BMA Pakistan Outlook 2007 15-Jan-07

January 15, 2007
PAKISTAN RESEARCH PAKISTAN OUTLOOK 2007: DIAMOND IN THE

STRATEGY ROUGH
BMA RESEARCH TEAM

1HFY07 ECONOMIC GROWTH REMAINS ROBUST
(+92) 21 - 111 262 111 Real GDP growth in FY07 should better our initial conservative projection of 6.6%-6.8%. Most
indicators of consumption spending remain strong aiding the take-off of an investment cycle. This
Ahsan Javed Chishty
augurs well for asset markets. Key risks remain such as high inflation and a rising current account
ajaved@bmacapital.com
deficit. However, we believe that concerns about large on-off rupee devaluation in the short term are
unfounded and the currency is much more likely to depreciate at a gradual 2% over the year.
Juvaria Jafri
jjafri@bmacapital.com
IS A HIGH POLITICAL RISK PREMIUM JUSTIFIED?
Navin Ali
We expect parliamentary elections to take place within the next 9-12 months following the presidential
nali@bmacapital.com
elections slated for October 2007. This will be the first Pakistan government to complete its tenure in
Ovais Siddiqui, CFA over 29 years. We are confident about President Musharraf’s re-election, which will ensure continuity
osiddiqui@bmacapital.com in policies and reforms. This is a long-term positive, not currently reflected in market valuations.
Uzma Makhani PAKISTAN MARKET UNDER VALUED

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

Sector R A C E P I C C S Total MSCI KSE-100 Outlook
Banks +1 +1 +1 +1 +2 +2 -1 7 37% 26% Overweight

E&P +2 +2 4 11% 29% Overweight
Fertilizer +2 +1 3 13% 5% Overweight
OMC's +1 +1 +1 3 11% 3% Overweight
FMCG -1 +2 +1 2 3% Overweight
Telecom -1 -1 +2 +2 2 10% 7% Overweight
Auto -1 +1 -2 +2 +1 1 2% Overweight
Cement -1 +1 +2 -2 - 7% 3% Market weight

Gas T&D -1 +1 - 4% 2% Market weight
Power -1 +1 - 4% 3% Market weight
Textile -2 +1 +1 - 2% 1% Market weight
Impact: +2 Very Positive, +1 Positive, 0 Neutral, -1 Negative, -2 Very Negative
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January 15, 2007
CONTENTS
1 INTRODUCTION 3
2 MACRO OUTLOOK: ECONOMICS 5
3 KEY THEMES FOR EQUITIES 8
4 SECTOR STRATEGY & SNAPSHOTS 13
2
January 15, 2007
1 INTRODUCTION
The year 2007, according to the Chinese calendar, is the year of the pig. The
year of the fire pig, to be precise. Worry not – pig in Chinese astrology stands for
the bold and vivacious. And the fire pig, we are told, is bolder, more vivid and
more vivacious than the rest of the pack. We will take their word for it. More
Ahsan Javed Chishty importantly, pigs, we are also told, have a knack for being able to find a diamond
in the rough.
This, perhaps, is the tone for CY07. The new year finds the Pakistan equity
market fairly undervalued relative to a robust domestic economic environment.
The KSE had a less than memorable CY06. Annual nominal return was
approximately 5% against 57.9% in CY05. Returns adjusted for inflation were
negative. Given a P/E of 8.6x CY07 based on forward earnings, the market
appears relatively cheap to many other costly regional diamonds. Consider the
multiples of other regional equity markets based on forward earnings – the BSE
Sensex trades at 19.1x, Indonesia at 14.1x, Thailand at 12x and Taiwan at 14.1x.
Relative to these, Pakistan equities trade at a discount of 30%-50%.
However CY06 was memorable for other reasons. Foreign portfolio investment
continued to grow and two Pakistani corporates, MCB, and OGDC were
successfully listed on the London Stock Exchange. Additionally, the much-touted
forensic investigation into the March 2005 crisis was released. The findings, as
expected, put to rest any concerns about manipulation by larger market players.
Pakistan equities have traditionally traded at a discount to other emerging
markets due to the higher risk premium attached to the country. Much of this is
political while some of the more recent widening (late Dec 06) is probably
economic (currency worries). But it is no secret that Pakistan suffers from a risk
perception to actual risk mismatch: the market is perceived to be riskier than it
really is. Gradual re-rating of the country risk (from default to three notches below
investment grade) in the last 7 years has not yielded the same degree of foreign
portfolio interest as seen in emerging markets with near-similar risk ratings. For
instance Philippines, an emerging market rated only one notch above Pakistan
by the S&P at BB-/Stable, attracted USD7.6bn worth of portfolio investments
from January 2005 to September 2006. In comparison, Pakistan, over the same
period, registered a relatively paltry USD974mn and only recently has this
number doubled due to the OGDC GDR.
Perhaps impacting the risk premium is a prospective precarious passage of
politics in CY07. Parliamentary and presidential elections are expected within the
next 9 to 12 months. The time frame is as yet uncertain though President
Musharraf has stated that elections will take place according to the constitution –
that is within 3 months of the end of the assembly run. Whenever the elections
do take place, the political risk associated with the election appears exaggerated.
Most analysts and commentators concur that President Musharraf should be able
to secure re-election and ensure continuity of command and policy. According to
Moody’s, ‘given a weak and divided political opposition (two of whose leaders are
in exile) and the dominance of the military, it is highly likely that General
Musharraf will remain in control of government beyond 2007’.
After all, the President is popular with the masses. According to a survey
conducted in September 2006 by the International Republican Institute (IRI), the
research wing of the Republican Party, General Pervez Musharraf is more
3
January 15, 2007
popular in Pakistan than Benazir Bhutto and Nawaz Sharif. Moreover, the US
has recently made it clear that democracy in Pakistan is an internal affair – a
policy move perceived by analysts as legitimizing General Musharraf’s re-
election bid.
While Pakistan might endure shifting political alignments in CY07, high political
risk is the staple of most emerging markets. Consider Philippines: in early March
2006, the Arroyo administration survived a coup d’etat and a subsequent state of
emergency. Risk premium widened only during the period of instability. In fact,
over the same quarter, portfolio investment into Philippines surged by USD
2.2bn. In comparison, Pakistan’s political passage promises to be lighter.
Moreover, if on schedule, elections are a 9 month to 12 month risk and should
not detract from the fundamentally improved (and improving) economic
architecture of the country. Strong economic dynamics and important
undercapitalized macro trends suggest that sector dynamics are sound,
corporate profitability should remain robust and asset markets should outperform.
In turn, this is the right time to pick Pakistan - a diamond in the rough.
4
January 15, 2007
2 MACRO OUTLOOK: ECONOMICS

The economy turns the corner into CY07 at a vigorous pace after a testy CY06.
Based on data over the past six months, real GDP growth in FY07, should better
Ahsan Javed Chishty our initial conservative projection of 6.6%-6.8%. The government’s own target of
7.0% is probable. Agriculture growth, after a fortuitous monsoon, should be at
ajaved@bmacapital.com 4.0% YoY driven primarily by higher wheat, sugar, and rice output. There are
some reservations about the cotton crop at 12.5mn bales for the fiscal year;
cotton output is lower than that of FY06. Within agriculture, livestock should
deliver above average performance given the emphasis on the sector in Budget
FY07. If corporate dairy sector revenues are any indication, then 5.0% plus
growth in livestock is likely. Manufacturing also continued its robust form. Large-
scale manufacturing (LSM) growth in Jul-Sept stood higher at 9.7% YoY,
moderately lower than the 10.7% YoY clip of FY06. The services sector, the
main engine of growth in the last 3 years, should continue to maintain above
trend performance. Growth in financial, communication, transport and retail
services has remained robust as consumption spending remains strong.
Consumer coattail: Revitalized investment
The Jul-Dec period provided further evidence that a consumption boom had
morphed into a fixed investment cycle. Most indicators of consumption spending
remain robust. Domestic sales tax collection, a suitable proxy for consumption
spending, grew 21.8%YoY in July-Nov. Tele-density rose from 26.3% at the end
of June 2006 to 34.11% in November 2006. Air passenger and cargo turnover of
PIA, the country’s dominant full service carrier, was 15.6% YoY and 18.0% YoY
higher in Jul-Sep FY07. Measures indicate that on the coat tails of accelerated
consumerism private domestic investment remains robust. Capacity utilization
levels in LSM in FY06 moved higher to 66.6% from 64.8%. Industries at capacity
including power generation, steel, fertilizer, autos, refinery and packaging, are at
different stages of considerable capacity expansion in the coming quarters. Bank
credit disbursement has grown at a respectable clip of 11.5% YTD (USD 3.0bn)
in Jul-Dec FY07 despite real interest rates being positive. Moreover, non-life
insurance gross premiums, an indication of asset accumulation, have advanced
at a 20%+ clip in Jul-Sept FY07. In CY06, 5,539 new companies were registered,
which was 30.8% YoY higher than CY05. Foreign direct investment grew 105.2%
to USD 2.1bn and should close the year close to 3.0% of GDP. Much of the focus
was in banking, telecom and E&P. In the coming months real estate, retail and
power generation will probably receive more investor interest. Heightened public
investment, set out at over USD 5bn in budget FY07, started to flex its muscle
with the unveiling of several mega (e.g Gwadar port stage 2, Bhasha Dam,
th
North-South corridor, 4 port) and not-so-mega projects.
Real interest rates positive
The investment climate has remained robust despite the monetary climate
becoming more restrictive in CY06. The liquidity cycle became less
accommodative due to continued stubbornness in headline inflation. And the
restrictive policy can be expected to remain intact in 2HFY07 as SBP has
declined all invitations to a premature easing of monetary policy and has
established steadfast adherence to tight monetary policy. An extended period of
positive real interest rates has curbed inflation from 7.9% FY06 to 9.3% in FY05.
Currently real interest rates are between 1-2%. However, the decline is not stable
5
January 15, 2007
- inflation in Jul-Dec FY07 stands at 8.4% YoY. The central bank has already
stated that inflation in FY07 is likely to exceed its 6.5% target and clock
somewhere in the 6.5%-7.5% range. Going forward, balance of risks favour real
interest rates remaining in the positive zone for an extended period of time as
real GDP growth continues to outpace potential growth. Moreover, inflation
expectations remain strong as does the hangover of price inertia (read Animal
rd
Spirits December 5: 3 Rock From The Summit).
However, the accommodation of price targets entails that while the monetary
cycle might not ease, it will not tighten significantly either. The pro-growth bias of
the central bank is strong. Leveraged sectors are already feeling the pinch of
higher nominal interest rates – further tightening might push real GDP growth
below potential. Moreover, the central bank can take heart from indications of
significant liquidity accretion: credit growth in the 1HFY07 has declined by 18.6%
YoY while core inflation has declined to 5.6% YoY (Nov). Broad money growth at
7.6% YTD has remained stable in the last six months and nominal money supply
will probably underperform nominal GDP growth in FY07. Consequently, barring
a major external supply shock, nominal interest rates may not rise anymore.
Hence, for the time being, the central banks hawkish posturing appears adequate
and appreciable, as the key economic risks have not yet mitigated. A major
reason behind the continuing inflation indiscipline is expansionary fiscal policy. A
widening of the fiscal deficit to 4.5% in FY07 from 4.2% in FY06, while the tax
base remains low at below 10.0% of GDP, is keeping the central bank wary
about price stability. Fiscal policy, though more oriented towards development
spending, is expansionary and can drawdown national savings. The SBP
establishes that, though relative debt levels are declining, increased fiscal
prudence requires less short-term borrowing, more long-term borrowing, a bigger
tax base and less reliance on privatization proceeds.
Currency: Lost in translation
On the external front, a persistent and significant current account deficit is an
ongoing concern. Jul-Nov data reveals a 17.9% worsening of the trade
imbalance to USD 5.4bn and we expect the current account deficit to reach 5.0%
of GDP in FY07 from 3.7% in FY06. A more recent worry has been a slowdown
in exports – 7.9% YoY growth in Jul-Nov CY06. Despite this, there are reasons to
be optimistic. Lower international oil prices and tighter monetary policy might
provide some respite on the trade balance. The GoP is putting together a major
relief package for exporters to take the sting out of eroding competitiveness. The
capital account is robust and should ensure a balance of payments surplus for
the country in FY07. In fact, net foreign assets growth, a proxy for BoP, for
1HFY07 stands at a small surplus of USD 191.9mn against a deficit of USD
1.1bn same period last year. Additionally, Pakistani experience does not
compare to currency crisis in other emerging markets in the past. On most
metrics, Pakistan’s macro indicators are safe compared to those of Mexico,
Thailand and Malaysia prior to severe currency devaluations in these emerging
markets. Pakistan is not hostage to the same level of external debt accumulation
and short-term money flows as the sample for financing of external deficit. In this
light, the central bank has ruled out devaluation and is sticking to its mantra of
‘flexible exchange rate’. This is a euphemism for allowing steady depreciation
pressure on the USD/PKR. However even steady nominal USD/PKR
depreciation of 2%YoY in FY07 will not set off any major impact on output and
income.
6
January 15, 2007
Load shedding
A major impediment to Pakistan’s long-term growth prospects is a chronic
deficiency in energy. The country’s electrical generation capacity is starting to
trail demand. In 2006, supply stood at 19,439 MW. Demand is growing at a 10%
clip and is expected to outstrip current supply by 2010. Moreover, thermal based
generation is 64.0% of the current electricity generation mix while oil is 29.4% of
primary energy supply.
According to the World Bank’s Doing Business 2007, the comparative investment
climate of Pakistan, with respect to energy infrastructure, lags behind major
regional players such as Thailand and China. For example, in the number of
firms suffering from shortages/outages in electricity, Pakistan is worse off than
China, India, Bangladesh, Philippines and Indonesia. According to another World
Bank study, 40% of firms in Pakistan own generators. Businesses estimate that
5%-8% of annual sales are lost due to power problems. Given the growing power
deficit, energy shortages and higher costs of domestic energy are likely to have
an adverse impact on the costs of doing business.
The GoP has a comprehensive power policy in place that looks to encourage
private sector investment. There are also increasing efforts to explore and
produce energy supplies indigenously. However, obstacles are likely to mar the
transition from deficit to surplus.
7
January 15, 2007
3 KEY THEMES FOR EQUITIES

From a macro perspective, there are several noteworthy themes to consider in
formulating equity strategy.
RACE – Capitalizing on key cyclical themes
R Rates High interest rates (PKR, USD) Cyclical
A Agriculture Higher agriculture income Cyclical
C Currency Currency depreciation Cyclical
E Energy Stable oil prices Cyclical
PIICCS- Capitalizing on key structural themes
P Power Increasing energy deficit Structural
I Infrastructure Infrastructure growth Structural
C Consumerism Growing consumerism Structural
C Capacity Capacity expansion Structural
S Savings Increasing savings deficit Structural
SECTOR THEMES AND OUTLOOK

Sector R A C E P I C C S Total MSCI KSE-100 Outlook
Banks +1 +1 +1 +1 +2 +2 -1 7 37% 26% Overweight
E&P +2 +2 4 11% 29% Overweight
Fertilizer +2 +1 3 13% 5% Overweight
OMC's +1 +1 +1 3 11% 3% Overweight
FMCG -1 +2 +1 2 3% Overweight
Telecom -1 -1 +2 +2 2 10% 7% Overweight
Auto -1 +1 -2 +2 +1 1 2% Overweight
Cement -1 +1 +2 -2 - 7% 3% Market weight
Gas T&D -1 +1 - 4% 2% Market weight
Power -1 +1 - 4% 3% Market weight
Textile -2 +1 +1 - 2% 1% Market weight
Impact: +2 Very Positive, +1 Positive, 0 Neutral, -1 Negative, - 2 Very Negative
8
January 15, 2007
Sectors Outlook
Overweight Marketweight
7
Telecom
Cement
Fertilizer
Gas T&D
Power
Banks
Auto
Textile
E&P
FMCG
OMC's
RACE STRATEGY – TAKING ADVANTAGE OF KEY

CYCLICAL THEMES
R –REAL INTEREST RATES POSITIVE
We have already discussed our view on real interest rates. To summarize: we
expect real interest rates to remain positive for the remainder of FY07 as inflation
is still high, fiscal spending is lax and the current account deficit is widening.
Banks are likely to benefit while mutual funds are not. Leveraged sectors
(cements, textiles, autos and telecoms) are also likely to be losers.
A –AGRICULTURE INCOME HIGHER
Agriculture output has rebounded in FY07 after a lukewarm FY06 due to
improved performance from major crops. Wheat, sugar and rice output are
expected to yield surpluses. There are some apprehensions about cotton output.
The original target of 13.5mn bales has been revised to 12.5mn bales. Bucking
up the agri-economy is continued growth in the livestock sector – a destination of
significant fiscal pump priming in FY07. The improved agriculture income
prospects (44% of total labour force) are likely to positively impact several
sectors including fertilizers, banks, textiles, autos, FMCGs, and OMCs.
C – CURRENCY DEPRECIATION
A growing trade deficit is likely to keep pressure on the USD/PKR parity, as
discussed above. While we are ruling out a major depreciation, the currency can
be expected to weaken by 2% YoY in CY07. While most macro indicators are at
comfortable levels and rupee weakness is unlikely to impact output, some
sectors can prosper/decline in a weak USD/PKR environment. The gainers
include E&P, textiles and banks and the losers are autos, cements, FMCGs and
banks (again!).
9
January 15, 2007
E –ENERGY PRICES STABLE

International energy prices are likely to remain stable as global demand
moderates and global energy supplies become more comfortable. Recent quota
cuts by OPEC might have stabilized downward oil price pressure but have not
done enough to push the price gradient north of USD 60. This could be attributed
to improved output from non-OPEC states. The US Energy Information
Administration, a government agency, has provided new long-term forecasts for
global oil supply and demand showing global oil demand rising by 1.3% a year to
91.05m bbl/d by 2030, a total increase of 39 per cent since 2005. OPEC supply
is expected to rise by 1.2% a year to reach 44.95m bbl/d by 2030. The EIA
forecasts that non-OPEC supply would increase by 1.8% a year to reach 43.32m
bbl/d by 2030, helped by robust annual growth of 4% in Russia and 4.1% in
Africa. The EIA has also trimmed its forecast of world oil demand to 86.2m bbl/d
for the first quarter of the year, down 0.3m bbl/d from its December forecast.
Moreover, additional downward pressure can be expected from a more restrictive
international monetary environment. These include rising real rates in the US and
gradual Yuan appreciation. A significant part of the leg-up in prices is attributable
to cheap carry trades – reversal in these trades is likely to trim oil expectations.
Hence, discounting periodic cyclical moves, we expect oil prices to remain stable
in the USD 55-USD 60 quadrant. This entails a neutral impact for OMC and E&P.
PICCS STRATEGY – TAKING ADVANTAGE OF KEY

STRUCTURAL THEMES
P – ENERGY/POWER DEFICIT
According to the Pakistan Economic Survey FY06, total supply of primary energy
has increased by 43.3% over the last 10 years. This has led to a rise in per
capita availability measured in tons of oil equivalent (TOE) from 0.304 TOE in
FY96 to 0.371 TOE in FY05, a jump of 22%. This amount remains miniscule on a
global basis however, significantly below world average per capita availability of
1.55 TOE (Planning Commission, Government of Pakistan). In stark contrast,
Pakistan’s energy demand is likely to continue witnessing rapid growth on the
back of increasing urbanization and industrialization. In this light, the GoP plans
to develop the local energy sector and rigorous efforts are underway to attract
local and foreign investment. An ongoing fall out of this energy shortage is rising
domestic energy costs and power outages. These will adversely impact
profitability and productivity of manufacturing. However, E&P, power and refinery
are likely to gain from the shortage.
I –INFRASTRUCTURE GROWTH
The Asian Development Bank in 2003 assessed that if Pakistan was to growth at
8%, improvements in infrastructure were required. The Government has
embarked upon massive plans for infrastructure development. Public
development spending as a percentage of GDP has been steadily rising from
2.2% in FY03 to 5.6% earmarked for FY07. In absolute terms, total development
expenditure allocation has been ratcheted up from USD 1.85bn in FY03 to USD
5.62bn in FY07 – 50% of which would be towards infrastructure. The
infrastructure sector in Pakistan comprises power, telecommunication, roads,
ports, railways, air transport, water supply, waste management, information
technology, cyber parks, and industrial estates. A more recent development has
10
January 15, 2007
been increasing private investment in infrastructure much of which is focused in

real estate, telecom and power generation. Other likely gainers from
infrastructure improvement are cements, fertilizers and banks.
C- CONSUMERISM RISING
Pakistan’s economic expansion, initially bank rolled by a positive monetary
supply shock, has transformed into a domestic consumption boom that is both
bonafide and self-sustaining. Private Consumption Expenditure (PCE) has grown
at a stellar 8.2% CAGR over the most recent 4 years with growth in FY06 at
8.09% YoY. For FY07, we are estimating PCE to grow by 8.0%YoY. This
increasingly potent domestic demand is being driven by rapidly expanding middle
class incomes. The middle class accounted for over 50% of income in FY04
against 45% in the beginning of the 90’s. Since 2003, poverty has declined while
4 million new jobs have been created. This powerful dynamic can be expected to
keep demand momentum intact and consumer confidence robust. Banks,
FMCGs, telecoms, autos, insurance, OMCs and retail will be better off.
C- CAPACITY EXPANSION: INVESTMENT CYCLE TAKE-OFF
Private investment increased by 10.97% YoY in FY06 and this trend is expected
to remain the same in FY07. Under most metrics, capacity utilization has been
steadily increasing over the last 4 years. In FY06, capacity utilization in LSM
moved up two hundred basis points to 66.6% and a number of sectors in FY06
reached capacity. The telecom, fertilizer, gas distribution, auto, banking, power
and refinery sectors are now in different stages of expansion that will allow them
to take advantage of strong demand fundamentals.
Capacity utilization in selected industries (%)
Industry FY03 FY04 FY05 FY06 Demand-YoY

Textiles 56.3 55.9 58.2 59 4.3
Edible oil & ghee 33.9 39.9 47.2 52 11.4
Automobiles 59.6 75.7 82.7 97.8 28.4
Electronics 20.6 32.5 14.2 16.1 36.5
Cement 69.9 79.1 91.3 87.9 14.3
Steel (Pak Steel) 91 93.6 89 62.2 3.6
Industrial chemicals 107 88.8 90.1 95.7 11.2
Fertilizer 92.1 100.4 105.7 108.5 5.1
Petroleum refining 93.4 88.8 85.2 85.6 NA
Paper & board 91.4 97.2 101 110.7 13.2
Overall capacity utilization 63 65.9 66.2 66.3
Overall capacity utilization * 61.3 64.2 64.8 66.6
* Excluding Pak Steel production
S- SAVINGS DEFICIT
The country’s savings deficit is the mirror image of its external deficit. Heightened
external inflows of the past few years have so far saved the country blushes on
the savings front. In FY06, the gap between investment (I) to GDP and savings
(S) to GDP continued to worsen. While nominal gross fixed investment rose from
16.3% of GDP (FY05) to 20.0% of GDP (FY06), nominal savings fell marginally
11
January 15, 2007
to 16.4% of GDP (FY06) from 16.5% of GDP (FY05). The latter is not surprising
given that real returns on saving instruments remain negative and are a
disincentive to save. Increased competition for savings will be a theme, which
can be expected to extend beyond CY07 as the savings deficit gradually
narrows. However this narrowing would entail higher real returns on money
balances, a negative development for banks and funds.
12
January 15, 2007
SECTOR STRATEGY
3 Sector
Auto
Positive Themes Negative Themes
Higher agriculture income High interest rates

Outlook
Overweight
Capacity expansion Currency depreciation

Growing consumerism
Banks Higher agriculture income Currency depreciation Overweight

Capacity expansion Increasing savings deficit
Growing consumerism
Development Spending
High interest rates

Currency depreciation
Cement Infrastructure growth Capacity expansion Marketweight
High interest rates

E&P Increasing energy deficit Overweight
Fertilizer Higher agriculture income Overweight

Capacity expansion
FMCG Higher agriculture income Currency depreciation Overweight

Consumerism
Closed-end Wide discounts,
Funds Equity outperfomance High interest rates Overweight
Increasing savings deficit
Gas Distribution Capacity expansion High interest rates Market weight
OMC's Growing consumerism Overweight

Infrastructure growth
Power Capacity expansion Market weight

Increasing energy deficit
Textile Agricultural Growth High interest rates

Currency depreciation Marketweight
Telecom Capacity expansion High interest rates Overweight
Growing consumerism
13
January 15, 2007
OVERWEIGHT AUTO ASSEMBLERS: STILL IN 4TH GEAR

Juvaria Jafri We remain positive on the auto sector. Although margins are likely to be
jjafri@bmacapital.com squeezed as a result of a relatively weaker rupee, demand fundamentals are still
strong. Relative to 18% lost by the KSE-100 index since peak, market
capitalization for the sector has fallen by approximately 6%. OVERWEIGHT.
Capacity building phase complete. Strong demand has been the basis for
heavy capacity expansion in this sector. Current combined capacity of listed
local assemblers (for passenger cars and LCVs) is approximately 240,000
units. The upcoming year will see the industry at this level of capacity, with
no major expansions taking place during the following year (CY08). This will
allow assemblers to market output that is uninterrupted by capacity
expansion shutdowns
Local production up. The local passenger car and light commercial vehicle
assembly sector was responsible for approximately 81% of total domestic
sales during the previous fiscal year. A marked slowdown in imports during
the current fiscal indicates that local assemblers will be responsible for an
even larger market share going forward.
Expensive consumer credit constrains sales growth… Auto sales growth
is expected to average between 5% and 8% during CY07. This represents a
slowdown that may be partially attributed to a high base effect; growth during
the last fiscal year amounted to approximately 23%, and during the previous
year it was 36%. Higher real interest rates have clearly had a negative
impact on sales growth. This is unsurprising since two thirds of car sales are
made on bank credit.
… however rising incomes will continue to boost demand. Rising per
capita incomes due to strong GDP growth are a crucial demand driver in this
sector. Data pertaining to recent fiscal years indicates a 97.6% correlation
between auto sales growth and GDP growth. Real interest rates are of
course currently at high levels relative to previous years and this will have an
impact in upcoming quarters. Nevertheless eventual rate loosening combined
with robust GDP growth will keep this sector on stable ground.
Pakistan motorization levels low. Key data indicates that demand for cars
is considerable and growing. Motorization levels remain low, at 10 vehicles
for every 1000 Pakistanis. This figure is comparable to those in China and
India and significantly lower than those of other regional economies. Sri
Lankans have access to 25 vehicles for every 1000 persons, and in Iran the
figure is 23 cars for every 1000 persons.
PKR weakness may affect margins. PKR/JPY parity is the key driver for
auto margins in an industry reliant on imported assembly kits. The PKR lost
approximately 3.4% of its value against the JPY during CY06. A weak rupee
will dent the bottom line as the Japanese Yen becomes relatively dearer.
But TBS will partially offset the slide. The tariff based system replaces the
deletion programme in CY06 and the current year should see assemblers
apply increased localization through more proficient implementation of TBS
(tariff based system).
14
January 15, 2007
KEY STOCKS
………………………………………………………………………………………………
PSMC Largest assembler with an output capacity of 120,000
units p.a.
Commands 54% of total local assembled passenger car
segment
Responsible for 56% of the total 800cc – 1000cc market.
Cash/ share of PKR 23.5
…………………………………………………………………………………………………………
INDU Leadership position in high margin 1300cc – 1800cc
segment with 36% market share.
Solid dividend payout record (FY06 PKR 12 per share,
FY05 PKR 10 per share)
………………………………………………………………………………………………
15
Company Snapshot
Pak Suzuki Motor Company Automobile Assembler
Basic Data Stock Chart
Sector Automobile Assembler PKR Shares
KSE / Bloomberg Ticker PSMC 500 500
Thousands
Current Price 416.00 450
450
Market Capitalization PKR mn 22,482 400
Shares Outstanding mn 54 350

400
300
Year-end Dec
350 250
200
Most Recent Announcement - Earnings / Dividends 300
150
EPS PE Dividends
100
250
PKR times Cash Bonus % 50
3Q06 54.60 5.7x - - 200 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
PSMC vs Automobile Assembler
PSMC Sector
2005 2004 2005 2004 Performance over 1M 3M 12M
Price to Earnings (x) 10.1 16.0 10.5 12.2 Absolute (%) 4% -2% 65%
EPS Growth (%) 59.4 (10.6) 16.2 6.1 Relative to KSE100 6% 3% 62%
Dividend Yield (%) 1.2 - 3.8 3.4
Price to Book (x) 2.9 4.0 2.9 3.7 Avg. Daily Turnover 1M 3M 12M
Net Margin (x) 6.3 5.7 5.5 6.5 PKR '000' 7,135 9,023 12,472
Return on Equity (%) 28.6 25.2 28.0 30.1 USD '000' 119 150 208
Financials (PKR mn) 2005 2004 2003 2002 Shares '000' 17.1 21.3 38.8
Income Statement
Price Multiples (based on current price)
Revenue 35,375 24,462 18,484 10,994
Profit after tax 2,237 1,404 1,570 850
Price to Earnings Ratio
Dividend (%) 50 - 30 30
30.0x
Bonus Issue (%) - 10 - -
25.0x
Right Issue (%) - - - -
20.0x
15.0x
Balance Sheet
10.0x
Assets 18,748 13,550 9,675 8,159
5.0x
Liabilities 10,922 7,973 5,457 5,511
0.0x
Equity 7,826 5,577 4,218 2,648 2005 2004 2003 2002
Paid-up Capital 540 491 491 491
Price to Book Ratio
Per Share Data (PKR) 10.0x

EPS 41.4 26.0 29.1 15.7 8.0x
DPS 5.0 - 3.0 3.0
6.0x
Book Value 144.8 103.2 78.0 49.0
4.0x
Key Ratios 2.0x
Price to Earnings (x) 10.1 16.0 14.3 26.45 0.0x

2005 2004 2003 2002
Price to Book (x) 2.9 4.0 5.3 8.5
Price to Sales (x) 4.9 7.1 9.4 15.7 Dividend Yield
Div Yield (%) 1.20 - 0.72 0.72 1.4%
Revenue Growth (%) 44.61 32.34 68.13 191.34 1.2%
1.0%
EPS Growth (%) 59.37 (10.61) 84.71 309.52
0.8%
Net Margin (%) 6.32 5.74 8.49 7.73
0.6%
Return on Equity (%) 28.58 25.17 37.23 32.10 0.4%
Return on Assets (%) 11.93 10.36 16.23 10.42 0.2%
Equity Turnover (x) 4.52 4.39 4.38 4.2 0.0%
Asset Turnover (x) 1.89 1.81 1.91 1.3 2005 2004 2003 2002
Company Snapshot
Indus Motor Company Limited Automobile Assembler
Sector Automobile Assembler PKR Shares
KSE / Bloomberg Ticker INDU 240 1,400
Thousands
Current Price 200.00
230 1,200
Market Capitalization PKR mn 15,720
220 1,000
Shares Outstanding mn 79
Year-end Jun 210 800
200 600
Most Recent Announcement - Earnings / Dividends
190 400
EPS PE Dividends
PKR times Cash Bonus % 180 200
1Q07 8.01 6.2x - - 170 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
INDU vs Automobile Assembler
INDU Sector
EPS Growth (%) 78.4 0.8 37.9 16.2 Relative to KSE100 2% -2% 1%
Dividend Yield (%) 6.0 5.0 2.5 3.8
Net Margin (x) 7.5 5.4 6.1 5.5 PKR '000' 4,808 6,913 15,914
Financials (PKR mn) 2006 2005 2004 2003 Shares '000' 24 34 76
Income Statement
Revenue 35,237 27,601 22,521 15,635
Profit after tax 2,648 1,485 1,473 1,258
Dividend (%) 120 100 90 70
14.0x
Bonus Issue (%) - - - - 12.0x
Right Issue (%) - - - - 10.0x
8.0x
Balance Sheet 6.0x
4.0x
Assets 15,822 13,033 12,450 11,069
2.0x
Liabilities 9,565 8,557 8,678 8,131
0.0x
Equity 6,258 4,476 3,772 2,938 2006 2005 2004 2003
Price to Book Ratio

EPS 33.7 18.9 18.7 16.0 5.0x
DPS 12.0 10.0 9.0 7.0 4.0x
Book Value 79.6 56.9 48.0 37.4 3.0x
2.0x
Key Ratios 1.0x
2006 2005 2004 2003
Price to Book (x) 2.5 3.5 4.2 5.4
Div Yield (%) 6.00 5.00 4.50 3.50 7.0%
Revenue Growth (%) 27.66 22.56 44.04 72.67 6.0%
5.0%
EPS Growth (%) 78.39 0.77 17.15 518.39
4.0%
Net Margin (%) 7.52 5.38 6.54 8.04
3.0%
Return on Equity (%) 42.32 33.17 39.06 42.81 2.0%
Return on Assets (%) 16.74 11.39 11.83 11.36 1.0%
Asset Turnover (x) 2.23 2.12 1.81 1.4 2006 2005 2004 2003
January 15, 2007
OVERWEIGHT BANKS: SPREADING THE WINGS

Ovais Siddiqui, CFA We maintain our positive stance on the sector. The sector is still trading at a
discount to its target Price to Book ratio (PBR), suggested by the long-term
osiddiqui@bmacapital.com sustainable Return on Equity (ROE) and earnings growth of the sector.
OVERWEIGHT.
Ability to raise new deposits key to sector profitability. With a current
advances deposit ratio (ADR) of 79.2%, banks have now started feeling the
pressure of raising new deposits. They need new deposits not only to reduce
their liquidity risk, but also to maintain the growth momentum of their
advances. We believe that the most important determinant of any bank’s
profitability in CY07 will be its ability to raise new and relatively cheap
deposits. This will depend on the size of its branch network and the rates it
offers on the deposits. On this measure, large banks, like NBP, MCB, UBL
etc, should perform better than their smaller peers. However, most of the
smaller banks are in the midst of major expansions of their branch network
which should help them raise new deposits.
Strong remittances drive deposit growth. On the macro level, the growth
in deposits has been historically linked with the level of foreign remittances.
With around 24% growth in the latter in the first five months of FY07, we are
positive on its implications for the overall growth in deposits, especially
considering the fact that now banks are offering better returns on their
deposit schemes.
Lending rates likely to remain flat… Since banks benchmark interest rates
on all lending against the Karachi Inter-bank Offer Rate (KIBOR), this
transmits monetary policy signals to lending rates fairly quickly. We do not
expect the State Bank of Pakistan (SBP) to further tighten monetary
conditions this year, as inflationary pressure is now coming down.
Accordingly, we expect the lending rates to increase very nominally this year.
…while cost of deposits will rise. However, we expect some upward
pressure on the cost of deposits of the banks. As mentioned before, the
prime driver of this pressure is the rush to raise new deposits by these
banks. Moreover, the SBP is also voicing its displeasure at the current low
deposit rates. So far, it has only resorted to ‘moral suasion’ to push banks to
pull up the return they give to depositors. Although it is difficult to guess the
next move of SBP in this regard, we do not expect it to impose a minimum
deposit rate upon banks. Since average deposit rates are now on the rise in
the last couple of months, the concerns of SBP will be addressed without any
drastic measure. Besides that, the expected increase in the National Saving
Scheme (NSS) rates will also build up some pressure on the banks to offer
better returns on deposits.
Big banks winners in current scenario. In this situation, bigger banks are
better placed than their smaller peers, because of higher proportion of
current and saving deposits in their deposit profile. These banks pay a very
low return on these deposits, keeping the weighted average cost of deposits
fairly insensitive to market interest rates.
Pressure on spreads. Therefore, consequent to nominal increases in
lending rates and more-than-nominal increases in the cost of deposits, the
interest rate spread of the banks would come under ‘minor’ pressure this
18
January 15, 2007
year. However, the effect could be more pronounced for smaller banks as,
coupled with high ADR and small branch network, they have no alternative
but to raise new expensive deposits.
Credit growth expected to recover this year. In CY06 the credit growth
was 26.3%, down from its peak of 40.8% in CY04. This relative slackness in
overall credit growth in CY06 can be mainly attributed to monetary tightening
and the lesser credit appetite in the textile sector which is in the final phase
of its expansion. However, we expect some recovery in the credit growth in
CY07, on the back of expected growth in telecoms, energy, SMEs and
consumer lending sectors.
Asset quality healthy. Despite the substantial increase in interest rates over
the past three years, the credit health of bank loans are still in good shape
with net NPL to net loans at 1.8%, a record low. With better legal safeguards,
improved capital and more stringent provisioning requirements, banks are
now well placed to contain minor incidents of defaults, especially on the
consumer lending.
Attractive Valuations. Coming to valuation, the sector is currently trading at
a CY07E Price to Book ratio (PBR) of 2.76x. In order to get an idea if the
sector is overvalued or undervalued at the current PBR, we used Gordon
Growth Model to get an idea of the fundamental PBR for the sector. As
illustrated in the figure below, the core inputs for this model are the
sustainable ROE and sustainable earning growth for the sector. The banking
sector is expected to show ROE of 26.9% in CY06. We believe that over the
longer-term term the sector could sustain ROE of 24%. In an earnings
context, CY06 was an exceptional year for the sector as its earnings are
expected to show a growth 54%. However, in our view, this growth will
stabilize at the 13% level in the long-run. Taking these two inputs and a cost
of equity of 16.9% into the model, we get a fundamental PBR of 3.38x for the
sector, suggesting ‘undervaluation’ for the sector.
Banking Sector Fundamental PBR - Gordon Growth Model

Long-term sustainable ROE (%)
Cost of equity 16.3%
21.0% 22.0% 23.0% 24.0% 25.0% 26.0% 27.0%
9% 1.66 1.79 1.93 2.07 2.21 2.34 2.48
Long-term sustainable 11% 1.90 2.10 2.29 2.48 2.67 2.86 3.05
growth 13% 2.46 2.77 3.08 3.38 3.69 4.00 4.31
15% 4.80 5.60 6.40 7.20 8.00 8.80 9.60
Source: BMA Research
19
January 15, 2007
KEY STOCKS
………………………………………………………………………………………………
NBP The largest bank under the leadership of Mr. Ali Raza, a
seasoned and dynamic banker
The current 68.7% ADR, compared to sector’s ADR of
80.3%, leaves a lot of room for further credit expansion
without new deposits
Large branch network to support new deposit raising
Current and saving deposits make up 71% of total
deposits; these cheap deposits reduce sensitivity of
deposit cost to rising interest rates
Interest rate spread to stay stable this year
Expected selling of stake in Bank Al-Jazira is to realize
handsome PKR 24.58 a share capital gain at the current
share price of Bank Al-Jazira
GoP is expected to issue GDR of NBP this year
Currently trading at a PBR of 2.0x, discount to sector
PBR 2.9x
…………………………………………………………………………………………………………
ADR on the higher side (77.5%), leaving little space for
BOP further credit expansion without new deposits
Has been a highly successful bank in raising new
deposits; captive deposits of Government of Punjab
making up 51% of its total deposits
Relatively large branch network to support new deposit
raising
Despite being a state-owned bank, it enjoys a low NPL
to Gross loans of 2.2%, suggesting a very healthy credit
portfolio
PBR 2.9x
…………………………………………………………………………………………………………
Has ADR on the higher side (76.2%), leaving little space
MCB for further credit expansion without new deposits
Enjoys the highest interest spread in the sector (7.1%),
on the back of very low cost of deposit. However, the
bank desperately need new deposits to maintain the
growth of its advances; plans to launch new deposit
schemes with competitive returns
Interest rate spread could decline slight before getting
stable
Plans to enter into consumer banking in a big way this
year. Using GDR proceeds to open up 60 new branches
in two years and to set up IT infrastructure for consumer
banking
20
January 15, 2007
Currently trading at a PBR of 4.3x, a wide premium to

sector PBR 2.9x
…………………………………………………………………………………………………………
ACBL Expected to issue 50% to raise the paid-up capital to

PKR 3 billion, in order to meet SBP requirement
Has ADR on the higher side (75.8%), leaving little space
for further credit expansion without new deposits
Smaller branch network could restrict new deposit
raising
Enjoys captive deposits of Fauji and Askari foundations
PBR 2.9x
…………………………………………………………………………………………………………
FABL
Very high ADR of 86.4% could expose the bank to
severe liquidity risk
Putting on new expensive deposits is taking a toll on
interest rate spread that sharply dip in 3QCY06
Smaller branch network could restrict new deposit
raising
Higher portion of relatively expensive term deposits in
total deposits makes cost of deposits more sensitive to
market interest rates
Interest rate spread could decline this year
PBR 2.9x
…………………………………………………………………………………………………………
21
Company Snapshot
National Bank Of Pakistan Ltd Commercial Banks
Sector Commercial Banks PKR Shares
KSE / Bloomberg Ticker NBP 350 90
Millions
Current Price 260.50 330 80
Market Capitalization PKR mn 184,713 310 70
60
270
Year-end Dec 50
250
40
230
30
EPS PE Dividends 20
190
3Q06 19.76 9.9x - - 150 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
NBP vs Commercial Banks
NBP Sector
Price to Earnings (x) 14.5 29.8 14.2 29.2 Absolute (%) -1% -3% 13%
EPS Growth (%) 105.1 47.6 105.0 19.6 Relative to KSE100 1% 1% 10%
Dividend Yield (%) 1.0 0.6 1.9 1.3
Net Margin (x) 29.5 21.2 26.4 26.1 PKR '000' 2,744,418 3,887,876 5,424,201
Return on Equity (%) 16.9 13.4 22.7 19.6 USD '000' 45,740 64,798 90,403
Financials (PKR mn) 2005 2004 2003 2002 Shares '000' 11,509 14,556 21,261
Income Statement
Revenue 43,058 29,204 26,701 32,336
Profit after tax 12,709 6,195 4,198 2,253
Dividend (%) 25 15 13 13
100.0x
Bonus Issue (%) 20 20 20 10
80.0x
60.0x
Balance Sheet 40.0x

Assets 579,651 553,231 468,972 432,803 20.0x
Liabilities 504,596 506,985 441,388 408,867
0.0x
Equity 75,055 46,246 27,584 23,936 2005 2004 2003 2002
Paid-up Capital 5,909 4,924 4,103 3,730
Price to Book Ratio

EPS 17.9 8.7 5.9 3.2 8.0x
DPS 2.5 1.5 1.3 1.3
6.0x
Book Value 105.9 65.2 38.9 33.8
4.0x
2.0x
Key Ratios
2005 2004 2003 2002
Price to Book (x) 2.5 4.0 6.7 7.7
Div Yield (%) 0.96 0.58 0.48 0.48 1.2%
Revenue Growth (%) 47.44 9.38 (17.43) (9.66) 1.0%
EPS Growth (%) 105.14 47.58 86.30 96.12 0.8%
Net Margin (%) 29.52 21.21 15.72 6.97 0.6%
Return on Equity (%) 16.93 13.40 15.22 9.41 0.4%
Return on Assets (%) 2.19 1.12 0.90 0.52 0.2%
Asset Turnover (x) 0.07 0.05 0.06 0.1 2005 2004 2003 2002
Company Snapshot
Bank Of Punjab Limited Commercial Banks
KSE / Bloomberg Ticker BOP 130 80
Millions
120
110
50
Year-end Dec 100
40
90
30
80
EPS PE Dividends 20

3Q06 10.50 7.6x - - 60 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
BOP vs Commercial Banks
BOP Sector
Price to Earnings (x) 13.0 22.4 14.2 29.2 Absolute (%) 2% 14% -5%
EPS Growth (%) 72.0 98.5 105.0 19.6 Relative to KSE100 3% 18% -8%
Dividend Yield (%) - - 1.9 1.3
Net Margin (x) 31.6 37.5 26.4 26.1 PKR '000' 492,228 901,277 1,016,700
Income Statement
Revenue 7,456 3,652 2,496 2,443
Profit after tax 2,353 1,368 689 284
Dividend (%) - - - 18
120.0x
Bonus Issue (%) 52 40 25 -
100.0x
80.0x
60.0x
Balance Sheet
40.0x
Assets 111,154 66,320 43,621 29,525
20.0x
Liabilities 97,484 58,481 38,413 26,220
0.0x
Equity 13,670 7,839 5,208 3,305 2005 2004 2003 2002
Paid-up Capital 2,350 1,506 1,004 1,004
Price to Book Ratio

EPS 8.2 4.8 2.4 1.0 8.0x
DPS - - - 1.8
6.0x
Book Value 47.7 27.3 18.2 11.5
4.0x
Key Ratios 2.0x

2005 2004 2003 2002
Price to Book (x) 2.2 3.9 5.9 9.3
Div Yield (%) - - - 1.63 2.0%
Revenue Growth (%) 104.17 46.33 2.15 1.27
1.5%
EPS Growth (%) 72.00 98.52 142.69 20.20
Net Margin (%) 31.56 37.47 27.62 11.62 1.0%
Return on Equity (%) 17.21 17.45 13.23 8.59
0.5%
Return on Assets (%) 2.12 2.06 1.58 0.96
Asset Turnover (x) 0.07 0.06 0.06 0.1 2005 2004 2003 2002
Company Snapshot
MCB Bank Limited Commercial Banks
KSE / Bloomberg Ticker MCB 300 60
Millions
250 50
Shares Outstanding mn 512 200 40
Year-end Dec
150 30
Most Recent Announcement - Earnings / Dividends 100 20

EPS PE Dividends
50 10
PKR times Cash Bonus %
3Q06 16.89 11.8x 6.00 - - 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
MCB vs Commercial Banks
MCB Sector
Dividend Yield (%) 1.6 0.9 1.9 1.3
Net Margin (x) 38.5 18.3 26.4 26.1 PKR '000' 1,560,517 2,036,505 2,951,071
Income Statement
Revenue 23,169 13,317 14,902 17,976
Profit after tax 8,922 2,432 2,230 1,735
Dividend (%) 43 25 28 25
100.0x
Bonus Issue (%) 20 10 10 25
80.0x
60.0x
Balance Sheet 40.0x

Assets 317,608 259,174 272,324 235,139 20.0x
Liabilities 293,874 244,621 261,215 223,440
0.0x
Equity 23,734 14,553 11,109 11,699 2005 2004 2003 2002
Paid-up Capital 4,265 5,118 3,065 2,665
Price to Book Ratio

EPS 17.4 4.8 4.4 3.4 12.0x
10.0x
DPS 4.3 2.5 2.8 2.5
8.0x
Book Value 46.4 28.4 21.7 22.9
6.0x
4.0x
Key Ratios 2.0x
2005 2004 2003 2002
Price to Book (x) 5.7 9.3 12.2 11.6
Div Yield (%) 1.60 0.94 1.04 0.94 2.0%
Revenue Growth (%) 73.98 (10.64) (17.10) (6.54)
1.5%
EPS Growth (%) 266.88 9.05 28.55 56.55
Net Margin (%) 38.51 18.26 14.97 9.65 1.0%
Return on Equity (%) 37.59 16.71 20.08 14.83
0.5%
Return on Assets (%) 2.81 0.94 0.82 0.74
Asset Turnover (x) 0.07 0.05 0.05 0.1 2005 2004 2003 2002
Company Snapshot
Askari Commercial Bank Limited Commercial Banks
KSE / Bloomberg Ticker ACBL
Millions
150 18
120
Year-end Dec 10
110
8
100
EPS PE Dividends 90 4
3Q06 8.65 9.9x - - 70 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
ACBL vs Commercial Banks
ACBL Sector
Dividend Yield (%) 1.3 1.7 1.9 1.3
Net Margin (x) 19.6 31.4 26.4 26.1 PKR '000' 131,793 180,834 202,582
Income Statement
Revenue 10,333 6,121 5,027 5,704
Profit after tax 2,022 1,923 1,103 687
Dividend (%) 15 20 20 20
40.0x
Bonus Issue (%) 33 20 10 5 35.0x
Right Issue (%) - - - - 30.0x
25.0x
20.0x
Balance Sheet 15.0x
Assets 145,100 107,168 85,387 70,313 10.0x
5.0x
Liabilities 136,512 101,151 80,340 66,140
0.0x
Equity 8,587 6,016 5,047 4,173 2005 2004 2003 2002
Paid-up Capital 1,507 1,256 1,142 1,087
Price to Book Ratio

EPS 10.1 9.6 5.5 3.4 5.0x
DPS 1.5 2.0 2.0 2.0 4.0x
Book Value 42.8 30.0 25.2 20.8 3.0x
2.0x
Key Ratios 1.0x
2005 2004 2003 2002
Price to Book (x) 2.7 3.8 4.6 5.5
Div Yield (%) 1.31 1.74 1.74 1.74 2.0%
Revenue Growth (%) 68.82 21.75 (11.86) 13.02
1.5%
EPS Growth (%) 5.15 74.34 60.56 24.90
Net Margin (%) 19.57 31.42 21.94 12.04 1.0%
Return on Equity (%) 23.55 31.96 21.86 16.46
0.5%
Return on Assets (%) 1.39 1.79 1.29 0.98
Asset Turnover (x) 0.07 0.06 0.06 0.1 2005 2004 2003 2002
Company Snapshot
Faysal Bank Limited Commercial Banks
KSE / Bloomberg Ticker FABL 95 30
Millions
25
Year-end Dec 75
15
70
EPS PE Dividends 60
5
3Q06 5.37 8.9x 2.50 - 50 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
FABL vs Commercial Banks
FABL Sector
Price to Earnings (x) 8.8 15.4 14.2 29.2 Absolute (%) -4% -7% -22%
EPS Growth (%) 75.1 (18.5) 105.0 19.6 Relative to KSE100 -2% -2% -25%
Dividend Yield (%) 5.5 7.1 1.9 1.3
Net Margin (x) 36.5 38.2 26.4 26.1 PKR '000' 174,806 378,869 268,184
Income Statement
Revenue 8,401 4,585 4,788 4,023
Profit after tax 3,069 1,753 2,151 656
Dividend (%) 35 45 45 17
50.0x
Bonus Issue (%) 30 10 10 -
40.0x
30.0x
Balance Sheet 20.0x

Assets 110,281 78,538 47,606 36,671 10.0x
Liabilities 96,021 68,324 39,628 31,407
0.0x
Equity 14,260 10,214 7,979 5,264 2005 2004 2003 2002
Paid-up Capital 3,684 2,913 2,648 2,648
Price to Book Ratio

EPS 7.2 4.1 5.1 1.5 5.0x
DPS 3.5 4.5 4.5 1.7 4.0x
Book Value 33.7 24.1 18.8 12.4 3.0x
2.0x
Key Ratios 1.0x
2005 2004 2003 2002
Price to Book (x) 1.9 2.6 3.4 5.1
Div Yield (%) 5.49 7.06 7.06 2.67 8.0%
7.0%
Revenue Growth (%) 83.24 (4.25) 19.02 35.21
6.0%
EPS Growth (%) 75.05 (18.49) 227.75 60.10 5.0%
Net Margin (%) 36.54 38.24 44.93 16.31 4.0%
3.0%
Return on Equity (%) 21.52 17.17 26.96 12.47
2.0%
Return on Assets (%) 2.78 2.23 4.52 1.79 1.0%
Asset Turnover (x) 0.08 0.06 0.10 0.1 2005 2004 2003 2002
January 15, 2007
MARKETWEIGHT CEMENT: WEATHERING THE GLUT

Ahsan Chishty We maintain our market weight stance on the cement sector in light of a widening
supply surplus despite strong demand fundamentals. However, the most of this
negative information is already in the price. Market capitalization has declined
from peak by 52.0% to USD1.3bn. Over the same period the KSE market cap
has declined by 18%. Hence, we believe that at current levels the sector offers
an opportunity for cherry picking. MARKETWEIGHT
Supply surplus expected in FY07. Following complete capacity

expansions, the total installed clinker capacity of the cement industry is
expected to rise to 40mn tons by FY09. This represents a rise of 203% from
year-end FY06 clinker capacity of 19.7mn tons. Based on a revised
commissioning schedule for the sector, total installed production capacity is
estimated to be around 33.5mn tons, in FY07 alone. However, incorporating
further delays, BMA research estimates put available installed capacity at
28.6mn tons for the sector. This implies over-capacity of approximately
7.1mn tons during FY07.
Prices under pressure, impacting sector profitability. Cement retail

prices in CY06 declined almost to the extent of 50% to PKR 200-230 per
bag. And since supply is expected to continue outpacing demand growth
during FY07, cement prices are expected to remain under pressure as the
sector struggles with excess output. As a result, we have assumed price
declines of 10% and 5% in FY07 and FY08 respectively. This will no doubt
weaken gross margins for the cement companies where average margins
are already down during 1QFY07.
1HFY07 consumption up 26% YoY. For FY07 we remain positive about

cement demand. In the first half of FY07, cement consumption has gone up
by 26% on a YoY basis to 11mn tones. This trend should remain intact and
we expect demand to reach 21.5mn tones in FY07, leaving the supply glut at
6-7mn tones. Heightened public and private investment in infrastructure,
residential and commercial space is likely to accelerate cement demand.
Urbanization, expanded development spending and rising disposable
incomes indicate robust domestic demand for cements as the business cycle
matures. Additionally, foreign investment is likely to rise at an accelerated
pace over the next few years especially with the start of work by Emaar on
two island cities off the coast of Karachi. Already, foreign investment in
construction and cement sectors in the last 1.5 years alone has been
USD185mn against USD119mn in the FY02 to FY04 period. A third source of
cement demand will be exports where Afghanistan will remain the prime
market. In turn, we expect 16.6% growth in local demand and 20% growth in
export demand in FY07 and expect cement consumption to grow at a
16.9%CAGR over the next 3 years.
Core demand healthy - expected growth 13.2% YoY for FY07. Domestic
cement demand tends to largely consist of core local demand driven by
developmental activities within the country. We expect core local demand to
growth by 13.2%YOY, from 16.9mn tons in FY06 to 19.1mn tons in FY07.
This has a direct correlation with overall GDP at above 2x over the last 4
years. For FY07, we feel that the huge PSDP allocation of PkR 435bn is
indicative of continuing focus on infrastructure by the GoP. Additionally, with
27
January 15, 2007
the reconstruction activities in the earthquake hit areas in the North set to
kick off in earnest during CY07, we expect an additional demand of 0.58mn
tons over and above expected core demand of 19.1mn tons during FY07.
Financial burden of leveraged plants will increase. Higher financial

charges in the wake of rising interest rates environment are expected to put
an additional dampener on profitability growth, as the sector remains highly
leveraged. This is even more pertinent for companies which have undertaken
huge loans for financing of new production capacities and whose impact will
be felt with the commissioning of the new production capacity. Lucky, DG
Khan and Maple all are significantly leveraged.
All this is already in the price! In terms of stock prices, we feel that
investors have more than accounted for all the negatives in the sector. .
Market capitalization has declined from peak by 52.0% to USD1.3bn. Over
the same period the KSE market cap has declined by 18%. As a result, at
current levels we feel that cement stocks offer good entry levels for long term
holding.
KEY STOCKS
…………………………………………………………………………………………………………
Strategic location in terms of access to the local market
DGKC
Income from equity investments (27% of assets) will help
counter interest rate expenses.
6,700 tpd capacity expansion coming online around
March-07
Relatively higher gross margins owing to efficient
German plant technology
…………………………………………………………………………………………………………
The largest cement producer with the ability to tap both
LUCK local and export demand due to a nation wide presence
via capacity expansions at Pezu and Karachi plants
Continues to enjoy first mover advantage by bringing all
four new lines online
Portion of debt hedged against rise in interest rates by
interest rate swaps
…………………………………………………………………………………………………………
28
Company Snapshot
D. G. Khan Cement Co. Limited Cement
Sector Cement PKR Shares
KSE / Bloomberg Ticker DGKC
Millions
160 140
Current Price 66.75
140 120
100
Year-end Jun 80
100
60
40
EPS PE Dividends
60
1Q07 1.91 8.7x - - 40 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
DGKC vs Cement
DGKC Sector
EPS Growth (%) 43.8 111.7 51.5 56.1 Relative to KSE100 -2% -27% -48%
Dividend Yield (%) 2.2 2.2 5.2 1.8
Net Margin (x) 30.4 31.9 26.1 23.7 PKR '000' 239,295 364,303 2,211,889
Income Statement
Revenue 7,956 5,280 3,883 2,992
Profit after tax 2,418 1,682 794 484
Dividend (%) 15 15 15 10
40.0x
Bonus Issue (%) 10 - 10 - 35.0x
Right Issue (%) 25 - - - 30.0x
25.0x
20.0x
Balance Sheet 15.0x
Assets 34,304 18,017 11,715 9,660 10.0x
5.0x
Liabilities 15,036 8,699 5,398 4,575
0.0x
Equity 19,268 9,318 6,317 5,085 2006 2005 2004 2003
Paid-up Capital 1,844 1,844 1,676 2,030
Price to Book Ratio

EPS 9.5 6.6 3.1 1.9 3.0x
2.5x
DPS 1.5 1.5 1.5 1.0
2.0x
Book Value 76.0 36.8 24.9 20.1
1.5x
1.0x
Key Ratios 0.5x
2006 2005 2004 2003
Price to Book (x) 0.9 1.8 2.7 3.3
Div Yield (%) 2.25 2.25 2.25 1.50 2.5%
Revenue Growth (%) 50.69 35.97 29.77 17.25 2.0%
EPS Growth (%) 43.75 111.72 64.29 (208.92)
1.5%
Net Margin (%) 30.39 31.86 20.46 16.16
1.0%
Return on Equity (%) 12.55 18.05 12.58 9.51
Return on Assets (%) 7.05 9.34 6.78 5.01 0.5%

Asset Turnover (x) 0.23 0.29 0.33 0.3 2006 2005 2004 2003
Company Snapshot
Lucky Cement Limited Cement
Sector Cement PKR Shares
KSE / Bloomberg Ticker LUCK
Millions
140 60
50
Year-end Jun 100
30
90
EPS PE Dividends 70
10
1Q07 1.81 8.7x - - 50 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
LUCK vs Cement
LUCK Sector
Dividend Yield (%) 1.6 - 5.2 1.8
Net Margin (x) 24.2 20.8 26.1 23.7 PKR '000' 148,652 257,611 1,160,728
Income Statement
Revenue 7,985 3,980 2,908 2,190
Profit after tax 1,936 827 686 228
Dividend (%) 10 - - 8
80.0x
Bonus Issue (%) - - 8 - 70.0x
Right Issue (%) - - - - 60.0x
50.0x
40.0x
Balance Sheet 30.0x
Assets 23,622 14,807 7,012 4,818 20.0x
10.0x
Liabilities 16,552 9,673 2,705 1,197
0.0x
Equity 7,070 5,134 4,307 3,621 2006 2005 2004 2003
Paid-up Capital 2,634 2,634 2,450 2,450
Price to Book Ratio

EPS 7.4 3.1 2.6 0.9 4.0x
DPS 1.0 - - 0.8
3.0x
Book Value 26.8 19.5 16.4 13.7
2.0x
Key Ratios 1.0x

2006 2005 2004 2003
Price to Book (x) 2.3 3.2 3.8 4.6
Div Yield (%) 1.59 - - 1.19 2.0%
Revenue Growth (%) 100.61 36.88 32.76 (0.58)
1.5%
EPS Growth (%) 134.21 20.54 200.80 (11.00)
Net Margin (%) 24.25 20.77 23.58 10.41 1.0%
Return on Equity (%) 27.38 16.10 15.92 6.30
0.5%
Return on Assets (%) 8.20 5.58 9.78 4.73
Asset Turnover (x) 0.34 0.27 0.41 0.5 2006 2005 2004 2003
January 15, 2007
CLOSED END FUNDS: MIRRORING THE MARKET

Wide discounts provide an ideal entry point for this sector that echoes KSE index
performance. Also, dividend payouts are expected to be generous on the back of
OVERWEIGHT strong corporate earnings. OVERWEIGHT
Uzma Makhani
umakhani@bmacapital.com Market recovery is expected to narrow discounts. Discounts are currently
at wide levels and are expected to begin closing during the first quarter of
CY07 as the market recovers. As we expect equity market to outperform in
CY07, funds will necessarily reflect market gains.
Expectations of healthy payouts by end of FY07. Anticipation of dividend
payouts will also play a significant role in discounts closing as the June end
approaches. Index performance is expected to improve and strong corporate
earnings will ensure good dividends.
Strong interest rates increases competition for funds. Rising interest
rates enhance the appeal of alternative investments (NSS, term deposits
etc.).This is a negative for the closed end funds sector as investors, both
retail and institutional, have stronger incentives to divert their investments.
KEY FUNDS
………………………………………………………………………………………………
Discount currently at 29.13% - among the widest in the
PGF
market.
Excellent dividend payout record; FY06 dividend yield
24.7%
Large frozen GoP holdings of PSO will provide a
significant upside once privatization process commences
…………………………………………………………………………………………………………
31
Company Snapshot
PICIC Growth Fund Closed-end Mutual Funds
Sector Close-end Mutual Funds PKR Shares
KSE / Bloomberg Ticker PGF
Millions
55 9
50
Year-end Jun 5
40
4
EPS PE Dividends 2
30
1Q07 1.44 5.1x - - 25 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
PGF vs Close-end Mutual Funds
PGF Sector
EPS Growth (%) (48.8) 49.2 12.2 35.7 Relative to KSE100 -4% -3% -48%
Dividend Yield (%) 23.9 12.0 23.8 15.1
Net Margin (x) 78.2 93.7 88.5 92.0 PKR '000' 6,881 9,657 33,149
Income Statement
Revenue 1,753 2,859 1,946 2,202
Profit after tax 1,371 2,678 1,795 2,121
Dividend (%) 70 35 45 35
7.0x
Bonus Issue (%) 20 25 - - 6.0x
Right Issue (%) 50 - - 50 5.0x
4.0x
Balance Sheet 3.0x
2.0x
Assets 12,730 9,268 6,946 4,415
1.0x
Liabilities 831 221 136 30
0.0x
Equity 11,899 9,047 6,810 4,385 2006 2005 2004 2003
Paid-up Capital 2,835 1,575 1,260 840
Price to Book Ratio

EPS 4.8 9.4 6.3 7.5
1.5x
DPS 7.0 3.5 4.5 3.5
Book Value 42.0 31.9 24.0 15.5 1.0x
0.5x
Key Ratios
2006 2005 2004 2003
Price to Book (x) 0.7 0.9 1.2 1.9
Div Yield (%) 23.93 11.97 15.38 11.97 30.0%
Revenue Growth (%) (38.67) 46.92 (11.63) 798.93 25.0%
EPS Growth (%) (48.79) 49.20 (15.37) 973.43 20.0%
Net Margin (%) 78.21 93.67 92.24 96.32 15.0%
Return on Equity (%) 11.53 29.60 26.36 48.37 10.0%
Return on Assets (%) 10.77 28.90 25.84 48.04 5.0%
Asset Turnover (x) 0.14 0.31 0.28 0.5 2006 2005 2004 2003
January 15, 2007
OVERWEIGHT EXPLORATION & PRODUCTION: DEEP VALUE

Navin Ali Despite declining international oil prices, we maintain our Overweight stance on
nali@bmacapital.com the E&P sector backed by expectations of strong demand, improving policy
environment and growing focus on domestic E&P activity. Relative to 18% lost by
the KSE-100 index since peak, market capitalization for the sector has fallen by
68%. OVERWEIGHT.
3yr demand CAGR of 5-7% and 8-10% for oil and gas. With average real
economic growth reaching 7.7% over the last three years, energy needs
have become more pressing and urgent. Over the next three years, oil and
gas demand is forecasted to rise by 5-7% and 8-10% p.a backed by
expectations of continued economic growth. As a result, domestic E&P
companies are well positioned to capitalize on this rising energy demand,
which will no doubt translate into strong revenue and bottomline growth going
forward.
Oil & gas potential – relatively under-explored. On the supply side,
Pakistan has 843.9mn bbl and 53 tcf of discovered proved and probable (2P)
oil and gas reserves. The country has a large sedimentary basin that spreads
over approximately 67% of total area and remains largely under-explored.
Geographically, it is surrounded by rich hydrocarbon basins of the Middle
East, Iran and Central Asian countries and given that E&P activity has been
sluggish over the past (around 3.2 wells per 1,000 sq. km vs about 7 for the
US), the likelihood of promising untapped reserves cannot be ignored. The
Economic Survey of Pakistan places the undiscovered potential at 27bn bbl
of oil and 282 tcf of gas. This implies that so far only 3% and 19% of total oil
and gas reserves have been tapped. As a result, aggressive exploration
efforts coupled with above average success ratio of 1:3.5 (against world
average of 1:4) for the country can radically improve the future prospects.
Successively favorable fiscal and pricing regimes. The GoP has
successively been providing better fiscal and pricing environment for
encouraging investment in the local sector. In this regard, a number of
petroleum policies have been issued which have taken wellhead-pricing
parity to international oil prices from partial to full. The current applicable
petroleum policy (2001) is capped at USD 36/bbl for gas, which while
keeping the sector from reaping maximum gains from rising oil prices,
protects it on the downside. The upcoming Petroleum Policy 2007 is
expected to raise this to USD 45/bbl. This will be applicable on new
discoveries only and will therefore provide a boost to exploration activities.
Furthermore, it will also attract new investment by offering better terms and
conditions.
Volume growth to drive profitability. International oil prices are a major
driver for domestic E&P earnings since local prices are benchmarked against
international crude oil prices. During 2006, oil prices provided a positive
earnings surprise by rallying upto 78.4/bbl in July-06. Going forward, prices
are expected to come down and being conservative we are assuming an
Arabian crude oil price of USD 55/bbl from FY07-10 onwards. Hence, profit
growth is expected to be driven primarily by volumetric growth arising from
new exploratory wells and development projects on existing fields.
Key risks. International oil price volatility and discovery of dry wells will
remain the key investment risks for the E&P sector. The two can impact the
33
January 15, 2007
profitability levels by dampening future revenue growth and increasing write-

offs in case of unsuccessful wells.
KEY STOCKS
…………………………………………………………………………………………………………
Pakistan’s largest E&P company- 37% & 32% share in
OGDC
country’s oil and gas reserves. Production shares of
48% and 22% for oil and gas respectively. Hence, well
positioned to benefit from country’s growing oil and gas
requirements.
Significant potential upside on the back of accelerated
E&P activity- An aggressive E&P strategy with plans to
drill 158 wells in the next three years as compared to
142 wells in the last ten years.
Production enhancement from existing fields expected to
provide near term volumetric boost- OGDC estimates oil
and gas production CAGR of 13% over the next three
years.
With 80% of production and 54% of revenues from gas,
sensitivity of EPS to oil prices is relatively low.
…………………………………………………………………………………………………………
Being a gas rich company, PPL is well positioned to
PPL capitalize on country’s growing gas focus.
Lowest sensitivity to oil prices as gas accounts for 98%
of production.
FY07 is the last year for upward revision in Sui and
Kandhkot wellhead discounts, which together account
for 83% of company’s total gas production. This would
add to the company’s topline growth
PPL is on the GoP’s privatization list and leading
contenders include companies such as MOL. This can
be a significant short term stock price driver.
…………………………………………………………………………………………………………
POL With 21% stake in the Tal block, upside in terms of
percentage production enhancement is more as
compared to bigger stakeholders such as OGDC and
PPL.
Upward revision of 32.5% and 39% in reserves at
Pindori and Manzalai respectively are expected to be
extremely positive for production growth going forward.
POL holds 25% stake in NRL and now plans to bid for a
stake in PSO as well. This indicates the group’s
increasing focus on diversifying and penetrating deeper
into the energy market as a whole. We feel this is a good
integrating strategy, which would hedge the company
against E&P sector specific risks.
Sensitivity of EPS to oil prices (at 0.9% for every 1% oil
price change) is the highest in the sector.
…………………………………………………………………………………………………………
34
Company Snapshot
Oil & Gas Development Company Oil & Gas Exploration
Sector Oil & Gas Exploration PKR Shares
KSE / Bloomberg Ticker OGDC
Millions
170 160
160
150
Shares Outstanding mn 4,301
100
Year-end Jun 140
80
130
60
120
EPS PE Dividends 40

1Q07 2.87 10.2x 1.75 - 100 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
OGDC vs Oil & Gas Exploration
OGDC Sector
Dividend Yield (%) 7.7 6.4 5.7 4.9
Net Margin (x) 47.5 44.7 44.8 42.1 PKR '000' 920,698 2,459,930 4,175,455
Income Statement
Revenue 96,755 73,710 51,326 45,008
Profit after tax 45,968 32,968 22,414 20,673
Dividend (%) 90 75 40 -
30.0x
Bonus Issue (%) - - - -
25.0x
20.0x
15.0x
Balance Sheet
10.0x
Assets 121,315 114,579 95,989 84,922
5.0x
Liabilities 26,544 31,369 19,941 19,461
0.0x
Equity 94,770 83,210 76,048 65,461 2006 2005 2004 2003
Paid-up Capital 43,009 43,009 43,009 10,752
Price to Book Ratio

EPS 10.7 7.7 5.2 4.8 8.0x
DPS 9.0 7.5 4.0 -
6.0x
Book Value 22.0 19.3 17.7 15.2
4.0x
2.0x
Key Ratios
2006 2005 2004 2003
Price to Book (x) 5.3 6.0 6.6 7.6
Div Yield (%) 7.73 6.44 3.44 - 10.0%
Revenue Growth (%) 31.26 43.61 14.04 17.52 8.0%
EPS Growth (%) 39.43 47.08 8.42 25.31
6.0%
Net Margin (%) 47.51 44.73 43.67 45.93
4.0%
Return on Equity (%) 48.50 39.62 29.47 31.58
Return on Assets (%) 37.89 28.77 23.35 24.34 2.0%

Asset Turnover (x) 0.80 0.64 0.53 0.5 2006 2005 2004 2003
Company Snapshot
Pak Petroleum Limited Oil & Gas Exploration
KSE / Bloomberg Ticker PPL 310 60
Millions
290 50
270
Year-end Jun 250
30
230
210
EPS PE Dividends
10
1Q07 5.54 11.0x - - 170 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
PPL vs Oil & Gas Exploration
PPL Sector
Dividend Yield (%) 3.7 2.3 5.7 4.9
Net Margin (x) 42.2 37.0 44.8 42.1 PKR '000' 1,423,362 1,570,644 3,194,317
Income Statement
Revenue 31,757 23,294 17,668 12,181
Profit after tax 13,401 8,623 6,617 4,190
Dividend (%) 90 55 45 -
50.0x
40.0x
30.0x
Balance Sheet 20.0x

Assets 41,066 31,792 25,340 20,451 10.0x
Liabilities 10,878 10,546 9,289 9,645
0.0x
Equity 30,189 21,245 16,051 10,806 2006 2005 2004 2003
Paid-up Capital 6,858 6,858 6,858 6,858
Price to Book Ratio

EPS 19.5 12.6 9.6 6.1
15.0x
DPS 9.0 5.5 4.5 -
Book Value 44.0 31.0 23.4 15.8 10.0x
5.0x
Key Ratios
2006 2005 2004 2003
Price to Book (x) 5.5 7.8 10.4 15.4
Div Yield (%) 3.70 2.26 1.85 - 4.0%
3.5%
Revenue Growth (%) 36.33 31.84 45.05 197.10
3.0%
EPS Growth (%) 55.41 30.31 57.92 812.95 2.5%
Net Margin (%) 42.20 37.02 37.45 34.40 2.0%
1.5%
Return on Equity (%) 44.39 40.59 41.23 38.78
1.0%
Return on Assets (%) 32.63 27.12 26.11 20.49 0.5%
Asset Turnover (x) 0.77 0.73 0.70 0.6 2006 2005 2004 2003
Company Snapshot
Pakistan Oilfields Ltd. Oil & Gas Exploration
KSE / Bloomberg Ticker POL 800 35
Millions
25
500
Year-end Jun 20
400
15
300
10
EPS PE Dividends 200

1Q07 9.35 9.1x - - - 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
POL vs Oil & Gas Exploration
POL Sector
Price to Earnings (x) 11.0 18.4 12.3 17.1 Absolute (%) -7% 4% -24%
EPS Growth (%) 66.8 47.2 38.6 42.7 Relative to KSE100 -5% 8% -27%
Dividend Yield (%) 4.4 3.7 5.7 4.9
Net Margin (x) 39.8 40.8 44.8 42.1 PKR '000' 1,157,069 1,874,134 3,929,307
Income Statement
Revenue 15,375 8,998 6,842 6,463
Profit after tax 6,126 3,673 2,495 2,428
Dividend (%) 150 125 125 175
30.0x
Bonus Issue (%) 50 - - 60
25.0x
20.0x
15.0x
Balance Sheet
10.0x
Assets 23,241 15,840 12,703 10,734
5.0x
Liabilities 8,617 4,708 3,695 4,227
0.0x
Equity 14,624 11,132 9,008 6,507 2006 2005 2004 2003
Paid-up Capital 1,971 1,314 1,314 821
Price to Book Ratio

EPS 31.1 18.6 12.7 12.3 10.0x
DPS 15.0 12.5 12.5 17.5 8.0x
Book Value 74.2 56.5 45.7 33.0 6.0x
4.0x
Key Ratios 2.0x
2006 2005 2004 2003
Price to Book (x) 4.6 6.1 7.5 10.4
Div Yield (%) 4.39 3.66 3.66 5.12 6.0%
Revenue Growth (%) 70.87 31.50 5.87 19.50 5.0%
EPS Growth (%) 66.79 47.20 2.75 2.30 4.0%
Net Margin (%) 39.84 40.82 36.47 37.57 3.0%
Return on Equity (%) 41.89 32.99 27.70 37.32 2.0%
Return on Assets (%) 26.36 23.19 19.64 22.62 1.0%
Asset Turnover (x) 0.66 0.57 0.54 0.6 2006 2005 2004 2003
January 15, 2007
OVERWEIGHT FERTILIZER: HARVESTING GROWTH

Uzma Shah With ongoing supply side constraints, growth remains limited in the sector until
Engro’s new capacity comes on line in FY10. However, the ability of
ushah@bmacapital.com manufacturers to pass on cost increases will ensure stable margins and positive
earnings growth, while healthy dividend payouts limit downside. The sector offers
an excellent defensive play in the market. Moreover against market peak, the
sector is trading at a discount of 23%. On comparison the KSE100 market
capitalization has declined by only 17%. OVERWEIGHT.
Supply side constraints. Fundamentals remain positive for the fertilizer
business with stable growth of about 3% in consumption. The main reasons
for the number being lower relative to last 3-years growth rate of around 6%
are supply side constraints.
Tight supply situation to continue in 2007. Tight supply situation is
expected to carry on despite fertilizer companies producing above their
nameplate capacity. Engro, FFC and FFBL the three main players contribute
81% to total production and 73% to urea off-take.
Capacity to increase to 6.3mn by 2010. In order to ease the situation of
undersupply of fertilizers, GoP has allocated 100 MMCFD gas to Engro
Chemical to build a new urea plant. Total capacity of the fertilizer industry will
increase to 6.3mn tons by 2010 with addition of Engro Chemical’s new
capacity of 1.27mn tons and Fatima’s 0.3mn tons.
Agriculture and credit off-take the key demand driver. A key driver in
fertilizer sector performance is the health of the agri-sector. Currently macro
and agricultural indicators are doing well with strong agricultural credit off-
take, strong farmer purchasing power, better than expected monsoon rains
and better wheat crop. Wheat accounts for 50% and 35% of Pakistan
consumption of DAP and urea.
Fertilizer off-take to grow at 2.9%. Overall fertilizer off-take is expected to
grow at a modest 2.9% (5year CAGR) comprised of the following;
Urea which makes-up 79% of total local fertilizer demand is expected to
grow at 2.8%
Di-Ammonium Phosphate (DAP) is expected to grow at 3.4% in line with
the aim of balanced nutrient off-take.
Demand-supply gap met by increased capacity and imports. The
increase in production capacity will help bridge some of the supply-demand
gap, which in absence of this new expansion was expected to grow to about
1.2mn tons in the next five years. However the country will continue to import
fertilizers, as by the time the new capacity comes online, demand is expected
to grow to the same level. Hence demand and supply will come at par only
for a year or two that is likely to be that is 2010 and 2011, after which we
expect the demand supply gap to surface.
Slow growth in prices. Fertilizer manufacturers are likely to have strong
pricing power due to widening demand supply gap and domestic and
international price differential. However the price levels are and will be kept in
check by GoP because of fertilizer being a vital sector due to its impact on
agricultural growth and hence GDP growth.
38
January 15, 2007
Good dividend yields. The sector has always had good dividend yields and
this is likely to remain so. However in the medium-term Engro’s payout is
expected to decline because of planned capex.
KEY STOCKS
………………………………………………………………………………………………
ENGRO Allocation of 100 MMCFD gas will enable the
company to increase its production capacity by
1.27mn tons to 2.25mn tons. Engro’s share in total
capacity as a result will increase from 20% to 35%
Engro.
3yr average: Selling price PKR10, 541 per ton, cost
(excluding depreciation) PKR 7,332 per ton.
3-yr average: gross margin 27% and net margin
13%
The company is aggressive in exploring new
business horizons in various sectors.
Healthy dividend income cushions the bottom line.
…………………………………………………………………………………………………………
FFC Largest manufacturer/ distributor with strong pricing

power
3yr average: Selling price PKR8,690 per ton, cost
(excluding depreciation) PKR 5, 270 per ton
18%
Best gross margins (and net profit margins in the
industry
The most efficient urea producer
…………………………………………………………………………………………………………
FFBL Only local granular urea and DAP manufacturer in
Pakistan. Granular urea is very well regarded in the
farming community over the standard.
Long-term agreement for phosphoric acid with
Maroc Phosphore S.A.
3yr average: Selling price PKR11,033 per ton, cost
(excluding depreciation) PKR 6,801 per ton
17%
Benefits from fixed gas feedstock prices till 2009.
…………………………………………………………………………………………………………
39
Company Snapshot
Engro Chemical Pakistan Limited Fertilizer
Sector Fertilizer PKR Shares
KSE / Bloomberg Ticker ENGRO 250 12
Millions
10

8
210
Year-end Dec
200 6
190
4
EPS PE Dividends
170
2
3Q06 8.12 16.6x 6.00 - 150 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
ENGRO vs Fertilizer
ENGRO Sector
Dividend Yield (%) 6.1 4.7 9.1 8.6
Net Margin (x) 12.7 12.6 20.2 18.2 PKR '000' 240,300 172,197 360,396
Financials (PKR mn) 2005 2004 2003 2002 Shares '000' 1,358 963 1,823
Income Statement
Revenue 18,276 12,798 11,884 10,893
Profit after tax 2,319 1,611 1,557 1,133
Dividend (%) 110 85 80 75
30.0x
Bonus Issue (%) - - - 10
25.0x
Right Issue (%) 10 - - -
20.0x
15.0x
Balance Sheet
10.0x
Assets 14,112 13,185 12,865 14,284
5.0x
Liabilities 6,736 6,599 6,666 8,953
0.0x
Equity 7,376 6,586 6,199 5,330 2005 2004 2003 2002
Paid-up Capital 1,529 1,529 1,529 1,390
Price to Book Ratio

EPS 13.8 9.6 9.3 6.7 5.0x
DPS 11.0 8.5 8.0 7.5 4.0x
Book Value 43.8 39.1 36.8 31.7 3.0x
2.0x
Key Ratios 1.0x
2005 2004 2003 2002
Price to Book (x) 4.1 4.6 4.9 5.7
Div Yield (%) 6.11 4.72 4.45 4.17 7.0%
Revenue Growth (%) 42.80 7.69 9.09 36.06 6.0%
5.0%
EPS Growth (%) 43.95 3.48 37.38 6.49
4.0%
Net Margin (%) 12.69 12.59 13.10 10.40
3.0%
Return on Equity (%) 31.44 24.46 25.11 21.26 2.0%
Return on Assets (%) 16.43 12.22 12.10 7.93 1.0%
Asset Turnover (x) 1.30 0.97 0.92 0.8 2005 2004 2003 2002
Company Snapshot
Fauji Fertilizer Company Limited Fertilizer
KSE / Bloomberg Ticker FFC 150 9
Millions
6
130
Year-end Dec 5
125
4
120
3
EPS PE Dividends 2
110
3Q06 6.14 13.1x 6.10 - 100 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
FFC vs Fertilizer
FFC Sector
Dividend Yield (%) 11.2 14.0 9.1 8.6
Net Margin (x) 19.2 19.0 20.2 18.2 PKR '000' 62,707 56,936 120,627
Return on Equity (%) 39.4 32.6 33.8 25.9 USD '000' 1,045 949 2,010
Income Statement
Revenue 25,481 21,027 21,035 16,787
Profit after tax 4,897 4,004 3,145 3,073
Dividend (%) 120 150 100 90
20.0x
Bonus Issue (%) 40 30 - -
Right Issue (%) - - - - 15.0x
10.0x
Balance Sheet
Assets 28,449 26,443 27,219 28,166 5.0x
Liabilities 16,008 14,148 15,697 17,403
0.0x
Equity 12,441 12,295 11,523 10,763 2005 2004 2003 2002
Paid-up Capital 4,935 2,950 2,565 2,565
Price to Book Ratio

EPS 9.9 8.1 6.4 6.2 4.8x
DPS 12.0 15.0 10.0 9.0 4.6x
Book Value 25.2 24.9 23.4 21.8 4.4x
4.2x
Key Ratios 4.0x
2005 2004 2003 2002
Price to Book (x) 4.3 4.3 4.6 4.9
Div Yield (%) 11.19 13.99 9.32 8.39 16.0%
14.0%
Revenue Growth (%) 21.18 (0.04) 25.31 40.09
12.0%
EPS Growth (%) 22.31 27.33 2.31 (4.07) 10.0%
Net Margin (%) 19.22 19.04 14.95 18.31 8.0%
6.0%
Return on Equity (%) 39.36 32.57 27.29 28.56
4.0%
Return on Assets (%) 17.21 15.14 11.55 10.91 2.0%
Asset Turnover (x) 0.90 0.80 0.77 0.6 2005 2004 2003 2002
Company Snapshot
Fauji Fertilizer Bin Qasim Fertilizer
KSE / Bloomberg Ticker FFBL 45 80
Millions
60
37 50
Year-end Dec
35 40
33 30
EPS PE Dividends 20
29
3Q06 1.42 15.2x 1.25 - 25 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
FFBL vs Fertilizer
FFBL Sector
Price to Earnings (x) 11.0 14.7 11.3 16.0 Absolute (%) -4% 4% -29%
EPS Growth (%) 33.8 52.5 41.9 20.9 Relative to KSE100 -2% 9% -32%
Dividend Yield (%) 8.7 3.5 9.1 8.6
Net Margin (x) 17.2 16.0 20.2 18.2 PKR '000' 71,229 173,907 375,453
Income Statement
Revenue 14,255 11,462 5,167 3,953
Profit after tax 2,449 1,831 1,201 2,131
Dividend (%) 25 10 - -
25.0x
20.0x
Right Issue (%) - - 3 -
15.0x
Balance Sheet 10.0x

Assets 24,581 21,967 19,368 18,741 5.0x
Liabilities 16,853 14,820 13,360 14,934
0.0x
Equity 7,728 7,147 6,008 3,807 2005 2004 2003 2002
Paid-up Capital 9,341 9,341 9,099 8,099
Price to Book Ratio

EPS 2.6 2.0 1.3 2.3 7.0x
6.0x
DPS 2.5 1.0 - - 5.0x
Book Value 8.3 7.7 6.4 4.1 4.0x
3.0x
2.0x
Key Ratios 1.0x
2005 2004 2003 2002
Price to Book (x) 3.5 3.8 4.5 7.1
Div Yield (%) 8.67 3.47 - - 10.0%
Revenue Growth (%) 24.36 121.84 30.71 (36.71) 8.0%
EPS Growth (%) 33.75 52.48 (43.65) (166.18)
6.0%
Net Margin (%) 17.18 15.97 23.24 53.91
4.0%
Return on Equity (%) 31.69 25.62 19.99 55.98
Return on Assets (%) 9.96 8.34 6.20 11.37 2.0%

Asset Turnover (x) 0.58 0.52 0.27 0.2 2005 2004 2003 2002
January 15, 2007
MARKETWEIGHT FMCG: RIDING THE CONSUMER WAVE, BUT EXPENSIVE

The wealth effect arising from the strong GDP growth has translated into healthy
Juvaria Jafri
demand for the FMCG sector. These scrips may be regarded as defensive
jjafri@bmacapital.com investments - very appealing in a choppy market, offering consistent growth and
healthy dividends. MARKETWEIGHT.
Economic growth. A growth rate that has averaged 7.5% over the last three
years places Pakistani FMCGs (fast moving consumer goods) in a desirable
position. The ensuing wealth effect has had local consumers clamouring for
more and more food and personal care goods. All the relevant macro
economic indicators point to a market that will continue to expand at a rapid
rate and offer strong value to potential investors.
Consumerism. A market characterized by almost one third of a total
population concentrated in the 15 years to 34 years age bracket and a
marginal propensity of consume of 0.76 bodes well for those producing
goods and services.
Urbanization. Since urban populations form the principal customer base for
companies providing branded goods, rising urbanization is a key driver for
FMCG growth. Urban consumers are growing at a rate of approximately 5%
p.a and are significantly wealthier, more educated, and more health
conscious than their rural counterparts.
Defensive strategy. The FMCG sector is comprised of low beta scrips that
are at the same time regular dividend payers making them extremely
attractive in the context of a defensive strategy. However, some of the scrips
are now trading at expensive valuations.
KEY STOCKS
………………………………………………………………………………………………
PKGS Pakistan’s largest paper and board manufacturer
Good exposure to virtually all areas of consumer
demand.
The company is in the process of expanding
production and expects to produce at 300,000
tonnes p.a in CY08 in order to meet rising demand
as well as to target production efficiencies
Healthy other income (from associated and
subsidiary companies) cushions the bottom line.
…………………………………………………………………………………………………………
43
Company Snapshot
Packages Limited Paper & Board
Sector Paper & Board PKR Shares
KSE / Bloomberg Ticker PKGS
Millions
225 3.5
Current Price 203.55 220 3.0
2.5
210
Year-end Dec 2.0
205
1.5
200
1.0
EPS PE Dividends 195
PKR times Cash Bonus % 190 0.5

3Q06 10.05 15.2x - - 185 0.0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
PKGS vs Paper & Board
PKGS Sector
Dividend Yield (%) 2.9 4.2 3.0 4.3
Net Margin (x) 14.3 16.0 14.3 16.1 PKR '000' 2,303 98,295 25,369
Return on Equity (%) 13.1 22.8 13.1 21.6 USD '000' 38 1,638 423
Income Statement
Revenue 7,099 5,987 5,436 4,622
Profit after tax 1,015 958 814 655
Dividend (%) 60 85 85 70
25.0x
20.0x
Right Issue (%) 47 - - -
15.0x
Balance Sheet 10.0x

Assets 11,620 6,474 6,154 5,950 5.0x
Liabilities 3,884 2,283 2,522 3,131
0.0x
Equity 7,736 4,192 3,633 2,819 2005 2004 2003 2002
Price to Book Ratio

EPS 14.5 13.7 11.6 9.4 5.0x
DPS 6.0 8.5 8.5 7.0 4.0x
Book Value 110.7 60.0 52.0 40.3 3.0x
2.0x
Key Ratios 1.0x
2005 2004 2003 2002
Price to Book (x) 1.8 3.4 3.9 5.0
Div Yield (%) 2.95 4.18 4.18 3.44 5.0%
Revenue Growth (%) 18.57 10.13 17.62 4.08 4.0%
EPS Growth (%) 6.04 17.70 24.13 54.25
3.0%
Net Margin (%) 14.30 15.99 14.96 14.18
2.0%
Return on Equity (%) 13.12 22.84 22.39 23.25
Return on Assets (%) 8.74 14.79 13.22 11.01 1.0%

Asset Turnover (x) 0.61 0.92 0.88 0.8 2005 2004 2003 2002
January 15, 2007
MARKETWEIGHT GAS DISTRIBUTION: UNCERTAINITY IN THE AIR

Uzma Makhani Cheaper availability and increasing gas focus are the core reasons why we
anticipate the demand for ‘natural gas’ to not only sustain current levels but also
umakhani@bmacapital.com
reach new heights. We therefore forecast gas demand to experience a 3-yr
CAGR of 8%. However, if added supply from enhanced exploration activities and
import of LNG do come online, it will ensure no gap prevails in the economy.
These are essentially the reasons why we maintain our ‘marketweight’ stance on
the segment. However, privatization might unlock latent value.
MARKETWEIGHT.
Privatisation expected to materialize in CY07. The two Sui’s are on the
Privatization Commission’s list of asset for sale by GoP, hence it opens room
for ample changes on the policy front, some of which are expected in CY07.
It has been announced by the government that no single buyer would be sold
both these companies, and we expect this delayed transaction to materialize
in CY07. We can expect changes in policies and regulations to smooth
transfer of ownership in CY07.
Anticipate demand increase in transport sector. Demand for gas is
primarily driven by the sectoral demand for gas in the economy. We expect
increased demand for gas from the transport and power sector. Other
sectors including household and fertilizer would be experiencing modest
growth primarily due to the reduced availability of this energy source.
Positive developments on the import front expected in CY07. Though
Pakistan has not been able to reach a consensus on gas import from Iran,
Turkmenistan or Russia, we anticipate some positive developments in this
regard. Thereby, increasing discoveries and import of LNG would enable the
economy to meet the supply – demand gap for gas.
New gas policy can be a major step towards privatization. MPNR is likely
to announce a new gas policy in CY07 envisaging auction of new quantities
of gas becoming available instead of their allocations to the subsidized
sectors and allow sale to bulk consumers through THIRD PARTY ACCESS
(TPA). This process is one of the several measures being contemplated
essentially as a major step towards privatization. This step would ensure no
more gas allocations by the government as was done historically but would
allow the best market price to prevail.
Fixed return formula linked to the company’s asset base. At present the
return for the Sui’s are fixed at 17% and 17.5% for SSGC and SNGPL
respectively based on asset base. Therefore any changes in the cost
structure, labour expansion or the retail prices will not affect the bottom line
of the companies. Growth in the operating profits of the Sui’s can only be
expected if the companies expand their asset base and infrastructure.
Bottom line formula revision expected in CY07. OGRA is considering a
revision in the link of its bottom line formula to either a greater percentage
return of the asset base or tagging it to the KIBOR rates. Implementation of
either of these formulae would be positive for Sui’s.
45
January 15, 2007
KEY STOCKS
…………………………………………………………………………………………………………
SNGPL At present, we would recommend investors to be

cautious on the Sui’s amid the privatization uncertainty
associated with the company.
However, in the long run, of the two Sui’s SNGPL is a
better investment in terms of its transmission
mechanisms and cash management techniques of the
two gas companies.
…………………………………………………………………………………………………………
46
Company Snapshot
Sui Northern Gas Pipelines Ltd. Oil & Gas Marketing
Sector Oil & Gas Marketing PKR Shares
KSE / Bloomberg Ticker SNGP
Millions
130 16
120
110
10
Year-end Jun 100
8
90
6
80
EPS PE Dividends 4

1Q07 1.41 12.3x - - 60 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
SNGP vs Oil & Gas Marketing
SNGP Sector
Dividend Yield (%) 4.3 4.3 8.3 5.8
Net Margin (x) 3.5 3.3 2.7 2.5 PKR '000' 18,171 24,521 135,784
Return on Equity (%) 24.6 21.2 29.6 25.1 USD '000' 303 409 2,263
Financials (PKR mn) 2006 2005 2004 2003 Shares '000' 263 303 1,409
Income Statement
Revenue 105,851 83,377 64,206 42,460
Profit after tax 3,722 2,736 2,297 2,014
Dividend (%) 30 30 25 22
20.0x
Bonus Issue (%) 10 - - -
Right Issue (%) - - - - 15.0x
10.0x
Balance Sheet
Assets 51,421 65,014 56,925 47,301 5.0x
Liabilities 36,312 52,130 46,071 38,744
0.0x
Equity 15,109 12,884 10,854 8,556 2006 2005 2004 2003
Paid-up Capital 4,992 4,992 4,992 4,992
Price to Book Ratio

EPS 6.8 5.0 4.2 3.7 4.0x
DPS 3.0 3.0 2.5 2.2
3.0x
Book Value 27.5 23.5 19.8 15.6
2.0x
Key Ratios 1.0x

2006 2005 2004 2003
Price to Book (x) 2.5 3.0 3.5 4.5
Div Yield (%) 4.30 4.30 3.58 3.15 5.0%
Revenue Growth (%) 26.95 29.86 51.22 24.59 4.0%
EPS Growth (%) 36.05 19.09 14.09 50.67
3.0%
Net Margin (%) 3.52 3.28 3.58 4.74
2.0%
Return on Equity (%) 24.64 21.24 21.17 23.54
Return on Assets (%) 7.24 4.21 4.04 4.26 1.0%

Asset Turnover (x) 2.06 1.28 1.13 0.9 2006 2005 2004 2003
January 15, 2007
OVERWEIGHT OIL MARKETING: NOW THE GOOD NEWS

We have an ‘overweight’ recommendation for the sector. We believe that all the
Ovais Siddiqui, CFA negative effects of margin cut, decline in POL consumption in the country and
delay in privatization of PSO are now factored in the sector valuation. However,
osiddiqui@bmacapital.com
the expected revival in POL consumption on the back of sustained economic
growth and the recent urgency being shown by GoP on PSO privatization should
trigger investor interest in the sector. This sector underperformed the market over
the last nine months as its market cap declined by 33.6%, compared to 17.3%
decline in the market. OVERWEIGHT.
Privatization of PSO, a big factor. The GoP is in the advanced stages of

divesting its 51% equity stake in Pakistan State Oil (PSO) to a strategic
investor. It recently called for new Expression of Interest (EoIs) and the last
date for submission is January 15 2007. We believe that a number of
international and local companies will show interest in taking over PSO. Any
major development on this issue will set off a strong speculative interest in
the PSO stocks.
HSD consumption to grow. In Pakistan the consumption of petroleum
products (POL) is heavily tilted in favor of High Speed Diesel (HSD) and
Furnace Oil (FO), which together make up around 81% of the total POL
consumption in the country, whereas gasoline accounts for 9% of the
consumption. The transport sector explains 93% of HSD consumption in the
country, since HSD sells at a significant discount to gasoline at the retail level
because of the substantial GoP’s subsidy. As the activity in the transport
sector is mainly dependent on macro growth, we found a correlation of 64%
between the real GDP growth and consumption growth in HSD. Moving
forward, we expect the economy to sustain its 6-8% growth pace over the
next three years due to large expansions expected in the manufacturing and
services sectors. This macro outlook is a good omen for the growth of HSD
consumption and, accordingly, for PSO, Shell and other oil market
companies (OMCs).
Shortage in gas supply to stabilize FO consumption. With 71% share in
the total consumption of furnace oil (FO), thermal power plants are the
largest consumer of FO in the country. The installed thermal power
generation capacity in the country is more or less stagnant at just over
12,000 MW since FY99, yet the FO consumption by these plants declined
annually by 13.1% in the last six years. As FO prices have been much
volatile and higher than those of locally produced gas, most of the power
plants switched to gas-based production that pushed up the usage of gas to
79% of the fuel consumption by these plants in FY05 from 43% in FY99.
Going forward, FO consumption is expected to rise this year as the growing
shortage in gas supplies is making it difficult for the Government of Pakistan
(GoP) to guarantee supply of gas to a number of new proposed thermal
power plants.
No substantial growth in gasoline consumption expected. We witnessed

9.3% average annual growth in the number of cars plying on the roads since
FY99. However, this translated into only 3.5% annual growth in the gasoline
consumption. The reason behind this disparity is the increased use of
Compressed Natural Gas (CNG) in cars that resulted in the decline of per car
48
January 15, 2007
annual gasoline consumption to 1.06 tonnes in FY05 from 1.47 tonnes in

FY99. We expect the car ownership rate in the country to get to 1% in the
next couple of years from the current 0.7% on the back of increasing
purchasing power of the consumers and aggressive car-leasing schemes of
the banks. This should arrest the decline in the gasoline consumption,
despite the popularity of CNG among the car owners.
CNG sales, a new earning source. Offsetting the decline in the growth of
gasoline consumption, Compressed Natural Gas (CNG) sales are rapidly
growing every year because of its significant price advantage over gasoline.
Though the margin in CNG varies in a large range, generally it is much better
than that on other POL products.
Further margin cut, a remote possibility. In March last year the GoP cut
the margin of OMCs by 20%. These companies made handsome profits last
year and this built up public pressure on the GoP to pull down their margin.
However, going forward, we believe that the GoP will not resort to margin cut
again, especially post- PSO privatization, as it wants OMCs to build up their
storage capacity to 45 days inventory from the current 25 days. Accordingly,
any further cut in margin could discourage these companies to finance any
such expansion.
KEY STOCK
………………………………………………………………………………………………
PSO Expected to be privatized by June this year.
Expected higher growth in Furnace oil sales this year will
positively impact the bottom-line
HSD consumption is expected to revive after winter. This
will bode well for PSO as 43% of its sales volume comes
from this segment
The GoP is expected to retire all dues to PSO by March
this year. This will remove an important hitch in the
privatization of this company
Currently trading at discount to our fair value of PKR 349
a share
………………………………………………………………………………………………
49
Company Snapshot
Pakistan State Oil Company Oil & Gas Marketing
Sector Oil & Gas Marketing PKR Shares
KSE / Bloomberg Ticker PSO
Millions
460 25
430
400
15
Year-end Jun 370
340 10
310
EPS PE Dividends
5
1Q07 3.30 23.2x - - 250 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
PSO vs Oil & Gas Marketing
PSO Sector
Dividend Yield (%) 11.1 8.5 8.3 5.8
Net Margin (x) 2.5 2.7 2.7 2.5 PKR '000' 377,312 478,074 1,005,878
Income Statement
Revenue 298,250 212,504 161,538 172,446
Profit after tax 7,525 5,656 4,212 4,030
Dividend (%) 340 260 175 160
14.0x
Bonus Issue (%) - - - - 12.0x
Right Issue (%) - - - - 10.0x
8.0x
Balance Sheet 6.0x
4.0x
Assets 70,169 52,308 42,409 32,338
2.0x
Liabilities 49,355 34,763 26,963 19,275
0.0x
Equity 20,813 17,545 15,446 13,063 2006 2005 2004 2003
Paid-up Capital 1,715 1,715 1,715 1,715
Price to Book Ratio

EPS 43.9 33.0 24.6 23.5 4.0x
DPS 34.0 26.0 17.5 16.0
3.0x
Book Value 121.3 102.3 90.1 76.2
2.0x
Key Ratios 1.0x

2006 2005 2004 2003
Price to Book (x) 2.5 3.0 3.4 4.0
Div Yield (%) 11.07 8.47 5.70 5.21 12.0%
Revenue Growth (%) 40.35 31.55 (6.33) 20.33 10.0%
EPS Growth (%) 33.04 34.28 4.50 79.02 8.0%
Net Margin (%) 2.52 2.66 2.61 2.34 6.0%
Return on Equity (%) 36.15 32.24 27.27 30.85 4.0%
Return on Assets (%) 10.72 10.81 9.93 12.46 2.0%
Asset Turnover (x) 4.25 4.06 3.81 5.3 2006 2005 2004 2003
January 15, 2007
MARKETWEIGHT POWER: BETTER THAN BONDS

Uzma Shah We are marketweight on the sector in view of potential re-rating lying ahead of
ushah@bmacapital.com capacity expansion and diversification by existing Independent Power Producers
(IPPs). MARKETWEIGHT.
Demand growth and capacity deficit. With high demand growth for power
(ranging 8-10%) in recent years and no significant capacity additions, the
sector is facing growing capacity deficit. In light of this, the GoP is going to
announce a new power policy which is expected to be more favorable and
hence will serve to attract investments in the sector.
Insulated against low operating rate. Based on the tariff structure of the
IPPs and the Power Purchase Agreements with WAPDA, the IPPs are
insulated against a low operating rate. The IPPs are guaranteed payments
based on a 65% load factor, which covers all their fixed costs and includes
an equity-return component. In order to receive capacity payments, which
consist of shareholders’ dividend, IPP’s have to fulfill an annual capacity test
and maintain certain level of ‘dependable capacity’ across the year.
WAPDA’s improved financial position bodes well. The security of the
IPPs’ cashflows is dependent on the ability of WAPDA to honor payment
obligations. The improvement in WAPDA’s financial position, coupled with
the improvement in the government’s financial position, has been a major
factor behind the improvement in the IPPs’ risk profile.
High dividend yields. Hub Power Co (Hubco) has been paying out
dividends regularly for the past three years. KAPCO is also a steady dividend
payer. Dividend yield for Hubco is 11.3% based on FY06 payouts, whereas
for KAPCO it is 19.8%. Both the yields are not only higher compared to any
other stock but also surpass the 1-year KIBOR rate of 10.7%.
KEY STOCKS
………………………………………………………………………………………………
Its turbines can be run with any of the three fuels that is,
KAPCO gas, furnace oil and HSD.
The proposed 450MW expansion is favorable because
of high demand growth and company related factors.
Distinctive advantages going in its favor include:
WAPDA ownership of about 44%, proximity of plant to
load center and existing supply of gas, and smaller
gestation period and lower cost for KAPCO undertaking
expansion than a new company undertaking Greenfield
project.
…………………………………………………………………………………………………………
Higher utilization levels leading to improved thermal
HUBCO efficiency
The stock is expected to factor-in potential growth going
forward, with Hub Power in 1) bidding process for SSGC
and its 2) plans to expand by 350MW to 500MW through
solicited as well as unsolicited proposals
………………………………………………………………………………………………
51
Company Snapshot
Kot Addu Power Power Generation
Sector Power Generation PKR Shares
KSE / Bloomberg Ticker KAPCO
Millions
53 9.0
Current Price 40.80 51 8.0
Market Capitalization PKR mn 35,914 49 7.0
Shares Outstanding mn 880 47 6.0
Year-end Jun 45 5.0
43 4.0
Most Recent Announcement - Earnings / Dividends 41 3.0
EPS PE Dividends 39 2.0
PKR times Cash Bonus % 37 1.0
1Q07 1.27 8.0x - - 35 0.0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
KAPCO vs Power Generation
KAPCO Sector
EPS Growth (%) (33.9) 16.0 (36.1) 2.8 Relative to KSE100 -1% -1% -19%
Dividend Yield (%) 19.9 19.6 9.9 16.4
Net Margin (x) 16.2 29.2 13.8 16.8 PKR '000' 10,832 17,780 34,276
Income Statement
Revenue 32,833 27,564 21,842 -
Profit after tax 5,317 8,048 6,936 -
Dividend (%) 81 80 - -
8.0x
Bonus Issue (%) - - - - 7.0x
Right Issue (%) - - - - 6.0x
5.0x
4.0x
Balance Sheet 3.0x
Assets 34,278 36,730 32,910 - 2.0x
1.0x
Liabilities 14,156 14,443 14,891 -
0.0x
Equity 20,122 22,287 18,020 - 2006 2005 2004 2003
Paid-up Capital 8,803 8,803 8,803 -
Price to Book Ratio

EPS 6.0 9.1 7.9 - 2.0x
DPS 8.1 8.0 - -
1.5x
Book Value 22.9 25.3 20.5 -
1.0x
Key Ratios 0.5x
Price to Earnings (x) 6.8 4.5 5.2 - 0.0x

2006 2005 2004 2003
Price to Book (x) 1.8 1.6 2.0 -
Price to Sales (x) 0.1 0.1 0.1 - Dividend Yield
Div Yield (%) 19.85 19.61 - - 25.0%
Revenue Growth (%) 19.12 26.19 (5.90) - 20.0%
EPS Growth (%) (33.93) 16.02 26.95 -
15.0%
Net Margin (%) 16.19 29.20 31.76 -
10.0%
Return on Equity (%) 26.43 36.11 38.49 -
Return on Assets (%) 15.51 21.91 21.08 - 5.0%
Equity Turnover (x) 1.63 1.24 1.21 - 0.0%

Asset Turnover (x) 0.96 0.75 0.66 - 2006 2005 2004 2003
Company Snapshot
Hub Power Company Limited Power Generation
Sector Power Generation PKR Shares
KSE / Bloomberg Ticker HUBC 30 12
Millions
10
Shares Outstanding mn 1,157 27

8
26
Year-end Jun
25 6
24
4
EPS PE Dividends
22
2
1Q07 0.62 10.9x - - 20 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
HUBC vs Power Generation
HUBC Sector
Price to Earnings (x) 11.4 5.9 8.1 6.1 Absolute (%) -7% 6% 9%
EPS Growth (%) (48.6) (1.4) (36.1) 2.8 Relative to KSE100 -6% 11% 6%
Dividend Yield (%) 11.4 14.3 9.9 16.4
Net Margin (x) 9.9 31.7 13.8 16.8 PKR '000' 37,688 40,801 44,003
Income Statement
Revenue 27,911 16,978 16,003 19,514
Profit after tax 2,768 5,385 5,463 6,102
Dividend (%) 31 39 32 54
12.0x
10.0x
8.0x
6.0x
Balance Sheet
4.0x
Assets 43,515 46,636 51,781 55,546
2.0x
Liabilities 13,530 14,964 22,138 29,515
0.0x
Equity 29,985 31,672 29,642 26,031 2006 2005 2004 2003
Paid-up Capital 11,572 11,572 11,572 11,572
Price to Book Ratio

EPS 2.4 4.7 4.7 5.3 1.2x
1.0x
DPS 3.1 3.9 3.2 5.4
0.8x
Book Value 25.9 27.4 25.6 22.5
0.6x
0.4x
Key Ratios 0.2x
2006 2005 2004 2003
Price to Book (x) 1.1 1.0 1.1 1.2
Div Yield (%) 11.38 14.31 11.74 19.82 25.0%
Revenue Growth (%) 64.39 6.10 (17.99) (32.91) 20.0%
EPS Growth (%) (48.59) (1.42) (10.47) (43.81)
15.0%
Net Margin (%) 9.92 31.72 34.14 31.27
10.0%
Return on Equity (%) 9.23 17.00 18.43 23.44
Return on Assets (%) 6.36 11.55 10.55 10.99 5.0%

Asset Turnover (x) 0.64 0.36 0.31 0.4 2006 2005 2004 2003
January 15, 2007
OVERWEIGHT TELECOM: RECOVERY ONLINE

Ovais Siddiqui, CFA We are ‘overweight’ on this sector. The new management of Pakistan
osiddiqui@bmacapital.com Telecommunication Limited (PTCL), the largest company in the sector, is now
taking steps to stem the decline in margins and has reduced tariffs to fend off
competition, especially in long distance traffic. It is planning to cut the payroll
expenses by offering Voluntary Separation Scheme (VSS) to surplus employees.
This sector underperformed the market over the last nine months as its market
cap declined by 29.3%, compared to 18% decline in the market. OVERWEIGHT.
A new earning source. The deregulation produced a new earning source for
the company in the form of interconnection charges and leased line rents.
Being the monopoly of decades before 2003, PTCL managed to establish an
extensive telephony transmission network all over the country and
consequently the majority of the new telecom operators are using PTCL
network for their LL and LDI services, earning handsome rents for the
company. Since, PTCL still holds 98% market share in fixed telephony, the
majority of the other operators’ calls terminate on the PTCL network, thus
earning termination charges for the company. However, we believe that
PTCL cannot bank on this earning for too long to make up its loss on other
fronts as the new operators are bound to own 10%, 20% and 50% of their
transmission network in the first, second and third year of their operation.
WLL operations took off well. PTCL started off well its wireless local loop
(WLL) business, which it launched in May 2005 with CDMA technology. It
has got leadership position in this sector with 60% market share. Currently,
WLL tele-density in the country stands at 0.66%, implying a huge growth
potential for PTCL, especially in small towns where people have no
alternative to relatively expensive cellular services as PTCL has not yet laid
copper or fibre optic network there for giving fixed telephone services. Hence
people will switch to cheaper WLL, if it is made available in those areas. An
aggressive roll out plan for WLL network is underway in PTCL and its
existing 1,134 base stations cover 720 cities and small towns in the country.
Cellular market, another growth avenue. Another growth area for PTCL is
the cellular market, where its wholly owned subsidiary Ufone holds 22%
market share with 7.49 million subscribers as on June 2006. The cellular
tele-density in the country rose significantly during FY05-06 from 8% to 26%,
yet the total cellular subscribers are expected to touch 92.2 million by 2010
from 36.8 million in June 2006.
Recent tariff cuts could win over lost market share. The new telecom
operators are gradually making inroads into the captive territory of PTCL.
These operators are eating away its margins, especially in its long-distance
revenues as they have established their international gateways to attract
incoming traffic in the country. This is quite evident from the fact that
international incoming revenues, which in 2003 accounted for 25.3% of the
total revenues of PTCL, now make up only 13.1%. According to Pakistan
Telecommunication Authority (PTA), the telecom sector regulator of the
country, the overall international incoming traffic in the country showed a
growth of 118% in FY05-06. However, the share of PTCL in this traffic
dropped to 55.3% from 73.3% a year earlier. Mobile operators also abolished
their national long distance tariffs (which used to be PKR 9 per minute) and
54
January 15, 2007
are now only charging airtime for national long distance calls. Similarly, new
LDI operators substantially reduced their tariffs, thereby taking away
significant long distance traffic from PTCL. The minimum international tariffs,
which were PKR 58 in 1996, are now as low as PKR 0.99 per minute and
NWD call is available at PKR 0.52 per minute. PTCL recently reduced their
long distance tariffs by 67% and nationwide by 50%. We do expect that this
step will help PTCL recoup its lost market share.
KEY STOCK
………………………………………………………………………………………………
PTCL recently reduced their long distance tariffs by
PTCL
67% and nationwide by 50%. We do expect that this
step will help PTCL recoup its lost market share.
Another growth area for PTCL is the cellular market,
where it’s wholly owned subsidiary Ufone holds 22%
market share.
PTCL successful wireless local loop (WLL) business
has acquired leadership position in this sector with
60% market share.
…………………………………………………………………………………………………………
55
Company Snapshot
Pakistan Telecommunication Company Tech. & Comm.
Sector Tech. & Comm. PKR Shares
KSE / Bloomberg Ticker PTC
Millions
70 140
Current Price 48.10
65 120
60 100
Shares Outstanding mn 5,100
Year-end Jun 55 80
50 60
45 40
EPS PE Dividends
1Q07 1.01 11.9x - - 35 0
May-06
Mar-06
Jan-06
Feb-06
Apr-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
PTC vs Tech. & Comm.
PTC Sector
EPS Growth (%) (21.9) (8.8) (23.4) (8.3) Relative to KSE100 2% 18% -32%
Dividend Yield (%) 10.4 4.2 7.4 4.9
Net Margin (x) 30.1 35.0 29.9 34.3 PKR '000' 327,924 515,003 852,259
Income Statement
Revenue 69,085 75,972 74,124 67,203
Profit after tax 20,777 26,606 29,170 23,081
Dividend (%) 50 20 50 35
14.0x
Bonus Issue (%) - - - - 12.0x
Right Issue (%) - - - - 10.0x
8.0x
Balance Sheet 6.0x
4.0x
Assets 152,240 136,078 141,595 130,779
2.0x
Liabilities 46,765 36,064 32,495 50,856
0.0x
Equity 105,475 100,014 109,100 79,923 2006 2005 2004 2003
Paid-up Capital 51,000 51,000 51,000 51,000
Price to Book Ratio

EPS 4.1 5.2 5.7 4.5 3.0x
2.5x
DPS 5.0 2.0 5.0 3.5
2.0x
Book Value 20.7 19.6 21.4 15.7
1.5x
1.0x
Key Ratios 0.5x
2006 2005 2004 2003
Price to Book (x) 2.3 2.5 2.2 3.1
Div Yield (%) 10.40 4.16 10.40 7.28 12.0%
Revenue Growth (%) (9.07) 2.49 10.30 8.32 10.0%
EPS Growth (%) (21.91) (8.79) 26.38 27.14 8.0%
Net Margin (%) 30.07 35.02 39.35 34.35 6.0%
Return on Equity (%) 19.70 26.60 26.74 28.88 4.0%
Return on Assets (%) 13.65 19.55 20.60 17.65 2.0%
Asset Turnover (x) 0.45 0.56 0.52 0.5 2006 2005 2004 2003
January 15, 2007
MARKETWEIGHT TEXTILE: A STITCH IN TIME

We are market weight on the textile sector on account of higher real interest
Yasir Shafi
rates, slowdown in demand in key export markets and increased competition.
yasir.shafi@bmacapital.com However currency depreciation and Chinese revaluation the currency might
prove to be fortuitous events. The KSE 100 index decreased by 17.7% since
April 06, while the Textile Composite index decreased by almost 60%.
MARKETWEIGHT.
Financial costs damaging. Financial costs in the textile industry are
increasing due to higher interest rates, which in turn affect company profits
negatively. This is particularly more marked given the significant degree of
leveraged capacity expansion by the textile sector in the last 4-5years.
Cotton prices might provide some comfort. Cotton prices are on the
decline, which will put downward pressure on yarn prices. Prices declined by
5.7% from the beginning FY06-07 to November 2006. This is an important
development particularly for spinning units as they buy raw cotton during the
cotton buying season, which commences from October and ends in
February. Therefore lower cotton prices will reduce raw material costs for
these units
Export multiplier dampening? Textile exports have declined by 3.6% on
average in the first five months of FY06-FY07 due to higher cost of doing
business and increased competition from regional competitors like India,
China and particularly Bangladesh. On a recent note due the current political
situation in Bangladesh textile orders have shifted to Pakistan and the local
textile industry is taking full advantage as foreign clients are very sensitive
about any instability in supplying countries
Measures taken to improve competitiveness. The State Bank of Pakistan
(SBP) has stated that the sector had taken advantage of its scheme to swap
expensive long-term loans for cheaper ones. The scheme allows the industry
to off-load their costly loans from commercial banks and swap them at lower
rates. The SBP bears the costs of the commercial loans and will swap the
textile industry loans taken from January 1 2003 to December 31, 2006 for
import of machinery. Of the PKR60bn offered, the sector had availed PKR34
Billion by 31st December 2006.
…but value added still low. A UNDP report issued in August 2006 showed
that Pakistan was getting the lowest prices for its textile products from the EU
and United States, pointing the finger at low value added products in the
Pakistani market as opposed to India and Bangladesh
57

BMA Pakistan Outlook 2007 15-Jan-07

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January 15, 2007

PAKISTAN RESEARCH PAKISTAN OUTLOOK 2007: DIAMOND IN THE

BMA RESEARCH TEAM

Uzma Makhani PAKISTAN MARKET UNDER VALUED

SECTOR THEMES AND OUTLOOK

Banks +1 +1 +1 +1 +2 +2 -1 7 37% 26% Overweight

Fertilizer +2 +1 3 13% 5% Overweight

OMC's +1 +1 +1 3 11% 3% Overweight

Cement -1 +1 +2 -2 - 7% 3% Market weight

Textile -2 +1 +1 - 2% 1% Market weight

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

2 MACRO OUTLOOK: ECONOMICS 5

3 KEY THEMES FOR EQUITIES 8

4 SECTOR STRATEGY & SNAPSHOTS 13

2 MACRO OUTLOOK: ECONOMICS

3 KEY THEMES FOR EQUITIES

RACE – Capitalizing on key cyclical themes

R Rates High interest rates (PKR, USD) Cyclical

A Agriculture Higher agriculture income Cyclical

C Currency Currency depreciation Cyclical

E Energy Stable oil prices Cyclical

PIICCS- Capitalizing on key structural themes

P Power Increasing energy deficit Structural

I Infrastructure Infrastructure growth Structural

C Consumerism Growing consumerism Structural

C Capacity Capacity expansion Structural

S Savings Increasing savings deficit Structural

SECTOR THEMES AND OUTLOOK

Banks +1 +1 +1 +1 +2 +2 -1 7 37% 26% Overweight

E&P +2 +2 4 11% 29% Overweight

Fertilizer +2 +1 3 13% 5% Overweight

OMC's +1 +1 +1 3 11% 3% Overweight

Telecom -1 -1 +2 +2 2 10% 7% Overweight

Cement -1 +1 +2 -2 - 7% 3% Market weight

Gas T&D -1 +1 - 4% 2% Market weight

Power -1 +1 - 4% 3% Market weight

Textile -2 +1 +1 - 2% 1% Market weight

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

RACE STRATEGY – TAKING ADVANTAGE OF KEY

E –ENERGY PRICES STABLE

PICCS STRATEGY – TAKING ADVANTAGE OF KEY

been increasing private investment in infrastructure much of which is focused in

Industry FY03 FY04 FY05 FY06 Demand-YoY

Higher agriculture income High interest rates

Capacity expansion Currency depreciation

Banks Higher agriculture income Currency depreciation Overweight

High interest rates

Cement Infrastructure growth Capacity expansion Marketweight

High interest rates

E&P Increasing energy deficit Overweight

Fertilizer Higher agriculture income Overweight

FMCG Higher agriculture income Currency depreciation Overweight

Gas Distribution Capacity expansion High interest rates Market weight

OMC's Growing consumerism Overweight

Power Capacity expansion Market weight

Textile Agricultural Growth High interest rates

Telecom Capacity expansion High interest rates Overweight

OVERWEIGHT AUTO ASSEMBLERS: STILL IN 4TH GEAR

KSE / Bloomberg Ticker PSMC 500 500

Shares Outstanding mn 54 350

Per Share Data (PKR) 10.0x

Key Ratios 2.0x

Price to Earnings (x) 10.1 16.0 14.3 26.45 0.0x