omc: no mention; hence safe - BMA Capital Management

65
Federal Budget 2010-11
Cautious Populism
Pakistan Research
Monday June 7, 2010
BMA Research
Hamad Aslam
haslam@bmacapital.com
Abdul Shakur
abdul.shakur@bmacapital.com
Nurali Barkatali
nurali.barkatali@bmacapital.com
Sana I. Bawani
sana.iqbal@bmacapital.com
Omar Rafiq
omar.rafiq@bmacapital.com
Muhammad Ali Taufiq
ali.taufiq@bmacapital.com

2
CAUTIOUS POPULISM
BUDGET FY11: NO CHANGE IN FLAVOR
June 7, 2010
Touching briefly upon a number of themes, the budget lacked a broad based plan to ensure
growth sustainability. Populist measures were announced but limited to the fiscal space
available with the government. Incentives extended to promote investment, corporatization
and equity market listing are commendable, nonetheless.
Wide scale opposition on implementation of Value Added Tax (VAT) forced the government to
defer the decision– thereby defeating the originally envisaged goal of increasing
documentation in the economy. Our main concern however emanated from the silence
adapted by the policy makers on the lingering power deficit and circular debt.
ECONOMICS: A CAUTIONED APPROACH
In pursuance to keep the economy on growth track, policy shift has been announced to
mobilize resources from non development side to capacity building. Deviation from the
planned targets and fiscal slippages remained the key dilemma time and again. All the
budgetary measures, including fiscal consolidation, bridging investment saving gaps and
enhancing potential output through development seem prudent – however implementation of
these targets remains challenging.
The envisaged GDP growth target of 4.5% for FY11 will be widely dependent on recovery
from commodity producing sectors i.e. manufacturing and agriculture; for which power deficit
remains the key challenge. On the revenue side, incremental 100bps increase in GST would
be the supporting factor up till the implementation of VAT. However given its inflationary
impact, inflation target of 9.5% for FY11 seem ambitious to us. On the whole, achievement of
fiscal deficit target of 4% of GDP will require resource utilization and strict adherence to the
announced austerity measures.
MARKET STRATEGY: GRIST TO THE MILL
Removal of CGT exemption on equity trading may imply short term attrition in trading
volumes. However given that the announcement was in-line with the consensus achieved in
Feb10 and continues exemption on long term holding; we do not foresee any knee-jerk
reaction on the index. Interplay of global markets may however require an ever closer look.
We thus re-iterate our safe investment themes with our KSE100 2010 index target intact at
11,500.
BUDGET IMPACTS AND OUR TAKE
Sector
Budget
Impact
BMA Recommendation Top Picks
Commercial Banks Positive MARKETWEIGHT MCB
E&P Neutral MARKETWEIGHT PPL, POL
OMCs Neutral OVERWEIGHT PSO
Power Neutral OVERWEIGHT HUBC
Fertilizer Neutral MARKETWEIGHT ENGRO
Cement Neutral OVERWEIGHT ACPL
Textile Neutral MARKETWEIGHT -
Chemicals Neutral MARKETWEIGHT ICI
Automobile Neutral MARKETWEIGHT -
Telecom and Tech Neutral MARKETWEIGHT -
Refineries Neutral UNDERWEIGHT -

3
TABLE OF CONTENTS
Budget FY11: No Change in Flavor 4
Market Strategy: Grist to the Mill 8
Economy: Budget, a Cautioned Approach 11
Summary of Sector Themes and Outlook
Banks: Key Beneficiary 16
E&P: Valuations with Convictions 17
OMC: No mention; Hence safe 19
Power: The Back of Beyond 20
Fertilizer: Still Favored! 22
Cements: Still Lurking! 23
Textile: VAT – Fabric-ated! 24
Chemicals: Mixed Reaction 25
Auto: Gears Unchanged 26
Telecom: Silent Talks! 28
Top Investment Ideas 29
June 7, 2010

Hamad Aslam
Head of Research
4
BUDGET FY11: NO CHANGE IN FLAVOR
Economic numbers: Challenging yet possible
June 7, 2010
Achieving fiscal deficit target of 4.0% of GDP, via imposition of additional taxes
will remain a challenging task for the incumbent government. However
persistently low tax revenues require strong footholds to produce resources for
welfare and development. Thus to manage fiscal space for development and
sustainable growth, all components of tax machinery are projected to be
channelized with the target of 18% YoY growth in tax revenue for FY11.
Overall budget outlay is envisaged to be PKR3trn (+25% YoY), against revenue
base of PKR2.4trn (+18 YoY), translating into consolidated fiscal deficit of
PKR685bn (4.0% of GDP). Strict compliance to the announced austerity
measures, consistent recovery in manufacturing sector, improvement in power
deficit and materialization of financing to its fullest will remain the key
determinants for achieving FY11 GDP growth target of 4.5%.
Populist measures: Limited by fiscal constraints
Amidst double digit inflation and rising unemployment, the budget lacked
populist measures that the public had been hoping for. However given
constrained fiscal space, there were limited social benefits that the government
could announce:
� limit of basic exemption was proposed to be enhanced from PKR200K pa
for salaried and PKR100K pa for non-salaried taxpayers to PKR300K pa;
� 50% ad-hoc increment on basic salary for government employees;
� outlay of Benazir Income Support Program increased to PKR50bn from
PKR46bn in FY10;
� maintenance of subsidy for Utility Stores Corporation at PKR4.2bn and
� minimum wage rate increased from PKR6,000/month to PKR7,000/month.
Investment encouraged; When push comes to shove
The budget envisages promoting investment and capacity building by extending
tax credit at the rate of 10% to tax paying companies undergoing BMR
(balancing, modernization and replacement) activity. This concession has been
proposed for the tax years FY11 to FY15 and will be allowed for the tax year in
which the said costs are incurred. While attractive on paper, we believe that
weak demand in most sectors may not allow many companies to take
advantage of this relief. However the aforementioned tax incentive should
encourage well established players, particularly in cement, textile and auto
sectors to undergo BMR in case of demand revival going forward.
Secondly, the budget announced tax-free repatriation of profits for foreign
lenders on loans extended to companies operating in Pakistan’s industrial
sector. We believe the measure will reduce the cost of such foreign loans taken
by domestic entities; given that the incentive has been extended for all such
loans issued since February 1999, companies such as ENGRO and DGKC
stand to marginally benefit on their current foreign denominated loan books.
Moreover, under this incentive scheme, other established players in cement and
textile sectors will also be able to take advantage of lower LIBOR for their
borrowing requirements.
Lastly, a number of tax incentives have been extended to taxpayers located in
war affected areas of Khyber Pakhtunkhwa, FATA and PATA. We however
believe that given the security situation in these areas, the announced relief

5
June 7, 2010
package will have limited impact on promoting investment and will be limited to
being a political announcement.
Energy deficit and circular debt: Ignored?
Economic Survey released on the weekend by the Ministry of Finance noted
that the ongoing power deficit in the country resulted in 2% shortfall in GDP
growth for FY10 – a figure that alone signifies the critical need to be addressed.
Current estimates suggest energy shortfall of 3,500MW in the country. While
setting up of Independent Power Producers (IPPs) and Rental Power Projects
(RPPs) may help ease the crisis in the short term; we argue that it is only a
stop-gap solution.
Moreover, circular debt in the energy system has once again ballooned to a net
amount of over PKR100bn; resolution of which is projected to recover at least
500MW of idle power capacity. Thus, in our view, the budget lacked
announcement of any concrete measures to address the deficit with allocation
for WAPDA and other state owned power sector entities not enough to curtail
the backlog of the crisis.
What happened to documentation? VAT deferred, increased taxes
on small companies
Pakistan’s Tax to GDP currently stands at ~10%, higher only to Afghanistan in
the region. Hence there remains no doubt that policy formulation needs to be
directed towards increasing tax revenues, with emphasis on increasing the tax
net rather than increasing tax rate on sectors/people already in the net.
In this regard, agriculture sector stands as the most notable challenge.
Contributing 21% to the country’s GDP, the sector only accounts for 1% share
in taxes. While bringing agriculture under the tax net will require political will; the
need of the hour was to increase documentation of the economy.
Value Added Tax (VAT) was the right step in this direction. However wide scale
opposition from political parties, industrialists and Sindh government forced the
federal government to defer the implementation of these reforms till October,
2010. As a stop gap measure, however, it was announced that General Sales
Tax (GST) will be increased by 100bps to 17% for all goods currently under the
16% regime. The aforementioned announcement is likely to be more inflationary
and yet not fulfil the originally envisioned purpose of increasing documentation
in the economy. On the flip side, potential implementation of VAT of 15% in
Oct10 is not likely to result in price rationalization, thereby increasing (or at least
maintaining) margins for manufacturers and the rest of the value chain.
In the same context, the budget announced increase of income tax on small
companies from 20% to 25%. The latter also being the highest slab for
Association of Persons (AOP) and non-salaried individuals (sole proprietors),
may thereby eliminate the incentive for them to register themselves as a
company.
CGT Exemption withdrawn for equities; minor deviations from
earlier understanding
The federal budget finally ended the Capital Gains Tax (CGT) exemption on
equity trading w.e.f July 1, 2010. The tax schedule was broadly in-line with the
one outlined earlier in February, 2010, however an official notification with
regards to exact modalities is still awaited.

6
CGT Slabs for Equity Trading
Holding Peiord
Less than 6 months
6 to 12 months
Source: Budget documents, BMA Research
June 7, 2010
Tax Year Rate of Tax
2010 10.0%
2011 10.0%
2012 12.5%
2013 15.0%
2014 17.5%
2015 17.5%
2016 17.5%
2010 7.5%
2011 8.0%
2012 8.5%
2013 9.0%
2014 9.5%
2015 10.0%
2016 10.0%
Greater than 12 months 0.0%
It should be noted that any purchase of shares done prior to July 1, 2010 will
remain exempt from CGT, irrespective of the date of disposal of these shares.
Moreover, as per our understanding, trading activity for mutual funds should
remain tax-exempt. However any gains made by investors of (both open-end
and closed-end) equity funds on buy-sell of units will be charged with CGT as
per the standard slabs. On the positive side, CGT will be adjustable for any
losses for a period of five years.
Against earlier expectations however, capital gains made by foreign investors
may not be adjusted for potential Pak Rupee devaluation. Moreover, the
‘Advanced Tax’ clause also eliminated the exemption on CGT for equity trading.
It was thus announced that entities filing advanced tax on quarterly basis will be
liable to pay 2% advanced CGT on security holding period of less than 6
months while holding period of 6-12 months will be applied with advanced CGT
of 1.5%. We understand that while such advanced tax will be adjusted against
potential future capital losses, treatment of CGT under a separate block may
not allow such adjustment against income earned under other revenue heads.
Currently, equity transactions in Pakistan are levied with 16% FED on
brokerage commission. Additional Withholding Tax (WHT) of 0.01% is applied
for sale of securities, however it is considered as minimum tax liable for
aforesaid transactions. Under the CGT regime, we understand that WHT will
also be adjustable against CGT filed annually.
As mentioned earlier, we await official FBR notification on the modalities of CGT
implementation and will update our investors as soon as the same is finalized.
Focus on increasing capital market depth; Incentives extended for
corporate listing on the bourses
Tax credit of 5% was announced for any tax paying company that opts for
enlistment of any registered stock exchange of Pakistan for the tax year of
listing. It should be noted that KSE witnessed merely 3 listings in the year 2009

7
June 7, 2010
against an average of over 7 for the period 2001-2008 (and 20 from 1992 to
2008).
2010 has been encouraging though; KSE has already witnessed numerous
listings from diverse set of industries. We believe the aforementioned budgetary
announcement should pave way for further listings and enhance market depth
in the domestic bourses.

STRATEGY
Budget Impact
Neutral
Hamad Aslam
Head of Research
8
MARKET STRATEGY: GRIST TO THE MILL
June 7, 2010
Entailing no major surprises, the federal budget FY11 remained broadly neutral
for the capital markets. Consensus had been achieved on end of exemption on
CGT w.e.f from July, 2010 between the three largest stakeholders i.e. stock
exchange, FBR and stock brokers. While a paper on exact modalities on the
said tax is awaited from the authorities, the tax brackets are largely in-line with
the ones announced in Feb, 2010.
CGT; Viewing it as market stabilization vehicle
With around 50% of KSE traded volumes dominated by individual investors,
their psyche and response to tax imposition remains a crucial determinant of
overall market reaction. Individuals are largely hesitant in filing annual tax
returns and thus aforesaid tax regime has given birth to concerns on future
trading activity on the local bourses.
While we do not downplay this concern, we would like to highlight that equity
trading activity for all investors (individuals and companies) is already
documented via earlier introduced Unique Identification Number (UIN).
Moreover, with the CGT having been announced as early as Feb10, the budget
announcement is not likely to result in a knee-jerk reaction in the index.
On the flip side, we argue that CGT inherently encourages long term investment
by reducing the incentive to book short term gains and thus acts as a
stabilization vehicle for the market.
Sector specific measures; Banks to stand out
Unlike previous years, the budget announcement largely maintained a statusquo
on most of the government’s sector-specific policies. Commercial Banks
however stand to gain from better cash flow arising from increased tax
allowance on provisioning expense.
Though largely neutral for Textiles, the budget announcement may have a short
term positive impact on the sector on the back of delayed implementation of
GST reforms (VAT). The reforms envisage elimination of umbrella cover of
zero-rating regime for export oriented sectors (specifically textiles) and were
thus being anticipated to levy additional taxes on the sector.
For the rest of the sectors, budgetary announcements remain largely neutral.
Manufacturing sector however may bear marginal increase in cost of production
through increased FED on gas tariff and increased minimum wage rate. Higher
GST will result in an increase in retail prices for cements and FMCG products;
but are likely to be passed on to end consumer without denting the margins.
Increase in turnover tax to 1.0% (from 0.5% earlier) will however be negative for
companies posting losses on the back of excess depreciation and amortization
expenses.

9
Sector wise Budget Impact and BMA Stance
Source: BMA Research
June 7, 2010
Sector Budget Impact BMA Recommendation Top Picks
Commercial Banks Positive MARKETWEIGHT MCB
Oil & Gas Exploration and Production (E&P) Neutral MARKETWEIGHT PPL, POL
Oil Marketing Companies (OMCs) Neutral OVERWEIGHT PSO
Independend Power Producers (IPPs) Neutral OVERWEIGHT HUBC
Fertilizer Neutral MARKETWEIGHT ENGRO
Cement Neutral OVERWEIGHT ACPL
Textile Neutral MARKETWEIGHT
Chemicals Neutral MARKETWEIGHT ICI
Automobile Neutral MARKETWEIGHT
Telecom and Technology Neutral MARKETWEIGHT
Refineries Neutral UNDERWEIGHT
What next: Our market view remains positive; inter-play of global
markets may play a role though
KSE100 posted a decline of 8.7% in the month leading to the budget
announcement; however this may not be too surprising for many. Studying past
index performances since 1998, reveals that uncertainties and concerns have
led to an average fall of 4.4% in the month preceding the announcement.
Similarly, announcement of policy measures and emergence of consensus on
them has later led to consolidation and gradual market recovery.
Historical Index movement pre and post budget announcement
Budget
Dates
07- Days
Prior
30-Days
Prior
90-Days
Prior
2010 5-Jun 1.2% -8.7% 0.1%
07- Days
Forward
30-Days
Forward
90-Days
Forward
2009 13-Jun 2.3% -1.2% 22.7% -0.23% 8.9% 28.4%
2008 11-Jun -0.6% -8.9% -13.7% -5.8% -10.1% -28.7%
2007 9-Jun 2.6% 7.5% 16.3% 1.2% 5.6% -6.5%
2006 6-Jun 4.1% -9.9% -0.6% -11.6% -5.8% -3.9%
2005 6-Jun 5.9% -1.1% -22.9% 4.8% 6.0% 9.6%
2004 12-Jun 0.4% 0.9% 9.6% -2.5% 1.9% -3.9%
2003 7-Jun 1.4% 6.1% 28.3% 3.4% 10.4% 42.0%
2002 15-Jun 4.6% -2.8% -6.3% 0.6% -1.9% 10.6%
2001 18-Jun 0.7% 2.1% -0.1% -2.5% -7.2% -18.0%
2000 17-Jun 6.6% -9.9% -25.5% 1.9% 5.0% 4.2%
1999 12-Jun -1.1% -5.8% 6.8% -6.4% 1.4% 2.8%
1998 12-Jun -2.3% -25.9% -34.3% -4.4% -26.9% -1.7%
1997 13-Jun 4.7% 2.9% 0.4% 0.6% 10.7% 15.0%
1996 13-Jun -2.5% -1.6% 4.1% -0.4% -2.5% -22.0%
1995 14-Jun 1.8% 10.3% -6.3% 1.4% 4.8% 9.5%
1994 15-Jun -0.7% 2.1% -13.0% 2.3% 1.6% -2.3%
1993 16-Jun 1.4% 6.8% 4.7% 4.0% 6.7% 8.9%

High Conviction Stock Ideas
Company Ticker
10
June 7, 2010
1992 17-Jun -3.0% 14.4% 6.1% -3.1% 0.6% -11.0%
1991 18-Jun 2.6% 2.5% 20.9% -4.3% 5.6% 35.2%
1990 19-Jun -0.6% -1.0% NA -2.0% 5.0% 4.1%
Average (since 1990) 1.4% -1.0% -0.1% -1.1% 1.0% 3.6%
Average (since 1998) 2.0% -4.4% -1.5% -1.8% -1.1% 2.9%
Source: BMA Research
Current
Price
Having said that, inter-play of global markets may play a more important role
though. Post short lived respite in international markets, financial crisis
emanating from European Union debt crisis has again played havoc in capital
markets.
Keeping these in view, we remain conservative in our investment themes: 1)
pricing power, 2) devaluation positive revenue stream, 3) downside protection
from dividend yields and 4) value with growth. Moreover, we reiterate the need
for concentrated portfolios with investments limited in stocks with greater
degree of certainty. In short, maintaining our 2010 KSE100 index target at
11,500 we (re)flag our high conviction investment ideas as PSO, PPL, HUBC,
ACPL and LUCK while we add MCB in the list on the back of its recent share
price decline and upwards revision in valuations.
Fair
Value
Pot
Upside
EPS (PKR) PER(x) EPS Growth Dividend Yield
PKR/share PKR/share FY09A/E FY10E FY09A/E FY10E FY09A/E FY10E FY09A/E FY10E
Pakistan Petroleum PPL 186 236 27% 27.8 23.4 6.7 8.0 41% -16% 6% 5%
Pakistan State Oil PSO 271 409 51% (39.1) 52.3 NM 6.1 NM NM 2% 2%
MCB Bank MCB 192 245 28% 20.4 22.5 9.4 8.5 1% 11% 6% 7%
Attock Cement ACPL 66 98 48% 17.2 14.1 3.8 4.7 243% -18% 6% 4%
Lucky Cement LUCK 64 87 37% 14.2 12.9 4.5 4.9 72% -9% 6% 3%
Hub Power Company HUBC 33 43 29% 3.3 4.6 10.0 7.2 45% 40% 10% 15%
BMA Universe Average
Source: BMA Research
8.9 7.8 2% 14% 7% 7%

ECONOMY
Budget Impact
Positive
Abdul Shakur
Economist
11
BUDGET FY11: A CAUTIONED APPROACH!
June 7, 2010
Considering the political and administrative issues for the implementation of
Value Added Tax (VAT), government postponed VAT implementation till Oct10.
The important factor of the budget announcement is to incentivise the lower
income class by salary enhancement and trimming direct tax for narrow tax
slabs. Although these measures encourage improvement in disposable income
of the masses, revenue generation will also remain a prime objective of the
government to meet the fiscal requirements.
Being a populist, imposition of additional taxes would remain a challenging act
for the incumbent government. However, persistently low tax revenues require
strong footholds to produce resources for welfare and development. To manage
fiscal space for development and sustainable growth, all components of tax
machinery are projected to be channelized with the target of 18% YoY growth in
tax revenue for FY11. Most important revenue measures includes 1) the
increase of 100bps rate for sales tax to 17%, 2) upward revision of 5% income
tax rate for small companies and 3) increased tax slab for high income class
under salaried head.
Budget FY11: Fiscal deficit of PKR685bn (4% to GDP)
The expected budget outlay of PKR3trn against PKR2.4trn of revenues would
translate into a consolidated fiscal deficit of PKR685bn – 4% of GDP.
Budget FY11: Snapshot
(PKR bn) FY08 FY09 FY10B.E FY11FB.E
Total Revenue 1,499 1,851 2,027 2,411
Tax revenues 1,086 1,331 1,513 1,779
Direct 388 440 557 658
Indirect 698 890 956 1,121
Non Tax revenue 414 520 514 632
FBR revenues 1,010 1,160 1,379 1,669
Total expenditures 2,281 2,497 2,749 3,096
Current 1,858 2,042 2,231 2,433
Interest 490 638 647 699
Defence 285 330 343 442
Development 423 456 646 663
Fiscal Deficit
Financing
(782) (646) (723) -685
External 151 150 312 186
Domestic
Key ratios
626 531 410 499
Tax to GDP 10.4% 10.2% 10.2% 10.4%
FBR tax to GDP 9.6% 8.9% 9.3% 9.7%
Development exp. To GDP 4.0% 3.5% 4.4% 3.9%
Current exp. To GDP 17.7% 15.6% 15.1% 14.2%
Debt servicing to GDP 4.7% 4.9% 4.4% 4.1%
Defence exp. To GDP 2.7% 2.5% 2.3% 2.6%
Deficit to GDP -7.5% -4.9% -4.9% -4.0%
External financing to deficit 19.5% 23.2% 27.0% 27.0%
Domestic finan. To deficit 80.5% 78.0% 56.8% 72.9%
Source: MoF, BMA Research

8%
7%
6%
5%
4%
3%
2%
1%
0%
12
Taxing consumption: Indirect taxes the key
June 7, 2010
Total revenues for the consolidated fiscal operations are expected to grow by
19% to PKR2.4trn. This growth is primarily led by enhanced tax revenue target
for FBR up to PKR1.67trn (21% YoY growth). As the government has increased
the 100bps rate for Sales tax along with number of relaxations for direct taxes,
the revenue generation is more tilted towards indirect taxes. Considering the
number of relief measures under direct taxes, tax revenue target for FY11
seems challenging. Thus imposition of VAT from Oct10 would remain a key
determinant to achieve the revenue targets in this regard.
Expense Rationalization: Seems optimistic
Government has announced to freeze the non development expenditures (excl.
salaries); although appealing considering the fiscal consolidation, the
materialization of these steps is of prime importance. The overall current
expenditure is projected to increase by 9% over last year budget to PKR3trn.
The unavoidable part of the budget including defence (+29% YoY to
PKR442bn) and debt servicing (+8% YoY to PKR699bn) are to consume as
high as 47% of the current expenditures. On the other hand, development
expenditure which remained the key element in terms of investment and
capacity building is projected to increase by 3% YoY. As it remained the key
accused of fiscal constraints, higher allocation of funds for PSDP to provinces
would remain a key element in materializing the projected outlays. During FY10,
actual disbursement of PSDP remained under PKR300bn compared to original
allocation of PKR646bn.
Higher share of provinces in revenues (57.9% YoY) and allocation of
development funds are the prominent features of budget FY11.
Tax to GDP Provinces to enjoy more autonomy
Direct Tax to GDP In direct Tax to GDP FBR tax to GDP
FY07A FY08A FY09A FY10BE FY11BE
Source: MoF, BMA Research Source: MoF, BMA Research
12%
10%
8%
6%
4%
2%
0%
60%
50%
40%
30%
20%
10%
Provincial share in total revenue Provincial share in PSDP
0%
FY08A FY09A FY10BE FY11BE
Subsidy elimination: The other half of the story
Fiscal constraints have left no option but to confine welfare through price pass
on. The government has thus eliminated a number of subsidies through budget
FY11; during FY10, govt. had allocated subsidies of PKR228.9bn (1.5% of
GDP) against initial estimates of PKR119bn (0.9% of GDP). Due to the set plan
of eliminating subsidies on electricity tariffs, the government projects total
subsidies of PKR127bn for FY11 which accounts for 0.7% of GDP and lower by
45% YoY compared to revised budget FY10. Although the electricity related
subsidies are projected to decline by PKR92bn in FY10, it is worth mentioning
that no concrete plan to address the lingering circular debt issue has been

13
June 7, 2010
announced in the budget. The circular debt not only caused partial outlays from
PSDP but also caused 2% decline in GDP growth for FY10.
Subsidies: Comparative Analysis
Classifacation Budget 2009-10 Revised 2009-10 Budget 2010-11 YoY
PKR mn
WAPDA 62,903 147,005 84,000 -43%
KESC 3,800 32,521 3,317 -90%
TCP 30,000 30,000 17,130 -43%
USC 4,200 4,200 4,200 0%
Others 19,012 15,266 18,036 18%
Source: MoF, BMA Research
Current Subsidies
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
FY01
FY02
FY03
Source: FBS, MoF, BMA Research
Deficit financing: Defies monetary easing
119,915 228,992 126,683 -45%
FY04
FY05
FY06
Contrary to last year, government has set rational targets for external financing
at PKR186bn (-41% YoY). During the current fiscal year, financial soundness
indicators i.e. CDS spread and Euro bond yield for Pakistan declined
significantly from their peak levels of 50% and 25% respectively to under 8%.
This development should help government to achieve the target of ~USD500mn
Euro bond issue during FY11. Moreover, it would also help reduce dependence
on uncertain resources i.e. FoDP and other multilateral funds.
On the other hand, rest of the financing requirement for PKR499bn is expected
to be routed through domestic resources wherein banking and non-banking
channels are to contribute PKR167bn and PKR333bn respectively.
Considering the prevailing liquidity issues of the banking system, higher targets
for deficit financing should keep private sector credit in check. Moreover,
uncertainty over projected grants (35% of external financing) would also remain
a concern. In case of non materialization of these inflows, borrowing pressure
on domestic resources is imminent. Persistent borrowing from banking channel
kept monetary aggregates under check and abandoned the private sector
credit. Continuation of deficit financing through banks in FY11 suggests no
major change on monetary side.
FY07
FY08
FY09
FY10
FY10P
FY11F

14
Fiscal consolidation; Promote savings
June 7, 2010
Considering lower savings and investment ratios for an emerging country like
Pakistan, it is of prime importance that savings are promoted – Pakistan’s
savings currently stand at 13.8% of GDP. In order to attain sustainable growth,
increasing domestic savings is the right step to conserve resources for
investments. As per budget FY11, government targets PKR213bn and
PKR61bn through saving instruments and investment bonds. Alongside the
higher targets, declaration of WHT as final tax on profit on Govt. securities i.e.
PIBs and T-bills seems the right step in this direction. However, the same also
indicates restricted downward adjustment for interest rates.
Saving mobilization on the cards Manufacturing to uplift economic growth
24
22
20
18
16
14
12
10
Current Account Balance Total Investment National Savings
2001 2002 2003 2004 2005 2006 2007 2008
F
2009
R
Source: FBS, MoF, BMA Research Source: FBS, MoF, BMA Research
2010
P
5
3
1
-1
-3
-5
-7
-9
-11
20
15
10
5
0
-5
GDP Agriculture Manufacturing Services Sector
2001 2002 2003 2004 2005 2006 2007 2008
F
2009
R
2010
P
Manufacturing: The key growth element
As per the revised economic indicators, trend in manufacturing sector remained
the key element for uplifting the overall growth to 4.1% compared to the
anticipated 3.3%. LSM sector has performed well by posting 5.2% YoY growth
compared to steep fall of 3.7% in FY09. To attain consistent growth in real
sector, the recent announcements regarding 1) tax credit for BMR, 2) 5% tax
credit for enlistment of corporate sector, 3) incentive to foreign lenders for tax
free repatriation of profit on loan and 4) exemptions for war affected areas are
expected to bode well for the industrial sector performance. However, 1)
electricity shortage 2) non resolution of circular debt and 3) higher interest rates
would remain the key risks to attain 5.6% growth target for manufacturing
sector.
Service sector is projected to grow at 4.7% in FY11, wherein tax incentives to
financial sector are to play a vital role. However, the agriculture sector seems to
be neglected in the budget with no significant measures announced on PSDP,
agri-credit and water conservation.
GDP growth for FY11 is targeted at 4.5% along with inflation target of 9.5%.
Considering the prevalent inflationary pressure (CPI at 13.26% for Apr10) along
with incremental 100bps increase in Sales tax and expected 6% electricity tariff
adjustment w.e.f Apr10, the said targets seem challenging to us.

15
KEY MEASURES
Income tax
June 7, 2010
� The long awaited capital gain tax has finally been imposed on securities
wherein long term investment prospects have been incentivised by lower
tax rates.
� Government has increased income tax rate for small companies form
existing 20% to 25%. We expect this to be a measure taken to gradually
bridge the income tax rate gap between small companies and corporates.
In addition, 5% tax credit for enlistment of companies has been announced
for the year of enlistment.
� Non taxable income has been increased from PKR100,000 and
PKR200,000 to PKR300,000 to incentivise the lower income non salaried
and salaried class. However, tweaking the upper slabs for the salaried class
will help offset the revenue impact for the same.
� To discourage loss adjustment and tax frauds, the government has
increased the minimum tax rate for loss making entities from 0.5% to 1.0%.
� Incentives for investment through 10% tax credit for BMR in the year of
incurrence
� For the rehabilitation of war affected areas the government has taken
multiple steps to promote commercial and industrial activities in the
northern areas.
� 10% Withholding tax on debt instruments (including govt. securities) is
proposed to be treated as final tax
Sales Tax and Federal Excise Duty
� Sales Tax (GST) rate has been increased form 16% to 17%
� Adjustment of FED paid on beverage concentrate allowed
� Increased FED on Natural Gas from PKR5.09/mmbtu to PKR10/mmbtu
� FED of PKR1.0 per filter rod of cigarettes
� 10% FED on electricity intensive home appliances
Custom Duty
� Reduced custom duty on crude palm oil from PKR9,000/MT to
PKR8,000MT to lower the cost of vegetable ghee and oil
� Reduction of duty to 5% on pharmaceutical raw materials
� Exemption of custom duty on import of raw material for energy saving
lamps to support the local manufacturers
� Exemption of CD and S.tax on rice processing machinery

BANKS
MARKETWEIGHT
Budget Impact
Positive
Abdul Shakur
Banking Analyst
16
BANKS: KEY BENEFICIARY!
June 7, 2010
A number of favorable decisions were announced for the banking sector in
Budget FY11 which are expected to have a positive impact on the sector. The
following are the key elements of the Budget FY11:
� In order to address the admissibility of provisions charged by banks as tax
deductible expenses, provisions against advances for consumer and SME
have been allowed up to 5% of total advances while for other loans it has
been maintained at 1% of total advances. In addition, provision under
doubtful and loss categories charged up to 2008 -which were not claimed
as tax admissible – shall be allowed for the period in which advances were
written off. However, in this case admissibility in case of consumer loans
shall be restricted to 3% of the annual income. Considering the current
practice of the banks to create deferred assets in this regard, this
admissibility of provisions will not impact the bottom-line of the banks.
However, it would help reduce the deferred tax issues and improve cash
flows.
� 10% withholding tax deductible on government securities (including T-Bills
and PIBs) is proposed to be treated as final discharge of tax liability, for
corporations other than commercial banks. This measure would help GoP
raise investments through the corporate sector and thus reducing the
crowding-out effect for the sector. Nevertheless, we believe bank lending is
to remain muted in CY10 amid credit risk and liquidity constraints
� The ambit of advance tax collection over cash withdrawal – subject to tax
@0.3% - has been enhanced to include various transactions including TDR,
CDR, TT, online transfer, pay order and demand draft. However, the impact
of the said development is neutral for banks as the same is passed on to
the customers
Outlook CY10: Positive
Taking into account the above mentioned amendments in the Finance Bill, the
banking sector is expected to remain the major beneficiary considering
improving private credit which yields higher than govt. securities. On the other
hand, non materialization of the anticipated change regarding higher corporate
tax rate for banks having 5% or higher spreads is also expected to tune-in
further positive sentiments.
Upward revision for NSS targets by 14% to PKR213bn would however exert
further pressure over banking deposit rates. This factor would further intensify
the impact due the prevailing liquidity issues, therefore we expect banking
spreads to adjust downward. Our liking remains limited to banks having
relatively better spreads and lower liquidity risk with our top pick being MCB.
Comparative Analysis of Spreads
11%
8%
5%
2%
6%
7%
8%
4%
NBP UBL MCB BAFL FABL HBL ABL
Source: Company Reports, BMA Research
4%
7%
5%

E&P
MARKETWEIGHT
Budget Impact
Neutral
Hamad Aslam
Head of Research
17
E&P: VALUATIONS WITH CONVICTION
June 7, 2010
With the E&P sector being governed under Petroleum Policies, the federal
budget normally has limited implications on the sector. However through its
announcement on allowance of decommissioning cost as a tax deductible
expense, the budget has resolved a long pending tax issue between FBR and
E&P companies.
Decommissioning cost: Deduction allowed over a period of ten
years but one-off expense to be incurred by E&P companies
It was announced that ‘Decommission Cost’ incurred by E&P companies shall
be allowed as a tax deductible expense to be depleted over a period of ten
years or the life of the development and production lease, whichever is less.
Based on our preliminary understanding, the E&P companies currently
expense out the aforementioned cost at the time of actual decommissioning of
respective wells. However FBR had up till now not allowed the expense to be
tax deductible, as a result of which a total amount of PKR6bn is estimated to be
pending against the sector. Based on latest financial reports, Pakistan
Petroleum (PPL) and Pakistan Oilfield (POL) have respective amounts of
PKR578mn and PKR447mn pending against this head.
For OGDC, recall that the company booked an additional tax amount of
PKR11.6bn in FY08 (and ~PKR3bn in FY09), thereby clearing off its pending
dues against the tax liability.
One-off expense to be booked by E&P companies
Source: BMA Research
However, the above amount will now be reversed over the remaining life (or the
remaining of ten years, whichever is less). Moreover, now that the expense has
been allowed to be depleted over ten years, the company will earn the inherent
benefit of time value by front loading the expense. As a result, we expect a
marginal improvement in the bottomline of the E&P companies from FY11
onwards.
Circular debt largely ignored in the budget: Attrition in cash
reserves to continue
To our disappointment, no concrete measures were announced with regards to
resolving the energy chain circular debt; which for E&P companies (particularly
OGDC and PPL) may mean continued attrition in cash reserves, low dividend
payouts and inability to meet desired exploration efforts. (Refer to the section on
Power Sector for details on the current situation on circular debt).
Market weight maintained on the sector
Amount (PKR'mn) EPS (PKR)
POL 578 2.4
PPL 447 0.5
OGDC - -
We maintain MARKETWEIGHT stance on the E&P sector as it continues to
offer cash rich balance sheets, low leverage, good quality of earnings, stable
cash flows and high conviction on earnings. Moreover, with the revenue stream
denominated in USD, the sector offers a hedge against devaluation in Pak
Rupee.

18
June 7, 2010
Our NAV based fair value for the index heavy weight OGDC stands at
PKR139/share, translating into a Neutral stance for the scrip. However our fair
value of PKR236/share for our favourite E&P pick, PPL offers an upside
potential of 27% from last closing price. Similarly, POL offers 28% upside to our
fair value of PKR282/share, along with an enticingly cheap FY11 PER of 6.3x.

OMC
OVERWEIGHT
Budget Impact
Neutral
Muhammad Ali Taufiq
OMC Analyst
19
OMC: NO MENTION; HENCE SAFE
June 7, 2010
While no direct budgetary measures were expected for the Oil Marketing
Companies (OMCs), the industry was largely expecting concretre
announcements from the Finance Ministry to resolve the circular debt menace
in the system. Promises recently made by GoP to inject PKR116bn have been
delayed and the uproar by the entire value chain managed to bring merely
PKR20bn into PEPCO during the month of May10.
Increase in GST to be valuation neutral
As declared in the budget for FY11, GST has been raised from 16% to 17%.
Assuming parity with current PKR/USD rate and intl Ex-refinery prices, the
aforementioned change in GST slab is likely to raise POL product prices by
PKR0.38-0.70/litre (~0.90%) wef July 1, 2010.
Impact of increased GST on retail prices of POL products, assuming parity
with current input prices
POL Products
Source: OGRA, BMA Research
However the measure is expected to be valuation neutral for the sector as GST
on POL products is applied on Prescribed + IFEM price which includes both,
distributor and dealer margin. Hence the aforesaid change in GST slab has
direct incidence on consumers and does not affect the respective margins.
FED raised on gas tariff; No impact on CNG prices
Budgetary measures announced an increase in rate of Federal Excise Duty
(FED) on Natural Gas from PKR5.09/mmbtu to PKR10.0/mmbtu. However with
CNG exempt from FED levy, the aforesaid announcement is not expected to
have any impact on its prices.
CNG dealers currently pay aggregate taxes of ~PKR33/kg (62% of retail price)
in the form of 25% GST, 4% Income tax and 10% WHT. We maintain our view
that decreasing price differential between 1) CNG and MoGas prices and 2) gas
load-shedding at CNG stations will continue to encourage end consumer to
switch to MoGas.
Outlook FY11E
Retail price @ 16%
GST (amount in PKR)
Retail price @ 17%
GST (amount in KR)
Premium Motor Gasoline 69.04 69.64
HOBC 82.04 82.74
Kerosene Oil 65.49 66.06
Light Diesel Oil 62.61 63.14
JP-1 (domestic) 55.36 55.86
JP-4 52.63 53.08
JP-8 (excluding PARCO) 55.08 55.55
We maintain OVERWEIGHT stance on the sector, backed by cheap valuations
and growing offtakes for furnace oil and motor gasoline. Moreover given the
recent unprecedented share price decline of Pakistan State Oil (PSO), we flag
the stock as one of our high conviction ideas. Our DCF based fair value for PSO
stands at PKR409/share, reflecting an upside potential off 50.9% from last
closing price.
%▲
0.87
0.85
0.87
0.85
0.90
0.86
0.85

POWER
OVERWEIGHT
Budget Impact
Neutral
Nurali Barkatali
Power Analyst
The Backlog of Circular Debt
Govt Entities
& Others
PIA
Ministry of
Finance
Provinces
PKR35bn
End &
Commercial
Consumer
20
PKR3bn
KESC
PEPCO
Power holding co.
PKR90bn
Power
Distributors
PKR43bn
PDC
PKR50bn
WAPDA
PKR9.2bn
PKR13bn
PKR38bn
PKR1.3bn
POWER: THE BACK OF BEYOND
June 7, 2010
Budget FY11 is a non-event for the listed power sector entities as surprisingly
the government did not touch upon the looming Inter-Corporate Debt (ICD).
However, impressions gauged from the budget speech indicate that electricity
tariffs would continue to rise in FY11, eliminating most of the subsidies under
the fiscal reforms agenda supervised by international financial institutions (IMF,
WB and ADB).
Inter-Corporate Debt (ICD): In a Cleft Stick
No tangible announcement was made in the budget for resolution of ICD which
is estimated to have risen to over PKR100bn on net basis. While profitability for
Independent Power Producers (IPPs) is dictated by their respective Power
Purchase Agreements (PPA), this issue has nonetheless strained cash flows
and has resulted in elevated finance cost. Moreover, there are far reaching
effects as well; KAPCO, the largest IPP, initially cut down its 450MW capacity
expansion plan to 280MW and then later decided to abandon the project
altogether.
To put things in perspective, federal budget FY09 laid out numerous promises
to resolve the related issues; the major ones included formation of a Power
Holding Company (PHC) which was suppose to assume all the loan liabilities
and pay the mark-up on these loans from budgetary resources. But
unfortunately only PKR85bn worth of TFC was issued during FY10.
PKR2bn
PKR41.1bn PKR58bn
IPPs
Other
KAPCO
HUBCO
Total receivables
PKR127.8bn
PKR10bn
PKR25.1bn
PKR18bn
PKR48.1bn
PKR5bn
OMCs
&
GMCs
PSO
SNGPL
SSGC
Total payables
PKR120bn
PKR31.5bn
PKR12.4bn
PKR18.2bn
PKR9.3bn
PKR4.8bn
PKR43.4bn
Refineries E&P
PARCO
PRL
ATRL
NRL
BOSICOR
Imports
PKR48bn
Source: Business Recorder, Annual Reports, BMA Research Total net circular debt: +PKR100bn
PKR2bn
OGDC

21
June 7, 2010
Moreover, seemingly the GoP abandoned the PHC formula and withheld further
issuance of TFCs under the said regime. Alternatively, the government planed
to resolve the issue by way of savings from un-utilized resources, cut in Public
Sector Development Program (PSDP) for FY10 and Benazir Income Support
Program (BISP). GoP released first instalment of PKR20bn in the first week of
May 2010 with an assurance to release PKR50bn in the next few days; which
again has failed to materialize as yet.
Additionally, budget FY09 also announced that GoP would be assuming
responsibility for all arrears of PEPCO against FATA (which at that point in time
stood at PKR80bn) and payment of their electricity bills for the year. While the
recent budgetary measures include PKR10bn subsidy for FATA, no allocation
has yet been made to clear the backlog of the region’s dues.
Budgetary Measures: Curry favour
In an effort to curtail electricity demand, the government announced imposition
of 10% FED on high energy consuming appliances (air conditioners and deepfreezers)
and distribution of ~30mn free energy saver bulbs. Additionally with
the help of ADB, PKR20bn has been allocated for an energy development fund
whose modalities and uses were not outlined.
While no comments were made on power tariff hike, we understand that the
GoP will soon be announcing a 6% tariff hike with retrospective effect from
Apr10. Furthermore, 1% increase in GST to 17% will also increase the
electricity tariffs.
On the flip side, in an effort to provide relaxation to the consumers, government
has proposed a 5% decrease (from currently 10%) in Advance Income Tax
charged on monthly electricity bills.
Power Subsidy: Bite The Bullet
For FY11, GoP will continue to subsidize WAPDA and KESC to the tune of
PKR84bn and PKR3bn respectively. It is pertinent to note that in the previous
budget, subsidy allocation for KESC under the head of tariff differential was
fixed at PKR4bn, however the GoP is expected to end up paying massively
higher at PKR32bn. For WAPDA, under different heads the subsidy increased
to PKR147bn from the budgeted amount of PKR63bn in FY10. Thus
cumulatively government will provide a relief of PKR87bn during FY11 against
PKR180bn in FY10.
Outlook FY11E
Proposed budgetary measures are not likely to have any immediate positive
surprises as uses of PKR20bn energy development fund are yet to be
disclosed. While elimination of power subsidies will have inflationary
implications; we consider it as a prudent measure given the lack of fiscal space
available with the government.
The budget in essence has no direct implications for the listed IPPs while no
announcements for the resolution of ICD remain a grave concern. The
government eyes Industrial sector growth of 4.9% for FY11; which we believe
will only be achieved through capacity expansions in the power sector.
Moreover, resolution of ICD will not only bode well for the energy chain but will
also encourage large scale investments in the country.
Having discussed the sector at large, we reiterate our OVERWEIGHT stance
and maintain our ‘BUY’ call on HUBC which currently offers a USD based IRR
of 17% based on our dividend forecasts.

FERTILIZER
MARKETWEIGHT
Budget Impact
Neutral
Omar Rafiq
Fertilizer Analyst
22
FERTILIZER: STILL FAVORED!
June 7, 2010
Being the cornerstone of GDP growth, agriculture and consequently the fertilizer
sector continued to remain the favored child of the country. Contrary to earlier
expectations of potential removal of subsidies attached to fertilizer production,
no outlined plans towards the same was hightlighted. Thus fertilizer
manufacturers are expected to continue to benefit from a lower feed stock gas
price (although fuel stock gas price is expected to go up due to increased FED).
Status-Quo maintained: Viable opportunities still exist within the
sector
No mention whatsoever of a possible removal of indirect subsidy (in the form of
feed-stock gas price) is expected to bode well for the sector and investors as
qualms towards possible declines in farming incomes inducing lower appetite
for fertilizer consumption stand abated.
Unlike feed stock gas prices, however, fuel stock gas price is expected to
increase as FED on natural gas is to be increased from PKR5/mmbtu to
PKR10/mmbtu. Although this increase is marginal (1.3%), we expect that this
increase will merely be a pass through for fertilizer manufacturers as the current
demand-supply for urea continues to be stretched by farmer appetite.
With low to negligible chances of increasing support prices and lack of structural
issue resolution for the agriculture sector in sight, farmer payrolls are expected
to decline in the coming period owing to increased urea prices. Urea retail
prices have already touched PKR900-925/bag compared to 1QFY10 average of
PKR800-810/bag. In current circumstances, viable opportunities continue to
exist for the sector via improvement in structural issues such as balanced
fertilizer usage, improved seed varieties and better water management.
Although VAT was expected to increase fertilizer prices (as fertilizer
manufacture is currently exempt from GST), delay in implementation of the
same will temporarily bode well for the sector.
A little down hill
Agrarian economic growth in the next year is to be watched carefully particularly
on account of decrease in PSDP allocation to the sector. Food and agriculture
division is expected to receive PKR10.8bn during FY11 compared to
PKR12.0bn in FY10. Live-stock and dairy development division is expected to
receive PKR886mn during FY11 compared to PKR1,400mn last year.
Thus lower availability of the development budget for agrarian economy is a
potential risk factor for the fertilizer sector.
Outlook FY11E; ENGRO to benefit from recently announced
incentives
Our top pick amongst the fertilizer manufacturers remains ENGRO. The
company provides an internal hedge as it operates in multiple business lines
while being a market leader in most. The stock offers a potential upside of 28%
from current levels to our SoTP based fair value of PKR232/share.
Additionally, with budget FY11 allowing for tax free repatriation of interest
income to foreign lenders together with beneficial tax credit provisions for new
IPO’s, we expect ENGRO to benefit from lower cost of foreign debt and from
formal listing of its subsidiaries.

CEMENTS
OVERWEIGHT
Budget Impact
Neutral
Omar Rafiq
Cement Analyst
23
CEMENTS: STILL LURKING!
June 7, 2010
While development budget (PSDP) seemed to be continually showing an
upward trend (standing at an estimated value of PKR663bn; up 30% over last
year’s revised allocation), no major development plans were announced during
the budget of FY11E, particulalry regarding higher infrastructure development.
Further, increase in the minimum wage of workers from PKR6,000/month to
PKR7,000/month is expected to affect cash flows for the concerned.
Despite growing needs of power and water management, dam development
continued to remain as allusive as ever. Moreover, increase in GST from 16%
to 17% is expected to increase cement prices, which though should be passed
on to the end consumer.
Major Development: the resounding shush
No new major infrastructure development was announced in the coming year’s
budget proposal while stress was laid on the successful completion of current
projects. Although the country continues to be in profound demand for dams
(both as a means for electricity production as well as better water
management), no proposal/allocation to fund the same was clearly highlighted.
Although completion of Gomal Zam Dam, Satpara Dam and the rising of
Mangla Dam were highlighted, these projects are medium sized projects
already reaching completion. The earlier indications of commencement of
Daimer-Bhasha Dam construction by October looks like a ‘back to square one’
situation. Further, no major infrastructure development plan (other than dams)
was announced despite continuous demands for improved road networks
catering to both the urban as well as rural parts of the country.
FED steady, GST North
Despite anticipation of increase in FED rates applied to cement production, the
same has been kept unchanged at current levels i.e. PKR700/ton. Although this
bodes well for the demand scenario (especially given the capacity over-hang),
increased GST by 1% to 17% is expected to impact the sector mildly negatively.
We however believe that the producers will pass through any related tax
incidence to final consumers. Moreover, we expect that when in place, this may
be used as a pretext by manufacturers to improve margins by increasing prices.
Loss making entities
An important dimension (potential consequence) for the sector emanates from
the higher tax charge on loss making entities. Under the new rules, tax
collections from such organizations will be done at a rate of 1% of revenues
compared to 0.5% earlier. Given the current scenario, companies such as
Gharibwal, Javedan and Maple Leaf might have increased tax consequences
potentially having a negative impact on their cash flow position.
Outlook FY11E
Our top pick amongst the cement sector continues to be Attock Cement (ACPL)
particularly on account of premium pricing of its product, low leverage in a high
interest rate environment and substantially positive cash flow from operations
compared to its peers. At current levels the stock provides potential upside of
48% to our DCF based fair value of PKR98/share.

TEXTILE
MARKETEIGHT
Budget Impact
Neutral
Sana I. Bawani
Textile Analyst
24
TEXTILE: VAT FABRIC-ATED!
June 7, 2010
Imposition of VAT stood as the foremost concern for the textile sector prior to
Budget FY11 announcement; hence a 3 month deferrel in the same is likely to
come as a relief for the sector. This is because the textile sector contributes
over 50% to the total export receipts of the country and is exempt from sales
tax. With the implementation of upcoming GST reforms, zero-rating would only
be restricted to exports while the local sales and their relevant input
transactions would be carged with VAT.
Tax credit for BMR costs
Tax credit of 10% for BMR costs is likely to be positive for the textile sector as
these companies undertake such activities to enhance their productivity. Tax
credit would further encourage these companies to keep their plants in up-todate
condition and produce quality products thus become competitive in the
international market.
Increase in FED on natural gas
A number of textile units run on gas-fired plants for which they have their own
captive power generation facilities. Natural gas is supplied to these plants at
PKR288/mmbtu. Budget FY11 has brought about an increase in the rate of
Federal excise Duty (FED) on natural gas from PKR5.09/mmbtu to
PKR10/mmbtu. Power costs account for ~10% of total cost of sales of such
companies thus the aforementioned gas tariff hike, though negative, will have a
minimal impact on the overall profitability. Also, minimum wage rate has also
been enhanced from PKR6,000/month to PKR7,000/month which is likely to
further exacerbate downward pressure on margins.
Outlook FY11E
Textile exports increased by 7% YoY to USD8,462mn in 10MFY10 with raw cotton
and yarn exports leading the way. Exports also benefitted from PKR/USD
depreciation of about 3.2% during the period resulting in higher revenues for the
sector. However, a weak PKR also led to 13% YoY increase in the import bill of the
textile products. Going forward, we believe introduction of BT cotton and higher
export prices for cotton and yarn would continue to encourage trade.
Furthermore, incentives such as zero-rated exports, availability of low cost
financing including export refinance (EFS) and Long-term Financing Facilities
(LTFF) and export rebates would continue to act in the favour of local industry.
At the same time, if Pakistan is awarded the General System of Preferences
(GSP) Plus status from the EU, textile products from the country would be even
more competitive in the international market.
Nishat Mills Limited (NML) stands as our pick from the sector. The stock
currently offers 38% potential upside to our SoTP based fair value of
PKR63/share.

CHEMICALS
MARKETWEIGHT
Budget Impact
Neutral
Sana I. Bawani
Chemicals Analyst
25
CHEMICALS: MIXED REACTION
June 7, 2010
Contrary to market expectations, chemical sector remained largely unaffected
from the new budget for FY11. No new policies were announced for the sector
nor any incentives given as such. We believe the government aims to let the
industry function in the present condition till VAT is enforced in Oct10.
Duty reduction on raw material of pharmaceutical items
One change brought about in Budget FY11 has been a reduction in duty to 5%
on pharmaceutical raw materials and drugs. This is expected to lead to a
reduction in prices of medicines based on imported raw materials. In addition,
drug manufacturers including ICI would also benefit from lower production
costs. However, the product would reach consumers with 1% additional sales
tax, thereby, muting the impact of a reduction in duties on raw materials.
Unchanged duty structure on PTA and PSF imports
Duty on Purified Terephthalic Acid (PTA) remains unchanged at 7.5% since
FY09 while on Polyester Staple Fibre (PSF) it currently stands at 4.5%. With
expectations of a revision in both not being materialized and continuation of
zero-rating; we anticipate a positive response from the market. However,
imposition of VAT in Oct10 would likely abolish zero-rating umbrella cover on
textiles and thus bring the two products under the normal tariff structure from
then onwards.
Furthermore, raw materials for PTA imported by LOTPTA which includes
Paraxylene (PX) and Acetic Acid continue to be zero-rated.
Outlook FY11E
PTA market remains dominated by LOTPTA, the sole domestic producer of
PTA in the country, whereas, PSF is produced by 4 large companies including
Ibrahim Fibres (IBFL) and ICI. LOTPTA would continue to benefit from the tariff
protection while its margins would depend on international prices for PTA and
PX. PX prices have been stable at USD1,020/ton since the last 2 months while
PTA prices are expected to decline in the near future on the back of low prices
for PTA futures and falling crude prices.
We reiterate our BUY call on ICI, which offers 33% upside to our DCF-based
fair value of PKR177/share. Diversified businesses, affiliation with the largest
decorative paints manufacturer, Akzo Nobel, and a strong brand following are
some of the factors which endorse our choice for the company as a value-pick
at these levels. Not only this, but ICI has also continued to post gross margins
in the vicinity of 20% and offers a dividend yield of 7.5% for CY11E.

AUTO
MARKETWEIGHT
Budget Impact
Neutral
Sana I. Bawani
Auto Analyst
26
AUTO: GEARS UNCHANGED
June 7, 2010
While no new policies were announced for the local auto assemblers, import
rules for used cars also remain unchanged. This suggests that the government
neither aims to encourage more imports of cars nor does it intend to let go of its
revenue from the locally assemebled cars. We believe the government has
taken a step in the right direction as automobile is characterized as a luxury
product and relaxation in its imports would have further burdedened the
country’s BoP while a reduction in duties on CKD kits would not necessarily
have been passed on to the customers.
Duties on CKD kits remain unchanged
Contrary to industry expectations, Customs duty at 35% on CKD kits has been
maintained for FY11. It is pertinent to note that CKD kits are imported by all the
4 listed auto assemblers for the manufacture of vehicles in the country. The
imposition of this duty adds to their production costs however it is passed on to
the customers in the shape of higher prices. Increase in demand during the year
has resulted in production going up by 30% YoY to 110,612 units in 10MFY10
against 85,051 units produced in 10MFY09.
Duties on CBUs also remain unchanged
Age limit on import of old CBUs has also been kept unchanged at 3 years,
contrary to importers’ expectations of an increase in the same. An increase in
the age limit of imported used cars would have encouraged greater imports and
burdened the BoP position. At the same time, continuation of this restriction
signals to the continued strength of auto assemblers in the domestic market.
Furthermore, duties on imported CBUs also remain unchanged:
Import Tariffs on CBUs
Company Import Tariff
Upto 800cc 50%
800-1000cc 55%
1000-1500cc 60%
1500-1800cc 75%
Source: Business Recorder, BMA Research
Duty-free import of agricultural tractors
Promotion of agriculture remains to be government’s key objective. For this
reason, it has maintained duty exemption on import of agricultural tractors.
During 10MFY10, tractor sales improved by 40% YoY to 57,749 units as various
tractor schemes aided their offtakes.
Increase in sales tax to increase car prices
Increase in GST from 16% to 17% in the next fiscal year should lead to an
increase in car prices from Jul 01, 10. Therefore, we expect May10 and Jun10
offtake numbers to be on the higher side; during 10MFY10 auto sales have
increased by 37% YoY to 110,752 units with INDU leading the pack with 50%
YoY growth in sales to 40,062 units.

27
Outlook FY11E
June 7, 2010
Increased car prices, owing to higher GST, are expected to reduce the pace at
which automobile sales have grown in the current year. We expect sales to
clock in at 135,576 units in FY10E, up 38% from last year. However, sales
growth is expected to be subdued in the following years to 8% and 9.5% in
FY11E and FY12E.
Additionally, the imposition of Value-Added Tax (VAT) from Oct 01, 10 in place
of GST even at a reduced level (15%) is unlikely to bring about a downward
revision in prices. We currently have an ADD stance on INDU with a DCFbased
fair value of PKR288/share.
Automobile Sales Expectations: FY10E-FY13E
Company FY09A FY10E FY11E FY12E FY13E
PSMC 50,584 71,000 77,728 86,014 96,202
INDU 34,146 50,000 54,000 58,860 58,860
HCAR 11,144 14,000 14,700 15,582 16,673
DFML 2,287 576 588 611 642
Total 98,161 135,576 147,016 161,068 172,377
Source: PAMA, BMA Research

TELECOM
MARKETWEIGHT
Budget Impact
Neutral
Omar Rafiq
Telecom Analyst
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TELECOM: SILENT TALKS!
June 7, 2010
Following a rapid expansion during the last 4-5 years, telecom sector of
Pakistan has recently seen a stabilizing trend. Growth in the sector has matured
on account of pervasive teledensity being already established, together with low
ARPU (Average revenue per user) decreasing the attractiveness to lure new
investments.
Status-Quo
Rampant growth in the telecom sector and its growing importance in the
services industry have historically allowed the government to consider the
sector for strengthening its revenue base via increased tax collection from
telecom service providers. While teledensity has improved over the period, the
trend has exhibited a decline. Growth rates for teledensity which clocked in at
123% in FY07 tapered off to merely 6% during FY10.
Thus recently slowed growth and an already over-burdened sector (21% GST
applicable compared to 17% for general industries) have led the government to
target other major avenues for boosting its revenue base.
As a result of this, the current year’s budget had little to do with the telecom
sector in general. No additional taxation or concessions were announced for the
sector as it was possibly considered over stretched amidst a declining ARPU
environment.
Falling PSDP on IT development
Although there exists a major consensus that future growth of the sector lies in
value added reselling and IT based industry (rather than pure conventional
telephony), PSDP allocation for the sector is expected to be declining in the
coming fiscal year - as indicated by 35.8% reduction over FY10 to PKR718mn.
As a result, growth can be expected to be potentially slower for telecom on
account of lacklustre importance given to the sector.
Increased tax on loss making entities; Wateen might bear the brunt
It has been proposed that the government intends to increase tax rate for loss
making organizations at a rate of 1% of revenues (compared to 0.5% earlier).
As a result we may expect new entrants (e.g. Wateen) suffering from high
depreciation (non-cash charge) to be adversely hit.
Outlook FY11E
Our pick from the sector continues to be Pak Telecommunication Limited
(PTCL), owing to its natural monopolistic presence, low leverage, rich cash
reserves and ever increasing array of products on offer. At current levels, the
stock currently offers 46% upside to our SoTP based fair value of PKR29/share.

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Top Investment Ideas
June 7, 2010

BUY
Fair Value: PKR 242
Current Price: PKR 192
Stock Statistics
Ticker MCB
3-month High/ Low 216.3/ 174.9
Mkt Cap USD mn 1,730
12M ADT mn 1.5
Beta 1.22
MCB vs. KSE Relative Graph
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MCB profile: MCB is one of the
leading banks of Pakistan. Incorporated
in 1947, MCB was nationalized along
with all other private sector banks in
1974. During the last fifteen years, the
Bank has concentrated on growth
through improving service quality,
utilizing its extensive branch network &
developing a large and stable deposit
base
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MCB Bank: Always a safe bet!
Investment Summary
June 7, 2010
� Strong fundamentals: Despite tough conditions faced by the banking
sector during the year, MCB has been able to maintain the highest NIMs in
the sector at ~8%. This is thanks to an extensive branch network (3 rd
largest) and highest CASA over its peers. Going forward as well, the bank
can leverage this advantage with an aim to mobilize low cost deposits and
hence maintain its NIMs. In addition, CASA is high at 83% which suggests
lower risk to incremental pressure over deposits cost due to liquidity
constraints.
� Comfortable CAR & roomy ADR: MCB has extremely comfortable CAR at
19.1% (Dec09) and roomy ADR at ~73% (Dec09) which bodes well for
balance sheet growth going forward. Although we do not see double digit
growth in its loan book for CY10; better position for the same as credit risk
subsides and high exposure to govt. securities ensure better asset quality
and profitability compared to peers.
� Winner on asset quality: Amongst top tier banks MCB has one of the best
asset quality given relatively lower NPLs to gross loans at ~8.9% compared
to BMA universe sector average of ~10%. Moreover, MCB has also
witnessed considerable deceleration in its NPL accumulation on a quarterly
basis. The full impact of this will be seen in CY10 where we expect
provisions against NPLs to come off considerably resulting in significant
bottom-line growth.
� Maintained ROE: MCB also carries one of the highest ROEs (24%)
amongst the Pakistani banks. Therefore, comfort is maintained for investors
with respect to continued dividend payouts.
� Pension fund reversals: MCB continues to benefit from pension fund
reversals. The management forecasts a three year timeline for complete
reversals to take place which will continue to provide relief through lower
administrative expenses and relatively better cost to income ratio.
Financials
CY09A CY10E CY11E CY12E
EPS(PKR) 20.55 23.16 24.88 29.39
Price to book (x) 2.08 1.84 1.62 1.43
Dividend Yield (%) 5% 6% 6% 8%
EPS Growth (%) 13% 7% 18% 13%
Return on Equity (%) 24% 23% 22% 23%
Return on Assets (%) 3% 3% 3% 3%
Source: BMA Research

BUY
Fair Value: PKR 282
Current Price: PKR 221
Stock Statistics
Ticker POL
3-month High/ Low 249.9/216.3
Mkt Cap USD mn 618
12M ADT mn 1.9
Beta 1.13
KSE vs POL Relative Graph
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POL Profile: Pakistan Oilfields (POL)
is engaged in oil and gas exploration in
the country and has been investing
independently and in joint ventures with
various other exploration and production
companies. In addition, it is also
manufactures LPG, solvent oil and
sulphur. The company is part of The
Attock Oil Company Limited (OCAC) and
holds 25% ownership stake in National
Refinery Limited.
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Pakistan Oilfields: Growth at its best
Investment Summary
June 7, 2010
� Amidst materialization of production growth from TAL Block: POL’s
performance over FY07-09 has stayed lacklustre as it posted dismal
production data over the period, primarily on account of concerns in one of
its key fields, Pindori (POL ownership stake: 35%). As a result, oil
production for the company declined from 6.0kbpd in FY07 to 3.7kbpd in
FY09 while gas production declined from 47mmcfd to 38mmcfd during the
same time period.
� However with POL accounting for 21% stake in Tal Block, the ongoing
production additions are projected to turn around the company’s profile.
Central Processing Facility has already come online (during 2QFY10) at
Manzalai field, enhancing its oil and gas production to 200+mmcfd (up 4x)
and around 4,000bpd (up 7x), respectively. Moreover Mamikhel and
Maramzai being relatively recent discoveries are projected to come online
during 1HFY11 with cumulative oil and gas production addition of 85mmcfd
of gas and 3,000bpd of oil. As a result, we project POL to deliver an
impressive oil and gas production growth of 18% and 89% respectively in
FY10 while complete annualized impact of production additions will
translate into further double-digit growth in FY11-12.
� Benefits of Attock’s oil conglomerate: POL being the exploration arm of
the Attock group’s portfolio derives part of the strength of its business
model through an inherent shield against the system’s circular debt.
Supplying a substantial portion of its production to the group’s refineries
(Attock Refinery and National Refinery), the company has been able to
sustain itself better than its peers (PPL and OGDC) in the current liquidity
starved environment.
� Moreover, POL owns 20mn shares (25% stake) of National Refinery
Limited (NRL). Hence dividend income from the refinery arm will continue to
add to cash flows and earnings for the company.
� Double-digit EPS growth; Prospective Dividend Yield of 9% for FY11E:
Offering robust EPS growth of 16% and 28% for FY10E and FY11E
respectively, we project the company to post an EPS of PKR42/share for
FY11. Moreover, backed by its rich cash reserves current prices also reflect
prospective dividend yield of 9% for FY11E – the highest amongst its peers!
Financials
FY09A FY10E FY11E FY12E
EPS(PKR) 23.8 27.5 35.3 41.9
Price to Earnings (x) 9.3x 8.0x 6.3x 5.5x
Dividend Yield (%) 8.1% 8.1% 9.1% 10.0%
EPS Growth (%) -35% 16% 28% 19%
Return on Equity (%) 20% 21% 23% 25%
Return on Assets (%) 26% 17% 17% 20%
Source: BMA Research

BUY
Fair Value: PKR 236
Current Price: PKR 186
Stock Statistics
Ticker PPL
3-month High/ Low 205.6/181.6
Mkt Cap USD mn 2,194
12M ADT mn 1.1
Beta 1.12
KSE vs PPL Relative Graph
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PPL Profile: Pakistan Petroleum (PPL)
is amongst the older E&P companies of
Pakistan. Besides being the largest gas
producer of the country, it also produces
crude oil, Natural Gas Liquid (NGL) and
Liquifies Petroleum Gas (LPG).
Government of Pakistan (GoP) holds
78.4% of the company while the
remaining is divided between
International Finance Corporation and
private investors.
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Pakistan Petroleum: Where there’s will…
Investment Summary
June 7, 2010
� Unrivalled exposure to Gas – invaluable in a declining oil price
environment: Given that gas production accounts for 80%+ of PPL’s
revenues, coupled with the fact that around 85% of this production is
contributed by uncapped fields (namely Sui, Kandhkot, Sawan and Miano),
wellhead gas prices for these fields continue to be the single most important
determinant of PPL’s profitability. Hence with the announcement of 25-30%
increase in wellhead gas prices for these fields, the company stands to
benefit from 34% HoH growth in its EPS for 2HFY10
� More importantly, with wellhead gas prices benchmarked against trailing
average intl crude oil prices, we expect the revenue stream for the company
to stay stable in 1HFY11 even amidst declining global commodity markets
� Declining Sui production profile – but still lower than our forecasts:
Sui field (PPL ownership stake: 100%), the country’s largest gas producing
field, has been posting natural annual production decline of 3-5%. While the
market has shown concerns on recent 5% WoW decline in the field’s
production, it needs to be highlighted that it was in-line with FY09 average
statistics – thereby actually hinting towards annual depletion that is way
lower than our assumption of 5% pa
� Nonetheless, contributing to around 50% of PPL’s revenues, Sui is still a
major concern for the company’s ongoing production and revenue stream.
However, recent and upcoming oil and gas production additions from Tal
Block have largely allayed these concerns.
� We project PPL to post gas production growth of 1%, 4% and 4% for FY10,
FY11 and FY12, respectively. Further, upcoming additions from Mela and
Nashpa are projected to translate into oil production growth of 5% and 2%
for the same time period.
� Turning aggressive, finally! After staying relatively muted on the
exploration front for the last 3 years, the company has finally unravelled its
plans to explore untapped reserves in Pakistan. Plans to assess deeper
prospects at Sui are underway to offset depleting reserves and enhance
production efficiencies while an aggressive international exploration
program (with JV partners) in Iraq, Iran, Yemen and other countries can
provide further impetus to the growth story.
Financials
FY09A FY10E FY11E FY12E
EPS(PKR) 27.8 23.4 28.0 29.0
Price to Earnings (x) 6.7x 8.0x 6.6x 6.4x
Dividend Yield (%) 5.8% 5.4% 6.4% 7.0%
EPS Growth (%) 41% (16%) 20% 4%
Return on Equity (%) 44% 31% 31% 31%
Return on Assets (%) 32% 33% 26% 27%
Source: BMA Research

BUY
Fair Value: PKR 409
Current Price: PKR 271
Stock Statistics
Ticker PSO
3-month High/ Low 320.8/255.0
Mkt Cap USD mn 549
12M ADT mn 1.0
Beta 1.04
KSE vs PSO Relative Graph
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PSO Profile: Pakistan State Oil (PSO)
is the market leader in Pakistan’s energy
sector. The company has the largest
network of retail outlets to serve the
automotive sector and is the major fuel
supplier to aviation, railways, power
projects, armed forces and agriculture
sector. PSO also provides Jet Fuel to
Refueling Facilities at 9 airports in
Pakistan and ship fuel at 3 ports. The
company is currently engaged in storage,
distribution and marketing of various POL
products. The company’s current market
share of 83% in the black oil market and
58% share in the white oil market, alone
speak volumes about its success.
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Pakistan State Oil: Remains Attractive
Investment Summary
June 7, 2010
� Attractive valuations despite its leadership position: PSO is currently
trading at an enticing FY11E PER of 6.0x and offers a potential upside of
51% to our DCF based fair value of PKR409/share.
� It is the largest OMC in Pakistan with overall market share of 74% and
dominates in almost all product segments particularly in High Speed Diesel
(HSD) and Furnace Oil (FO) with market shares of 56% and 89%
respectively.
� Strong FO demand from the power sector: During 9MFY10, PSO
denominated a sizeable market share of 89% in FO sales with contribution
from the product accounting for 43% towards gross sales of the company.
PSO therefore continues to benefit the most from increasing FO demand
from the power sector. With the new IPPs and RPPs coming online, we
expect industry FO demand surge to continue with total demand to grow by
10% over FY11.
� We believe circular debt in the system should continue to hold back APL
and Shell from regaining their market share; however any resolution in the
issue would encourage these OMCs to re-enter the market. We have thus
assumed a conservative market share of 87% for PSO by FY12E.
� Mogas substituting CNG: During 9MFY10, Mogas sales clocked in at
1,414K MT, depicting a tremendous YoY growth of 24%. This growth stems
from 1) increased power outages and 2) CNG to MoGas substitution on the
back of reduced Mogas-CNG price differential and gas load shedding. We
expect this trend to continue with Mogas sales anticipated to clock in YoY
growth of 23% and 5% for FY10E and FY11E respectively.
� The trigger to look for - PSO stands to benefit the most from circular
debt resolution: Owing to the working capital issues arising from the
circular debt hazard, PSO reported colossal finance costs of PKR7.6bn
during 9MFY10. The resolution of the circular debt can improve liquidity and
payout of the company. More importantly, it has the potential to reduce
annual financial charges for the company by 85%. However at present, we
only foresee a gradual resolution of the crisis as electricity tariff hikes start
to ease the liquidity crunch in the system.
Financials
FY09A FY10E FY11E FY12E
EPS(PKR) (39.1) 52.3 45.3 55.2
Price to Earnings (x) 3.4x 5.2x 6.0x 4.9x
Dividend Yield (%) 7.3 1.2 1.0 1.3
EPS Growth (%) NM NM -13.4 21.8
Return on Equity (%) (32.0) 31.0 21.9 21.3
Return on Assets (%) (4.4) 4.5 3.8 4.5
Source: BMA Research

BUY
Fair Value: PKR 43
Current Price: PKR 33
Stock Statistics
Ticker HUBC
3-month High/ Low 35.3/ 31.1
Mkt Cap USD mn 452
12M ADT mn 0.7
Beta 0.80
KSE vs HUBC Relative Graph
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HUBC Profile: HUBC’s is an
Independent Power Producer. Its
principal business activity is to own,
operate and maintain furnace oil based
power generation. With current installed
capacity of 1,292MW, the company is the
second largest IPP of Pakistan.
HUBC is in the process of setting up an
additional 225MW thermal power plant at
Narowal along with a 75% controlling
stake in Laraib which is to set up an
84MW Hydel power project by FY13.
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HUB Power Company: For ever and a day
Investment Summary
June 7, 2010
� Expansion, from strength to strength: Domestic electricity demand
currently outstrips supply, as the gap is currently estimated at over
3,500MW. The situation raises grave concerns for economic growth but
highlights potential opportunities for select players. HUBC is all set to
capitalize on this opportunity with two additional power projects (i) 225MW
Narowal Power project and (ii) 84MW Laraib Power Project.
� While Narowal Power project got delayed by six months, it is expected to be
commissioned by the end of 1QFY11. However , unless there is a wavier
extended by the GoP/WAPDA, the company will be required to abide by the
contractual liability of paying Liquidated Damages (LD) at the rate of
USD17,800/day. A decent portion of LD is then reclaimable from EPC
Contractor by way of contract between the company and the contractor.
� The company is also the first in the private sector to venture into hydel
power generation via its 75% recent acquisition in Laraib Energy Limited,
located in Azad Kashmir. Based on envisaged 70:30 debt to equity ratio,
the management plans to employ internally generated cash for equity
investment and is well positioned to capitalize on 17% USD IRR guaranteed
by the government. The plant is expected to come online in FY13 and will
start adding to shareholder value from then onwards.
� Tariff and indexation factors, Hedged bets: Given the U-shaped tariff
structure of Power Purchase Agreement (PPA) governing HUBC, Dec08
marked the trough for Project Company Equity (PCE) laid out for the
company. Since then, the rise in PCE has been and is projected to result in
increasing tariff and payout for HUBC. Additionally, with the tariff indexed in
USD, any depreciation in Pak Rupee is projected to translate into
proportional increase in bottom-line, cash payouts and fair value for the
company.
� Moreover, with debt repayment schedule being front-loaded for IPPs,
HUBC has already retired the principal portion of its long-term debt for its
original plant of 1,292MW. The remaining portion will be completely retired
by FY16 – allowing the company to take additional debt for its upcoming
expansions as well as sustain its dividend stream going forward.
� Dividend payout, as fit as a fiddle: We have already priced in Narowal
project’s delay implications, based on which our DPS projections stand at
PKR4.5 and PKR5.5 for FY10E and FY11E, respectively. Current prices
thus still reflect attractive prospective dividend yields of 14% and 17%
respectively. In addition, the stock offers USD based IRR of 17% and
reflects 30% upside to our DDM based fair value of PKR43/share.
Financials
FY09A FY10E FY11E FY12E
EPS(PKR) 3.3 4.6 5.5 6.6
Price to Earnings (x) 10.1 7.2 6.0 5.0
Dividend Yield (%) 10.1 13.6 16.6 19.1
EPS Growth (%) 45 40 21 20
Return on Equity (%) 13 18 21 25
Return on Assets (%) 4 8 9 11
Source: BMA Research

BUY
Fair Value: PKR 232
Current Price: PKR 182
Stock Statistics
Ticker ENGRO
3-month High/ Low 212.8/ 166.6
Mkt Cap USD mn 704
12M ADT mn 2.3
Beta 1.12
KSE vs ENGRO Relative Graph
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ENGRO Profile: ENGRO Corporation
(ENGRO) is soon to become the largest
Urea producer in Pakistan with a name
plate capacity of 2.3mtpa. The company
has followed an aggressive growth
strategy and now operates in various
business lines such as FMCG, chemical
handling, polymer production and
automation.
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ENGRO Corporation: Eggs in more than one basket
Investment Summary
� Diversification: ENGRO’s main advantage stems from its diversified and
well entrenched business lines. The company operates in fertilizer, foods,
energy, chemical, chemical handling and automation business. The
company has recently gone through a demerger of its fertilizer operations
thereby becoming a holding company to better manage debt/cash flows for
its ventures and further expansionary needs.
� Largest Indeed: The company’s current expansionary plant to set-up a
1.3mtpa urea plant at Qadirpur is expected to make Engro the largest urea
producer of the country. Further the company is to receive feed stock gas
subsidy in excess of its counterparts up till 2020 (under the Fertilizer Policy
of 2001) at USD0.70/mmbtu compared to USD1.2/mmbtu prevailing for its
peers. Core margin differential for urea production is expected to be in the
tune of 7% which is to boost the company’s profitability. This increase in
core margin bodes well for the company’s ongoing growth orientation as it
has more access to internally generated funds in a high interest rate
environment.
� Synergies: ENGRO benefits directly and indirectly from synergies existing
between its business units. Chemical handling and polymer generate
supply chain links, Engro Foods benefits indirectly through market
penetration and brand recognition of the fertilizer operations while Engro
EXIMP acts like a trading arm for the fertilizer operations and potentially for
other subsidiaries. By CY11 it is expected that some of ENGRO’s
subsidiaries will reach the maturity phase and start paying out dividends.
This should help boost internal liquidity for the company and reduce
reliance on external sources of financing for the company.
Financials
CY09A CY10E CY11E CY12E
EPS(PKR) 12.07 15.09 23.30 34.94
Price to Earnings (x) 15.0x 11.9x 6.4x 5.2x
Dividend Yield (%) 7% 3% 2% 3%
EPS Growth (%) (7%) 25% 88% 23%
Return on Equity (%) 15% 15% 26% 28%
Return on Assets (%) 5% 5% 9% 11%
Source: BMA Research

BUY
Fair Value: PKR 98
Current Price: PKR 66
Stock Statistics
Ticker ACPL
3-month High/ Low 76.8/ 61.2
Mkt Cap USD mn 68
12M ADT mn 0.1
Beta 0.93
KSE vs ACPL Relative Graph
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ACPL Profile: Attock cement accounts
for 4% of the country’s installed cement
capacity; in the south-zone it is 2 nd only to
LUCK. The company is part of the Attock
Group which has thrived well in Pakistan.
The company has managed to push its
product well in the market where it trades
at a premium compared to the
competition and has managed to keep
utilization rates well above the rest of the
industry.
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Attock Cement: Ready Acoustics
Investment Summary
June 7, 2010
� Product Premium: ACPL has consistently been able to market its product
at a premium price owing to its superior quarrying quality, together with
proactive marketing strategies. The company currently sells its product at a
market premium of PKR25-30/bag at PKR300/bag. Its premium product has
led to impressive demand for its product despite a higher price.
� Low Leverage: ACPL benefits from a low leverage, as its profitability is not
hurt by high financial charges (unlike many of its peers). In the current high
interest rate environment, debt servicing has led to severe curtailment of
profitability for many cement manufacturers. The lower leverage also
benefits the company’s liquidity as cash flow from operations are not
affected significantly by minor fluctuations in price and thus leads to an
overall stability on the profitability front. The company has not required
short-term financing arrangements to bridge the gap between internally
generated funds and cash requirements since FY06.
� Announced acquisition of Al-Abbas Cement (AACIL): Capitalizing on
cheap valuations and cash rich balance sheet, ACPL has already
announced its interest in acquiring 74% equity stake in AACIL. The
objective is to target the local and export markets with the lower quality
brand at lower prices and thereby entering into a segment of the market
previously untapped by ACPL. Further, the company wants to aggrandize
its market share in the south of the country which is expected to bode well
as demand for commercial and residential real estate is expected to
improve given the rural urban migration as well as improving per capita
earnings. Not to mention that the aforesaid acquisition should result in
inherent tax advantages for ACPL, emanating from tax credit accumulated
by AACIL.
� Utilization: Despite a slum in cement demand locally, ACPL has managed
to maintain its sales utilization at over 96%. More importantly, the company
has managed this feat whilst charging premium price for its product. This
has been made possible by focusing on exports as a means to achieve
higher utilization levels. Its current location near the port allows for lower
freight charges on cement exports which adds to the company’s competitive
advantage in the international markets.
Financials
FY09A FY10E FY11E FY12E
EPS(PKR) 17.2 14.1 17.9 19.2
Price to Earnings (x) 3.4x 4.7x 3.7x 3.4x
Dividend Yield (%) 7% 5% 8% 9%
EPS Growth (%) 243% -18% 27% 7%
Return on Equity (%) 31% 21% 23% 21%
Return on Assets (%) 21% 16% 18% 17%
Source: BMA Research

BUY
Fair Value: PKR 177
Current Price: PKR 133
Stock Statistics
Ticker ICI
3-month High/ Low 166.3/125.6
Mkt Cap USD mn 218
12M ADT mn 0.2
Beta 0.96
KSE vs ICI Relative Graph
160
150
140
130
120
110
100
90
80
Volume mn(RHS) ICI KSE100
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
ICI Profile: ICI manufactures and sells
a wide range of industrial and consumer
products in Polyester, Soda Ash, Paints,
Chemicals and Life Sciences segments.
A partnership with AkzoNobel, world's
largest decorative and performance
coatings company, has further added to
ICI's operational and product efficiencies
37
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
ICI Pakistan: Go for it!
Investment Summary
June 7, 2010
� A downtrend at the KSE in recent months pulled down ICI’s stock price to
PKR133/share from its high of PKR181/share in Feb10. However, we
believe that the stock is significantly undervalued at current levels; we have
a DCF-based fair value of PKR177/share for the stock reflecting 33%
upside from current levels
� Diversified Businesses: ICI Pakistan stands to benefit from its strategy of
diversification in its product portfolio and offers high-margin products
including paints, life sciences products and chemicals. Simultaneously, it is
a market leader in Soda Ash and Polyester Staple Fibre (PSF) in Pakistan.
The company’s revenues have increased at a 3yr CAGR of 7% to CY09
while its gross margins have remained in the vicinity of 20%. Given the
diversification in business activities we expect ICI to show a consistent
growth in its sales and profits going forward.
� PSF – the Revenue Driver: PSF contributes 49% to the company’s total
revenue while it earned a gross margin of 9% for the company in 1QCY10.
ICI is the second largest producer of PSF in the country after Ibrahim Fibres
(IBFL). PSF prices averaged at PKR133/kg in the 1QCY10 while after
increasing to PKR138/kg in May10 it has come back to PKR134/kg at
present. The onset of summer season and 15% RD on yarn exports during
the quarter are the key reasons for a slightly subdued demand for the
product during the ongoing quarter leading to a decline in its prices.
However, peaking cotton prices have lately led spinners to tilt their mix
towards polyester for blended yarn. Therefore, we believe ICI’s PSF
segment would continue to benefit from high utilization rates and a regular
clientele going forward. Also, expected declines in the prices of its raw
materials including PTA and MEG are expected to lead to better margins for
the company in case PSF prices also hold strong during the same period.
� Soda Ash – ICI, the market leader: Soda Ash is the second major
contributor to ICI Pakistan's revenue and also yields margins around 30%.
However, in 1QCY10 the segment’s gross margin drastically dropped to 8%
on the back of high costs of energy. We believe ICI would continue to
benefit from stability in its soda ash sales in CY10 on the back of consistent
demand from the downstream industry in the local as well as export
markets.
� Prudent Cash Management: One of the key stones for ICI has been its
low debt levels and adequate management of its working capital
requirement. Improving cash balance (PKR3.6bn as of Mar10) has led to an
improvement in ICI’s other income to PKR144mn in 1QCY10 compared to
PKR41mn in the same period last year.
Financials
CY09A CY10E CY11E CY12E
EPS(PKR) 14.7 16.4 20.3 23.9
Price to Earnings (x) 9.0x 8.1x 6.5x 5.6x
Dividend Yield (%) 6% 6% 8% 8%
EPS Growth (%) 10% 11% 24% 18%
Return on Equity (%) 14% 15% 16% 17%
Return on Assets (%) 10% 9% 11% 12%
Source: BMA Research

38
DISCLAIMER
June 7, 2010
This memorandum is produced by BMA Capital Management Limited and is
only for the use of their clients. While the information contained herein is from
sources believed reliable, we do not represent that it is accurate or complete
and should not be relied upon as such. Opinions expressed may be revised at
any time. This memorandum is for information only and is not an offer to buy or
sell, or solicitation of any offer to buy or sell the securities mentioned.
ANALYST CERTIFICATION
We, Hamad Aslam, Abdul Shakur, Nurali Barkatali, Sana I. Bawani, Omar Rafiq
and Ali Taufiq, hereby certify that this report represents our personal opinions
and analysis of information. All views are accurately expressed to the best of
our knowledge. We certify that no part of our remuneration is linked either
directly or indirectly to recommendations or analysis covered in this report.