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A relatively focused Budget!
Priced on June 12, 2013 KSE-100 Index 22324.57 FYTD Chg. 61.7% KSE Market Cap PkR5,412bn (US$54,900mn) FYTD KSE-100 High/Low 22,358 / 14,142 FYTD Avg. Daily Traded Value PkR6,468mn (US$66mn)

June 2013

Considering limited preparation time, the PML-N governments FY14 Budget, delivered by Finance Minister Ishaq Dar comes across as focused on pushing through energy reforms (circular debt stock to be eliminated in 60 days) and reviving the privatization program with a view to curbing the fiscal deficit to 6.3% of GDP vs. 8.8% in FY13. Also laudable is the decision to continue with the previous governments targeted support program, a welcome sign that the PML-N government is not looking to rescind previous positive steps. That said, much remains contingent on execution capability (revenue collection targets appear ambitious) as well as on the materialization of foreign assistance. We see a generally positive impact from the market's perspective due to 1ppt reduction in the corporate income tax rate (exBanks) and continued exemption from OMCs and Refineries from 1% turnover tax. Specifically, the high PSDP allocation spells positives for Cements while the Oil & Gas and Electricity sectors should continue momentum on resolution to circular debt. Our revised end-Dec13 Index target is 23,300 points. The Economy: With provisional FY13 GDP growth logging in at 3.6%, the FY14 Budget envisages achievable GDP growth of 4.4%. The total budgetary outlay for FY14 is PkR3,985bn, up 15%YoY, underpinned by an ambitious FBR tax collection target of PkR2,475bn (+23%YoY) leading to a fiscal deficit target of 6.3% of GDP. While revenue collection (tax + non-tax) is highly contingent on execution capability and dependence on external sources (incl. privatization proceeds) will remain strong, key positives include planned 40%YoY reduction in tariff differential subsidies and high PSDP allocation of PkR1,155bn given the myriad backward linkages of the construction industry. The Market: No change to the CGT regime is a key positive. Although turnover tax increase to 1% will hurt specific sectors, reduction in corporate income tax rate (ex-banks) to 34%, which is proposed to be gradually reduced to 30% is a key positive in the broader context where the AKD Universe (ex-banks and E&P) should see EPS estimate upgrades of 1%-2% across FY14F/FY15F. Other noteworthy measures include mandating dividend income for companies as final tax and withdrawal of tax exemption on specie dividends (e.g. bonus issues). In our view, initial market movement will track sector-specific developments with attention to soon turn to the Jun 21'13 MPS, IMF-Pakistan talks at month-end and the upcoming energy reform plan. We expect foreign investors to remain engaged with the Pakistan Market with relatively undemanding valuations (FY14F P/E: 7.8x) underpinning our revised end-Dec'13 Index target of 23,300 points although we caution that the market could witness near-term volatility as divergent sector themes come into play. Sectors: A mixed bag - we see clear positives for Cements (big PSDP allocation) while OMCs/Refineries may see a relief rally due to exemption from higher turnover tax (no change in the specific clause of the Income Tax Ordinance related to oil & gas exemptions). OMCs, Refiners and Gas T&D companies will continue to be subject to 0.5% turnover tax. Sectors that appear largely unaffected include Index heavyweights E&P and Banks as are Telecoms, Textiles and Electricity. We see negatives at the margin for Fertilizers (high urea import subsidy) and Autos . (higher taxes on new registrations). .

(mn) 800 700 600 500 400 300 200 100 0

KSE-100 Index vs. Volume

(Index) 24,000 22,000 20,000 18,000 16,000 14,000 12,000

Dec-12

Feb-13

Jun-12

Aug-12

Volume (LHS)

KSE-100 Index

Important disclosures, including investment banking relationships and analyst certification at end of this report. AKD Securities does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. AKD Securities Limited
Member Karachi Stock Exchange
Find AKD research on Bloomberg (AKDS<GO>), firstcall.com and Reuters Knowledge UAN: 111-253-111
Copyright2013 AKD Securities Limited. All rights reserved. The information provided on this document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject AKD Securities or its affiliates to any registration requirement within such jurisdiction or country. Neither the information, nor any opinion contained in this document constitutes a solicitation or offer by AKD Securities or its affiliates to buy or sell any securities or provide any investment advice or service. AKD Securities does not warrant the accuracy of the information provided herein.

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Contents
KSE-100 Index - Timeline! ...................................................................................................................03 Pakistan Market Outlook .................................................................................................................04-06 Budget Implications on Sectors ......................................................................................................07-08 Budget Review .....................................................................................................................................09 Budget Snapshot..................................................................................................................................10

Economy REVENUE ............................................................................................................................................11 EXPENDITURE....................................................................................................................................12 Medium Term Budgetary Framework Economic Indicator ...................................................................13 Sector Implications Cements ...............................................................................................................................................14 Banks ...................................................................................................................................................14 Oil & Gas ..............................................................................................................................................15 Autos ....................................................................................................................................................15 Electricity ..............................................................................................................................................15 Textiles .................................................................................................................................................16 Fixed Line Telecom .............................................................................................................................16 Food Producers....................................................................................................................................16 Fertilizers..............................................................................................................................................17 Annexure - Salient features of the FY14 Budget ............................................................................18-19

AKD Research Team

Analyst Naveed Vakil Raza Jafri, CFA Ayub Ansari Anum Dhedhi Reema Shakeel Raza Hamdani Bilal Alvi Qasim Anwar Hassan Quadri Azher Ali Quli Nasir Khan Tariq Mehmood Tel no. +92 111 253 111 (692) +92 111 253 111 (693) +92 111 253 111 (693) +92 111 253 111 (693) +92 111 253 111 (665) +92 111 253 111 (639) +92 111 253 111 (647) +92 111 253 111 (680) +92 111 253 111 (639) +92 111 253 111 (646) +92 111 253 111 (646) +92 111 253 111 (643) E-mail naveed.vakil@akdsecurities.net raza.jafri@akdsecurities.net ayub.ansari@akdsecurities.net anum.dhedhi@akdsecurities.net reema.shakeel@akdsecurities.net raza.hamdani@akdsecurities.net bilal.alvi@akdsecurities.net qasim.anwar@akdsecurities.net hassan.quadri@akdsecurities.net azher.quli@akdsecurities.net nasir.khan@akdsecurities.net tariq.mehmood@akdsecurities.net Coverage Strategy, Oil & Gas Pakistan Economy, Commercial Banks & Insurance Fertilizer, Chemical, Food & Telecom Economist Cement & Power Fertilizer, Chemicals & OMCs Textiles, Chemicals Technical Analysis & Equity Dealer Research Production/Autos Research Production Research Production Library Operations

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23,000

KSE-100 Index - Timeline

22,000

21,000

20,000

GoP considers reducing stake in state owned enterprises to 51%

19,000
Date for General Elections set as May 11'13

S&P says new IMF package for Pakistan imperative PM announces Governor rule in Balochistan IMF team arrives in Pakistan to hold talks SC approves draft of Swiss letter QE3 announced KSE representatives meet MSCI S&P affirms 'B' lt. sovereign credit rating Supreme Court disqualifies Gilani from National Assembly DR cut by 50bps to 10% US waives restrictions blocking aid to Pakistan DR cut by 150bps to 10.5% EU trade package kicks off Clash between Pak and Indian Army at LoC 3 Bomb blasts in Quetta killed at least 98 people

General Elections held, PML-N become winner

18,000

FBR envisages new taxation measures in Budget FY14 to increase Tax-to-GDP ratio by 0.5% The new federal cabinet takes oath

17,000
US Defense Secretary states, US is losing patience with Pakistan

Law & order concerns in Quetta Mr. Saleem Mendiviwalla replaces Dr. Sheikh as Finance Minister

Caretaker PM sworn in Dr. Shahid Amjad Chaudhry appointed Advisor Finance

16,000

15,000

SC ordered the arrest of PM Raja Pervaiz Ashraf Moodys maintains Caa1 rating

Groundbreaking ceremony of IP gas pipeline

14,000

US releases US$1.1 bn CSF

NATO supply re-open after US apology

Jun-12

Aug-12

Oct-12

Dec-12

Feb-13

Apr-13

Jun-13
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Pakistan Market Outlook

Tax rate Cut - Sectorwise impact
2014 Autos Banks Chemicals Cements E&P Fertilizer FMCG IPPs OMCs Telecom Universe Universe Ex-Banks 2.3% 0.0% 2.0% 1.3% 0.0% 2.4% 2.3% 0.62% 1.5% 1.6% 0.6% 0.9% 2015 3.8% 0.0% 3.0% 2.8% 0.0% 3.8% 3.8% 1.2% 3.1% 3.3% 1.1% 1.5%

Although turnover tax increase to 1% will hurt specific sectors, reduction in corporate income tax rate (ex-banks) to 34%, which is proposed to be gradually reduced to 30% is a key positive in the broader context together with no change to the CGT regime. Other noteworthy measures include mandating dividend income for companies as final tax and withdrawal of tax exemption on specie dividends (e.g. bonus issues). While initial market reaction may depict volatility as divergent sector-specific themes come into play, we expect investor attention to soon turn to the Jun 21'13 MPS, IMF-Pakistan talks at month-end and the upcoming energy reform plan. Importantly, we expect foreign investors to remain engaged with the Pakistan Market as valuations remain relatively undemanding (FY14F P/E: 7.8x) underpinning our revised end-Dec'13 Index target of 23,300 points. From a sectoral perspective, we expect Cements to outperform in the near-term. Genesis of market performance: After 49% returns in CY12, the KSE-100 Index has gained another 34%CYTD where recent strong market performance has been driven by 1) a smooth democratic transfer of power and the emergence of a strong central government, 2) expected priority focus on energy sector reforms, 3) lower inflation (May'13: 5.8%YoY) which opens up the prospects for further monetary easing and 4) continued foreign interest that has seen CYTD FPI clocking in at a net US$400mn.

Source: AKD Research

CYTD FIPI vs. LIPI

(US$mn) 500

Market Performance
15% 11% 10% 5% 2% 3% 0% -1% -1% 8% 5% 2% 2% 12%

400

FIPI, 400

5%

300

Banks/DFIs, (62)

Companies, (95)

Individuals, (17)

200

Mutual Funds, (100)

0% -3% -7% -10% -11% -15% FY05 FY06 FY07 FY08 FY09 FY10

-2%

NBFCs, (97)

100

Others, (29)

-5%

-9% -10%

-8%

FY11

FY12

FY13

FY14

(100)

1M Before Budget

1M After Budget

Source: AKD Research

AKD Index Target

Current Index E/Y vs. T-Bill Mean P/E TP Mapping Regional Discount Blended Index Target Upside to BIT 22,325 25,093 22,460 23,374 22,291 23,305 11%
Source: AKD Research

Eyeing 23,300+! With the FY14 Budget containing a blend of positives and negatives for the listed corporate sector, initial market performance could depict volatility post initial positive momentum. That said, investor attention should shift very quickly to the state of the economy (covered in detail in the next section) as well as to market specific developments. In this regard, considering market valuations are still undemanding (FY14F P/E: 7.8x) ; D/Y: 7.0%) we raise our end-Dec'13 Index target to 23,300 points with potential for further gains provided monetary easing sustains. In addition to the economy particularly the Balance of Payments position, key flags going forward include the execution capability of . the new government, corporate sector profitability and FPI outlook. The GoP's deliverability: While an energy reforms plan will shortly be announced separately, the FY14 Budget appears focused and cements the market's views that the
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The upcoming reforms plan will go a long way towards setting the tone

new government will attach priority focus to the resolving the energy crisis where the vow to eliminate the circular debt stock in 60 days points to a likely hefty T-bill issuance. This will, in our view, be a key litmus test for the next government where success in resolving the energy issue would give immense credibility. Within this backdrop, the GoP has outlined ambitious targets for FY14 with respect to: 1) revenue collection (tax + non-tax), 2) subsidy control, 3) high PSDP allocation and 4) external receipts including revival of the privatization program. Consistent deliverability on the same will likely further buttress investor confidence and potentially lead to a valuation rerating going forward. Corporate sector profitability: Based on a sample of 40 top-tier companies, corporate profitability decelerated to 5%YoY in 1QCY13 vs. 10%YoY growth in 4QCY12. This was largely due to weak earnings delivered by Index heavyweights Banks (tighter NIMs) and Oil & Gas (upstream sector disappointed due to production slippages and high exploration costs). However, ex-financial growth was 11%YoY while ex-financials/oil & gas growth was a robust 60%YoY, underpinning continued strong performance for Cements, Textiles and Fertilizers, among others. At the same time, broader corporate profit growth remains inline with expectations. Going forward, we expect headline corporate profitability growth to recover to the mid-teens in 2014 with hitherto lagging Index heavyweights poised to depict a turnaround. As a result, while the Pakistan Market's FY13F P/E of 8.9x is at a 44-month high, FY14F P/E contracts to a more palatable 7.8x with room for upside as corporate income tax rates are reduced and turnover tax exemptions are potentially obtained.

Corporate profitability should rebound in 2014

Corporate Profitability vs. Expectations

40% 30% 20% 10% 0% -10% -20% 4.00 3.00 2.00 1.00 7.00 6.00 5.00

Earnings Deviation (s)

Oil & Gas Banks Cements Chemicals Autos KSE Teleco Food Power

1QCY10

2QCY10

3QCY10

4QCY10

1QCY12

2QCY12

3QCY12

4QCY12

1QCY13

1QCY11

2QCY11

3QCY11

4QCY11

-30%

YoY Growth

Deviation from Mkt.Est

QoQ Growth

-2.5

-1.5

-0.5

0.5

1.5

2.5

Source: AKD Research

FPI outlook: The MSCI World Index gained 13.2% in CY12 and has followed that up with 8.9%CYTD gains, with global equity market rallies ostensibly being driven by availability of cheap funds with global central banks engaging in coordinated monetary easing amidst bond buyback programs. Of late however, global equity markets are facing pressure (MSCI World Index down 4.9% since CYTD peak) with burgeoning expectations that a strengthening US economy will lead the Federal Reserve to scale back stimulus. That said, we believe foreign investors are likely to remain engaged with the Pakistan Market considering earnings growth is poised to rebound, valuations remain attractive (Pakistan trades at a 29% discount to the MSCI Asia Pacific Index) and that Pakistan's weight in the MSCI Frontier Markets Index may increase by 2ppt to ~7% in May'14 when the Qatar and UAE indices will be upgraded to the Emerging Market Index. In this regard, CYTD net FPI of US$400mn (which contains one-off flows related to ULEVER buyback) are at 0.8% of market capitalization,
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Regional MktCap to FIPI ratio CY13 Pakistan India Indonesia Philippines S.Korea Taiwan Thailand Vietnam FIPI US$mn 400 15,363 715 1,520 (56) 2,975 (1,835) 244 Ratio% 0.80% 2.87% 0.17% 0.95% -0.01% 0.39% -0.46% 0.59%

still lower compared to several regional peers such as India and Philippines. Over the medium-term, further unlocking of value will emerge post elevation to the MSCI Emerging Market Index where the Pakistan Market already meets the quantitative criteria for upgrade (four companies needed with market cap of US$1.01bn; free float market cap of US$505mn and 15% AVTR) while uptick in activity - CY13TD volumes and value at 262mn shares and . US$400mn - provides clear insight on the qualitative aspects, in our view. Regional Valuations
PER (x) Pakistan Indonesia Malaysia Philippines Vitenam India China Regional Avg. 7.49 11.67 12.69 15.02 17.27 12.10 8.54 12.88 ROE (%) 23.35 20.00 13.86 15.07 17.89 16.59 13.80 16.20 DY (%) 7.28 2.37 3.45 2.26 1.98 2.06 3.75 2.65 EPS % 16.62 12.56 18.83 9.35 11.20 14.91 13.29 13.36

Source: Bloomberg & AKD Research

Source: Bloomberg & AKD Research

Investment perspective: In our view, the FY14 Budget holds a mixed bag for the listed corporate sector with divergent themes to potentially lead to volatility in market performance post initial positive momentum. Specifically, we see clear positives for Cements (big PSDP allocation) while OMCs/Refineries may see a relief rally from exemption from doubling of turnover tax. Sectors that appear largely unaffected include Index heavyweights E&P and Banks as are Telecoms, Textiles and Electricity. We see negatives at the margin for Fertilizers . (high urea import subsidy) and Autos (higher taxes on new registrations). AKD Universe Snapshot
12-Jun-13 EPS (PkR) EPS chg (%) EPS chg (%) Ex-Financials Book Value per Share (PkR) Payout (%) Price to Earnings (x) Price to Book (x) PER (x) Ex-Financials P/BVS (x) Ex-Financials Price to CF (x) Earnings Yield (%) Dividend Yield (%) EV / EBITDA (x) Return on Equity (%) Return on Assets (%) 2011A 8.59 25.27 25.65 38.43 54.92 11.59 2.59 12.98 3.38 18.97 8.63 4.74 7.40 22.36 4.06 2012A 9.60 11.65 13.26 44.65 51.54 10.38 2.23 11.46 2.89 18.10 9.63 4.96 6.64 21.49 4.08 2013F 11.18 16.48 24.46 50.05 54.63 8.91 1.99 9.21 2.49 13.03 11.22 6.13 5.86 22.33 4.26 2014F 12.81 14.64 15.35 56.40 54.14 7.78 1.77 7.98 2.16 11.01 12.86 6.96 5.08 22.72 4.40 2015F 14.41 12.47 13.30 63.42 52.60 6.91 1.57 7.05 1.90 10.28 14.47 7.61 4.46 22.73 4.49

Source: AKD Research

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Budget Implications on Sectors

Sector
Budget Stance

Budget Implications
Budget FY14 is a mixed bag for the KSE. Emergent positives include a clear focus on addressing the circular debt issue, higher PSDP spending and reduction in corporate taxes. Increase in turnover tax rate is the the big negative for the market though

AKD Research Comment

Investors will draw comfort from a more focused approach towards addressing structural issues relating to the energy crisis and enhancement of tax base. However, ambivalence over the turnover tax rate on OMCs and refineries could drag sentiment in the near term.

Market

Neutral

Positive

Significant infrastructure development plans announced which include spending on dams, canals, power projects, roads and low cost housing. Corporate tax rate reduced by 1% to 34%. GST has been increased to 17% from 16% in FY13. Taxes are being levied on real estate devlopers and builders.

Cements

Overall impact should be positive as demand due to spending on big ticket infrastructure projects and the decrease in coroprate tax rate offset the negative impact of the levy of tax on real estate developers and builders.

Neutral to Negative

Advance tax on registration of new cars increased. Furthermore add. valorem tax of 10% imposed on 1800cc+ cars. Additionally, duty reduction is proposed on Hybrid cars which could eat into the share of OEMs.

We view budget implications for the Auto sector to be neutral to negative due to increase in advance tax on new registrations, reduction in import duties of hybrid vehicle cars and application of add. valorem of 10% on 1800cc+ cars. Status quo maintained on CKD and CBU imports. Announcement of taxi scheme going forward could be a trigger, particulalrly for PSMC.

Autos

Neutral to Positive

Considering no change to the relevent clause for oil & gas exemptions in the Income Tax Ordinance, we understand that OMCs and Refiners will continue to be subject to 0.5% turnover tax. Elmination of outstanding stock of circular debt within 60 days is a broader positive for the sector.

Oil & Gas

The Budget is a non-event for the E&P sector but status quo in turnover tax rates spells a relief rally particularly as GoP focus remains on circular debt elimination.

Neutral to Negative

Increase of 1% in GST will increase inflationary pressures, reducing purchasing power ceteris paribus. However, the packaged milk sector will continue to enjoy exemption on GST on output, as the exemption of GST withdrawn on certain products containing milk preperations does not include EFOODS products as per management.

FMCGs

While FMCGs could witness kneejerk downward reaction, EFOODS management has indicated that GST imposition will not apply on their products. We advocate a Buy on Dips stance.

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Budget Implications on Sectors

Sector
Textiles Budget Stance

Budget Implications
Zero rating scheme for intermediary textile products is being reintroduced while sales tax will be levied on finished textile goods such as home textiles, made ups and garments.

AKD Research Comment

Reintroduction of zero rating schemes on intermidiary goods and the implementation of sales tax on only finished textile goods bodes well for the textile sector.

Neutral

Electricity

Positive

A one- time cash injection of ~PkR500bn is expected in the next 60 days. In addition, total power subsidies allocation of PkR220.1bn is 37% lower than FY13R allocation of PkR349.287bn.

Elimination of circular debt will ease liquidity constraints for IPPs, resulting in higher fuel supply and enhanced utilization levels. While sustained positivity will depend on long-term structural reforms, lower subsidy allocation for FY14 indicates power tariff rationalization.

Neutral

An amalgam of minor positives and negatives. Positives include decision to allow tax on dividend income to be treated as final tax and freezing tax on income from money market funds/income funds at 25%. Negatives include increasing WHT on cash withdrawals (PkR50k and above) to 0.3% while corporate income tax rate will stay unchanged.

Banks should not witness any material direct impact from the FY14 Budget although they stand to reap medium-term benefits if economic growth picks up. For now, interest rate trajectory holds more meaning for Banks. We retain a selective preference for the larger banks with a liking for UBL and BAFL.

Banks

Telecom

Neutral

The Government has set a rather ambitious 3G auction license target of US$1.2bn, which should result in a per license cost of ~US$300mn (PkR31.2bn)

Budget is largely a non-event for the telecom sector. 3G auction, if successfully conducted will help lift cellular ARPUs but could result in curtailment of PTC dividend and higher sector leverage.

Neutral to Positive

Subsidy for urea import has been set at PkR30bn, 15%YoY higher than last year's budgeted amount. Up gradation of Guddu Power Project, which is allocated gas from the Mari network, has been announced, which could potentially lead to higher gas curtailment for Mari supplied plants.

With subdued international urea prices, the allocated amount for urea subsidies is estimated to result in urea imports of ~0.85mn tons, accounting for ~15% of total consumption for FY14. Gas supply to Guddu Power is currently suspended, where resumption in production could lead to higher gas curtailment for Mari based plants.

Fertilizer

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Budget Review
Although the FY13 GDP growth target of 4.3% was missed (FY13P growth: 3.6%) due to a persistent energy crisis retarding manufacturing growth and security concerns, positives for the fiscal year included 1) benign CPI average of 7.8%YoY (11MFY13) much lower than the GoP target of 9.5%, 2) a lower than expected CA deficit of ~1.1% of GDP partly due to receipt of CSF flows amounting to US$1.8bn and 3) contained 4.2% depreciation in the PkR/US$ parity. That said, structural deficiencies persist with the FY13 fiscal deficit clocking in at a high 8.8% of GDP vs. the 4.7% target as provisional FBR tax collection of PkR2.07tn fell some way short of the FY13 target while the subsidies target was again overshot. At the same time, the investment-to-GDP ratio remained subdued at 12.6% of GDP. Going forward, while the FY14 Budget rightly prioritizes the energy issue as well as reviving the privatization program, the Balance of Payment position stands out as the key-nearterm risk, potentially leading to a formal IMF program before too long. . Within this backdrop, the FY14 Budget pinpoints structural reforms such as widening the tax net, addressing the acute energy deficit (5,000MW shortfall at peak hours) and privatization as holding the keys for unlocking Pakistan's true growth potential even as the economy will likely remain reliant on the materialization of foreign flows in the near-term. The FY14 Budget envisages: GDP growth of 4.4% which appears achievable, in our view, particularly if the energy issue is tackled head-on. A total budgetary outlay of PkR3.9tn and FBR tax collection target of PkR2.5tn (+23%YoY) underpinned by a 1ppt increase in GST to 17% and doubling turnover tax to 1% even as corporate income tax rate is proposed to be reduced by 1ppt to 34% A fiscal deficit target of 6.3% of GDP. Provided subsidies are contained, actual budgetary shortfall should be similar to the target Average inflation of 8.0% vs. an average of 7.8% in FY13 (11M). Target appears broadly achievable but is susceptible to risks emanating from an increase in power tariffs, a weaker PkR/US$ parity etc. External inflows amounting to US$5.9mn emanating from programme loans, privatization proceeds etc. Failure to realize the same in a timely manner may necessitate an IMF program in 2HCY13. In our view, almost as important as the Budget will be the GoP's energy reforms plan to be unveiled shortly. From a broader vantage, any respite on the energy front will firstly be positive for the Oil & Gas and Electricity sectors (resolution of circular debt) to be followed by across-the-board benefits where capacity utilizations for various sectors should increase while private sector credit offtake (presently 5%YoY) should also revive. This should ultimately result in higher employment generation and an improvement in overall social conditions and living standards, potentially lead to a second round of positives for the corporate sector in terms of stronger domestic demand. In our view, the GoP's resolve and execution capability will determine the extent of sustainable macroeconomic improvement that shall be witnessed across FY14, with our without an IMF program. .

PkR/US$ and Reserves

(PkR/US$) 100.00 98.00 96.00 94.00 92.00 90.00 (US$mn) 16,000 15,000 14,000 13,000 12,000 11,000 10,000 9,000 8,000

Sep-12

Dec-12

Feb-13

Aug-12

Nov-12

Mar-13

Jan-13

Jul-12

Oct-12

Reserves (RHS)

USDPkR - Interbank

Source: SBP & AKD Research

DR vs. Trimmed Core Inflation

14% 13% 12% 11% 10% 9% 8% 7%

Sep-12

Feb-13
Sep-13

DR

Trimmed core

Source: SBP & AKD Research

Projected CPI under 1.1%MoM increase

13% 12% 11% 10% 9% 8% 7% 6% Sep-12 Dec-12 Dec-13 5% Mar-12 Dec-11 Jun-12 Mar-13 Jun-13 CPI YoY +0.75% +0.50% +1.00%

Source: SBP & AKD Research

May-13

Jan-12

Jun-12

Nov-12

6%

Aug-11

Apr-12

Oct-11

Apr-13

88.00

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Expenditures
Expenditures (PkRbn) Defence Subsidies Debt Service (Foreign) Debt Repayment (Foreign) Debt Service (Domestic) Total Debt Servicing Public Order & Safety Economic Affairs Education Affairs Health Affairs Others Total Current Expenditure Development Exp (PSDP & Others) TOTAL EXPENDITURE As percentage of Total Expenditure Defence Subsidies Total Debt Servicing Public Order & Safety Economic Affairs Education Affairs Health Affairs Others Total Current Expenditure Development Exp (PSDP & Others) 17% 15% 32% 2% 3% 2% 0% 15% 86% 14% 16% 16% 32% 2% 2% 1% 0% 14% 85% 15% 16% 11% 35% 2% 1% 2% 0% 16% 84% 16% FY11R 445 396 74 127 654 855 59 80 40 7 414 2,296 382 2,678 FY12R 510 512 72 137 772 981 62 72 45 7 443 2,632 478 3,110 FY13R 570 367 77 187 952 1,216 72 50 52 8 571 2,907 571 3,478

Budget Snapshot
Revenues
Indirect Taxes Direct Taxes Total Tax Revenue Income from Property & Enterprise Civil Admin & Other Receipts Misc. Revenue Sources Total Non-Tax Revenue 78 52 59 10 608 3,196 789 3,985 75 60 50 10 550 3,051 671 3,722 Gross Revenue Receipts (Less: Provincial Share) Net Revenue Receipts Net Capital Receipts External Receipts Estimated provincial surplus Privatization Proceeds Bank Borrowing TOTAL RESOURCES As percentage of Total Revenues Indirect Taxes 16% 6% 38% 2% 1% 1% 0% 15% 80% 20% 16% 7% 39% 2% 2% 1% 0% 15% 82% 18% Direct Taxes Total Tax Revenue Income from Property & Enterprise Civil Admin & Other Receipts Misc. Revenue Sources Total Non-Tax Revenue Gross Revenue Receipts (Less: Provincial Share) Net Revenue Receipts Net Capital Receipts External Receipts
Source: AKD Research & MoF

FY14B 627 240 89 367 1,065 1,520

FY14AKD 600 250 89 367 1,000 1,456

Revenues (PkRbn)

FY11R 1,052 627 1,679 104 303 150 557 2,236 998 1,238 459 290 120 452 2,559 41% 24% 66% 4% 12% 6% 22% 87% 39% 48% 18% 11% 5% 0% 18% 100%

FY12R 1,279.6 745.0 2,025 93.719 249 169 512.2 2,537 1,208.62 1,328 525 226 91 939 3,110 41% 24% 65% 3% 8% 5% 16% 82% 39% 43% 17% 7% 3% 0% 30% 100%

FY13R 1345 779 2125 109 385 218 712 2837 1221 1616 106 243 -62 1576 3478 39% 22% 61% 3% 11% 6% 20% 82% 35% 46% 3% 7% -2% 0% 45% 100%

FY14B 1622 976 2598 240 317 265 822 3420 1502 1918 493 576 23 79 975 3985 41% 24% 65% 6% 8% 7% 21% 86% 38% 48% 12% 14% 1% 2% 24% 100%

FY14AKD 1,499 902 2,401 200 278 225 703 3,103 1,365 1,738 450 422 10 79 1,023 3,722 40% 24% 65% 5% 7% 6% 19% 83% 37% 47% 12% 11% 0% 2% 27% 100%

Estimated provincial surplus Privatization Proceeds Bank Borrowing TOTAL RESOURCES

Source: AKD Research & MoF

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The Economy
With provisional FY13 GDP growth logging in at 3.6%, the FY14 Budget envisages achievable GDP growth of 4.4%. The total budgetary outlay for FY14 is PkR3,985bn, up 15%YoY, underpinned by an ambitious FBR tax collection target of PkR2,475bn (+23%YoY vs. nominal GDP growth of 12.5%YoY) even as an eye on expenditure control leads to an achievable fiscal deficit target of 6.3% of GDP. While revenue collection (tax + non-tax) is highly contingent on execution capability and dependence on external sources (incl. privatization proceeds) will remain strong, key positives include planned 40%YoY reduction in tariff differential subsidies pointing to a likely increase in power tariffs ahead and high PSDP allocation of PkR1,155bn given the myriad backward linkages of the construction industry.

REVENUE
Tax Collection Breakup
11% 37%

41% 5% 6%

Customs Duties Petroleum Levy

Sales Tax Income Tax

Federal Excise Duty

Ambitious tax collection target: Pakistan has one of the lowest Tax-to-GDP ratios in the world at less than 10% of GDP. In this regard, FY13P FBR tax collection is PkR2,007bn, much lower than the budgeted PkR2,381bn target. Going forward, the new government is aiming to raise the Tax-to-GDP ratio to 15% across the next 5yrs through a widening of the tax net. In the near-term, the FY 14 Budget envisages FBR tax collection of PkR2,475bn which would represent an increase of 23%YoY - ambitious considering nominal GDP growth of not more than 12.5%YoY. In this regard, the 1ppt increase in GST to 17% will only add an estimated PkR50bn to overall revenue collection while doubling of turnover tax to 1% will likely come under severe pressure for exemptions from affected corporates. Within the backdrop of proposed 1% p.a. reduction in corporate income tax rate (ex-Banks) to 30% over the medium-term, tax collection targets will hinge on widening the tax base. For now, we expect the FY14 revenue collection target of PkR2,598bn to be missed by about 10%.

Source: Budget Documents & AKD Research

Tax to GDP is low

12.0 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY12 FY13 FY11 2,250 2,050 1,850 1,650 1,450 1,250 1,050 850 650 450 250

Tax Collection (PkRbn)

Tax to GDP ratio % (LHS)

Source: SBP & AKD Research

Non-tax revenues require execution: According to the revised revenue estimates for FY13, the GoP achieved non-tax revenue of PkR712bn, broadly inline with the target of PkR732bn. This was despite failure to conduct the 3G license auction where Defense Receipts came to the rescue. For FY14, the government is targeting non-tax revenue generation of PkR822bn, up 15%YoY. In this regard, considering that the interest rate environment may potentially remain soft, the targeted SBP profits of PkR200bn may not

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materialize. At the same time, even if the 3G license auction finally goes through, targeted receipts of PkR120bn appear on the higher side, in our view. As a result, we eye a 15% shortfall in budgeted non-tax revenue leading to total gross revenue receipts of PkR3,103bn vs. the targeted PkR3,420bn. Privatization proceeds can be a winner: Recognizing the acute need to revive the privatization process, the GoP has budgeted an amount of PkR79bn against this head for FY14. In our view, provided the GoP prioritizes execution, the privatization proceeds target can easily be met through second round GDR/SPOs for the large E&P companies as well as selected commercial banks together with targeted privatization of GENCOs/DISCOs. At the same time, the GoP has signaled its intent to focus on restructuring bleeding SOEs including Pakistan Railways. In addition, an amount of PkR50bn has been earmarked through issue of Eurobonds which we believe can possibly go through particularly as Pakistan's risk perception appears to have reduced going by the recent reduction in CDS spreads and existing Eurobond yields. That said, any inordinate delay in the privatization process will likely necessitate another IMF program.

Privatization will have to make up for any tax collection shortfall

Euro-Bond Yield (2016 AtM)

Pakistan 5Y Govt. CDS Spread

Source: Bloomberg & AKD Research

EXPENDITURE
Current Expenditure
10% 8% 11% 48%

20% 5%

Debt Servicing Grants

Pension Subsidies

Defense Civil Govt.

Looking to limit current expenditure: On the current expenditure side, the GoP has increased defense allocations for FY14 to PkR625bn (+10%YoY). That said, the GoP is planning to reduce overall subsidies by 35%YoY largely due to a reduction in the tariff differential subsidy. In this regard, considering the GoP appears to be serious in conducting energy sector reforms, including tough decisions such as raising power tariffs, we believe the actual subsidy burden should not exceed the budget target by a wide margin. This is within the backdrop of focused targeted subsidies where the GoP has earmarked a 29%YoY increase in the Benazir Income Support Program to PkR75bn. At the same time, while the FY14 Budget envisages a 12%YoY increase in domestic debt servicing to PkR1,065bn, this figure could potentially tag in below PkR1,000bn if the interest rate environment remains soft. In sum, together with a planned austerity drive at the governmental level (underpinned by a 45%YoY reduction in the PM office's own budget), the GoP plans to limit increase in current expenditure to a manageable 10%YoY. Large development budget: The total budgetary allocation for PSDP has been set at a record high PkR1,155bn (federal component: PkR540bn; up 40%YoY) where inline with
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Source: Budget Documents & AKD Research

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Budget Review 2013-14

High PSDP allocation remains hostage to revenue collection

expectations, the PML-N government has outlined a vision to embark on large-scale infrastructure projects including dams (Gomal Zam, Diamer Bhasha, Mangla raising etc.), motorways (Gwadar-Karachi-Northern Areas) and low income housing projects (1,000 colonies). While the GoP's vision to revive economic growth through the construction industry given its myriad of backward linkages is laudable, actual PSDP allocation remains hostage to revenue collection where shortfall in the same will likely lead to a cut in the federal development budget as has been the case in prior years. Fiscal deficit & Financing: We estimate that the actual FY14 budget deficit will likely remain close to the targeted 6.3% of GDP with revenue slippage to be compensated for by a reduction in the development budget. In this regard, with materialization of targeted external resources of PkR576bn subject to risks, the onus of bridging this gap will continue to fall heavily onto domestic banking channels where targeted bank borrowing of PkR975bn may potentially be exceeded. Medium-term Economic Framework: While the FY14 Budget acknowledges that this coming fiscal year will remain a year of consolidation ahead of stability, projections for the next few years are more optimistic. In this regard, the GoP is targeting GDP growth of 5.5% in FY15 and 7.0% in FY16. In our view, while FY14 GDP growth should clock in above the 4% mark, consistent improvement up to the 7.0% growth mark will likely need resolution to the energy deficit coupled with an uptick in private sector credit offtake. At the same time, the GoP is aiming to restrict inflation to 8% across the next 3yrs which appears relatively more achievable provided natural calamities are averted, international oil prices remain stable and there is no speculative run on the PkR. Considerably more challenging, in our view, is the aim to raise the Tax-to-GDP ratio to 15% across the next 5yrs where this may require agriculture tax/wealth tax in addition to a comprehensive widening of the tax net. In sum, while the FY14 Budget focuses on the right areas and provides a policy guideline for the next 5yrs, the road ahead remains challenging where we reiterate that an IMF program appears likely in the next 3-6 months. Medium Term Budgetary Framework Economic Indicators
Variables Real GDP Growth (%) CPI (%) (As Percent of GDP) Total Revenue Tax Revenue FBR Tax Revenue Total Expenditure Current Expenditure Development Expenditure Fiscal Balance Total Public Debt GDP at market prices (PkRbn) 13.2 9.9 8.8 22.0 16.5 4.2 (8.8) 63.5 22,909 14.0 10.6 9.5 20.3 15.2 5.1 (6.3) 61.3 26,001 14.0 11.4 10.4 18.9 13.8 5.2 (5.0) 59.1 29,749 14.2 12.0 11.0 18.2 12.9 5.3 (4.0) 55.2 34,622 FY13P 3.6 7.5 FY14 4.4 8.0 FY15 5.5 8.0 FY16 7.0 8.0

Source: Budget Documents

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Cements
Relative Performance
1M Absolute (%) Rel. Index (%) 10.8 -0.7 3M 24.5 -2.3 6M 41.2 8.2 12M 71.3 8.0

Budget Implications - Positive

PSDP allocation for FY14 set at PkR1,155bn (Federal: PkR540bn; Provincial: PkR615bn) up 36% from last year. In this regard, the Government's plans for spending on dams including Diamer-Bhasha Dam and extension of Tarbela IV project, development of low cost housing and other infrastructure projects is likely to provide impetus for growth in cement off take in the coming months. The decline in corporate tax rate from 35% to 34% is likely to provide impetus for growth in the earnings of cement companies. The decrease in the tax rate will result in a positive EPS impact of PkR0.45 and PkR0.20 for LUCK and DGKC respectively in FY14. Tax of PkR25/sq. ft and PkR50/sq. yard are being levied on builders and land developers respectively, which is a slight negative for the construction sector. However, we believe that the increased PSDP allocation will more than offset impact of this tax. Net net, we believe the FY14 Budget holds significant positives for the Cement sector particularly as feared increase in FED did not materialize. Our top picks are LUCK (TP: PkR204/share) and DGKC (PkR108/share) while smaller . players such as FECTC, PIOC and KOHC can also outperform.

Performance Chart
60% 50% 40% 30% 20% 10% 0% -10% -20% Jun-12 Sep-12 Dec-12 Mar-13 Cement Jun-13

KSE-100 Index

Banks
Relative Performance
1M Absolute (%) Rel. Index (%) 19.9 8.4 3M 27.3 0.6 6M 27.6 -5.4 12M 48.2 -15.1

Budget Implications - Neutral

Dividend income emanating from money market/income mutual funds has been kept at 25% against earlier expectations that the available tax arbitrage would be eliminated from FY14 onwards. This spells positives for money market mutual funds as well which should witness increased funds flow. Further positives include directive to treat tax on dividend income as final tax which should benefit the larger banks with sizeable equity portfolios such as NBP and ABL. There are some minor negatives too; these include WHT on cash withdrawals above PkR50,000 to be increased to 0.3% from 0.2% previously, which should be passed through, as well as indications that further NSS products could be launched that would compete with Banks on deposit growth. Furthermore, the corporate income tax rate has not been reduced for Banks. We see the FY14 Budget as Neutral for Banks where the upcoming MPS on Jun 21'13 holds more relevance for the sector, in our view. That said, indirect positives could materialize over the medium-term provided the envisaged improvement in GDP growth materializes as the energy issue is resolved. We have a Marketweight stance on . Banks with a selective preference for the larger banks (UBL and BAFL).

Performance Chart
60% 50% 40% 30% 20% 10% 0% -10% -20% Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Banks KSE-100 Index

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Oil & Gas

Relative Performance
1M Absolute (%) Rel. Index (%) 12.9 1.4 3M 22.3 -4.4 6M 27.7 -5.3 12M 54.5 -8.8

Budget Implications - Neutral to Positive

Considering no change to the relevent clause for oil & gas exemptions in the Income Tax Ordinance, we understand that OMCs and Refiners will continue to be subject to 0.5% turnover tax rather than 1%. The Budget is silent for E&P companies. Resolution of circular debt viz immediate release of ~PkR500bn to ease liquidity concerns across the energy chain spells positives specifically for OMCs. Implementation of turnover tax rate of 1% on oil companies would have significantly pruned earnings estimates. Thus, continued exemption comes as a major relief. Beyond the Budget, the next key checkpoint is the upcoming energy reforms plan which should be announced shortly. We retain our preference for PSO from within the midstream space given the GoPs apparent resolve to find a solution to energy issues.

Performance Chart
60% 50% 40% 30% 20% 10% 0% -10% -20% Jun-12 Sep-12 Dec-12 Mar-13 Oil & Gas Jun-13 KSE-100 Index

Autos
Relative Performance
1M Absolute (%) Rel. Index (%) 6.5 -5.1 3M 15.6 -11.1 6M 48.1 15.1 12M 51.2 -12.1

Budget Implications - Neutral to Negative

Status quo maintained on duties of CBU and CKD units. Advance tax on below 850cc to 1300cc vehicles has been raised by PkR2,500 to PkR13,125/unit while for the 1301cc to 2000cc+ category, advance tax increase ranges between PkR25k/unit to PkR100k/unit. We view this as Negative for INDU and Neutral to Negative for PSMC given its dominance in the Economy (below 1300cc) category. Furthermore, duty relaxation on hybrid vehicles is also a negative for the OEM sector. . Auto sector has gained 44%CYTD and has outperformed the broader market by 11% in the said period. Budgetary measures are largely negative, but potential upside could emanate from introduction of taxi scheme going forward (PSMC to benefit if scheme announced).

Performance Chart
60% 50% 40% 30% 20% 10% 0% -10% -20% Jun-12 Sep-12 Dec-12 Mar-13 Jun-13

KSE-100 Index

Automobile and Parts

Electricity
Relative Performance
1M Absolute (%) Rel. Index (%)
60% 50% 40% 30% 20% 10% 0% -10% -20% Jun-12 Sep-12 Dec-12 KSE-100 Index Mar-13 Jun-13 Electricity

Budget Implications - Neutral to Positive

6M 33.7 0.8 12M 47.6 -15.7

3M 19.0 -7.8

10.1 -1.5

As part of near-term measures to curb the circular debt, the government is likely to issue T-bills worth ~PkR500bn in the next 2 months, where an immediate relief across the energy chain will spell positives for IPPs. Addressing of structural concerns relating to recoveries and reduction in line losses is also a long term positive for the sector. While sustained positivity for the sector would depend on long-term structural reforms, lower subsidy allocation for FY14 (PkR220bn vs FY13R allocation of PkR349bn) indicates potential planned tariff hikes during the year. Our preferred plays in the IPP space are HUBC and KAPCO.

Performance Chart

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Budget Review 2013-14

Textiles
Relative Performance
1M Absolute (%) Rel. Index (%) 20.3 0.9 -10.6 8.8 3M 37.9 8.1 -18.6 11.2 6M 66.1 12.9 -20.1 33.1 12M 135.2 12.0 -51.3 71.9

Budget Implications - Neutral to Positive

The budget favored the textile sector by applying sales tax only on finished textile goods such as home textile, made ups and garments (most likely to be passed on to customers) and reintroducing the zero rated tax scheme on intermediary products. Turnover tax on the textile sector is implemented in the form of a final tax. In this . regard the textile sector already pays a tax at the rate of 1% of revenues. The recent apprehensions about additional tax burden on the textile sector are likely to subside with this budget. In this regard, we expect the textile sector to perform well over the coming months on expectation of improvement in energy supplies as well as opening up of trade with regional players including India. NML remains the top pick in the sector which provides an upside of 27% to our revised . Jun'14 TP of PkR131/share.

Performance Chart
120% 100% 80% 60% 40% 20% 0% -20% Jun-12 Sep-12 Dec-12 Mar-13 Textile Jun-13

KSE-100 Index

Fixed Line Telecom

Relative Performance
1M Absolute (%) Rel. Index (%) 13.9 2.4 3M 6.9 -19.9 6M 28.7 -4.3 12M 50.7 -12.6

Budget Implications - Neutral

The budget has remained silent over the International Clearing House Mechanism which in itself is a positive. Ambitious 3G auction target of US$1.2bn, translating into a per license fee of ~US$300mn (PkR31.2bn). We maintain our conviction call on PTC (Dec'13 end TP of PkR34/hare, implying 52% upside from current levels). 1% reduction in corporate tax rate would increase our annualized earnings estimates by 2% or PkR0.08/share. While the auction of 3G license will help in boosting cellular ARPUs which have been stuck in the US$2.5 range, higher cash outlay will result in curtailment of dividends for PTC. .

Performance Chart
60% 50% 40% 30% 20% 10% 0% -10% -20% Jun-12 Sep-12 KSE-100 Index Dec-12 Mar-13 Jun-13 Fixed Line Telecommunication

Food Producers
Relative Performance
1M Absolute (%) Rel. Index (%) 0.8 -10.7 3M 32.3 5.6 6M 53.7 20.7 12M 114.3 51.0

Budget Implications - Positive

Nearly doubling of 'Income Support Fund' (formerly Benazir Income Support Fund) to PkR75bn from PkR40bn as well as 20% rise in monthly income to PkR1,200 are key positives. Contrary to earlier news reports regarding possible GST imposition on packaged dairy products, sector exemption from sales tax (GST) has been maintained as per conversation with management. We have an 'Accumulate' stance on EFOODS, which offers 8% upside to our Dec'13 end TP of PkR158/share. Reduction in 1% corporate tax rate would result in annualized EPS impact of PkR0.11, or 2% of annual income.

Performance Chart
120% 100% 80% 60% 40% 20% 0% -20% Jun-12 Sep-12 KSE-100 Index Dec-12 Mar-13 Food Producers Jun-13

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Fertilizers
Relative Performance
1M Absolute (%) Rel. Index (%) 0.9 -10.6 3M 8.1 -18.6 6M 12.9 -20.1 12M 12.0 -51.3

Budget Implications - Neutral

Urea import subsidy has been set at PkR30bn, which is 3x higher than FY13's revised number of PkR10bn. Assuming an average landed cost of US$350/ton for imported urea, we estimate urea imports for FY14 at 0.86mn tons, accounting for ~15% of total annual consumption. Reduction in corporate tax rate will increase CY14F earnings by 3.2% for FFC, 1.5% for FFBL, 2.3% for FATIMA and 1% for ENGRO. As part of the energy sector development program, the government plans to upgrade the Guddu Power Project. Full gas supply to the Guddu plant could increase gas curtailment for the Mari supplied plants. Budget FY14 is largely Neutral for the fertilizer sector as we expect the increase in subsidy for urea imports to be offset by an overall increase in industry urea offtake on the back of higher demand. That said, possible downside risks going forward could emanate from a likely gas tariff hike, where reduced pricing power of local manufacturers due to subdued international urea prices could result in a partial pass through. In this backdrop, we highlight FATIMA and ENGRO (with fixed feedstock gas rates) as beneficiaries.

Performance Chart
60% 50% 40% 30% 20% 10% 0% -10% -20% Jun-12 Sep-12 Dec-12 Mar-13 Fertilizer Jun-13

KSE-100 Index

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Annexure
Salient features of the FY13 Budget are as follows:
Income Tax Measures
Rate of corporate tax rate on non-banking companies to be reduced by 1ppt to 34% Turnover tax to be doubled to 1% Tax on dividend received by banks from money market funds and income funds to be 25% Margin finance to now be subject to WHT of 10% on profit/markup earned with NCCPL to conduct collection Exemption on specie dividend (e.g. bonus issues) to be withdrawn Currently, Corporate Income Tax Holiday for a period of 5yrs is available for SEZs only. Period of holiday to be extended to 10yrs. WHT exempted on import of hybrid cars with engine capacity up to 1200cc. WHT on engine capacity up to 1800cc reduced by 50% and by 25% for vehicles up to 2500cc. WHT on cash withdrawals from banks (PkR50k+) to be 0.3% For builders, minimum tax of PkR25/sq. ft on the constructed area sold and PkR50/sq. yard of area sold of developed land. Rate of adjustable WHT from wholesale/retail sectors to be reduced to 0.1% Rate of initial depreciation to be reduced from 50% to 25% for Plant and Machinery Exemption limit of WHT for investment in NSS to be withdrawn

Sales Tax Measures

Enhancement in GST by 1ppt to 17%, effective from Jun 13'13 Further ST of 2% imposed on taxable supplies to a non-registered person ST exemption on dairy products to be withdrawn Additional ST of 5% on non-registered commercial and industrial users of electricity/gas having monthly bill in excess of PkR15,000 Increase of 3ppt to 9% in FED on aerated beverages FED at PkR0.40/kg on imported seeds, PkR1/kg on locally produced oil and 10% ad valorem on motor vehicles above 1800cc engine capacity All financial services to be subject to 16% FED Exemption of FED on hydraulic cement and services provided by AMCs to be withdrawn

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Expansion in list of items subject to ST on retail price including Fertilizers and Cements Withdrawing concessions available to 13 districts of KpK, FATA and PATA Substituting zero-rating with exemption on the items of non-exported oriented sectors Exemption of duty/ST on energy savings tubes, currently at 20%

Customs Duty Measures

Reduction in duties/taxes on hybrid electric vehicles; by 25%-100% depending on engine capacity CD on paper & board used in rolls/sheets to be omitted (5% previously) CD on LCD/Plasma panels to be withdrawn (20% previously) Exemptions under active pharmaceutical ingredients to be available to the pharma sector as per requirements of DRAP and for packing materials as per requirements of IOCO CD exemptions on Agricultural machinery (including dairy machinery) to be available only "if used for agriculture sector" CD exemptions on Energy Saving Tube Light and any other item approved by AEDB/FBR

ST SROs
ST zero rating on supply of Hydrogen/Nitrogen/Helium from BOC (now Linde) to Pakistan PTA Ltd (LOTCHEM) to be withdrawn Exemptions provided to registered persons of KpK, FATA and PATA pertaining to penalty on ST/FED to be withdrawn including those exemptions provided through Prime Minister's Fiscal Relief to Rehabilitate Economic Life. Finished articles of textile and textile made-ups to no longer be exempt from ST zero rating

Others
GoP has inserted clause that it can charge tax on production capacity of plants, machinery etc. While this likely pertains to aerated beverages only we await clarity on the same Dividend income for a company including a banking company to be final tax

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AKD SECURITIES LIMITED

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PAKISTAN
Muhammad Farid Alam Chief Executive Officer Tel: (9221) 111 253 111 farid.alam@akdsecurities.net

AKD Sales Team

Domestic and International Sales Team Sheikh Zia-ur-Rehman Head of Institutional Sales Tel: (9221) 111 253 111 (Ext:696) sheikh.zia@akdsecurities.net Qasim Shah International Sales Tel: (9221) 3586-4385 qasim.shah@akdsecurities.net Salman Zahur Senior Equity Trader Tel: (9221) 111 253 111 (Ext:674) salman.zahur@akdsecurities.net Mohted Hassan Khan Equity Trader Tel: (9221) 111 253 111 (Ext:674) mohted.khan@akdsecurities.net

AKD Research Team

Naveed Vakil Director, Research & Business Development Sector: Strategy, Oil & Gas Tel: (9221) 111 253 111 (Ext:692) naveed.vakil@akdsecurities.net Anum Dhedhi Economist Sector: Pakistan Economy Tel: (9221) 111 253 111 (Ext:693) anum.dhedhi@akdsecurities.net

Raza Jafri, CFA Head of Research Sector: Commercial Banks, Insurance, Economy Tel: (9221) 111 253 111 (Ext:693) raza.jafri@akdsecurities.net Bilal Alvi Investment Analyst Sector: Textile Tel: (9221) 111 253 111 (Ext:647) bilal.alvi@akdsecurities.net

Ayub Ansari Deputy Head of Research Sector: Fertilizer,Telecom, Chemicals, Food Tel: (9221) 111 253 111 (Ext:693) ayub.ansari@akdsecurities.net Hassan Quadri Research Database Manager/Investment Analyst Sector: Autos Tel: (9221) 111 253 111 (Ext:639) hassan.quadri@akdsecurities.net

Raza Hamdani Investment Analyst Sector: Fertilizer, Chemicals, OMCs Tel: (9221) 111 253 111 (Ext:693) raza.hamdani@akdsecurities.net

Qasim Anwar Technical Analyst & Equity Dealer Tel: (9221) 111 253 111 (Ext:680) qasim.anwar@akdsecurities.net

Azher Ali Quli Database Officer Tel: (9221) 111 253 111 (Ext:639) azher.quli@akdsecurities.net

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The information and opinion contained in this report have been complied by our research department from sources believed by it to be reliable and in good faith, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. All opinions and estimates contained in the document constitute the department's judgment as of the date of this document and are subject to change without notice an are provided in good faith but without legal responsibility. This report is not, and should not be construed as, an offer to sell or a solicitation of an offer to buy any securities. AKD Securities (the company) or persons connected with it may from time to time have an investment banking or other relationship, including but not limited to, the participation or investment in commercial banking transaction (including loans) with some or all of the issuers mentioned therein, either for their own account or the account of their customers. Persons connected with the company may provide corporate finance and other services to the issuer of the securities mentioned herein, including the issuance of options on securities mentioned herein or any related investment and may make a purchase and/or sale of the securities or any related investment from time to time in the open market or otherwise, in each case either as principal or agent. Neither the company or any of its affiliates, nor any other person, accepts any liability whatsoever for any director or consequential loss arising from any use of this report or the information contained therein. Subject to any applicable laws and regulations, AKD, its associate or group companies or individuals connected with AKD may have used the information contained herein before publication and may have positions in, may from time to time purchase or sell or have a material interest in any of the securities mentioned or related securities or may currently or in future have or have had a relationship with, or may provide or to have provided investment banking, capital markets and or other services to, the entities referred to herein, their advisors and/or any other connected parties. This document is being distributed in the United State solely to "major institutional investors" as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934, and may not be furnished to any other person in the United States. Each U.S. person that receives this document by its acceptance hereof represents and agrees that it: is a "major intuitional investor", as so defined; understands document wishing to follow-up any of the information or to effect a transaction in such securities should do so by contacting a registered representative of AKD Securities Limited. The securities discussed in this report may not be eligible for sale in some states in the U.S. or in some countries. Any recipient, other than a U.S. recipient that whishes further information should contact the company. This report may not be reproduced, distributed or published, in whole or in part, by any recipient hereof for any purpose.

June 2013