate in an event of gradual reduction in exposure to circular
debt.
37
Pakistan
Market Strategy
Profit & Loss
FY12A
FY13A
FY14A
FY15F
FY16F
1,024,424
1,100,122
1,187,639
1,068,875
1,122,319
Cost of Sales
990,101
1,065,961
1,150,815
1,147,899
1,203,190
Operating Profit
17,397
22,631
24,621
22,745
25,004
Other Income Net
(1,506)
(1,081)
10,515
3,048
3,743
EBITDA
25,991
27,375
43,441
33,069
34,913
Profit Before Tax
13,674
19,210
32,969
23,601
26,527
Net Profit
9,056
12,638
21,818
15,812
17,773
(21,327)
79,444
(57,326)
21,348
12,666
CF from Investing
(46,107)
(760)
(1,469)
(1,572)
CF from Financing
22,737
(11,698)
63,682
(15,062)
(4,594)
Net Change in Cash
1,415
21,639
5,596
4,817
6,500
Ending Cash Balance
(18,116)
3,524
9,120
13,937
20,438
Free Cash Flow to Eq.
3,759
23,231
7,325
7,262
9,217
Current Assets
337,795
224,356
313,514
301,953
306,947
Long Term Assets
10,469
57,593
58,637
58,722
58,833
Total Assets
348,264
281,949
372,151
360,675
365,780
Current Liabilities
294,949
217,035
288,346
262,827
252,808
4,982
4,271
5,184
5,859
5,928
Total Liabilities
299,931
221,307
293,530
268,686
258,736
Total Equity
48,334
60,643
78,621
91,988
107,045
EPS (PkR)
33.3
46.5
80.3
58.2
65.4
DPS (PkR)
5.5
5.0
8.0
10.0
12.0
BVS (PkR)
177.9
223.2
289.4
338.6
394.0
PER (x)
10.9
7.8
4.5
6.2
5.5
Dividend Yield
1.5%
1.4%
2.2%
2.8%
3.3%
P/BVS(x)
2.0
1.6
1.3
1.1
0.9
EV/EBIDTA
6.5
6.2
3.9
5.1
4.9
Asset Turnover
2.9
3.9
3.2
3.0
3.1
Sales Growth
24.8%
7.4%
8.0%
-10.0%
5.0%
Op. Profit Margin
1.7%
2.1%
2.1%
2.1%
2.2%
Net Profit Margin
0.9%
1.1%
1.8%
1.5%
1.6%
EBITDA Margin
2.5%
2.5%
3.7%
3.1%
3.1%
Net Sales
Cash Flow
CF from Operations
Balance Sheet
Key Ratios
5 Jan 2015
38
Pakistan
Market Strategy
United Bank Limited (UBL)
UBL: BUY
Target Price:
225
Banking on diversified revenue base
Current Price: 175
Stock Data
Price (PKR/Share)
Reuters
Bloomberg
UBL.KA
UBL PA
Dividend Yield
Market Cap (PKR bn)
Market Cap (USD mn)
Free Float (%)
175
Website
www.ubldirect.com
196.7 / 123.8
7%
214
2,133
226
2.6
1,224
5.0
40

UBL
KSE100Index
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
70%
60%
50%
40%
30%
20%
10%
0%
10%
Company Description
UBL is engaged in commercial banking and
related services. The bank operates over 1,200
branches inside Pakistan including 14 Islamic
Banking branches, making it the third largest
bank in Pakistan. The bank also operates 17
branches outside Pakistan. UBLs GDRs are
traded at London Stock Exchange. The bank was
established in 1959 as a local private sector bank
but was nationalized in 1974 by the GoP. It was
sold off to a consortium of Abu Dhabi Group of
UAE and Bestway Group in 2001 under a
privatization program.
Others
38%
Bestway
Group
51%
International
GDRs
11%
5 Jan 2015
United Bank Limited (UBL) is all set to post stellar earnings CAGR of 16% during
next five years underpinned by strengthening net interest income (5yr CAGR: 15%).
UBL offers a unique banking play with exposure to the vastly underpenetrated
Pakistan market as well as the GCC. The bank has a de-risked balance sheet as
evident from consistently improving infection ratio to 11.6% in Sep14 from previous
peak of 14.0% in CY12. Going forward, we expect infection ratio to further decrease
to 9.3% in CY18 (considering tight lending policies) along with increase in coverage
to 91.7%. Despite concerns on financial position of GCC operation post significant
melt down in oil prices, we expect UAE operations to remain strong owing to Expo
2020 which will further add value to the banks overall prospects. UBL's non-interest
income shall remain strong with a CAGR of 12% during CY14-CY18. UBL trades at a
CY15F P/B of 1.8x, P/E of 8.2x and D/Y of 7.4% where our target price of
PKR225/share offers a total return of 36%.
Earnings to remain strong despite monetary easing: UBLs profitability is expected to
continue heading northwards despite expected monetary easing in early CY15F where we
expect the banks earnings for CY14E and CY15F to clock in at PKR22.7bn (EPS:
PKR18.5) and PKR26.3bn (EPS: PKR21.5), posting growths of 22%YoY and 16%YoY,
respectively. The notable growth in profitability can be attributed to i) higher Net Interest
Income (NII) due to heavy investment in PIBs during 9MCY14 offering 2.5%-3.0% higher
yields than 6M T-bills, ii) growing focus on low cost deposits as current account deposits
are forecasted to register a 5-year CAGR of 15%, iii) strong non-interest income driven by
UBL Omni, higher trade and remittances and efficient fx and capital market trading, and iv)
subdued cost pressures on softening inflation in CY15F.
Adequately placed to capitalize on revival in credit demand: With expected macroeconomic recovery, as evident from improvement in key economic parameters (inflation,
external account, exchange rate), we foresee a strong prospect of recovery in credit
demand going forward. In such a scenario, we believe UBL is ideally placed given current
ADR at just 48%. Over the next 5 years, we expect UBLs advances to grow at a CAGR of
15% in stark contrast to previous 5 year CAGR of just 2%.
Asset quality to remain strong: Prudent lending policies post CY08 led consistent
improvement in NPLs ratio to 11.6% in Sep14 from the previous peak of 14.0% in CY12.
With growing concerns on GCC operations post significant melt down in oil prices, we have
accounted higher accretion in NPLs of overseas loan book (comprising of 29% to total
loans). That said, we expect asset quality to remain strong due to vigilant risk management
policies thus gross infection ratio is expected tp further reduce to 9.3% by CY18F. At the
same time, the bank also increased its NPL coverage to 85% in Sep14 compard to just
78% in CY12. We expect the management will further extend coverage ratio to ~91.7% by
CY18F.
Growing non-core business to provide competitive edge: UBL dominates branchless
banking through its stronghold UBL Omni across Pakistan which remains a major
contributor in non-funded income. Going forward, we expect fee and commission income to
register a 5-yr CAGR of 16% on the back of expanding branchless banking, trading
volumes and rising foreign and domestic remittances. Alongside higher fee income, the
banks investment in equity/associates will further strengthen the bottom line through
steady dividend income and capital gains.
Investment Perspective: With strong fundamentals, we recommend a BUY on UBL with
a TP of PKR225/sh, implying an upside of 29%. The recent correction in the scrip price
post DR cut in Nov14 and overly assumed weakness in GCC operation has brought UBL
to attractive levels where the stock is currently trading at an undemanding P/B of 1.8x. With
strong ROE of 26.1% (CY14F-18F) and attractive valuations given Dec15 P/B and P/E 1.8x
and 8.2x, respectively, we recommend UBL as our top pick in banking space.
39
Pakistan
Market Strategy
Profit & Loss
CY11A
CY12A
CY13A
CY14E
CY15F
CY16F
Interest Income
70,451
73,507
72,846
85,312
92,180
106,183
Interest Expense
31,026
34,948
34,910
39,729
37,885
42,698
Net Interest Income (NII)
39,425
38,560
37,936
45,583
54,295
63,485
7,291
4,137
1,303
1,825
3,326
6,397
NII after provision
32,134
34,423
36,633
43,758
50,969
57,088
Non Interest Income
12,718
17,131
18,114
20,119
22,458
24,870
Provisions
Non Interest Expenses
20,629
24,703
26,940
29,542
33,609
37,608
Profit before tax
24,223
26,851
27,807
34,335
39,819
44,350
Profit after tax
15,500
17,891
18,614
22,661
26,280
29,271
Investments
294,411
349,590
423,777
524,028
607,643
690,019
Advances
325,347
364,364
390,813
432,520
503,223
582,179
Total Assets
779,207
896,535
1,009,739
1,151,357
1,308,788
1,490,369
Balance Sheet
Borrowing
49,953
68,720
40,574
47,272
54,026
61,743
Deposit and other accounts
612,980
698,430
827,848
945,435
1,080,525
1,234,869
Total Liabilities
698,779
804,296
908,825
1,041,487
1,190,146
1,359,993
Net Assets
80,428
92,238
100,914
109,870
118,642
130,376
Share Capital
12,242
12,242
12,242
12,242
12,242
12,242
Core Equity
71,898
78,702
88,558
97,514
106,286
118,020
Total Equity
80,428
92,238
100,914
109,870
118,642
130,376
12.7
14.6
15.2
18.5
21.5
23.9
38.9%
15.4%
4.0%
21.7%
16.0%
11.4%
7.5
8.5
10.0
11.1
12.9
14.3
4.3%
4.9%
5.7%
6.3%
7.4%
8.2%
65.7
75.3
82.4
89.8
96.9
106.5
P/B
2.7
2.3
2.1
1.9
1.8
1.6
P/E
13.8
12.0
11.5
9.5
8.2
7.3
ROE
20.8%
20.7%
19.3%
21.5%
23.0%
23.5%
ROA
2.1%
2.1%
2.0%
2.1%
2.1%
2.1%
Net Interest Margin
6.5%
5.7%
4.8%
5.0%
5.1%
5.2%
Cost to Income
46.0%
47.9%
49.2%
46.2%
45.8%
45.9%
ADR
59.8%
58.6%
52.8%
50.8%
51.3%
51.8%
IDR
48.9%
49.5%
51.0%
55.3%
56.1%
55.8%
CASA
70.7%
71.3%
70.6%
71.1%
71.1%
71.1%
Infection Ratio
14.0%
14.0%
12.1%
11.3%
10.4%
10.0%
Provision Coverage
80.1%
78.0%
87.3%
87.7%
88.4%
89.6%
Key Ratios
EPS (PKR)
Earnings growth
DPS (PKR)
DY
BVS (PKR)
5 Jan 2015
40
Pakistan
Market Strategy
BAHL: BUY
Al- Habib Limited (BAHL)

Bank
Target Price:
60
The Safe Banking Haven
Current Price: 48
Stock Data
Price (PKR/Share)
Bloomberg
Reuters
BKEQ.KA
BAHL PA
Dividend Yield
Market Cap (PKR bn)
Market Cap (USD mn)
Free Float
48
Website
www.bankalhabib
.com
50.1 / 33.4
5%
54
536
28
0.3
1,111
1.9
60
Earnings to continue heading northwards: Bank Al Habib (BAHL) is likely to post an

earnings growth of 15%YoY in CY15 despite the monetary easing that is likely in CY15. In
this regards, we expect the bank to post CY14 and CY15 earnings of PKR6.7bn (EPS:
PKR5.97) and PKR7.6bn (EPS: PKR6.86) up 29%YoY and 15%YoY respectively with a 3
year earnings CAGR of 18% between CY14-CY17. The earnings growth is likely to come
about due to i) 12%YoY higher NII as a result of heavy subscription of high yielding PIBs
(PIB to deposit ratio expected to reach 32% of deposits, amongst highest in the mid tier
banks) ii) 14%YoY growth in non funded income due to higher trade and remittances and
efficient fx and capital market trading and iii) muted provisioning expenses on back of
supreme asset quality (infection ratio 2.4% and coverage ratio 143%)
Company Description
Bank AL Habib Limited provides commercial
banking services in Pakistan and the Middle
East. The company operates in the Retail
Banking, Commercial Banking, and Retail
Brokerage segments. The company offers
personal banking products, such as current,
savings, and foreign currency accounts;
housing, personal, and car loans; credit cards;
and home remittances and MoneyGram, as well
as e-banking services,
Others,
14%
Foreign
Cos., 3%
Joint
Stock
Cos., 7%
Insurance
Co., 9%
Mutual
Funds,
10%
5 Jan 2015
Bank Al-Habib Limited (BAHL) is our second pick from the banking universe with a
forecasted 3 year earnings CAGR of 13% between CY14-CY17. This growth in
earnings will likely be a factor of i) a healthy CAGR of 18% in NII between CY14FCY17F, ii) 3 year CAGR of 14% in the non funded income between CY14F-CY17F and
iii) muted provisioning expense due to impressive asset quality. BAHL is expected to
park PKR142bn in high yielding PIBs by Dec14 (32% of total deposits) thereby
locking in higher returns thus keeping the NII of the bank robust. Also given the ultra
conservative lending approach (gross ADR: 41% in 9MCY14) that the bank adheres
to and resultantly impressive book quality (infection ratio 2.35%), we expect the
provisioning expense of the bank to remain muted. Finally, with a CAR ratio of 14.6%
against statutory requirement of 10%, we expect the bank to maintain its payout
profile where we expect the bank to maintain a long term payout of ~45%. At current
levels, the scrip trades at a forward CY15 P/E and P/B of 8.1x and 1.7x, respectively.
Individuals
, 57%
Conservative approach yielding fruits: BAHL has an un-satiable appetite for risk free
government securities and operates on very conservative lending policies where its current
ADR stands at ~ 41% (against industry average of 48.2%) and IDR at 66.4% (against the
industry average of 53.9%). The majority of banks investments are risk free government
securities which comprise 64% of the banks investment portfolio. The prospects of another
DR cut might increase the credit off-take from private sector in the country and the bank is
ideally placed to increase its ADR in that scenario. However, given the conservative nature
of the banks lending policies, we do not expect any abrupt increase in ADR, we expect
ADR to improve from its current levels (9MCY14 ADR: 39.5%) to 44% by CY20 .
Robust deposit growth and improving CASA: BAHLs deposits base posted a healthy
growth of 13% during 9MCY14 to clock around PKR436bn, improving the banks share of
industry deposits from 5.13% in CY13 to 5.20% by 9MCY14. However, this increase in
market share came about at a cost as banks fixed deposit base inched up to ~22% in
9MCY14, an increase of 0.5% (additional fixed deposits of PKR12.5bn), resultantly the
CASA of the bank contracted to 78.2% in 9MCY14 from 78.61% in CY13. The costly
deposits raised by the bank will likely limit NIMs accretion going forward. Given the
aggressive branch expansion (bank likely to add 17-20 branches each year), we expect the
bank to grow its market share of deposits slightly from its current level of 5.2% to 5.3% by
CY20 and at the same its CASA to improve to 80% by CY20.
Best cost to income ratio amongst midsized banks: The bank has always been able to
keep the administrative cost in check where its cost to income ratio traditionally has
remained between 50%-55% over the last many years. We expect the trend to continue in
CY15 and beyond as we expect inflation to remain muted and the bank is likely to see a
healthy growth in funded and non funded income. The bank has adequately expanded its
branch network over the last five years which has allowed it to distribute its cost to a larger
base and kept administrative expenses per branch at a manageable level. We expect the
bank to expand the branch network even further, adding 17-20 branches each year going
forward. Consequently, we expect the cost to income ratio to remain at current levels.
41
Pakistan
Market Strategy
Profit & Loss
CY11A
CY12A
CY13A
CY14E
CY15F
CY16F
Interest Income
36,503
41,468
37,256
43,636
46,655
52,054
Interest Expense
22,374
26,106
22,994
24,999
25,691
28,776
Net Interest Income (NII)
14,129
15,362
14,261
18,637
20,964
23,279
1,821
466
480
533
730
992
12,308
14,896
13,782
18,103
20,234
22,286
2,594
2,967
3,908
4,097
4,671
5,327
Provisions
NII after provision
Non Interest Income
Non Interest Expenses
7,747
8,994
10,177
12,264
13,500
15,077
Profit before tax
7,155
8,869
7,513
9,937
11,406
12,537
Profit after tax
4,533
5,447
5,155
6,658
7,642
8,400
Investments
222,959
249,754
239,753
298,254
350,255
402,261
Advances
114,872
147,869
167,579
182,544
204,512
235,298
Total Assets
384,282
453,106
460,727
535,648
618,810
710,767
Balance Sheet
43,442
69,622
29,480
35,376
44,220
48,642
Deposit and other accounts
Borrowing
302,099
340,393
386,161
448,237
514,267
590,645
Total Liabilities
364,429
429,175
435,445
504,348
583,657
671,860
19,854
23,931
25,282
31,300
35,153
38,907
Net Assets
8,786
10,104
10,104
11,114
11,114
11,114
Core Equity
Share Capital
17,837
21,175
23,227
27,602
30,346
33,138
Total Equity
19,854
23,931
25,282
31,300
35,153
38,907
Key Ratios
EPS (PKR)
Earnings growth
DPS (PKR)
DY
BVS (PKR)
P/B
P/E
ROE
ROA
5.97
6.86
7.54
29.16%
14.78%
9.92%
2.50
3.00
2.00
2.50
3.00
3.50
5.16%
6.19%
4.13%
5.16%
6.19%
7.22%
22.60
21.47
22.68
28.08
31.54
34.91
2.14
2.26
2.14
1.73
1.54
1.39
11.91
9.92
10.48
8.11
7.07
6.43
25.24%
24.88%
20.95%
23.53%
23.00%
22.68%
1.30%
1.13%
1.34%
1.32%
1.26%
4.70%
3.96%
4.54%
4.21%
3.92%
Cost to Income
50.89%
53.49%
60.89%
58.81%
56.95%
57.02%
ADR
38.02%
43.44%
43.40%
40.72%
39.77%
39.84%
IDR
Infection Ratio
Provision Coverage
4.62
-5.36%
1.32%
CASA
4.89
20.14%
5.23%
Net Interest Margin
5 Jan 2015
4.07
25.85%
73.80%
73.37%
62.09%
66.54%
68.11%
68.11%
60.22%
71.77%
78.62%
76.80%
77.80%
78.50%
2.67%
2.41%
2.13%
2.44%
2.40%
2.42%
160.17%
150.96%
164.41%
143.37%
139.47%
133.86%
42
Pakistan
Market Strategy
LUCK: ACCUMULATE
Lucky Cement Company Limited (LUCK)
Target Price:
The emerging conglomerate!
596
Current Price: 513

Stock Data
Price (PKR/Share)
Reuters
Bloomberg
LUKC.KA
LUCK PA
Dividend Yield
Market Cap (PKR bn)
Market Cap (USD mn)
Free Float (%)
513
Website
www.lucky-cement.com
513.9 / 292.9
2%
166
1,653
273
2.8
323
3.9
40

LUCK
KSE100Index
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
70%
60%
50%
40%
30%
20%
10%
0%
10%
Company Description
Lucky Cement Limited manufactures and
markets cement primarily in Pakistan. It offers
ordinary Portland cement that is used in general
constructions, concrete mortars and grouts, etc;
sulphate resistant cement for use in foundations
near seashore and canal linings; clinker; and
block cement. The company also exports its
products.
Lucky
Cement
Limited
was
incorporated in 1993 and is headquartered in
Karachi, Pakistan
Others
5%
Dir, CEOs
& Spouse
24%
Associate
d Cos
13%
Foreign
41%
Local
13%
5 Jan 2015
Mutual
Funds
4%
Lucky Cement Limited (LUCK) remains a strong BUY based on its ambitious
expansion and diversification plans coupled with strong cash generation. Our
investment case on the stock is premised on i) improving core profitability backed by
steady volumetric growth and cost efficiency projects, ii) commercialization of cross
border projects in Congo and Iraq, iii) strong cash flows creating space for funding
existing and future potential projects, iv) 660MW coal power project being added in
the business portfolio and v) exponential growth in earnings of subsidiary company
ICI. Our Dec'15 TP of PKR596/sh, offers an upside of 16%. The scrip trades at
FY15/16 PER of 12.5 x and 10.5x respectively and offers a dividend yield of 2%. BUY
Dispatch growth and cost efficiency projects; driving core profitability growth: Given
strong demand growth in the country, we expect the companys dispatches to experience a
3-year CAGR of 2% leading to growth in revenue stream of the company. Implementation
of cost efficiency projects is expected to prop up margins, further compounded by lower
coal prices. We expect LUCKs earnings to grow at a CAGR of 17% during FY14-17.
LUCK is en-route to become multinational: Post commercialization of Congo project.
LUCK will stand out as the only multinational company in the cement sector with two
operational overseas projects. The grinding mill in Basra, Iraq achieved commercial
production in Feb14 and has already become profitable with an estimated annualized
earnings impact of PKR673mn (PKR2.0/sh). Furthermore, the Congo project is expected to
become operational by end of FY16 where prevailing margins of USD80-USD100 per ton
are expected to add PKR2.3bn (PKR7.0/sh) to LUCKs bottom-line at an 80% utilization.
Big pockets; all projects to be financed through internal financing: The operating cash
generation of LUCK for the next 5yrs stands at ~PKR91bn against the cumulative CAPEX
requirement of PKR30bn (announced projects) resulting in surplus cash balance of
PKR61bn. The strong cash position will enable the company to pursue more projects
financed through internal cash generation. Another consequence of this healthy cash
generation could be that the company may ramp up its dividend payouts ratio which
currently stands at 25%.
660MW power projects; to augment earnings from 2019: LUCK is undertaking a
660MW coal based power project on its own books which will provide a sizeable uplift to
the company earnings from FY19 onwards. Based on the cost and financing structure of
the project, we believe the project would add PKR4.6bn (PKR14.2/sh) to the bottom line of
LUCK based on a 17%IRR.
ICI booming; LUCK is beneficiary: The LUCKs subsidiary business ICI, is expected to
witness substantial earnings growth in the years to come as the company is becoming self
reliant on power and fuel requirement by shifting its reliance from furnace oil and gas to
coal leading to roughly 12% savings in fuel and power cost. Furthermore, the company also
plans to spread its footprint in life sciences (healthcare) and chemical business which is
expected to add further to the bottom line. With increasing share of revenues being derived
from consumer related segments post commercialization of aforementioned projects, ICI
may emerge as a potential candidate for re-rating.
Valuation: We maintain our conviction on LUCK with a TP of PKR596/sh, translating into
total return of 18%. At last closing, the stock is trading at FY15F and FY16F P/E of 12.5x
and 10.5x, respectively.
43
Pakistan
Market Strategy
Income Statement
FY12A
FY13A
FY14A
FY15F
FY16F
FY17F
Net Sales
33,323
56,050
81,148
84,594
89,866
95,595
Cost of Sales
20,601
37,655
58,021
59,781
62,171
66,984
Operating profit
8,577
12,447
16,852
18,597
22,102
23,680
374
1290
1,523
2,321
3,422
EBITDA
10,299
14,909
20,288
20,813
24,429
26,112
Profit Before Tax
8,324
11,883
15,773
17,626
21,228
22,893
Net Profit
6,782
9,818
12,573
14,019
16,709
20,265
9,375
12,239
13,495
14,246
16,071
19,248
CF from Investing
(1,030)
(8,094)
(4,949)
(5,887)
(2,077)
(2,140)
CF from Financing
(7,851)
(2,833)
(2,833)
(3,248)
(3,549)
(4,376)
Net Change in Cash
493
1,961
5,713
5,111
10,445
12,732
Ending Cash Balance
844
2,806
8,519
13,630
24,076
36,808
Other Income Net
Cash Flow
CF from Operations
Balance Sheet
Current Assets
9,555
13,013
19,600
25,018
35,588
48,776
Long Term Assets
31,077
37,183
40,198
43,869
43,619
43,327
Total Assets
40,631
50,196
59,798
68,887
79,207
92,103
Current Liabilities
3,624
3,846
4,484
4,532
4,566
4,781
3,745
5,315
5,521
5,521
5,521
5,521
Total Liabilities
7,369
9,161
10,006
10,053
10,087
10,303
Total Equity
33,262
41,035
49,792
58,834
69,120
81,801
EPS
21.0
30.4
36.8
41.2
49.1
59.5
DPS
6.0
8.0
9.0
10.0
11.0
11.0
BVS
103.0
127.0
154.2
182.1
214.0
253.3
PER
24.5
16.9
14.0
12.5
10.5
8.7
Dividend Yield
1.2%
1.6%
1.7%
1.9%
2.1%
2.1%
Key Ratios
P/BVS(x)
5 Jan 2015
5.0
4.1
3.3
2.8
2.4
2.0
Sales Growth
28.1%
68.2%
44.8%
4.2%
6.2%
6.4%
Operating Profit Margins
25.7%
22.2%
20.8%
22.0%
24.6%
24.8%
Net Profit Margin
20.4%
17.5%
15.5%
16.6%
18.6%
21.2%
EBITDA Margins
30.9%
26.6%
25.0%
24.6%
27.2%
27.3%
44
Pakistan
Market Strategy
FCCL: BUY
Cement Company Limited (FCCL)

Fauji
Target Price:
Yielding higher returns
34
Current Price: 27
Stock Data
Price (PKR/Share)
Reuters
Bloomberg
FAUC.KA
FCCL PA
Dividend Yield
Market Cap (PKR bn)
Market Cap (USD mn)
Free Float (%)
27
Website
www.fccl.com.pk
26.8 / 14.3
7%
36
355
130
1.3
1,331
1.1
55

FCCL
80%
Fauji Cement Company Limited (FCCL) offers a unique blend of high yield and
earnings growth emanating from a decline in input cost and rising operating
efficiencies. FCCL's dividend yield at 7.5% remains the highest in the cement sector.
We expect the company to post 3yr earnings CAGR of 23% during FY14-17. The
company is expected to witness strong margin expansion to 39.6% by FY16F from
current 34.7% owing to declining fuel and power cost, and expected commissioning
of 9MW Waste Heat Recovery (WHR) unit in Apr15. The latter shall augment EPS by
19% on annualized basis. The company's volume growth will likely outperform the
sector while balance sheet deleveraging and falling interest rates would deliver
saving in finance cost. Our target price for the company stands at PKR34/sh offering
a total return of 35%. Given i) highest dividend yield in the sector on robust payout
and ii) strong earnings outlook, we believe FCCL (FY15F P/E of 10.5x) will continue
to trade at a premium over its comparables with BMA Cement sector FY15F P/E at
9.6x (ex LUCK).
Highest Yield in the sector: FCCL's dividend yield at 7.5% remains the highest in the
cement sector, as the company maintains a strong payout of ~80%. With growing earnings
of the company backed by volumetric growth and margin expansion, we expect the payout
of the company to reach PKR2.75/sh by FY17 which translates into FY17 dividend yield of
10.3%.
KSE100Index
65%
50%
35%
Decreasing power tariffs; margin growth ahead: The recent cut in power tariffs by
NEPRA by PKR2.32/unit is expected to expand the companys margins by 230bps. The cut
is expected to add PKR0.38/sh or 17% to the bottom-line of the company.
20%
5%
Dec14
Oct14
Nov14
Sep14
Jul14
Aug14
Jun14
Apr14
May14
Mar14
Jan14
Mar14
Dec13
10%
Company Description
Fauji Cement Company Limited manufactures
and sells ordinary Portland cement in Pakistan. It
offers cement for the construction of various
projects, such as dams, bridges, highways and
motorways, commercial and industrial complexes,
residential housing societies, and other
structures. The company also exports its products
to Afghanistan, as well as to Tajikistan, India, the
Middle East, Sri Lanka, East Africa, and South
Africa. Fauji Cement Company Limited was
incorporated in 1992 and is headquartered in
Rawalpindi, Pakistan.
Others
20%
FIs & Joint

Stock Cos
5%
Cost savings on WHR commissioning: Being entirely dependent on national grid, FCCL
will significantly benefit from installation 9MW WHR, which is expected to commission by
Apr15. The unit is expected to prop up the companys profitability by PKR0.42/sh or 19%
on annualized basis.
Deleveraging and DR cut to reduce burden of financial cost: With FY15-FY17 average
operating cash flow expected at PKR7.3bn, strong cash generation amid rising profitability
will help FCCL in comfortably retiring its entire debt of PKR8.6bn by FY17 end.
Furthermore, decline in interest rates by 150bps will reduce the burden of finance cost by
PKR0.04/sh or 2% on annualized basis. Furthermore, the expiry of swap on foreign debt is
also expected to contribute PKR300mn (PKR0.23/sh) since the company would now have
to pay LIBOR + 0.8% as compared to KIBOR + 0.9%, previously.
Valuation: Our DCF based target price for FCCL stands at PKR34/sh, offering an upside of
27% from current levels. While FY15F P/E at 10.5x appears expensive, we believe the
valuation is justified given PEG of 0.45x and an impressive dividend yield of 7.5% in FY15.
BUY!
Gen Public
26%
5 Jan 2015
Low utilization; a trigger for future: Given major cement producing companies are
operating close to maximum utilization and growing cement demand in the country,
companies with low utilization levels are expected to be the biggest beneficiaries of the
growth. FCCL, with current utilization levels of 73% and located close to major
infrastructural projects, will likely benefit the most from the expected infrastructure
development in the country. FCCL currently has an idle capacity of 0.85mn tons which
would likely be used up by FY20, assuming a 6% p.a. growth in dispatches. Thus, the
company is not likely to pursue an expansion in the near future.
Associated
Cos
49%
45
Pakistan
Market Strategy
Income Statement
FY12A
FY13A
FY14A
FY15F
FY16F
FY17F
Net Sales
11,523
15,968
17,532
18,872
19,644
20,720
Cost of Sales
8,455
10,887
11,448
12,123
12,033
12,817
Operating profit
460
2,792
4,598
5,552
5,282
6,980
Other Income Net
27
95
152
152
157
278
3,862
5,872
6,836
7,432
8,327
8,697
Profit Before Tax
966
3,086
4,510
5,481
6,716
7,195
Net Profit
553
2,097
2,626
3,595
4,366
4,677
CF from Operations
4,305
5,994
4,971
6,001
7,722
8,150
CF from Investing
(125)
(54)
(800)
(1,000)
(250)
(250)
CF from Financing
(4,496)
(4,567)
(4,557)
(4,900)
(6,020)
(6,175)
(315)
1,373
(386)
102
1,451
1,725
169
1,542
1,316
902
2,248
3,974
Current Assets
4,160
5,039
5,188
4,687
6,027
7,867
Long Term Assets
26,544
25,266
24,193
23,144
22,037
20,919
Total Assets
30,703
30,305
29,383
28,631
28,660
29,177
Current Liabilities
5,494
4,409
4,483
4,294
4,026
1,885
11,304
9,959
9,112
8,050
7,727
9,720
Total Liabilities
16,798
14,369
13,594
12,344
11,753
11,605
Total Equity
13,905
15,936
15,788
16,201
16,824
17,494
EPS
0.3
1.4
1.8
2.5
3.1
3.4
DPS
1.25
1.50
2.00
2.50
2.75
BVS
10.4
12.0
11.9
12.2
12.6
13.1
PER
101.5
18.9
14.8
10.5
8.6
8.0
Dividend Yield
0.0%
4.7%
5.6%
7.5%
9.3%
10.3%
2.6
2.2
2.3
2.2
2.1
2.0
Sales Growth
143%
38.6%
9.8%
7.6%
4.1%
5.5%
4.0%
17.5%
26.2%
29.4%
26.9%
33.7%
Net Profit Margin
4.8%
13.1%
15.0%
19.1%
22.2%
22.6%
EBITDA Margins
33.5%
36.8%
39.0%
39.4%
42.4%
42.0%
EBITDA
Cash Flow
Net Change in Cash

Ending Cash Balance
Balance Sheet
Key Ratios
P/BVS(x)
5 Jan 2015
46
Pakistan
Market Strategy
MLCF: BUY
Maple
Leaf Cement Limited (MLCF)
Target Price:
62
De-risking with growth
Current Price: 46
Stock Data
Price (PKR/Share)
Reuters
Bloomberg
MPLF.KA
MLCF PA
Dividend Yield
Market Cap (PKR bn)
Market Cap (USD mn)
Free Float (%)
46
Website
www.kmlg.com
46.4 / 25.3
0%
25
244
260
2.6
528
0.64
45

MLCF
KSE100Index
60%
50%
We highlight MLCF as our preferred play in the Cement Universe with a TP of

PKR62/sh, an upside of 33%. Our investment case on MLCF is premised on a rerating theme as the scrip is trading at an FY15 P/E of 6.9x which implies a discount
of 28% to the average industry multiple of 9.6x. Declining fuel and power cost and
reduction in transportation expenses will ensure consistent growth in gross margin,
which is expected to reach 37.2% in FY16F from 34.4% in FY14. Capacity utilization
for MLCF is expected at 78% capacity which will allow the company to capture
substantial share in domestic dispatch growth. We believe there is a high possibility
of dividend initiation in FY15 owing to improving cash flows and deleveraging of
balance sheet. With debt to asset at 35%, MLCF is also ideally placed to benefit from
the decline n interest rates.
Valuation discount: The scrip is currently trading at a discount of 28% over its
comparables as FY15F P/E of the company stands at 6.9x compared to industry average of
9.6x. Going forward, we believe a potential cut in interest rate in 2HFY15 (projected at
~100bps) is expected to further re-rate the industry thus unlocking further upside in the
scrip. Given decreasing financial risks associated with the company due to falling debt
levels, we expect MLCFs discount over peers to narrow.
Cost Savings Initiatives to Expand Margins: MLCF shifted its mode of inland coal
transportation to railway services in 1QFY15 from trucks. Based on management guidance,
the initiative is expected to result in cost savings of PKR0.7/share or 10% on annualized
basis. Furthermore, falling power tariffs and decreasing cost of power generation amid
~40%FYTD decline in FO prices is expected to substantially increase the companys
margins. Moreover, decline in coal prices will further expand margins. Resultantly, we
forecast the companys GMs to increase to 37.2% by FY16 from 34.4% in FY14.
40%
30%
20%
10%
0%
Dec13
Jan14
Feb14
Mar14
Apr14
May14
Jun14
Jul14
Aug14
Sep14
Oct14
Nov14
Dec14
10%
Company Description
Maple Leaf Cement Factory Limited produces
and sells cement primarily in Pakistan. The
company primarily offers ordinary Portland
cement and white cement. Maple Leaf Cement
Factory Limited also exports its products to
African, Gulf, and other Asian countries. The
company was founded in 1956 and is based in
Lahore, Pakistan. Maple Leaf Cement Factory
Limited is a subsidiary of Kohinoor Textile Mills
Limited.
Dir, CEOs
& Spouse
1%
Others
37%
Associated
Cos
58%
Mod &
Leasing
Cos
0%
Banks &
DFIs
4%
5 Jan 2015
Ins Cos
0%
Lower Utilization An opportunity to grow without expanding: MLCFs low utilization

level at 78% offers the company with ample space to cater to the increasing demand of
cement in the Northern region of Pakistan. We believe the growth momentum in cement
sales in the Northern region, up 10%YoY in 5MFY15, is expected to continue where we
project Northern demand to grow by ~6%p.a over the next 5 years. MLCF, one of the major
operators in North, will stand to benefit from the overall growth in domestic sales.
Additionally, initiation of any major developmental projects i.e. dams and motorways may
provide further impetus to demand growth. Moving ahead, we portend MLCF to depict an
FY14A-FY20F production CAGR of 4%, taking utilization level to 93% by FY20F.
Improving cash flows to help the company re-initiate dvidends: Given strengthening
margins and improving profitability, the companys debt will likely be retired earlier than
scheduled. This shall not only decrease the financial charges but will also improve the
companys risk profile. Furthermore, given strong operating cash flows with FY15 operating
cash flow at PKR5.4bn, the company will also be in a position to re-initiate dividend payouts
by end FY15. Dividend announcement remains the key upside trigger for the company and
will help in re-rating of the scrip to industry multiples.
Prime beneficiary of DR Cut: MLCF, being one of the most leveraged players in the
industry, is expected to be the prime beneficiary of the recent monetary easing cycle. The
company has a debt of PKR11bn with debt to asset standing at 35%. A 100 bps decline in
discount rate is expected to reduce financial charges by PKR0.14/sh or 2% on annualized
basis. Furthermore, falling finance cost will also assist the company in accelerating its debt
payments.
Investment Perspective: The steep discount on multiples available with the company as
compared to the industry makes MLCF an attractive investment opportunity coupled with
consistent growth. Furthermore, a prospective dividend in FY15 may increase the total
return of the company while diluting the risks associated with the scrip. Thus at our target
price of PKR62 the scrip offers a total return of 33%.
47
Pakistan
Market Strategy
Income Statement
FY12A
FY13A
FY14A
FY15F
FY16F
FY17F
Net Sales
15,461
17,357
18,968
19,327
20,209
21,133
Cost of Sales
11,447
11,312
12,445
12,088
12,492
13,195
Operating profit
2,794
4,867
5,057
5,925
6,489
6,829
34
41
81
197
383
592
4,516
7,329
8,493
20,813
24,429
26,112
Profit Before Tax
444
3,162
3,593
4,992
5,752
6,287
Net Profit
496
3,225
2,832
3,495
3,854
4,212
CF from Operations
3,644
4,999
3,742
5,415
5,552
5,926
CF from Investing
(207)
(497)
(768)
(852)
(894)
(939)
CF from Financing
Other Income Net

EBITDA
Cash Flow
(3,297)
(4,500)
(3,765)
(1,961)
(2,000)
(2,000)
Net Change in Cash
140
(791)
2,602
2,658
2,987
Ending Cash Balance
463
524
207
2,809
5,467
8,454
Current Assets
5,886
6,683
7,144
9,490
12,343
15,641
Long Term Assets
26,842
25,690
24,765
23,927
23,036
22,138
Total Assets
32,728
32,373
31,909
33,417
35,379
37,780
Current Liabilities
10,604
8,569
7,133
5,527
5,135
4,823
12,996
11,982
10,138
9,710
8,210
6,710
Total Liabilities
23,600
20,550
17,270
15,237
13,346
11,534
Total Equity
9,128
11,823
14,641
18,136
21,989
26,202
EPS
0.7
5.9
5.4
6.6
7.3
8.0
DPS
BVS
17.3
22.4
27.7
34.4
41.7
49.6
PER
61.8
7.8
8.6
6.9
6.3
5.8
Dividend Yield
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
2.7
2.1
1.7
1.3
1.1
0.9
Sales Growth
18.3%
12.3%
9.3%
1.9%
4.6%
4.6%
18.1%
28.0%
26.7%
30.7%
32.1%
32.3%
Net Profit Margin
3.2%
18.6%
14.9%
18.1%
19.1%
19.9%
EBITDA Margins
29.2%
42.2%
44.8%
107.7%
120.9%
123.6%
Balance Sheet
Key Ratios
P/BVS(x)
5 Jan 2015
48
Pakistan
Market Strategy
NML: BUY
Nishat
Mills Limited (NML)
Target Price:
Core operations turning the corner
146
Current Price: 124

Stock Data
Price (PKR/Share)
Reuters
Bloomberg
NISM.KA
NML PA
Dividend Yield
Market Cap (PKR bn)
Market Cap (USD mn)
Free Float (%)
124
Website
www.nishatmillsltd.com
136.5 / 93.0
4%
44
435
257
2.6
352
1.3
50
Improving margins on plummeting cotton: Average local cotton procurement prices are
expected to have declined to PKR5,200/maund compared to last years procurement price
of PKR6,600/maund, resulting in significant margin expansion for Textile companies in
Pakistan. With cotton comprising 66% of NMLs COGS, this is expected to result in GMs
expanding to 16.8% in FY15F and 19.8% in FY16F from 14.4% in FY14. Every
PKR100/maund decline in the cotton price yields an annualized EPS impact of PKR0.35
or2% of FY15 EPS.

NML
80%
KSE100 Index
70%
60%
50%
40%
30%
20%
10%
Oct-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Feb-14
Dec-13
Oct-13
Nov-13
0%
Company Description
Nishat Mills Limited is engaged in the textile
manufacturing business primarily in Pakistan. The
company is involved in spinning, weaving,
processing and manufacturing garments. In
addition, it operates a fuel powered station with a
gross capacity of 200 The Company also
operates in Europe, Africa, Australia, Canada, the
United States, and other Asian countries.
Associated
Cos
9%
Others
3%
Insurance
5%
Directors,
CEO &
Others
25%
FI's
7%
Modaraba
& MF
9%
Foreign
16%
Nishat Mills Limited (NML) is expected to witness an eventful FY15 on account of i)

reduced raw material prices, ii) lower fuel and power cost due to declining
international oil prices and iii) easing interest rates due to low inflation. Moreover,
the benefits of the GSP+ program have also started to flow in as evident from recent
export numbers where value added textile segments' exports have grown by 1017%YoY in 5MFY14. With a 3% share in total exports and 25% of its topline
comprising of exports to EU region, NML is likely going to be the key beneficiary of
GSP plus. That said, the depreciating EUR remains a key downside risk to exports
with the EUR already down 10.3% FY15TD against the PKR. Our Dec-15 TP for NML
stands at PKR146/sh. The stock offers a total return of 21% (capital gain: 17%; D/Y:
4%). The scrip currently trades at FY15F and FY16F P/Es of 7.2x and 5.3x,
respectively BUY
Decline in fuel and power cost: The notable decline in both i) power tariffs and ii) cost of
in-house power generation following 40% FYTD decline in FO prices will significantly
reduce the fuel and power cost which has a 12% share in total cost of NML. Decline in fuel
and power cost will yield a benefit of PKR2.2/sh or 13% on annualized earnings and will
more than offset the impact (PKR0.33/share) of an expected 14% increase in gas tariffs
from Jan-15. Going forward, the improvement in gas supply to the textile sector will further
improve the productivity of NML.
Benefits of GSP+ Starting To Trickle-in: The sector has started realizing the benefits of
GSP+ scheme as evident from the monthly export numbers. Countrys textile exports to the
EU posted a jump of 19%YoY in 9MCY14 to USD5.7bn compared to a muted growth of 6%
last year. NML, the countrys biggest textile unit, contributing ~3% to the total textile exports
of Pakistan is likely to be the biggest beneficiary of rising exports to EU. We expect the
companys sales of Home Textiles and Garments to witness a growth of 20%YoY in FY15.
Projects Coming Online in FY15: NML has invested heavily to increase its production
capacities across the high margin segments of the value chain which will further strengthen
the earnings of the company. NML is expected to add another 28,800 spindles, which will
augment earnings by 2.7%, with the capacity having commenced operations towards the
tail end of 2QFY15. Moreover, NMLs new garments production facility, with a capability to
produce 4.8mn garment pieces per annum, is also expected to come online in 2HFY15.
This will have an EPS impact of PKR2.1 (12% of FY15F EPS).
Monetary easing to reduce financial cost: SBP decided to cut the DR by 50bps in its last
monetary policy in wake of low inflation in the country. The continuation of low inflation
raises likelihood of additional 100 bps cut in DR in 1HCY15. This cut in DR would bode well
for the company with debt/asset of 26%. For every 50bps cut in DR, the companys
earnings increase by PKR0.33/sh or 2%.
Valuation: Our Dec-15 TP for NML stands at PKR146/sh. The scrip offers an upside of
17% coupled with a dividend yield of 4%. Valuations remain undemanding with NML
trading at FY15F and FY16F PER of 7.2x and 5.3x, respectively. BUY
Individual
26%
5 Jan 2015
49
Pakistan
Market Strategy
Profit & Loss
FY12A
FY13A
FY14A
FY15F
FY16F
FY17F
Net Sales
44,924
52,426
54,444
56,673
63,386
65,762
Cost of Sales
38,134
43,381
46,580
47,237
50,723
52,093
Operating Profit
6,174
8,384
7,585
8,332
11,063
12,019
Other Income Net
2,445
2,672
2,739
3,653
3,241
3,325
EBITDA
7,101
9,335
9,128
10,084
12,993
14,198
Profit Before Tax
4,082
6,357
5,976
6,550
8,933
10,102
Net Profit
3,529
5,847
5,513
6,081
8,190
9,317
Cash Flow
CF from Operations
2,760
492
4,887
5,832
7,625
8,931
CF from Investing
37.3
-2,695
-7,909
-6,500
-5,500
-5,500
CF from Financing
-1,572
974
4,695
-1,500
-2,000
-2,000
Net Change in Cash
1,226
-1,230
1,674
-2,168
125
1,431
Ending Cash Balance
2,359
1,129
2,803
635
759
2,190
Free Cash Flow to Equity
4,689
-868
-47
957
1,049
1,911
Current Assets
19,848
31,567
28,775
35,774
39,329
44,049
Long Term Assets
36,779
49,067
68,274
79,625
96,289
113,268
Total Assets
56,626
80,634
97,049
115,399
135,618
157,316
Current Liabilities
15,127
18,068
21,553
31,255
39,944
49,555
Balance Sheet
3,737
3,649
6,906
10,982
16,315
21,238
Total Liabilities
18,864
21,717
28,460
42,237
56,260
70,793
Total Equity
37,763
58,917
68,589
73,162
79,358
86,524
EPS (PkR)
10.0
16.6
15.7
17.3
23.3
26.5
DPS (PkR)
3.5
4.0
4.0
4.5
7.0
7.5
BVS (PkR)
107.4
167.6
195.2
208.2
225.8
246.2
PER (x)
12.4
7.5
7.9
7.2
5.3
4.7
Dividend Yield
Key Ratios
5 Jan 2015
2.8%
3.2%
3.2%
3.6%
5.6%
6.0%
P/BVS(x)
1.2
0.7
0.6
0.6
0.6
0.5
EV/EBIDTA
5.8
4.9
4.5
4.8
4.3
3.9
Asset Turnover
0.8
0.7
0.6
0.5
0.5
0.4
Sales Growth
9.0%
16.7%
3.8%
4.1%
11.8%
3.7%
Operating Profit Margin
13.7%
16.0%
13.9%
14.8%
17.6%
18.6%
Net Profit Margin
8.6%
11.9%
10.1%
10.9%
13.1%
14.4%
EBITDA Margin
16.8%
18.7%
16.8%
17.8%
20.5%
21.6%
50
Pakistan
Market Strategy
ENGRO: ACCUMULATE
Engro Corporation Limited (ENGRO)
Target Price:
Gaining traction!
272
Current Price: 232

Stock Data
Price (PKR/Share)
Bloomberg
Reuters
EGCH.KA
ENGRO PA
Dividend Yield
Market Cap (PKR bn)
Market Cap (USD mn)
Free Float
232
Website
www.engro.com
239.9 / 164.7
0%
122
1,212
680
6.6
524
3.1
44

ENGRO
60%
KSE100Index
45%
30%
15%
Dec14
Oct14
Nov14
Sep14
Jul14
Aug14
Jun14
Apr14
May14
Mar14
Jan14
Mar14
Dec13
0%
Company Description
Engro Corp. (ENGRO) is a holding company with
subsidiaries and a joint venture operating in
fertilizer, food, polymer, energy, and chemical
storage & handling businesses. The company
has annual production capacities of over 2.2mn
tons of urea (2 plants), 100k tons of NPK
fertilizer, 150k tons of PVC Resin, 127k tons of
EDC, 106k tons of caustic soda, 220k tons of
VCM, 275MW of power, 500mn liters of dairy
products, 134k tons of rice and 35mn liters of ice
cream.
Dir, CEOs
& Spouse
1%
Associated
Cos
45%
Gen Public
20%
Insurance
Cos
3%
5 Jan 2015
Bright prospects on fertilizer business: ENGRO has garnered much attention of-late
owing to news related to continued supply of feed gas to the EFERTs base plant as well as
anticipated initiation of concessionary rate chargeability for the Enven plant. Given
management guidance, we factor in concessionary rate for 11 months in CY15 (starting
Feb15) while maintaining operations for both plants throughout the year. Consequently,
urea production in CY15 is expected to increase ~12%YoY to 2.1mn tons with EFERTs
profitability expected to jump 2.0x. While CY16 earning remain tricky, given non-supply of
gas to the base plant, we have conservatively assumed only Enven to operational at 110%
(CY15: 97%) with production ramp up due to additional supplies from Reti Maru and Mari
SML (~30mmcfd) already with the company.
EFOODS set for a rebound! CY15 will also likely yield broad improvements in other
businesses, prominently EFOODS. The company has already sold off its loss making
Canadian subsidiary while improvement in margins should support bottomline growth in the
new year. In this regard, margin expansion will likely be aided by twofold improvement in
retail milk prices as well as lowering cost pressures. Street sources indicate EFOODS
management has already loaded up on powdered milk given current low international price
resulting in GMs likely picking up by 1QCY15. To note, international milk powder price has
fallen from USD5,125/ton at the beginning of the year to current USD2,862/ton, a decline of
44%.
Other businesses to add value: Other business lines are expected to add value to
ENGRO with the power business having already successfully listed, thereby resulting in
consequent price discovery. Moving into CY14, we believe a key trigger for price discovery
will be the initiation of the companys LNG re-gasification project where the company will
likely have a sovereign guarantee under a similar structure to IPPs. Tolling structure agreed
upon is USc6.6/mmbtu with first year imports at 200mmcfd and 400mmcfd thereafter.
The Unlisted Subsidiaries to augment bottom line: Searle Pharmaceuticals Pvt. Limited,
started operations in FY14, reported a healthy profit in the first year of operations with profit
clocking in at PKR466mn (PKR5.43/sh). Sales of the company have already jumped
19%YoY in 1QFY15 with earnings growth likely to match parent's growth. Also, the
company formed two new wholly owned subsidiaries, Searle Biosciences and Searle
Laboratories, which are expected to commence operations by FY16. We have not
incorporated these two subsidiaries into our model which remains an upside trigger to our
investment case.
Others
27%
Positive developments abound as Engro Corporation (ENGRO) makes the cut as our
top pick, providing a varied exposure between agri and energy related investments.
CY15 will likely mark the start the recovery period for ENGROs as subsidiary Engro
Fertilizers (EFERT) earnings gain traction owing to continued feed supply to the
base plant throughout the year and likely chargeability of USD0.7/mmbtu rate for the
Enven plant. CY15 expected earnings at PKR19.7bn (fully diluted EPS: PKR37.7) are
2.5x full year CY14 earnings expected at PKR7.7bn (fully diluted EPS: PKR14.8), with
CY14 disappointment due to the Foods and Rice businesses. Moving ahead, key
triggers for Engros price discovery are likely to include i) initiation of chargeability
of concessionary rate for the Fertilizer business, ii) impact of improved dairy
margins likely in CY15 on EFOODS earnings, iii) initiation of the LNG re-gasification
project (Engro Elengy) by Feb15 and v) news flow regarding strategic asset sales as
management looks to consolidate its position in the agri and energy businesses.
ENGRO has already rallied by 42% over the past 3 months, outperforming the
broader market by 33%. At current levels, we continued to have an Accumulate
stance on ENGRO with a TP of PKR272/sh, an upside of 17%.
Investment Perspective: While the scrip has already rallied by 42% over the past three
months, we believe ENGRO remains primed for continued investor interest as check points
for price discovery are ticked. At current levels, ENGRO trades at undemanding CY15F
and CY16F P/Es of 6.0x and 6.2x, respectively and offers an upside of 17% to our TP of
PKR272/share Accumulate!
Banks &
DFIs
4%
51
Pakistan
Market Strategy
Income Statement
CY12A
CY13A
CY14F
CY15F
CY16F
CY17F
Net Sales
125,151
155,360
151,526
185,192
183,826
206,120
Cost of Sales
96,631
114,763
112,625
126,724
128,196
144,425
Gross Profit
28,520
40,597
38,901
58,468
55,631
61,695
Operating expenses
11,636
13,784
12,756
15,292
16,014
18,800
Operating profit
17,973
26,364
26,795
43,240
39,879
42,791
Other Income Net
2,028
2,686
1,421
2,434
2,914
2,880
EBITDA
26,330
34,153
34,715
51,294
48,072
51,128
Profit Before Tax
2,457
13,263
15,906
33,643
32,467
37,871
Net Profit
7,811
1,797
8,690
9,265
22,533
22,911
EPS
2.5
15.6
14.8
37.7
38.9
45.3
DPS
2.00
5.00
5.50
6.50
PER
91.3
14.9
15.8
6.2
6.0
5.1
Dividend Yield
0%
0%
1%
2%
2%
3%
Sales Growth
9%
24.1%
-2.5%
22.2%
-0.7%
12.1%
14.4%
17.0%
17.7%
23.3%
21.7%
20.8%
Net Profit Margin
6.2%
1.2%
5.7%
5.0%
12.3%
11.1%
EBITDA Margins
21.0%
22.0%
22.9%
27.7%
26.2%
24.8%
Key Ratios
5 Jan 2015
52
Pakistan
Market Strategy
BMA Capital Management Limited | Pakistan

Karachi Office
Unitower, Level 8,
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Tel: +92 51 280 2354-5
Fax: +92 51 280 235
info@bmacapital.com
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Exchange (KSE) and regulated by the Securities and Exchange Commission of Pakistan (SECP).
Each Analyst of BMA Capital Management Limited whose name appears as the Author of this Investment Research hereby certifies that
the recommendation and opinions expressed in the Investment Research accurately reflect the Investment Analysts personal,
independent and objective views about any and all of the Designated Investments or Relevant Issuers discussed herein that are within
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Azfer Naseem, CFA
Director Research and Business Development
azfer.naseem@bmacapital.com
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Head of Research
Investment Strategy
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Research Analyst
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muhammad.affan@bmacapital.com
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Research Analyst
Economy & Banks
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Research Analyst
Textile, Telecoms, Banks
jehanzaib.zafar@bmacapital.com
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Research Analyst
Cements & Automobiles
sajjad.hussain@bmacapital.com
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Database Admin.
Database
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Database
ajay.lovjee@bmacapital.com
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Head of International Equity Sales
omair.chaghtai@bmacapital.com
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Head of Retail (BMA Trade)
mirfan@bmacapital.com
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SVP, Institutional Sales
ashezad@bmacapital.com
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SVP, Institutional Sales
jsgodil@bmacapital.com
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VP, Institutional & HNWI Sales
furqan.punjani@bmacapital.com
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VP, International Sales
bilal.khan@bmacapital.com
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AVP, Institutional Sales
Imran.rizvi@bmacapital.com
Muzzammil Khan
AVP, Institutional Sales
mkhan@bmacapital.com
21 Oct 2014
Pakistan
Market Strategy
Disclaimer
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in this research document. BMA Capital Management Limited also expects to receive or intends to seek compensation for Corporate Finance services
from the company covered herein in the next 6 months, excluding acting as a corporate broker, on a retained basis, for the relevant issuer. As such,
investors should be aware that BMA Capital Management Limited may have a conflict of interest that could affect the objectivity of this research report.
Investors should consider this research report as only a single factor in making their investment decision.
This research report is for information purposes only and does not constitute nor is it intended as an offer or solicitation for the purchase or sale of
securities or other financial instruments. Neither the information contained in this research report nor any future information made available with the subject
matter contained herein will form the basis of any contract Information and opinions contained herein have been complied or arrived at by BMA Capital
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The investments and strategies discussed herein may not be suitable for all investors or any particular class of investor. Investors should make their own
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Pakistan

Pakistan Equity Market

Priced on: 1-Jan-15

KSE100 Dec15 target: 41,400

Macro improvements continue as a blend of political and economic developments lend

KSE Market Capitalization

KSE100 Market Capitalization

12M KSE100 ADT Value

BMA Universe Valuation Summary

EPS Chg (%)

*All metrics based on current prices

KSE100 Index & Volume Chart

Timeline: Events Chart CY14 .....

Pakistan Market: Targeting 41,400 by Dec15! ................................................................

BMA Conviction Portfolio......

Pakistan Politics: A United Front! ...

Oil & Gas: Exploration and Production.

Oil Marketing Companies..........

Chemicals (Fertilizer) ......

OGDC: Developments meriting a second look! ....

POL: Negatives already priced in! ...

PSO: Gaining momentum on recovery in energy chain....

UBL: Banking on diversified revenue base......

BAHL: The Safe Banking Haven ......

LUCK: The emerging conglomerate!

FCCL: Yielding higher returns

MLCF: De-risking with growth.

NML: Core operations turning the corner...........

ENGRO: Gaining traction!.......

Events Chart CY14

Figure 1: Forward Regional P/E (x)

Source: Bloomberg, BMA Research

Figure 4: P/E vs. Reserves

Figure 3: Average PIB and E/Y differential

SBP Forex Reserves (USDbn)

10yr PIB yield

Source: KSE, SBP, BMA Research

Figure 6: BOP Composition (USDmn)

Current Account Bal

Source: SBP, BMA Research

Market Outlook: Targeting 41,400 by Dec15!

tailwinds of i) continued macroeconomic de-risking as economic indicators improve

Figure 8: Forward Regional Dividend Yield (%)

Source: Bloomberg, BMA Research

KSE-100's upward journey to continue in the wake of macro de-risking: In

account of non-collection of GIDC as well as lower than targeted tax collection.

Index target calculation & regional valuation

Earnings Growth & D/Y

Blended Index Target

Upside to Index Target

Source: Bloomberg, BMA Research

Source: BMA Research

10yr PIB yield

Current PIB yields have

Source: SBP, Bloomberg

Discount Rate (%)

Market P/E (x)

SBP Reserves (USD bn)

Source: SBP, KSE, Bloomberg

Figure 11: P/E vs. Reserves

Source: Bloomberg, SBP, BMA Research

Market Performance (RHS)

Market returns have