FEDERAL BUDGET FY14

Reformist budget; implementation is the key

Macro economic Overview & Targets

Acceleration in GDP growth at a time of fiscal adjustment!
24% jump in total budgetary outlay: With total outlay of PKR3.9trn (+24%), Budget FY14 represents a realistic response to challenges to macro stability and the need for self-driven reforms. The govt. has set out a plan to achieve divergent objectives of accelerating growth and undertaking fiscal adjustment via belt-tightening and new tax measures. Unsurprisingly, we see risk to govt. targets of achieving 4.4% GDP growth, 8% inflation and 6.3% FD. Implementation of reforms has proved difficult in the past. Broad based GDP growth targeted: FY14 GDP growth of 4.4% is projected to be broad-based with all three key engines. i.e. agriculture, industrial and service expected to deliver improved performance. With major tax incidence of new measures concentrated in service sector, a 4.5% growth in FY14 looks ambitious. On the same count, industrial sector growth has the potential to negatively surprise. With new tax measures and anticipated fiscal adjustment, govt. may emerge as a key contributor to overall GDP growth. How the budget numbers appear? Total budgetary outlay builds in 22% jump in total tax collection to PKR2.6trn. Governments focus is on increased direct tax collection (+25%) via new tax measures and removing tax exemptions. New tax slabs have been introduced for personal income tax while property withholding tax has been imposed on retailers/wholesalers. Non-tax collection targets of 15% looks reasonable though 3G licenses fee (PKR120bn projected) has proved to be elusive in the past two years.
Fig 1: Unimpressive GDP growth
5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2009 2010 2011 2012 2013 0
May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Jan-12 Nov-11 Sep-11 Jul-11 May-11 Mar-11 Jan-11 Nov-10 Sep-10 Jul-10 May-10 Mar-10 Jan-10

Fig 2: Inflation trend

20 15 10 5

Source: MoF, Foundation Research, June 2013

Source: Bloomberg, Foundation Research, June 2013

Macro economic Overview & Targets

Energy received its due share
No increase in salaries of govt. employees: Interestingly, govt. expenditure appears to be understated with just 10% jump projected for FY14. In a bold move, the govt. has decided not to raise salaries of government employees in FY14. Absence of pay rise has already invited criticism from different unions and a section of employees have already announced plans to go on strike. Salaries constitute almost 10% of total expenditure (1.2% of GDP). We think the govt. will be forced to change its course and announce at least 8-10% increase in salaries. Fiscal deficit target of 6.3%: Government has set an ambitious target of reducing fiscal deficit by 18% to PKR1.6trn or 6.3% of GDP vs projected deficit of 8.8% in FY13. A major chunk of fiscal adjustment is projected to come from reduction in subsidy (from 1.6% of GDP to 1% of GDP), especially on power and aggressive revenue collection targets. We see high possibility of slippage in govt. fiscal deficit target. Energy received its due importance: Energy remains one of the four reform areas the new govt. has set its eye on to provide relief to masses. Govt. has reiterated its aim to eliminate long-standing circular debt issue within 60 days. Details on the government plan are, however, vague. Govt. estimate total circular debt of ~PKR500bn which we think is over-stated and may have incorporated double counting. Budget document shows the govt. has allocated PKR169bn as investment for clearing circular debt and reduction in tariff subsidy by 38% to PKR165bn. The govt. has not announced the much-anticipated increase in electricity tariff though pre-budget news flow had highlighted the possibility of tariff hike of as much as PKR0.75/kwh. In absence of tariff hike, the expected fund injection in energy sector will equate to yet another ad-hoc payment mechanism to energy companies to reduce over-due receivables backlog. Discipline in disbursement of power subsidy may, however, provide sustainability.

Macro economic Overview & Targets

a step closer to re-entry into IMF program
Highest ever development expenditure planned : A key highlight of FY14 budget is governments ambitious plan to lift development spending by 36% to PKR1.1trn, primarily focused on water, power generation and transportation. We see two risks (1) low capacity to deliver higher spending. Historically, actual spending has undershot targets in the past (average 75% materialization), and (2) lower revenue collection dragging down overall spending. Reforms require strong political will: Other important areas include increased documentation, broadening the tax net and plugging the loophole in tax collection. While the initial response from trade bodies is largely positive, we hasten to highlight documentation efforts in the past have triggered protest, leading to ultimate shelving of plans. Agriculture is still a sacred cow and largely remain untaxed. A step closer to re-entry into IMF program: Broadly speaking, budget 2014 appears to make much-needed change in policy direction which prepare grounds for Pakistans potential re-entry into program. Most of the macro targets are closely aligned with the numbers IMF/World banks have reportedly pushed forward to the past governments. Interestingly, the govt. has set a target to lift SBP FX reserves to US$20bn by 2016 (from US$6.6bn in FY13) under the medium-term plan, details on BoP financing and action plan on meeting growing IMFs repayment burden are sketchy.
Fig 3: Rising fiscal indiscipline (PKR bn)
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 FY10 FY11 FY12 FY13 FY14E Fiscal Deficit (% of GDP) 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

Net Revenue Receipts

Total Expenditures

Source: MoF, Foundation Research, June 2013

Macro economic Overview & Targets

Growth Rate (%)
Agricultural Sector Industrial Sector Services Sectors GDP CPI Inflation Fiscal Deficit (% of GDP) Tax Revenue (% of GDP) Investments (% of GDP)

FY10
0.2 3.4 1.8 2.6 10.1 6.2 8.9 15.8

FY11
2 4.7 3.3 3.7 13.7 6.5 8.5 14.1

FY12
3.5 2.7 3.1 4.4 10.8 6.8 9.4 14.9

FY13P
3.3 3.5 3.4 3.6 7.8 8.8 8.8 14.2

FY14E
3.7 4.8 4.5 4.4 8 6.3 9.5 15.1

Source: MoF, Foundation Research, June 2013

Budget FY14
Medium term framework defined
Decline in commodity price is a key upside: Commodity prices are exhibiting heightened volatility in the past few weeks. Among key commodities, crude prices have slipped 15% from the peak (in 1Q) and urea by 41% (May12 high). CRB index has slipped 12% since Sep12. Decline in commodity prices may offer the largest upside to Pakistan which is 2/3 reliant on imported energy needs and has to import 1/5th of urea demand despite having surplus production capacity. Medium-term targets unveiled: The government has also unveiled medium term targets for various macro indicators though detail calculations supporting the targets are not available. Overall, government is targeting ramping of GDP growth to 7% by 2017 from 3.6% in 2013, containing inflation at 8% and bringing down fiscal deficit to 4%. Following is a brief snapshot of government targets. Revised Budget Forecast 2012-13 2012-13
Real GDP Growth (%) Inflation (%) Total Revenue -Tax Revenue -FBR Tax Revenue Total Expenditure -Current -Development Fiscal Balance Revenue Balance Total Public Debt GDP at market prices (Rstrn)
Source: MoF, Foundation Research, June 2013

Forecast Budget 2013-14 2014-15

4.4 8.0 14.0 10.6 9.5 20.3 15.2 5.1 -6.3 -1.2 61.3 26.0 5.5 8.0 14.0 11.4 10.4 18.9 13.8 5.2 -5.0 0.2 59.1 29.7

2015-16
7.0 8.0 14.2 12.0 11.0 18.2 12.9 5.3 -4.0 1.3 55.2 34.6

4.3 9.5 14.3 10.9 10.1 18.9 14.6 4.4 -4.6 -0.3 56.6 23.7

3.6 7.5 13.2 9.9 8.8 22.0 16.5 4.2 -8.8 -3.3 63.5 22.9

Budget FY14
Deficit financing plans
Finance Minister has expressed governments plan to focus on international capital raising via divestment, Euro bond, recovery of backlog of PTCL privatization proceeds and potential privatization deals. The government has set a target of PKR354bn under these heads. Govt. targets of external funding faces risks. Payment from Etisalat still encumbered to transfer of titles of disputed properties. Since passage of 18th amendments, provincial govt. has laid claims of many such disputed property making transfer of titles a difficult proposition. On the same count, we think issuance of Euro Bond of US$500mn and program loans may require Pakistan to first re-enter into program in order to provide comfort to international investor/donors.

Financing of fiscal deficit PKR bn

External loans External grants Local bank Local non-bank Privatization

FY13BE
22 109 484 487 -

FY13RBE
(19) 29 1,576 430 -

FY14BE
59 109 975 507 -

%
N/A 275% -38% -1% NA

Source: MoF, Foundation Research, June 2013

Budget FY14
PKR bn
REVENUE RECEIPTS Direct Taxes Indirect Taxes FBR Taxes Petroleum Levy Other Taxes Tax Revenues Non-Tax Revenues Gross Revenue Receipts Less: Provincial share Net Revenue Receipts EXPENDITURES Debt Servicing Defense Subsidies Others Current Expenditure PSDP Est. operational shortfall Provincial PSDP Federal PSDP Other development expenditure Others Total Expenditures Federal Fiscal Deficit Change in provincial cash balances Consolidated budget deficit as % of GDP GDP Source: MoF, Foundation Research, June 2013

FY13BE
932 1,449 2,381 120 3 2,504 733 3,237 1,459 1,778

FY13RBE
779 1,228 2,007 115 3 2,125 712 2,837 1,221 1,616

FY14BE
976 1,499 2,475 120 3 2,598 822 3,420 1,502 1,918

%
25% 22% 23% 4% 19% 22% 15% 21% 23% 19%

926 545 209 716 2,396 873 (513) 360 154 50 2,960 1,182 80 1,102 4.7% 23,655

1,029 570 367 753 2,720 851 (463) 388 107 354 3,570 1,954 (62) 2,016 8.8% 22,909

1,154 627 240 808 2,829 1,155 (615) 540 172 50 3,591 1,673 23 1,650 6.3% 26,001

12% 10% -35% 7% 4% 36% NA 33% 39% 60% NA 1% -14% -137% -18% -28% 13%

Key taxation measures

Not much of a populist budget
General sales tax to be raised by 1% from 16% to 17%. Tax on dividends received by banks from money market funds and income funds to be 25% from year 2014

onwards. An adjustable withholding tax is being introduced which shall be collected by hotels/marriage halls from persons

arranging functions. An adjustable withholding tax to be levied on renewal of license fee on cable operators and other electronic media,

collected by Pakistan Electronic Media Regulatory Authority (PEMRA). Rate of withholding tax on cash withdrawals from banks has been raised to 0.3% (previously 0.2% in FY13) Builders and developers to pay minimum tax of PKR25 per sq ft if the constructed area is sold and PKR50 per sq

yd of the area sold of developed land. All manufacturers are liable to collect adjustable WHT from distributors, dealers and wholesalers (the WHT is restricted to certain items). Rates of tax on motor vehicle registration to be raised in line with inflation. Adjustable WHT has been levied on imported movies at the rate of PKR1mn per film and PKR100,000 per episode

of TV plays.

Key taxation measures

The minimum tax in case of losses has been raised from 0.5% to 1% of turnover. Transaction of margin financing, trade financing and lending shall be subject to WHT of 10% of

profit/markup/interest earned (collected by NCCPL). Sale of any item by auction would be subject to adjustable advance tax of 10% instead of 5%. An adjustable advance tax of 5% is levied on fee of all educational institutions where annual fee is above

PKR200,000. WHT on payments of prize bond to be increased to 15% from 10%. Initial depreciation rate to be reduced from 50% to 25% for plant and machinery to rationalize taxation. The rate of FED on aerated beverages to be raised from 6% to 9%. Three tier structure of FED on cigarette chargeability to be replaced by two tier structure. The FED chargeability on all financial services falling in PCT 98.13 is 16%. Exemption of FED on hydraulic cement and services provided by AMCs is being withdrawn. FED 10% (Ad valorem) on motor vehicle of cylinder capacity of 1800cc or above is being charged.

10

Subsidies are proposed to see a sharp decline

Budget Subsidies (PKRbn)
WAPDA KESC TCP PASSCO Oil refineries USC Others Total Source: MoF, Foundation Research, June 2013

FY12-13B
135.0 50.3 0.0 5.1 7.7 6.0 4.5 208.6

FY12-13R
265.0 84.3 6.2 1.8 6.0 4.2 367.5

FY13-14B
165.1 55.0 9.0 4.0 6.0 1.3 240.4

%
-38% -35% N/A 45% 129% 0% -69% -35%

11

PSDP Highlights
Key measures
The size of Public Sector Development Program (PSDP) has been 1,400 increased to PKR1,155bn (up by 36% YoY) which is 3.4% of GDP.
1,200 Fig 4: Historical growth trends in PSDP (PKR bn)

The federal portion has augmented by 39% YoY to PKR540bn while provincial PSDP witnessed an increase of 33% to PKR615bn.

1,000 800

Physical infrastructure allocated 47% of federal PSDP (PKR256bn) 600 whereas social sector allocations stand at 19%of federal PSDP 400 (PKR100bn). The government has allocated PKR115bn to the new development initiatives (up by 100% YoY). The other development expenditure has been set at PKR172bn (rose by 12% YoY).
200 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Federal PSDP

Provincial PSDP

Source: Foundation Research, June 2013

FY12-13B Federal PSDP Provincial PSDP Total 360.0 513.0 873.0

FY12-13R 388.0 463.0 851.0

FY13-14B 540.0 615.0 1,155.0

% 39% 33% 36%

12

Stock Market
Positive Largely supportive to corporate earnings Impact
Positive: Though two heavy-weight sectors i.e. banks and E&Ps, will not benefit from the proposed tax rate cut, the reduction in rate would still benefit a large number of companies. The reduction in tax rate will bring Pakistans corporate tax rate closer to levels prevailing in regional peers. Positive: While details on govt. plans are lacking, the measure will benefit both energy companies, (direct earnings/cash payout impact on index-heavy weight OGDC, PSO) and other manufacturing companies via higher electricity generation. Positive: Details suggest the outlay will be concentrated in energy, water and transportation sectors. While cement and energy companies will emerge as direct beneficiaries, higher govt. spending will drive up economic activity and may create demand for other sectors.

Key measures
Corporate tax rate reduced to 34%: In a surprisingly positive move, the government has decided to reduce corporate tax rate to 34% in FY14 and progressively reduce it to 30% within five years.

Circular debt resolution targeted within 60 days: Finance Minister has re-iterated government commitment to eliminate circular debt within two months.

Ambitious development plan: PKR1.1trn development plan target set for FY14, highest in Pakistan history.

13

Stock Market
Positive CGT ordinance incorporated in the Finance Act Impact
Neutral : Applicability of tax being debated as final liability or adjustable towards normal tax rate. In case it is final liability , we see increased funding for leveraging of stock purchase due to better tax incentive. Neutral: The estimated increase in our prices is nominal and can easily be passed down to end-consumers hence leaving corporate earnings unharmed.

Key measures
Margin Financing to attract 10% withholding tax: Income from margin financing, trade financing and lending to be taxed at 10% withholding tax.

GST hike to 17%: One of the easiest way to lift tax collection is via higher incidence of indirect taxes. Interestingly, dairy products are still outside he GST ambit.

Minimum turnover tax at 1%: Earlier turnover tax was set at 0.5% in Budget 2013 which has been lifted to 1% in Budget 2014.

Negative: While large number of sectors are enjoying healthy margins which provide them the cushion from higher tax incidence, autos appear to be the sole sector which can face higher effective tax rate. We understand OMCs and Refineries are required to pay only 0.5% turnover tax. Negative: Our discussion with tax expert suggests the levy is also applicable on shares, however, it remains to be seen if the levy would also be applicable on share trading. Given the very nature of levy being wealth tax, we think it is unlikely to be imposed on share trading.

0.5% levy on moveable property imposed: Finance Bill has proposed levy of 0.5% for income support program with collection target of PKR6bn

14

Sector wise Impact

Sector
Exploration & Production Banks & Insurance Companies Cement IPPs Autos Telecom Fertilizers Oil Marketing & Refining Companies Textiles FMCG

Budget impact
Positive Neutral Positive Positive Negative Positive Negative Positive Neutral Negative

Gainers
OGDC/PPL None All HUBC None PTCL None PSO None None

15

Cement
Positive Sector in limelight Impact
Neutral: Maintaining current level of FED will provide support to those cement manufacturers who are relying more on local sales.

Winners: ALL

Key measures
FED remained unchanged: Federal Excise Duty (FED) has been kept at the level of PKR400/ton, despite speculation/rumor of increase by PKR350/ton.

PSDP allocation: Public Sector Development Program (PSDP) fund size is PKR1,155bn (Federal component PKR540bn and Provincial component PKR615bn), 36% higher than revised FY13 budget allocation.

Positive: Higher allocation of PSDP at both levels will boost the local cement demand; however, actual PSDP utilization will remain a key challenge.

Increase in GST by 1%: General sales tax (GST) on local sales has augmented by 1% to 17%.

Negative: Increase in GST will reduce the margins of the manufacturers initially as it can not be passed on immediately to the consumers.

Turnover tax restored to 1% from 0.5%: Loss making companies or those companies whose tax payable on declared income is less than the minimum tax will bear 1% tax on turnover.

Negative: It will increase the tax liability of those cement companies who are already incurring losses.

16

Cementcontinued
Positive Key measures
Dealers margin reduced to 0.1%: Adjustable withholding tax applicable on dealers shrunk from 0.5% to 0.1%. Housing scheme for low and lower-middle classes: At least 1000 colonies with 500 houses each will be developed for which the government has kept a provision of PKR3.5bn. 2% tax on taxable supplies: Further 2% tax on taxable supplies will be imposed on unregistered persons.

Sector in limelight Impact

Winners: ALL

Positive: It will reduce the tax burden of the cement companies who will bear the cost.

Positive: The housing scheme will bolster the local cement consumption.

Negative: It will affect the profitability of the cement manufacturers as the cost will be borne by them.

17

Oil Marketing Companies & Refineries

Positive Rerating via removal of overhang of circular debt Impact
Circular debt has been the most important drag on both earnings and valuation of downstream companies, especially PSO. While the govt. has not provided details on plans, we see higher chances of government delivering on its commitment by providing near-term relief. In terms of numbers, assuming circular debt is completely resolved , we see earnings upside of as much as of PKR15/sh or 27% of FY14E EPS. PSO stock price has seen healthy run-up of 51% in anticipation of govt. plans and currently trades at FY14E P/E of 5.6x (excluding earnings upside via circular debt). Historically, PSO has traded at P/E band of 4-4.5x since 2009. We see re-rating in the stock to continue for now. We understand both refining and oil marketing companies are not required to pay higher turnover tax and will only pay 0.5% MTR as stipulated by relevant tax laws.

Winners: PSO

Key measures
Circular debt settlement: Resolution of circular debt within 60days to be delivered, however no measures defined till now.

Minimum turnover tax increased to 1% but OMCs are not affected.

18

Power
Positive Higher tariffs & circular debt elimination the only way! Impact
Neutral: The decision to reduce subsidy on the power distribution companies WAPDA and KESC, is based on the fact that the companies would charge a higher tariff in the coming days, and hence improve their liquidity position which in turn would reduce the demand for government support through subsidy. Positive: Resolution of circular debt issue would result in smoother functioning of not only the power sector but the whole energy chain. It would reduce the liquidity problem and hence short term financing costs for the whole value chain. Positive: An increase in tariff as per the media reports is a bitter pill for the consumers. However, it is impossible to bring the power sector on track without tariff rationalization. Hence policies geared towards reduction in line losses and increase in tariffs would have positive impact on the performance. Positive: Such methods would promote investment in the projects that utilize wind, solar and other renewable energy resources to generate power.

Winners: HUBC

Key measures
Lower subsidy for power distribution companies: The government has significantly reduced the subsidy for power distribution companies in FY14. The total subsidies allocated for FY14 are around PKR220bn (PKR165bn for WAPDA/PEPCO and PKR55bn for KESC), 24% lower than the revised estimate of FY13. Circular debt settlement: Resolution of circular debt within 60days to be delivered; however, no measures defined till now.

Tariff rationalization: The government is expected to increase the power tariffs in near future. As per the initial media reports the government is expected to raise the electricity tariff by PKR0.74/Kwh.

Promotion of alternate power generation: Emphasis on streamlining and deregulating the procedure for import of renewable energy resources.

19

Exploration & Production

Positive All eyes on circular debt Impact
Positive: Piling up of receivables constrain liquidity and results in short term borrowing. The resolution of the circular debt issue would result in lower working capital expenditure and may enhance payout especially for OGDC Neutral: The government is expected to get lower dividend income from the state owned enterprises (SOEs), primarily due to lower payout from Exploration and production companies which comprise a sizable chunk of the SOEs.

Winners: OGDC/PPL

Key measures
Government set to resolve the circular debt issue: Circular debt to be resolved in 60 days (however no concrete measures, that the government intends to take were mentioned in his speech).

Dividend payout expected to remain flat: Overall dividend expectation are flat from state-owned enterprises implying cash payout expectation from Oil & Gas companies is also flat.

FED exemption: Exemption of federal excise duty on hydraulic cement removed.

Neutral : Nominal impact on cost of drilling.

20

Telecommunication
Positive Old plans with renewed commitment Impact
Positive: Although the proposal has been afloat in the last governments tenure, the licensing process had been delayed and it is yet to be seen if the new government has the conviction to proceed with the auction process. The government has estimated revenue generation of PKR120bn. Neutral-Positive: Previously it was widely anticipated that the government would increase government officers salaries by 15-20%. We believe it provides upside since wages take up a hefty portion of PTCLs cost structure. Although cautious approach is recommended in the light of expected backlash by government officials and probable reversal of the proposal.

Winners: PTCL

Key measures
The government has announced the initiation of licensing process for 3G technology.

Contrary to the pre budget expectations, the government did not announce any increase in salaries of government employees.

Tentative repayment of USD800mn from the Etisalat that is due for more than 5 years.

Positive: The government has made clear its intentions to go forward with the collection of PKR80bn from Etisalat Group which have been due for over five years now. We assign high probability to this event in this government tenure.

21

Banks & Insurance Companies

Neutral Focus on credit growth Impact
Positive: A shift in focal point for the banking sector as govt. wants to revive private sector lending and reduce reliance on investments through such schemes. Negative: Deposit base of the banks to hurt along with constraining on NIMs.

Winners: None

Key measures
Improving private sector lending: Small business loans scheme with an amount of PKR100,000PKR2,000,000 (50,000 loans in first year) along with Microfinance scheme (Qarz-e-hasana) of PKR5bn. Promoting public saving schemes to finance deficit: Enhancing the public access to invest in government securities rather than banks. Dividends from AMCs to be taxed at 25%: Contrary to the widespread expectation, taxation from AMCs remain at 25%. FED 16% to be charged on all financial services: To broaden tax base, banking, asset management companies etc will charge 16% FED on all financial services rendered. No decrease in corporate tax rate: Corporate tax will not be reduced for the banking sector. Withholding tax on cash withdrawals to 0.3%: Keeping the limit constant at PKR50,000 for cash withdrawals; however, increasing the rate to 0.3% from 0.2%.

Positive: A major relief for the banking sector as benefit of tax arbitrage still exist for banks with higher dividend from AMCs. Negative: The cost to be borne by the customers.

Neutral: No change in earnings for the banks.

Neutral: The cost will be passed on to the customers.

22

Fertilizers
Neutral Status quo prevails Impact
Negative: Government allocation of PKR30bn for tentative import of urea fertilizer indicates the lack of governments conviction to improve gas allocation to the sector. According to our estimates domestic demandsupply deficit stands at 1.2-1.5 million tons for FY14 which is in line with government subsidy set aside for fertilizer urea imports. Neutral-Negative: Contrary to our pre-budget expectation and governments manifesto to rationalize gas prices, the government has not announced an increase in GIDC. However, due to the provisioning of funds for GDS, we believe that the government will increase feed gas tariff for the sector going forward leading to a hike in domestic fertilizer prices. Neutral: The imposition will increase the final retail price of fertilizer urea by PKR 295/ton. The subsequent impact on CAN, DAP and NP would be PKR 226, PKR 670 and PKR 430 on per ton basis respectively. The government would pocket additional ~PKR 2.2bn in revenues.

Winners: None

Key measures
Allocation of PKR30bn subsidy for Urea imports: This translates into ~1.36 million tons of Urea.

Allocation of PKR35.34bn for Gas Development Surcharge: An increase of more than 2x from the last years revised estimates.

Increase in imposition of GST from 16% to 17% for FY14 is although applicable across the board yet it has a moderate impact on fertilizer sector considering 1/5th share of agriculture in GDP constitution.

23

FMCG
Neutral Key measures
Federal Excise Duty on aerated beverages to increase: Rate of FED is increased to 9% from 6% on aerated beverages amid introduction of capacity based taxation. Sales tax exemption withdrawn on milk preparations: Sales tax of 17% to apply on milk preparations from replacing one or more constituent of milk by another substance.

Caught in tax measures Impact

Winners: None

Negative: A marginal increase in prices will be observed however strong brand equity would dilute any consumption decrease scare.

Negative: Milk producers to see a hike in prices; however, EFOODS to remain exempted until further clarity emerges.

24

Automobiles
Negative Policies yet again unfavorable Impact
Negative: INDU to be the sole loser, as Fortuner and Hilux fall under this category.

Winners: None

Key measures
Tax on 1800cc+ vehicles: 10% ad valorem tax on vehicles of 1800cc or above with immediate effect.

Duty reduction for hybrid cars: Complete elimination of duty of up to 1200cc, 50% reduction in duty for 1201cc to 1800cc and 25% reduction in duty for 1801cc-2500cc hybrid cars. Rise in tax of purchase of motor cars and jeeps: Higher imposed rate of payment of tax for different engine capacity.

Negative: Sales of used hybrid cars will outweigh the brand new hybrid cars imported by the local manufacturers.

Neutral: The cost will be borne by the end consumer.

25

FSL Universe Snapshot

Company Name MKT Price 2012F Commercial Banks Habib Bank MCB Bank National Bank United Bank Cement Attock DG Khan Lucky Fauji Cement Power Generation Hubco Kapco Oil & Gas Marketing PSO APL Oil & Gas Exploration OGDCL Pakistan Oilfields Pakistan Petroleum Automobile Assembler Indus Motor Pak Suzuki Motors Food Producers EFOODS Telecom PTCL Textile Nishat Mills Fertilizer Engro Corporation Fatima Fertilizer Fauji Fertilizer Bin Qasim Fauji Fertilizer 103.29 10.83 13.78 15.49 3.00 3.50 3.50 9.5 7.5 6.7 0.9 0.9 0.8 6.3 5.8 5.3 2.9% 3.4% 3.4% 5.6% 22.47 1.28 1.48 1.52 1.28 1.48 1.52 17.5 15.2 14.8 1.2 1.2 1.1 4.6 4.2 3.6 5.7% 6.6% 6.8% 14.1% 63.21 63.35 7.08 6.90 8.24 8.44 9.07 9.00 6.00 6.90 7.00 7.50 7.25 8.00 8.9 9.2 7.7 7.5 7.0 7.0 2.4 2.4 2.2 2.2 2.0 2.1 6.4 3.9 6.1 3.5 5.7 3.5 9.5% 10.9% 11.1% 11.8% 11.5% 12.6% 9.1% 26.5% 12-Jun-13 114.10 310.92 43.70 110.53 19.01 23.47 10.14 15.35 EPS (Diluted) 2013F 19.96 22.90 9.59 13.33 2014F 23.36 25.31 10.21 15.03 2012F 8.00 14.00 7.50 8.50 DPS (Diluted) 2013F 9.00 15.00 7.00 8.50 2014F 10.00 16.00 7.50 9.00 2012F 6.0 13.2 4.3 7.2 PE (x) 2013F 5.7 13.6 4.6 8.3 2014F 4.9 12.3 4.3 7.4 2012F 1.1 2.8 0.5 1.4 PBV (x) 2013F 1.0 2.6 0.5 1.3 2014F 0.9 2.4 0.5 1.2 2012F NA NA NA NA EV/EBITDA 2013F NA NA NA NA 2014F NA NA NA NA 2012F 7.0% 4.5% 17.2% 7.7% Div. Yld. 2013F 7.9% 4.8% 16.0% 7.7% 2014F 8.8% 5.1% 17.2% 8.1% 2007A 16.9% 28.6% 16.5% 19.6%

131.03 80.49 191.10 11.78

16.59 9.38 20.97 0.42

23.45 12.83 29.74 1.89

24.87 12.54 28.96 2.08

4.00 1.50 6.00 -

5.00 2.50 6.00 0.50

5.75 2.50 6.00 0.50

7.9 8.6 9.1 28.4

5.6 6.3 6.4 6.2

5.3 6.4 6.6 5.7

1.7 1.1 1.9 1.1

1.3 1.0 1.5 1.0

1.1 0.8 1.3 0.9

4.9 6.8 6.0 8.9

3.0 4.6 4.8 4.5

2.4 4.1 4.4 3.9

3.1% 1.9% 3.1% 0.0%

3.8% 4.3% 4.2% 4.2%

4.4% 4.3% 4.2% 4.2%

23.5% 4.8% 27.2% 0.0%

314.69 557.22

36.67 59.61

47.70 66.94

56.41 72.93

3.82 50.00

8.00 56.90

10.00 61.99

8.6 9.3

6.6 8.3

5.6 7.6

1.6 3.1

1.3 2.9

1.1 2.8

4.6 4.5

3.4 4.1

3.0 4.0

1.2% 9.0%

2.5% 10.2%

3.2% 11.1%

97.0% 50.0%

249.37 509.32 218.98

22.53 50.11 32.88

24.71 53.38 34.53

33.50 71.03 33.79

7.25 52.50 14.79

7.50 50.00 15.54

15.00 59.00 15.21

11.1 10.2 6.7

10.1 9.5 6.3

7.4 7.2 6.5

4.0 3.4 2.4

3.1 3.4 2.0

2.5 3.0 1.7

6.9 5.5 3.4

5.5 5.3 2.8

4.2 3.8 2.4

2.9% 10.3% 6.8%

3.0% 9.8% 7.1%

6.0% 11.6% 6.9%

45.4% 32.4% 41.8%

339.99 149.46

54.74 24.70

29.97 20.69

45.78 24.69

18.00 3.00

20.00 3.00

22.10 4.00

6.2 6.1

11.3 7.2

7.4 6.1

1.6 0.7

1.5 0.7

1.4 0.6

2.1 2.3

1.8 2.2

1.5 1.6

5.3% 2.0%

5.5% 2.0%

6.5% 2.7%

34.1% 19.8%

145.93

2.66

4.51

6.77

54.8

32.3

21.5

11.9

8.7

6.2

22.4

14.4

10.5

0.0%

0.0%

0.0%

0.0%

141.13 25.99 39.59 113.56

8.20 2.87 5.23 15.76

16.88 4.52 5.67 16.88

24.25 5.27 5.29 17.63

1.00 4.50 14.00

1.25 5.00 15.50

2.00 4.50 16.50

17.2 9.1 7.6 7.2

8.4 5.8 7.0 6.7

5.8 4.9 7.5 6.4

1.6 1.9 2.6 6.2

1.4 1.5 2.5 5.8

1.1 1.3 2.4 5.5

9.6 5.6 3.2 4.2

7.6 4.1 3.1 4.1

5.9 3.6 3.1 3.9

0.0% 3.8% 11.4% 12.3%

0.0% 4.8% 12.6% 13.6%

0.0%

20.0%

7.7% #DIV/0! 11.4% 29.9% 14.5% 42.1%

26

Foundation Research Analysts Muhammad Fawad Khan, CFA Syed Asad Ahmed Fahad Irfan Sonia Agarwal Syed Sanakhawan Shahzad Usman Sectors Strategy ,Economy, Energy Banks, Autos, FMCGs Textile, IPPs Cements Fertilizers, Telecom Database Foundation Sales Traders Karachi Atif Muhammad Khan Siraj Ebrahim Kazi Syed Rehan Ali Zubair Ghulam Hussain Faisal Khan Adnan Ahmed Usmani Muhammad Rameez Mansoor Khanani Islamabad Mohammad Irfan Lahore Atta ur Rehman PABX Email PABX +92 21 3561 2290-94 x 338 +92 21 3561 2290-94 x 311 +92 21 3561 2290-94 x 339 +92 21 3561 2290-94 x 335 +92 21 3561 2290-94 x 339 +92 21 3561 2290-94 x 312 Email fawad.khan@fs.com.pk asad.ahmed@fs.com.pk fahad.irfan@fs.com.pk sonia.agarwal@fs.com.pk sanakhawan.hussain@fs.com.pk shahzad.usman@fs.com.pk

+92 21 3561 2253 +92 21 3561 2256 +92 21 3561 2259 +92 21 3563 5166 +92 21 3561 2258 +92 21 3561 0887 +92 21 3561 0820 +92 21 3563 5013

atif@fs.com.pk siraj@fs.com.pk rehan@fs.com.pk zubair.hussain@fs.com.pk faisal@fs.com.pk adnan@fs.com.pk mrameez@fs.com.pk mansoor.khanani@fs.com.pk

+92 51 3289 5221

mirfan@fs.com.pk

+92 42 3577 6821

arehman@fs.com.pk

Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments. FSL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. FSL, their respective directors, officers, representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. FSL may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. FSL may have recently underwritten the securities of an issuer mentioned herein. This document may not be reproduced, distributed or published for any purposes.

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