KTrade 2023 Strategy Report - Where To Invest in 2023

25th December 2023
PAKISTAN
KASB | KTrade Research
Equity Market
Where to Invest in 2023?

Views of Ali Farid Khwaja
Key themes for 2023:
1. Geostrategic investment from Saudi Arabia.
Ali Farid Khwaja

2. Dealing with PkR depreciation.
Chairman KTrade
3. High interest rates environment.
4. Political volatility.
5. IMF Program
Investment View
I think the macro headwinds of 2022 will extend into the next year and
the themes of political volatility, IMF conditions, high inflation and
exchange rate vulnerability will continue until the 4th quarter of next
year. The political situation could further deteriorate in 2023 as the
current government will end its tenure. On the positive side, I expect
geostrategic investment from Saudi Arabia along with support from
China and investment from Qatar and UAE. We think this will drive
investor interest in sectors such as Energy, Power, Food and Agriculture,
Warehousing and Logistics and Technology Infrastructure.
I think sectors exposed to domestic consumption demand such as

housing and construction will face demand pressure and further
squeeze in profit margins. The domestic economy is likely to also get hit
by higher interest rates, which could eventually also create credit quality
issues for the banking sector.
I expect Gold to remain in a bullish run, both domestically as a dollar

hedge and globally, as the US dollar will come under pressure (against
other developed markets).
The world is transitioning to a state of global fracture, where each

regional power wants to secure access to energy, food and materials
used for renewable supply chain (semiconductors, lithium etc). Pakistan
could benefit as a supplier to regional powers such as Saudi Arabia and
China. While I am overall bearish on the equity markets, until the rates
cycle turns, I think energy sector stocks look attractive and could
become the next thematic play.
A recessionary year is typically about search for safety. Investors will

maintain overweight on fixed income in search of yields and try to hedge
against inflation through commodities such as gold and silver. If the
interest rates start to come down by 4Q2023, that could make cyclicals
attractive by the 3Q23. Ali Farid Khwaja
2
PAKISTAN
Equity Market
KTrade Research Recommendations

Stocks
▪ KSE 100 Index target (Dec 2023: 47,640pts): We project the index target of 47,640
based on earnings growth of 12% and dividend yield of 8%. We assume that the index
will not re-rate based on economic and political volatility.
▪ Top five stocks
Mari Petroleum (Target Price: PkR 2,658/sh, upside 72%): Mari is aggressively
expanding its exploration activities to enhance overall production flows. It is largely
insulated from the circular debt and offers a hedge against currency and oil prices.
Attock Refinery (Target Price: PkR 313/sh, upside 140%): Approval of long-awaited
refinery policy would be the key trigger for ATRL. Its tilt towards higher margin HSD
and Motor Gasoline would keeps it insulated from demand slowdown in FO.
The Hub Power (Target Price: PkR 120/sh, upside 90%): The stock offers a long-term,
lucrative growth story, with its profitability largely insulated from macroeconomic
volatility. It enjoys a diversified stream of revenues through exposures in electricity
production, coal mining, and most recently, upstream energy exploration.
Fauji Fertilizer (Target Price: PkR 135/sh, upside 35%): The stock offers i) hedge
against macroeconomic shocks amidst stable cash flow generation, ii) strong dividend
yield and iii) robust dividend income from various subsidiaries.
Meezan Bank (Target Price: PkR 167/sh, upside 62%): Meezan is expected to deliver
3yr earnings CAGR of 19% and sustainable ROE of 30%. It trades at CY23f and CY24f
PBv of 1.2x and 0.9x. We expect NIMs expansion amidst hike in interest rate by 200bps.
Commodities
▪ Gold (Price Forecast: $1,850/oz, PkR 209,362/tola, 18% upside)
▪ Oil (Price Forecast: Brent $80-90/bbl)
Interest rates
• Peak policy rate (Jun 2023: 18%, 200bps increase)
• Cut in policy rate by 100bps in Sep 2023
Real Estate Prices

• 2022 estimated decline (Zameen.com) -11% Karachi, +8% Lahore, +13% Islamabad
• 2023’s return will be lower than the projected inflation of 21% because of reduced real
estate turnover amidst economic slowdown and new taxes on real estate.
Economic Forecasts
• We expect GDP growth of 1.5%, fiscal deficit of 7.0% of GDP, inflation of 23%, and CAD
of USD 10.5bn (2.8% of GDP). Exchange rate is expected to close at 275 by Dec 2023
(average: PkR265 for the period).
3
PAKISTAN
Equity Market
KTrade Valuation Summary

Target
Stock Last Price Upside EPS DPS P/E D/Y BVPS P/B ROE
Price
2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E 2023E 2024E
Commercial Banks
HBL PA 63 130 107% 32.5 39.1 8 10 1.94 1.61 13% 16% 224 248 0.28 0.25 15% 16%
MCB PA 112 151 35% 33.0 36.9 22 24 3.39 3.03 19% 21% 162 174 0.69 0.64 20% 21%
UBL PA 104 160 54% 25.6 33.4 18 24 4.06 3.11 17% 23% 182.1 190 0.57 0.55 14% 18%
BAFL PA 30 48 61% 9.7 12.2 5 6 3.08 2.45 17% 20% 62.1 67 0.48 0.45 16% 18%
MEBL PA 105 167 59% 22.3 30.5 7 12 4.71 3.44 7% 11% 81 96 1.30 1.09 28% 32%
AKBL PA 20 45 124% 12.0 13.0 4 4 1.67 1.54 18% 19% 67 75 0.30 0.27 18% 17%
ABL PA 63 85 35% 21.5 25.3 11 13 2.93 2.49 17% 20% 119 130 0.53 0.48 18% 19%
Exploration and Production
OGDC PA 72 136 95% 34.3 31.6 6 6 2.11 2.29 8% 8% 183 209 0.39 0.35 19% 15%
PPL PA 55 115 108% 28.6 27.2 3 3 1.91 2.01 5% 5% 153 177 0.36 0.31 19% 15%
MARI PA 1569 2658 71% 418.1 444.4 209 222 4.33 3.81 12% 13% 1094 1290 1.43 1.22 33% 32%
POL PA 398 468 17% 86.7 77.6 70 60 4.59 5.13 10% 10% 146 184 2.72 2.17 59% 42%
Oil Marketing Companies
PSO PA 130 250 92% 46 51.5 10 10 2.82 2.52 8% 8% 283 325 0.46 0.40 16% 16%
Fertilizer
FFC PA 102 135 32% 20.1 21.6 16 17.3 5.07 4.72 16% 17% 52 56 1.95 1.81 39% 38%
EFERT PA 78 90 15% 14.3 14.9 13.5 14.3 5.48 5.26 17% 18% 37 38 2.12 2.07 39% 39%
ENGRO PA 263 350 33% 57 58 30 30 4.61 4.53 11% 11% 317 344 0.83 0.76 18% 17%
FFBL PA 15 28 92% 6.2 4.1 1 1 2.35 3.55 7% 7% 25 31 0.57 0.48 24% 13%
Power
HUBC PA 61 120 98% 27.4 32.5 12 15 2.22 1.87 20% 25% 88 105 0.69 0.58 31% 31%
Cement
LUCK PA 439 800 84% 113 140 5 7 3.88 3.14 1% 2% 324 457 1.36 0.96 35% 31%
DGKC PA 48 94 95% 15.2 14 1 1 3.17 3.44 2% 2% 154 167 0.31 0.29 10% 8%
FCCL PA 12 28 158% 3.6 4.4 0 0 2.95 2.84 0% 0% 13 17 0.91 0.70 31% 25%
MLCF PA 22 33 50% 5.3 4.8 0 0 4.24 4.68 0% 0% 30 35 0.75 0.65 18% 14%
KOHC PA 143 229 60% 30.2 27.8 5 5 4.75 5.16 3% 3% 97 120 1.48 1.20 31% 23%
PIOC PA 48 89 84% 10.6 9.8 0 0 4.57 4.94 0% 0% 51 60 0.96 0.80 21% 16%
Textile
GATM PA 22 37 65% 10.5 13.5 2.1 2.7 2.14 1.67 9% 12% 71 79 0.32 0.28 15% 17%
NML PA 53 84 57% 21.48 20.84 4 4 2.49 2.57 7% 7% 242 259 0.22 0.21 9% 8%
NCL PA 23 30 28% 7.5 10.1 2 2 3.13 2.32 9% 9% 102 108 0.23 0.22 7% 9%
ILP PA 58 77 33% 9.8 13 3.5 4.5 5.92 4.46 6% 8% 32 38 1.81 1.51 31% 34%
Autos
INDU PA 985 1539 56% 235 199.8 120 100 4.19 4.93 12% 10% 581 680 1.70 1.45 40% 29%
HCAR PA 135 255 89% 25 21.3 5 3 5.41 6.35 4% 2% 124 143 1.09 0.95 20% 15%
PSMC PA 129 225 74% 26.5 22.5 5 3 4.88 5.74 4% 2% 339 359 0.38 0.36 8% 6%
Chemicals
EPCL PA 42 80 90% 18.3 15.3 12 10 2.30 2.75 29% 24% 29 34 1.45 1.22 63% 44%
LOTCHEM PA 26 18 -30% 5.3 3.5 2 1 4.85 7.35 8% 4% 12 14 2.16 1.79 45% 24%
Source: PSX, KTrade Research
4
PAKISTAN
Equity Market
KASB | Trade Annual Strategy 2022

Equities not for 1HCY23
We think Pakistan equities will be sidelined in 1HCY23 as other Market Overview (CY22)
asset classes take precedence in Pakistan’s volatile economic KSE100 Index pts 39,669
and political environment. Investors portfolio allocation Mkt. Return % -11%
witnessed a significant shift away from equities over the past few Mkt. Return USD (%) -33%
months and we expect this trend to continue well into CY23. Mkt. Cap PKR bn 6,363
Since the reversal in the interest rate cycle back in Sep21, Mkt. Cap USD bn 28
equities allocation in the mutual funds industry fell by 9pps to Avg. Turnover mn shares 99
12% of total AUMs. We think the asset shift towards fixed PE Multiple x 3.8
income and other asset classes will accelerate in the coming PB Multiple x 0.7
months as interest rates trend higher.
Div. Yield % 8
Source: PSX, Bloomberg
Liquidity will likely be diverted towards commodities and
fixed income instruments: We think the high interest rate cycle `
and the likely Pak Rupee depreciation will drive liquidity towards
fixed income instruments and commodities, particularly gold.
We foresee interest rates touching 18% in FY23 driven by the
high inflation environment (CY23 CPI estimates: 21%), compelling
investors to opt for higher returns in ‘risk-free’ instruments.
Moreover, commodities offer a general inflation and currency
hedge with our particular inclination towards gold as global
economies brace for a slowdown.
Equities may rerate in 2HCY23 as the economic cycle turns:

We think that equities may potentially rerate in 2HCY23 prior to
the economic cycle turning. The high inflation base coupled with
lower oil prices will push CPI figures in the 12-14% range from
Jul23 onwards. We think the central bank will commence the
easing cycle once real interest rates cross the 2.0% mark, likely in
Sep23. Given historical precedence set in Pakistan’s market, we
may see cyclical stocks performing prior to the economic
cycle turning.
Themes to look out for in CY23: We think the refinery policy’s

approval prior to MBS’s visit will likely garner interest towards
the refinery space, with our top pick as Attock Refinery (Target:
PkR 313/sh). We also recommend banks with strong asset
quality and well positioned loan book such as Meezan Bank
(Target: PkR 167/sh) and energy companies that benefit from
USD-linked revenues (top picks: MARI – Target: PkR 2,658/sh;
HUBC – target: PkR 120/sh). Additionally, a trend of buybacks
has emerged in the PSX, signaling management confidence in
the company’s outlook. We believe the buybacks will likely place
a floor on the stock’s price and recommend building positions in
said stocks (top picks: ENGRO – target: PkR 350/sh; LUCK -
target: PkR 800/sh; BAFL – target: PkR 48/sh).
5
PAKISTAN
Equity Market
IMF’s suggested policies will be implemented in 1HCY23

We think that despite some political hesitation, eventually the government will need to
implement the reforms suggested by IMF. The economic policy is likely to target building
sustainable reserves through a flexible exchange rate regime, power sector repricing, interest
rates hike, more aggressive tax collection and fiscal discipline. This is likely to lead to further
increase in inflation and slowdown in the economic activity.
- GDP growth rate will likely slow down to 2%: After two continuous years of 6.0% growth,
Pakistan’s GDP growth rate will likely slow down to 2.0% in FY23. A number of factors will
come into play, including high interest rates and inflation, shrinking fiscal space, restricted
imports, and the flooding.
- Currency may weaken to PkR 265/USD: Plummeting foreign exchange reserves amidst
high debt servicing obligations will likely exert considerable pressure on the Pak Rupee. As
per the SBP, REER has again crossed the 100 mark, driven by Pakistan’s high inflation
environment. As debt servicing exerts additional pressure on the Pak Rupee, we believe
the currency may depreciate to PkR 265/sh by FY23.
- Interest rates still finding its peak: The surprise policy rate hike in Nov22 and ensuing
guidance by the central bank compelled the market to revisit its interest rate expectations,
which many had capped at 15.0% for the economic cycle. With core inflation likely
dictating interest rate direction, we think the policy rate may find its peak at 17-18%.
- Inflation may remain above 20%: Weakening Pak Rupee, surging commodity prices,
changes in the petroleum pricing structure, and flood-driven supply constraints will likely
keep inflation high in FY23.
- Fiscal discipline a priority: We think fiscal discipline will be a priority despite the election
year. We foresee a sharp cut in development spending and enhanced revenue measures.
We think the budget deficit target of 4.9% is largely unachievable given current dynamics.
Economic Overview
FY20 FY21 FY22 FY23E FY24E
GDP (USD bn) 262.6 279.5 380 378 395
GDP Growth (%) -0.94% 5.74% 5.97% 1.50% 3.00%
PKR/USD Parity (end) 168.1 157.7 204.5 265 281
Interest Rate (%) 7.00% 7.00% 13.75% 18.00% 14.00%
CPI Inflation (%) 10.74% 8.90% 12.15% 23.04% 13.41%
Imports (USD mn) 42,417 54,273 72,152 60,500 64,500
Exports (USD mn) 22,507 25,639 32,471 27,500 30,000
Remittances (USD mn) 23,134 29,450 31,279 29,000 30,000
CA balance (USD mn) (3,123) (2,820) (17,405) (10,500) (12,500)
Fiscal Deficit (% of GDP) -8.1% -7.1% -7.9% -7.0% -5.5%
Primary Deficit (% of GDP) -1.8% -1.4% -3.1% -1.5% 0.0%
Source: SBP
6
PAKISTAN
Equity Market
Sectors in Brief
Sector Outlook Stance
Pakistan’s automobile sector will likely bear the brunt of
the economic slowdown, with a projected 30-35%
decline in volumetric off-take. The interest rate cycle
coupled with the Pak Rupee depreciation has increased
Autos the cost of financing a car by 3-4x over a two-year period. Negative
Moreover, restricted imports has caused supply-chain
concerns for the sector, resulting in many automobile
assemblers holding off their bookings because of
production limitations.
Banks are expected to greatly benefit from a favorable
interest rate cycle, which will enhance the industry’s net
interest margins and ROEs. Moreover, risks of NPLs
Banks Positive
remain limited amidst economic down cycle and
potential implementation of additional taxation levy
would be the key risks to the sector.
Pakistan’s cement sector also remains vulnerable to the
economic down cycle as the industry may witness a 12-
15% decline in volumetric off-take during the year.
Moreover, the highly leverage sector may have its
profitability restricted because of a sharp increase in
Cement Negative
debt servicing costs. Additionally, record-high
construction costs amidst a slowing housing market
may take a significant toll on construction activity during
the year. The decline in energy prices, however, may
allow the industry to enhance its primary margins.
Pakistan’s fertilizer sector has benefitted from improved
pricing power after a sharp surge in global fertilizer
prices. Notably, Urea prices are up 34% YoY to PkR 2,500
per bag as the industry has been able to pass on
Fertilizers additional inflationary costs. The industry’s demand has Positive
shown consistent stability over decades and benefits
from agriculture packages introduced by the
government. Moreover, the sector offers a stable yield,
ensuring a floor to current price levels.
Pakistan’s oil and gas exploration sector has been a
victim of the circular debt, which reported crossed PkR
4.1tn after a sharp increase in energy costs, particularly
Oil & Gas RLNG. The recent quarter saw the two main E&P
Neutral
exploration companies add PkR 80bn to their receivables balance.
While profits have touched record-high levels, cash flow
issues have limited the sector’s payouts and capital
expenditures.
7
PAKISTAN
Equity Market
Sectors in Brief (cont’d)

Sector Outlook Stance
Pakistan’s oil and gas marketing sector is also a victim of
the circular debt, particularly PSO, which is responsible
for supplying imported RLNG to the country. The sector
has also been affected by the domestic slowdown and
the wide-scale flooding, which has reduced demand for
Oil & Gas
petroleum products. The high interest-rate environment Negative
Marketing
amidst higher petroleum prices may also considerably
increase the debt servicing burden amidst a sharp rise in
working capital. We, however, think that product
deregulation will improve the sector’s efficiencies and
may potential enhance core margins.
Pakistan’s Independent Power Producers have also been
a victim of the circular debt. The sector recently
benefitted from the clearance of its overdue receivables
Independent with the caveat of a reduced tariff. Cash-flow issues,
Power however, have emerged as collection rates fall to lower Neutral
Producers levels amidst rising circular debt. We think the sector’s
cash-flow yields will largely hinge upon the
government’s ability to address key circular debt
concerns.
We think the refinery sector is set to benefit from the
upcoming refinery policy, which is likely to be finalized
prior to the Saudi Prince’s visit. The policy would offer
significant tariff protection to finance the refinery
Refineries Positive
upgrades. Moreover, a multi-year tax holiday is also
under discussion for new investments. Core refinery
margins, however, have come off from peaks recently as
the global demand-supply dynamics stabilize.
Pakistan’s Technology sector benefitted from the global
surge in the demand for technology products. The
sector’s revenues remain largely foreign currency
Technology denominated through its focus on exports. Its expenses Positive
remain primarily PkR based. The sector’s growth,
however, may slowdown over the coming months as the
global recessionary trend affects demand.
Pakistan’s textile sector stand as the country’s largest
exporter, responsible for nearly 60% of all exports. The
sector, in turn, remains hedged from currency weakness.
Moreover, the textile industry benefits from preferential
rates of energy and interest rates to ensure global
Textile Neutral
competitiveness. The demand for Pakistan’s textile
exports may come under pressure amidst the global
recessionary wave. Moreover, heavy flooding damaged
considerable cotton crops, compelling the industry to
increase its reliance on imported cotton.
8
PAKISTAN
Equity Market
Debt management will remain the key

economic theme
High gross financing requirements a cause of concern
Ballooning debt servicing burden amidst limited inflows have
pushed Pakistan’s foreign exchange reserves to critically low
levels. As of Dec22, SBP’s foreign currency reserves balance
fell to USD 6.7bn, a sharp contrast to peak levels of over USD Debt Servicing Projections
20.0bn witnessed back in Aug21. Pakistan’s import cover, in USD mn FY23E FY24E
turn, declined to vulnerable levels of below 1.5months against Gross Financing Req. (33.5) (41.6)
peaks of 3.0 months during FY22. CAD (10.5) (14.9)
Principal Payments (20.5) (25.0)
SBP’s foreign currency reserves
IMF Repurchases (1.0) (1.7)
USD mn months
Inflows 28.1 24.8
25,000 4.00
FDI 1.0 2.0
3.50
Multilateral 26.6 23.3
20,000
3.00 Misc. 0.5 (0.5)
15,000 2.50 Financing Gap (4.9) (16.8)
2.00 Source: MEI, SBP
10,000 1.50
1.00
5,000
0.50
0 0.00
Sep-22
Sep-21
Dec-21
Jan-22
Feb-22
Dec-22
May-22
Oct-22
Aug-21
Oct-21
Nov-21
Jun-22
Nov-22
Mar-22
Apr-22
Aug-22
Jul-22
Jul-21
Reserves (SBP) Import Cover (mo)

Source: SBP
External financing requirements necessitating debt Pakistan Int'l Bonds

restructuring: We estimate gross financing requirements for Tenor Maturity Discount Yield
FY23 at USD 33.5bn and for FY24 at USD 41.6bn. Given 5Y Apr-26 59% 43.4%
Pakistan’s critically low foreign currency reserves of USD 7Y Jan-29 45% 22.8%
6.7bn, concerns of a potential default have arisen. Certain
10Y Jun-31 69% 33.1%
international bonds floated by Pakistan are trading at 30% of
their par value, signaling low investor confidence on 30Y Mar-36 63% 25.0%
Source: Bloomberg
Pakistan’s ability to timely service these bonds.
The government, however, has assured that it is in late stages
of talks with Saudi Arabia and China for potentially rolling
over their loans. Moreover, the government also announced
additional financial support of USD 4.2bn from Saudi Arabia.
We believe that Pakistan is likely fully funded for FY23 and
the burden of financing the country’s obligations for FY24
onwardsss may fall on the newly elected government.
9
PAKISTAN
Equity Market
Domestic Debt Sustainability a Concern

Rising debt levels troubling amidst monetary
tightening
Pakistan’s debt levels have ballooned past the PkR 50tn mark
as of Oct22, led by a sharp increase in both domestic and
external debt. Since FY17, Pakistan’s total debt levels grew by
a 5yr CAGR of 19%, of which domestic debt rose by a 5yr CAGR
of 17% and external debt surged by a 5yr CAGR of 24%.
Concerns of Pakistan’s debt spiraling to unsustainable levels
have emerged amongst the investor base as key indicators
show considerable signs of deterioration.
Central Government Debt

PKR bn FY19 FY20 FY21 FY22 Oct22
Domestic Debt 20,732 23,283 26,265 31,036 32,501
Long Term Debt 15,231 17,704 19,557 24,188 25,690
Sukuk 249 399 866 2,280 2,447
PIBs 10,933 12,886 14,590 17,687 19,239
Saving Schemes 2,992 3,524 3,498 3,208 2,996
Prize Bonds 894 734 444 375 379
Others 163 161 159 639 628
Short Term Debt 5,501 5,578 6,680 6,803 6,763
Market Treasury Bills 5,501 5,578 6,680 6,752 6,707
External Debt 11,055 11,825 12,439 16,747 17,651
Long Term Debt 10,849 11,565 12,304 16,471 17,419
Short Term Debt 206 259 135 276 231
Central Govt. Debt 31,787 35,107 38,704 47,783 50,152
% of GDP 77% 78% 74% 71% 64%
GDP (PKR bn) 41,110 44,747 52,213 66,950 78,197
Source: SBP
Domestic debt levels driven by fiscal indiscipline: Domestic Pakistan Fiscal Deficit
debt levels have risen on account of elevated fiscal deficit for
the past 5 years. Since FY18, Pakistan’s fiscal deficit averaged 10.0%
9.0%
7.7% of GDP driven by elevated fiscal expenditures and 8.0%
comparatively low tax collection. For FY23, we think fiscal 7.0%
deficit may hover around the 7.0% of GDP mark, above the 6.0%
5.0%
target of 4.9% of GDP. Lower tax collection amidst subdued 4.0%
imports and the economic slowdown, increased debt 3.0%
2.0%
servicing costs, and flood-related expenditures may exert 1.0%
pressure on the government’s fiscal targets. 0.0%
FY18
FY19
FY23E
FY22
FY20
FY21
Shrinking fiscal space necessitating revenue measures or

expenditure cuts: We think that the government may be Source: MoF
compelled to introduce another one-off revenue measure,

likely under the guise of ‘flood levy’ to ensure revenue
targets are met. Moreover, we think expenditure cuts will
materialize under the reduction of development spending.
Most notably, the PSDP was slashed by over 50% to PkR
350bn in FY22.
10
PAKISTAN
Equity Market
We expect further pressure on the PkR

USD-hedged sectors may fare better
Given the projected debt servicing burden amidst limited PkR USD Parity
inflows, the SBP’s foreign currency reserves fell to critically PKR/USD
low levels of USD 6.0bn as of Dec22, implying an import cover 250
of 1.1 months. Low reserves compelled the government and 230
the SBP to implement drastic measures to ensure the
210
availability of US dollars for essential imports, particularly for
oil. In CY22, the following unprecedented measures were 190
implemented to limit the outflow of US dollar: 170
1) Complete ban on certain luxury imports 150
Jul-22
Jul-21
Sep-21
Sep-22
Jan-22
Mar-22
Nov-21
May-22
Nov-22
2) Restriction on LCs above a certain denomination,
presently increased to USD 100,000 from USD 50,000 prior
Source: SBP
3) Restrictions on dividend repatriation for foreign sponsors
4) Restricted the US dollar amount carried by outbound
travelers to USD 2,500.
Pressure on the Pak Rupee once imports normalize: We

project the Pak Rupee to come under significant pressure as
import restrictions ease, likely in CY23. This fact is evident by
the burgeoning difference between the inter-bank USD rate
and the open market rate, which prevails at a premium of
PkR 20-25/USD. We project the Pak Rupee to cross PkR
265/USD by Jun23 as demand for the dollar is likely to
outstrip supply.
Textile Industry – Pakistan’s largest exporter: Pakistan’s

textile industry continuously benefits from fiscal support from
the government because of its status as the largest export. In
FY22, the sector was responsible for 61% of the country’s total
exports. The sector’s profitability potential considerably
benefits from a weakening Pak Rupee because of increase in
revenues in PkR terms.
Technology Industry – Pakistan’s fastest growing industry:

The technology sector was Pakistan’s fastest growing
industry and one of the best performing. It has taken full
advantage of fiscal benefits, including tax breaks. The
technology sector’s exports have exhibited a 3yr CAGR of 25%,
supported by the global increase in demand for technology
products. The sector’s costing, however, remains largely
denominated in the Pak Rupee, allowing the sector to greatly
benefit from currency weakness.
Pakistan’s E&Ps – USD hedged revenues: Pakistan’s energy

space, particularly E&Ps, benefit from USD-denominated
revenues. Currency depreciation, in turn, increases the
accounting earnings of all exploration companies.
11
PAKISTAN
Equity Market
Monetary tightening may continue

Leveraged sectors to come under pressure
Given the high inflation environment (FY23 inflation estimate: Pakistan Interest Rates
22-23%), unsustainable external account imbalances, and a Date Policy Rate
weakening Pak Rupee, we think interest rates may witness 28-Nov-22 16.00%
additional hikes and likely peak at 18.0%. The SBP conveyed
13-Jul-22 15.00%
that it prioritizes inflation control and found it worrying that
core inflation showed a consistent rise (Nov22: 16.16% YoY). 24-May-22 13.75%
Moreover, given considerable pressure on the Pak Rupee, 8-Apr-22 12.25%
amidst limited USD supply and consistent outflows, we think 15-Dec-21 9.75%
additional policy rate hikes may be necessary to cool down
22-Nov-21 8.75%
the economy.
21-Sep-21 7.25%
Leveraged sectors to face heightened debt servicing: High
26-Jun-20 7.00%
economic growth rate over the past couple of years
Source: SBP
compelled many to opt for capacity expansions. Most notably,
the cement and the steel sector possess highly geared
balance sheets. The textile industry is also subject to interest
rate volatility as the central bank linked the preferential
interest rates for exporters to the policy rate.
Demand slowdown in cyclical stocks likely: We think
higher interest rates will considerably slowdown the
economy and affect the operations of cyclical stocks. The
cyclical industry will also be affected by shrinking fiscal space
as debt servicing takes a larger portion of the government’s
expenditures. The automobile sector will be hit further as
automobile financing becomes even more expensive.
Leveraged Companies
Debt DA DE
PKR mn Ticker
PKR mn x x
Steel Companies
Mughal Steel MUGHAL 26,552 0.50 1.22
Agha Steel AGHA 22,512 0.55 1.42
Amreli Steel ASTL 23,352 0.51 1.51
Ayesha Steel ASL 21,662 0.42 1.72
International Steel ISL 26,028 0.45 1.30
Cement Companies
DG Khan Cement DGKC 45,284 0.33 0.65
Fauji Cement FCCL 35,377 0.31 0.59
Pioneer Cement PIOC 21,694 0.30 0.71
Maple Leaf Cement MLCF 26,998 0.31 0.65
Power Cement POWER 24,657 0.51 1.45
Bestway Cement BWCL 55,722 0.36 0.87
Cherat Cement CHCC 15,383 0.38 0.82
Textile Companies
Gul Ahmed Textile GATM 59,215 0.52 1.64
Nishat Mills NML 52,099 0.35 0.63
Nishat Chunian NCL 35,131 0.53 1.56
Interloop Pakistan ILP 53,768 0.52 1.54
Chemical Companies
Engro Polymer EPCL 19,318 0.25 0.71
ICI Pakistan ICI 18,288 0.28 0.68
Fertilizer Companies
Fauji Fertilizer FFC 64,651 0.28 1.39
Fauji Fertilizer bin Qasim FFBL 41,641 0.27 1.88
Engro Fertilizer EFERT 20,412 0.14 0.48
Fatima Fertilizer FATIMA 16,015 0.08 0.16
Power Companies
The Hub Power HUBC 130,874 0.40 0.97 12
PAKISTAN
Equity Market
Buybacks emerging as a theme

Sponsor buybacks signaling confidence and may
provide a floor to stock prices
The Pakistan Stock Exchange is witnessing a sudden flux of
buybacks from notable sponsors. We think record-low
valuations amidst high profitability over the past two years
likely drove the buyback phenomenon in the PSX.
The buyback likely signals management confidence in the
company’s outlook and will likely provide a floor to stock
prices.
Notable Buybacks
Stock Shares (mn) % of float % of shares Earnings growth (3yr) Price performance (1yr)
ENGRO 70 22.1% 12.1% 40% -18%
BAFL 200 32.2% 11.3% 52% -34%
LUCK 10 8.8% 3.1% 160% 6%
MLCF 25 5.2% 2.3% 85% -4%
NETSOL 2 6.4% 2.2% -27% 47%

Source: PSX
We see that despite sharp earnings growth for the majority of

the companies, their price performance has remained
relatively muted. Given that the KSE100 is trading at record-
low multiples of 3.8x and PB of 0.6x, we see other candidates
for potential buybacks.
We think the mostly likely candidates for buyback
announcement may emerge from the banking industry
given its record-high profitability and very low multiples
(average PB of 0.70x). Moreover, the cement industry may
also announce buybacks rather than invest in new
expansions given that their stocks are trading at 60-70%
discount to their replacement costs.
Table 1: The banking sector a prime candidate for buybacks
12.0 1.3
10.0
1.1
8.0
6.0 0.9
4.0
0.7
2.0
- 0.5
CY17
CY18
CY19
CY22
CY20
CY21
PE (x) PB (x)
Source: SBP
13
PAKISTAN
Equity Market
Commercial Banks
Strong earnings growth amidst monetary
tightening
Banking sector vs KSE100 in last 12M
We maintain Outperform rating on the sector with a cherry-
picking strategy. Within Ktrade universe, we recommend 10%
5%
defensive stocks comprising MCB and UBL (TP: PkR 151/sh 0%
and PkR 160/sh) and MEBL for its strong earnings growth and -5%
consistent outperformance in all KPIs (TP: PkR 167/sh). All -10%
these banks are well capitalized and have strong asset -15%
quality that would shelter them from macro shocks. Banks -20%
-25%
are currently trading at a 20yr low valuations reflected from -30%
P/B and P/E multiple of 0.71x and 3.96x, respectively, discount
08-Nov-22
08-Mar-22
08-Jul-22
08-Oct-22
08-Dec-21
08-Jan-22
08-May-22
08-Jun-22
08-Feb-22
08-Apr-22
08-Aug-22
08-Sep-22
of 40% and 50% to 10yr avg P/B and P/E. We think that these
historic lows are accredited to macro headwinds and political
uncertainty. We think that in the near term, visibility on NPL Banks KSE-100
formation, interest rate cycle and resumption of IMF program

would take the front seat and drive the sector’s performance.
Meanwhile, in the medium to long run, revival in economic
activity would be the key factor.
Bank’s PB multiples at sharp discounts Bank’s PE multiples trading at steep discounts
3.0 18.0
16.0
2.5
14.0
2.0 12.0
10.0
1.5
8.0
1.0 6.0
4.0
0.5
2.0
- -
CY00
CY11
CY01
CY05
CY00
CY02
CY03
CY04
CY06
CY07
CY08
CY09
CY10
CY15
CY01
CY05
CY02
CY03
CY04
CY06
CY07
CY08
CY09
CY10
CY12
CY13
CY14
CY16
CY17
CY18
CY19
CY11
CY15
CY12
CY13
CY14
CY16
CY17
CY18
CY19
CY99
CY99
CY20
CY21
CY20
CY22
CY21
CY22
Source: Bloomberg Source: Bloomberg
Additional hike in policy rate on cards: With inflation nearing

its historic high of 24% amidst soaring food and oil prices, we
think that there is an additional room of 200bps hike in policy
rate by Jun23. We expect the policy rate to peak at 18.0%, a level
previously witnessed in 1997. For FY23, we project CPI inflation to
average around 23%. Monetary tightening and a period of low
GDP growth might trigger a wave of delinquencies particularly
in textile and agriculture sectors in the aftermath of global
recession and floods in the country, respectively. Having said
that, we expect the monetary easing cycle to commence from
end of 1HFY24.
Expansion in NIMs supported by monetary tightening: Hike in

policy rate would contract the NIMs in short run as deposit
repricing kicks in earlier than asset repricing. Full impact of
repricing would be seen in 1Q/2Q. We project earnings to grow
20% - 25% CAGR during CY23-25. Banks comprising MCB and
UBL with higher CASA mix are expected to greatly benefit from
this development. Consequently, we expect the NIMs to expand.
14
PAKISTAN
Equity Market
NPL formation risks ahead: Recall that banks considerably

improved the asset quality evident from infection ratio of 7.6%
(Sep22) vs. a peak of 15.9% in Jun12 supported by cautious
lending as ADR declined to 46.4% in Sep22 as opposed to 52.6%
in Jun12. Simultaneously, coverage also improved to 91.9% from
66.3% in Jun12. Asset quality might come under pressure as the
sector might face problems due to its exposure in textile sector
(around 16% of loans), agriculture industry (close to 9% of
advances) and domestic cyclical sectors in a slowing growth
(especially manufacturing) and high interest rate and
inflationary environment. Moreover, Energy sector (exposure of
14% of loans) would remain insulated from macroeconomic
headwinds.
Upon assessing the sector wise loan quality of banks, we
highlight UBL as the safest bank in Ktrade’s universe because of
its exposure of 24% in Power sector and lowest exposure in high
risk sectors. Meanwhile, BAFL appears to be the most vulnerable
bank given macroeconomic challenges.
UBL being the safest bank amidst macroeconomic headwinds Textile loans have the highest share of 16%
100%
Agribusiness
90%
2% 2% Automobile/Transportation
80% 39% 9% 4%
46% 43%
50% 53% Cement
70% 1%
69%
60% Chemicals &
37% 3% Pharmaceuticals
13%
50% 12% Electronics
19%
40% 15%
18% 10% Financial
24%
30% 22% 13%
5% 13% Individuals
2% 9%
20% 0%
17% 11% 14%
15% Insurance
10% 22% 21% 13%
8% 5% 10% 8% Energy
0% 1% 1% 16%
MCB BAFL HBL UBL ABL MEBL
0% Shoes & Leather garments
2%
Agri Individuals Textile Power Others
Source: Company Accounts Source: SBP
Risk of higher taxes to meet fiscal targets: We highlight the

risk of higher taxation measures for the banks to meet the
revenue target of PkR 7.6trn this year. With a strong likelihood of
mini-budget in 2HFY23, we expect the sector to face the brunt
of higher charges that would hurt the profits.
Switch to interest-free banking system in five years: The govt

recently announced to introduce interest-free banking system
in the next five years. As a reminder, this was decided in 2013
and 2018 as well, however this could not be executed in the past
years because of technical difficulties. Implementation of such a
development this time would enable the conventional banks to
catch up with the MEBL’s KPI. We think that its practical
implementation is very complicated and it might get delayed
yet again.
15
PAKISTAN
Equity Market
Meezan Bank
Unmatched ROE in banking industry
Meezan is the largest bank of Pakistan with a market cap of MEBL stock details
Valuation PKR 167
USD 590mn. We have a BUY recommendation on the stock - Residual Income
with a target price of PkR 167/sh. This is based on 3yr Valuation
earnings CAGR of 19% and sustainable ROE of 30%. The stock Last Close PKR 106
Upside/downside % 58%
currently trades at a CY23f and CY24f PBv of 1.2x and 0.9x,
Market cap USD mn 590
respectively. Higher PBv compared to industry is accredited Free Float % 40
to consistent outperformance on all KPIs. The stock has
underperformed the benchmark KSE100 by 22% in the past 12
months based on concerns on higher taxation measures, risk
of NPL formation and slowdown in deposit growth. We think
that the concerns are overplayed and the stock can
outperform based on the following reasons.
Highest deposit growth in the industry: The bank’s first mover
advantage in Islamic Banking has resulted in the highest
deposit 3yr CAGR of 25% during CY19-22 vs. the industry’s
growth of 23%. During the past 12 months, the bank has MEBL vs KSE100 in last 12 M
recorded a growth of 23%. On capital adequacy front, MEBL’s 10% MEBL KSE-100
CET1/Tier1 are at comfortable level of 15.03%/16.07% way above 5%
the statutory requirement. 0%
-5%
Expansion in NIMs amidst interest rate hike: Meezan has -10%
access to low cost of funds (non-applicability of minimum -15%
deposit rate), which is one of the reasons for its high ROE. We -20%
think the bank can easily cross 30% ROE over the next three -25%
years. We expect margins to expand amidst a rising interest rate -30%
environment. With the further hike of 200bps in interest rate by
08-Nov-22
08-Mar-22
08-Jul-22
08-Jan-22
08-May-22
08-Oct-22
08-Dec-21
08-Jun-22
08-Dec-22
08-Feb-22
08-Apr-22
08-Aug-22
08-Sep-22
Jun23, NIMs are estimated expand too.
Strong asset quality: MEBL’s ADR was at 51% in Sep22 and the
bank was able to avoid adverse taxation measures. Moreover,
the quality of balance sheet remained strong over the past few
years as it has one of the lowest infection ratio of 1.56%.
Moreover, MEBL has one of the highest coverage ratios of 154%
vs. 92% for the industry. This would enable the bank to
withstand macro shocks in CY23.
Key risk:
- In terms of lending, the bank has the highest exposure in
textile and agriculture sectors of 18% and 16%, respectively.
Higher than anticipated provisioning expense could dent the
profits.
- The govt announced to introduce interest-free banking system
in the next five years. Its implementation would enable the
conventional banks to catch up with the MEBL’s KPI.
16
PAKISTAN
Equity Market
Financial Snapshot
Meezan Bank Limited
Income Statement (PkR mn) 2018A 2019A 2020A 2021A 2022F 2023F 2024F
Net mark-up/interest income 28,167 46,539 64,849 68,922 113,353 134,373 159,447
Total provisioning (1,166) (4,186) (8,210) (992) (2,930) (5,740) (6,818)

Fee, commission and brokerage income 5,258 6,175 5,913 9,352 12,967 14,515 16,351
Total non mark-up income 7,465 9,320 10,070 14,887 20,352 21,027 26,030
Total Income 34,466 51,673 66,709 82,817 130,775 149,659 178,658
Administrative expense (19,290) (24,831) (28,809) (34,356) (44,037) (49,915) (57,038)
OPEX (19,671) (25,522) (29,775) (35,323) (45,957) (51,951) (59,513)
Profit before tax 14,795 26,151 36,934 47,493 84,817 97,708 119,145
Taxation (5,832) (10,919) (14,770) (19,141) (41,838) (46,900) (57,190)
Profit after tax 8,963 15,232 22,164 28,352 42,979 50,808 61,956
EPS - Basic 5.51 9.36 13.62 17.43 26.42 31.23 38.08
DPS 3.50 5.00 6.00 6.00 8.31 11.06 13.84
No. of Shares 1,627 1,627 1,627 1,627 1,627 1,627 1,627
Balance Sheet (PkR mn) 2018A 2019A 2020A 2021A 2022A 2023A 2024A
Assets
Cash and balances with treasury banks 65,022 92,193 136,242 170,501 -87,778 174,288 182,143
Balances with other banks 8,255 15,372 19,446 16,420 13,517 14,920 16,469
Lending to financial institutions 184,815 223,689 342,068 238,401 217,503 244,304 274,326
Investments 123,743 225,646 434,208 620,132 1,272,111 1,176,967 1,358,877
Advances 512,565 493,775 512,532 758,086 872,959 977,433 1,094,073
Other assets 29,404 46,517 52,024 65,474 112,764 124,471 137,392
Total assets 937,916 1,121,258 1,521,557 1,902,972 2,441,120 2,755,729 3,110,198
Liability
Bills payable 23,751 17,187 26,494 36,141 43,704 48,241 53,249
Borrowings 36,408 42,047 94,500 220,414 449,280 504,641 566,654
Deposits and other accounts 785,477 932,579 1,254,431 1,455,886 1,699,365 1,908,763 2,143,322
Sub-ordinated loans 14,000 14,000 18,000 20,990 18,000 18,000 18,000
Other liabilities 37,947 53,600 58,979 82,982 119,174 131,545 145,202
Total liabilities 897,583 1,062,243 1,452,404 1,816,413 2,329,522 2,611,190 2,926,427
Equity
Paid-up capital 11,692 12,861 14,147 16,269 17,896 17,896 17,896
Reserves 15,161 18,208 20,424 23,393 25,073 27,675 30,548
Unappropriated profit 13,526 18,546 29,022 42,832 68,147 99,156 136,329
Surplus/(deficit) on revaluation of assets -46 9,400 5,562 4,064 482 -188 -1,002
Total equity 40,333 59,015 69,155 86,558 111,598 144,539 183,771
Total Equity and Liability 937,916 1,121,257 1,521,559 1,902,971 2,441,120 2,755,729 3,110,198
Key ratios 2018 2019 2020 2021 2022 2023 2024

EPS 5.5 9.4 13.6 17.4 26.4 31.2 38.1
DPS 3.5 5.0 6.0 6.0 8.3 11.1 13.8
Dividend Yield 3% 5% 6% 6% 8% 10% 13%
PE 19.24 11.32 7.78 6.08 4.01 3.39 2.78
PB 4.28 4.12 3.65 3.61 4.14 3.30 3.16
ROE 22% 26% 32% 33% 39% 35% 34%
17
PAKISTAN
Equity Market
MCB Bank
Strong CASA and attractive dividend yield
We identify MCB Bank as our preferred play amidst one of MCB stock details
the highest CASA mix, strong dividend yield and well Valuation PKR 151
- Dividend Discount
positioned loan book. Our target price stands at PkR 151/sh, Model
offering an upside of 29% from the last close. We forecast a Last Close PKR 119
dividend yield of 18% and 20% for CY23 and CY24, Upside/downside % 29%
respectively supported by Tier1/CAR of 15.46%/16.68%. This Market cap USD mn 617
Free Float % 35
would be one of the highest dividend yield in the sector and
above 3yr/5yr PIB yield of 15.25%/14.25%. The bank currently
trades at a PB multiple of 0.8, which represents a discount of
55% from its 10yr average historical PB.
Well positioned loan book: The bank has a relatively insulated
loan book because of minimum exposure in agri sector (share of
MCB vs KSE 100 in last 12 M
1%) and individuals (share of 8%). Moreover MCB improved its
10%
infection ratio to 7.3% in Sep22 from 8.3% in SPLY. Its coverage MCB KSE-100
5%
stands close to 85% as of Sep22. We think that robust asset
0%
quality would enable it to withstand macro shocks. Moreover,
-5%
we believe that the loan growth would remain restricted next
year in the backdrop of heightened macroeconomic -10%
uncertainty. -15%
-20%
Nonetheless, recovery from NIB would be a key trigger. So far -25%
the bank has received PkR 29bn that accounts for 28% of the -30%
total loans. The management expects the recovery to be in the
08-Jul-22
08-Nov-22
08-Mar-22
08-May-22
08-Dec-21
08-Jan-22
08-Jun-22
08-Oct-22
08-Feb-22
08-Dec-22
08-Apr-22
08-Aug-22
08-Sep-22
range of PkR 1.0bn every year.
Best CASA mix in industry: MCB has consistently maintained
its rank of highest CASA mix in the industry. Its stands above
90% and the CA is close to 40%. With the further hike of 200bps
hike in policy rate, we expect the bank to capitalize on strong
CASA mix with an expansion in NIMs.
Healthy CAR ensures strong attractive dividend yield: The
bank has adequate capital buffer of 15.46%/16.68% for Tier1/CAR
that would ensure strong dividend yield. MCB’s 5yr avg PO
stands close to 75%. Higher than anticipated dividend would be
a key trigger to our investment thesis.
Key risk:
- MCB’s inability to meet the required ADR threshold of 50% will
result in additional taxation for the bank as witnessed in
3QCY22. Current ADR stands close to 40% as of Sep22 accounts.
- Higher than expected provisioning expense in low GDP growth
environment would erode the profits.
18
PAKISTAN
Equity Market
Financial Snapshot
MCB Bank
Income Statement (PkR mn) 2018 2019 2020 2021 2022 2023 2024
Net mark-up/interest income 48,006 63,718 75,843 68,378 94,193 115,034 123,696
Total provisions 821 (2,674) (7,330) 5,473 (155) (4,558) (4,399)

Fee, commission and brokerage income 11,637 12,231 11,971 13,691 15,294 16,876 18,304
Dividend income 1,157 1,241 969 1,955 2,222 3,288 3,515
Income from dealing in foreign currencies 3,569 2,958 2,735 3,847 8,715 1,560 1,592
Total Revenue 67,339 78,902 88,353 95,448 120,168 128,720 141,998
Administrative expense (35,715) (37,685) (37,763) (40,590) (47,821) (52,602) (57,052)
Total Opex (36,534) (38,748) (39,034) (42,173) (49,279) (53,511) (57,962)
Profit before tax 30,805 40,153 49,319 53,275 70,889 75,209 84,036
Profit after tax 20,414 23,947 29,563 31,327 28,511 39,108 43,699
EPS 17.2 20.2 24.9 26.4 24.0 33.0 36.9
DPS 16.0 17.0 20.0 19.0 18.4 21.5 24.0
Balance Sheet (PkR mn) 2018 2019 2020 2021 2022 2023 2024
Cash and balances with treasury banks 110,165 142,957 132,053 175,922 341,102 403,803 390,960
Balances with other banks 13,338 21,372 29,011 22,554 37,056 39,736 42,401
Lending to financial institutions 39,150 6,061 17,968 40,617 35,303 37,857 40,396
Investments 754,386 757,442 1,036,218 1,062,569 1,094,042 1,146,372 1,272,892
Advances 566,792 548,473 547,686 686,388 691,466 738,800 785,484
Operating fixed assets 44,984 66,181 63,679 64,190 64,060 69,341 75,057
Other assets 56,395 69,730 64,661 69,881 108,102 117,013 126,658
Total assets 1,585,210 1,612,215 1,891,276 2,122,121 2,371,130 2,552,922 2,733,849
Bills payable 17,003 12,795 26,451 26,486 12,003 12,993 14,064

Borrowings 223,216 92,860 184,577 282,899 281,568 301,937 322,188
Deposits and other accounts 1,122,307 1,226,593 1,388,738 1,534,586 1,765,161 1,892,855 2,019,808
Other liabilities 65,487 102,406 91,027 99,002 135,748 146,938 159,050
Total liabilities 1,433,887 1,440,868 1,698,284 1,944,552 2,194,481 2,354,722 2,515,110
Paid-up capital 11,851 11,851 11,851 11,851 11,851 11,851 11,851

Reserves 74,375 77,895 81,060 85,044 89,178 92,799 96,567
Surplus/(deficit) on revaluation of assets 10,418 24,752 28,803 15,226 6,081 10,322 11,799
Total equity 150,614 170,606 192,213 176,818 176,650 198,200 218,739
Key ratios 2018 2019 2020 2021 2022 2023 2024

EPS 17.2 20.2 24.9 26.4 24.0 33.0 36.9
DPS 16.0 17.0 20.0 19.0 18.4 21.5 24.0
Dividend Yield 14% 14% 17% 16% 16% 18% 20%
PE 6.84 5.83 4.72 4.45 4.89 3.56 3.18
PB 0.92 0.82 0.72 0.79 0.79 0.70 0.64
ROE 14% 14% 15% 18% 16% 20% 20%
19
PAKISTAN
Equity Market
The Energy Chain

Deep-value discounts may converge
once circular debt crisis improves
Circular debt control a top priority: Circular debt control has
been a top priority of the IMF-led economic program. The
past few years saw both governments take major steps to
reduce its proliferation, including hiking of the power tariffs
and the clearance of overdue receivables.
Average power tariff rose significantly
PkR/kWh
30
“The hike in the base power
tariff was a necessary measure
20 to improve the collection of the
energy chain and reduce its
reliance on subsidies. It was a
10 fundamental requirement of
reviving the IMF program”
0
FY18
FY19
FY22
FY20
FY21
Source: SBP
Gas price hike another necessary step: Pakistan’s circular

debt levels have surged to reported levels of PkR 2.4tn, driven
by the gas sector. Increasing reliance on RLNG amidst higher
prices have pushed the sector’s receivables to high levels. As
of 1QFY23, the overdue receivables emanating from the gas Receivables growth (gas)
sector stood at PkR 963bn for the three key companies (PSO, PkR bn
OGDC, and PPL). Moreover, over the past year, the receivables 140 116
witnessed a growth of PkR 314bn. The gas price hike has 120
become necessary to ensure the financial health of Pakistan’s 100
82
79
energy sector. As per our projections, we think the sector 80

requires a significantly higher hike than earlier proposed 60
38
37
because of the recent spell of Pak Rupee depreciation

27
40
pushing the overall cost of procuring gas, particularly
13
20
7
imported RLNG. 0
3QFY22
3QFY21
2QFY21
2QFY22
4QFY21
1QFY22
4QFY22
1QFY23
Gas-based overdue receivables

PkR bn
400 Source: Company Accounts
350
300
250
200
150
100
50
0
1QFY21 2QFY21 3QFY21 4QFY21 1QFY22 2QFY22 3QFY22 4QFY22 1QFY23
PSO OGDC PPL
Source: Company Accounts

20
PAKISTAN
Equity Market
Overall improvements in sector’s efficiency witnessed: The

past two years saw considerable improvement in the sector’s
distribution losses. The DISCOs network witnessed a 1.8pps
decline in losses to 17.1% since FY20 and the KE network
exhibited a marked improvement of 4.4pps to 15.4% over the
same timeframe.
Distribution losses on the decline

22.0%
19.8%
20.0% 18.9%
18.0% 17.5%
18.0% 17.1%
16.0% 15.4%
14.0%
12.0%
10.0%
FY20 FY21 FY22
DISCOs KE
Source: NEPRA
A shift towards a cheaper fuel mix: Introduction of cheaper

fuel sources in the energy mix will play a significant role in
limiting the circular debt growth. The recent addition of coal-
based power plants, particular electricity generated from
Thar coal will keep the overall production costs lower. Most
notably, the recent decline in energy prices pulled the
average electricity generation cost to 17mo low levels of PkR
6.0/kWh in Nov22.
Low sector multiples may improve once material

improvement is witnessed: Pakistan’s energy chain is
trading at record-low multiples of around 2.2x despite a sharp
increase in core profitability. Over the past two years, the
sector provided a negative return of 19% despite a 25%
increase in profitability. We think a material improvement in
the sector’s cash-flows, likely after the implementation of the
WACOG bill may allow the sector’s multiples to converge
towards historical averages.
21
PAKISTAN
Equity Market
Mari Petroleum (MARI) – Target: PkR 2,658/sh

High growth with limited sector risks
Mari Petroleum (MARI) stands as one of our preferred plays in MARI vs KSE100
the energy space based on its high growth trajectory and 10%
limited sector specific risks. The company benefitted from 5%
higher oil prices and the Pak Rupee depreciation, allowing its 0%
-5%
profits to growth considerably over the past few years.
-10%
-15%
Jan-22
Aug-22
Dec-21
Mar-22
Jul-22
Oct-22
Limited exposure to the circular debt: MARI stands as one
Feb-22
Apr-22
Sep-22
Nov-22
May-22
Jun-22
of the few E&P companies not debilitated by the circular debt
because of its limited exposure to the energy chain. Over 85% KSE100 MARI
of its sales are diverted towards the fertilizer sector, which
utilizes the company’s low btu gas. Said gas is unusable in Source: PSX
households and conventional gas-based power plants. Its

trade receivables stand at a comparatively low PkR 34bn,
compared to OGDC and PPL’s cumulative balance of nearly
PkR 900bn.
Increased focus on production growth: MARI has

significantly increased its focus on production growth. Its
production rose to record-high levels of 37mmboe, indicating
Mari Petroleum (MARI)
daily production levels of 100kboepd. Its gas production levels
Stock Rating BUY
increased to 776mmcfd in FY22, a market share of 23%. 2,658
Price Target
Recent discoveries have also enhanced MARI’s reserve level Closing Price 1,582
estimate to 642mmboe. Upside 71%
Mkt. Cap (PKR bn) 211
The company is concluding its Sachal Gas Processing
Mkt. Cap (USD mn) 938
Complex (SGPC), connecting MARI with SNGPL’s network.
Free Float (%) 20%
Phase two of the project would enhance production of 133
Shares Outstanding (mn)
pipeline quality gas by 90mmcfd, all of which would benefit Avg. Daily Volume (mn) 0.03
from PP2012 pricing. 52wk range (PkR/sh) 1,535-1,815
Source: Bloomberg, PSX
MARI also had a successful drill at Bannu West, which has
assessed flows of 50mmcfd and 300bopd. With the
company’s 55% stake, we think the project would enhance its
profits by PkR 25/sh.
Higher yields on offer: Healthy cash flow generation amidst

limited impact of the circular debt has enabled MARI to offer
a healthy dividend yield. After the removal of its dividend cap,
the company’s dividend payout ratio increased to 60% in FY21
and 50% in FY22. We think the company will continue a 50%
payout in view of its capital expenditure plans. Based on our
projections of a PkR 210/sh payout in FY23, the company
offers a yield of 13%.
22
PAKISTAN
Equity Market
MARI Financial Overview
Income Statement
PkR mn FY21 FY22 FY23E FY24E
Sales 73,018 95,134 142,813 160,564
Royalty 9,315 12,000 17,852 20,071
EPS (PkR) 235.71 247.84 418.05 444.37
DPS (PkR) 141.00 124.00 209.02 222.19
PE (x) 6.70 6.38 3.78 3.56
Yield (%) 9% 8% 13% 14%
Source: Company Accounts, KASB Research
Valuation PkR mn
Value of Firm 323,900
Cash and Equivalent 31,372
Debt 742
Value of Equity 354,530
Value of Equity (PKR/sh) 2,658
Source: KASB Research
23
PAKISTAN
Equity Market
The Hub Power Company (HUBC) – Target:

PkR 120/sh
Healthy yields on offer amidst growth
The Hub Power Company (HUBC) stands as our top pick in HUBC vs. KSE100
the IPPs space. The stock offers a long-term, lucrative growth 15%
story, with its profitability largely insulated from 10%
5%
macroeconomic volatility. We think the stock has the 0%
-5%
potential to offer sustainable yields, given its favorable tariff -10%
structure. -15%
-20%
Dec-21
Jan-22
Jul-22
Aug-22
Mar-22
Feb-22
Apr-22
May-22
Sep-22
Oct-22
Nov-22
Jun-22
HUBC trading at cheap levels: The company has been a
victim of the circular debt with overdue receivables KSE100 HUBC
exceeding PkR 60bn as of Sep22. Moreover, its coal-based
power plant has also succumbed to the circular debt with Source: PSX
collections falling to low levels.
More recent, HUBC’s JV partner in the 1,320MW coal-fired
power plant, CPHGC, also cashed the USD 150mn standby
letter of credit prior to its expiry, creating concerns of the
company’s ability to pay dividends, going forward.
Circular debt plan may improve prospects: With the The Hub Power (HUBC)
government’s priority under the IMF program to control the Stock Rating BUY
Price Target 120
circular debt, we think the company’s cash- flow prospects,
Closing Price 60
particularly for its coal-fired power plant, may improve
Upside 100%
considerably. Moreover, the government has also set up a 78
Mkt. Cap (PKR bn)
PkR 50bn revolving credit to ensure the company’s Mkt. Cap (USD mn) 347
availability of working capital. At current price levels, we Free Float (%) 75%
project that the company offers a dividend yield of 20% in Shares Outstanding (mn) 1,297
FY24. Avg. Daily Volume (mn) 2.0
52wk range (PkR/sh) 59.2-82.8
The only IPP with a long-term growth story: HUBC stands
as the only IPP in Pakistan with a lucrative, long-term growth
story. The company has significant investments in CPEC’s
coal-based power plants, utilizing both domestic and
imported coal. The projects benefit from USD and inflation
hedged ROE of 27.2%-30.6% for a 30-year period. We estimate
the projects to enable HUBC’s bottom-line to growth by a 5yr
CAGR of 27% by FY24.
A diversified stream of revenues: The company also enjoys a

diversified stream of revenues through exposures in
electricity production, coal mining, and most recently,
upstream energy exploration. HUBC invested in ENI via a JV
with ENI’s employees. ENI has stakes in 7 operating fields.
24
PAKISTAN
Equity Market
HUBC Financial Overview
HUBC Financial Forecast

PKR mn FY21 FY22 FY23F FY24F
Revenues 54,639 97,158 74,632 77,546
Fin. Cost 7,341 7,928 11,241 10,432
Share of Profit 15,501 9,232 18,627 19,581
PAT 33,688 29,579 35,542 40,471
EPS (PKR) 25.97 21.95 27.40 32.50
DPS (PKR) 12.00 6.50 15.50 10.00
PE (x) 2.3 2.7 2.2 1.8
Yield (%) 20% 11% 26% 17%
HUBC Balance Sheet Forecast

PKR mn FY21 FY22 FY23F FY24F
Property, Plant and Equipment 79,004 108,670 106,254 120,145
Long term Investment 70,009 80,248 78,545 79,653
Cash 6,349 7,528 8,256 8,451
Trade Debts 101,987 84,749 85,326 83,214
Total Assets 278,248 315,153 306,458 320,546
Long term debt 46,585 91,575 84,362 80,632
Short term debt 41,398 37,379 43,214 42,165
Payables 69,516 43,971 30,625 28,545
Total Liabilities 168,582 189,650 175,050 174,480
Reserves 82,255 96,162 102,497 117,155
Total Equity 109,666 125,502 131,408 146,066
HUBC Valuation Summary

Capacity IRR Equity Valuation FY24 ROE
Project
MW % USD mn PKR/sh PKR/sh
Legacy Projects 1,601 13% 521 56.5 16.67
Hub (Base) 1,292 13% 400 42 13.30
Narowal 225 15% 80 10 1.68
Laraib 84 17% 41 5 1.69
CPEC Projects 1,980 28% 397 64 10.37
China Power Hub 1,320 27% 249 44 7.13
Thar Energy 330 31% 78 10 1.60
ThalNova 330 31% 50 7 0.75
Sindh Engro Coal Mining 7.6 mn MT 31% 20 4 0.89
Source: KASB Research 918 120 27.04
25
PAKISTAN
Equity Market
Pakistan Refineries
Attock Refinery
Saudi Prince’s visit may catalyze the refinery policy
Pakistan’s long-awaited refinery policy likely on the fast
track: We think that the long-awaited refinery policy may be
on the later stages and will likely finalize prior to Saudi
Prince’s planned visit. Mohammad Bin Salman is expected to
announce a USD 10-12bn investment via Saudi Aramco in a
Refinery situated in Gwadar. News reports suggest that the
refinery’s stakes would be shared amongst Saudi Aramco,
PSO and the Chinese.
Significant benefit to existing refiners: Domestic refineries

are expected to benefit from the refinery policy. A key
incentive under the draft proposal includes a 10% tariff
protection for both MS and HSD. Moreover, tax holidays are
also on offer for new investments and upgrades. We have
conducted a sensitivity analysis on the impact of the
additional duty protection on National Refinery (NRL) and
Attock Refinery (ATRL).
Impact of additional tariff protection on Refineries
Oil Price USD/bbl 70 80 90 100 110
HSD Spread "" 10 10 10 10 10
MS Spread "" 7 7 7 7 7
HSD USD/bbl 2.0 2.3 2.5 2.8 3.0
Duty Benefit
MS "" 7.7 8.7 9.7 10.7 11.7
Margin ATRL "" 3.4 3.9 4.3 4.8 5.2
Growth NRL "" 1.6 1.8 2.0 2.2 2.4
PKR mn 7,502 8,469 9,436 10,404 11,371
ATRL PKR/sh 70.36 79.44 88.51 97.58 106.65
% - FY24 97% 110% 122% 135% 147%
Profit Impact
PKR mn 3,589 4,047 4,504 4,962 5,420
NRL PKR/sh 44.88 50.60 56.33 62.05 67.78
% - FY24 86% 97% 108% 119% 130%
* Based on FY22’s production
slate
** The Pak Rupee assumed at PkR 225/USD
Upgrades under the refinery policy to phase out low

margin products: The planned upgrades will be
implemented to phase out low margin products from the
refinery’s production slate, most notably Furnace Oil and
Naphtha. Deep conversion refineries will essentially reduce
FO output to 2-3% of the production slate from 23% currently.
This shift would improve the sector’s profitability potential as
low demand for furnace oil has dropped product’s GRMs to
USD -9/bbl. Moreover, Naphtha, which has a negative margin
of USD -25/bbl, will be converted to relatively higher margin
26
Motor Gasoline.
PAKISTAN
Equity Market
ATRL’s production slate tilted towards higher margin ATRL vs. KSE100
products: Attock Refinery’s tilt towards higher margin HSD
40%
(35% of production slate) and Motor Gasoline (37% of 30%
production slate) keeps its profitability potential relatively 20%
10%
insulated from the slowdown in FO demand. Given that FO- 0%
based generation will likely be phased out once Thar-based -10%
-20%
coal power plants come online, most refiners will be
Dec-21
Jan-22
Jul-22
Aug-22
Mar-22
Oct-22
Nov-22
Feb-22
Apr-22
May-22
Sep-22
Jun-22
compelled to export the commodity. Most notably,
international FO margins remain significantly lower
compared to the domestic market, hovering at USD -33/bbl. KSE100 ATRL
As such, exports of FO will largely result in significant losses Source: PSX

for said refiners.
Expansion plans to future-proof its operations: The

management plans to install a Continuous Catalyst
Regeneration (CCR) and Diesel Desulphurization (DHDS) via a Attock Refinery (ATRL)
planned outlay of USD 500mn. The investments would Stock Rating BUY
enhance the production mix of higher margin MS over Price Target 313
Naphtha and would also reduce the Sulphur content, Closing Price 125.45
ensuring a higher quality product meeting Euro V Upside 150%
Mkt. Cap (PKR bn) 13
requirements.
Free Float (%) 40%
Buy with a Dec23 target of PkR 313/sh: We have a BUY call Shares Outstanding (mn) 106
with a Dec23 target of PkR 313/sh based on the company’s Avg. Daily Volume (mn) 1.5
improving GRMs and a healthy balance sheet. As of 1QFY23, 52wk range (PkR/sh) 114.4-183.6
the company remains essentially debt-free and possess a Source: Bloomberg, PSX
cash balance of PkR 29.8bn (PkR 280/sh).
27
PAKISTAN
Equity Market
ATRL Financial Overview
Income Statement
PkR mn FY21 FY22 FY23E FY24E FY25E
Revenues 127,730 261,984 291,457 278,165 291,999
COGS 130,299 243,306 278,877 268,110 284,926
Gross Profit (2,568) 18,678 12,580 10,055 7,073
Other Inc. 1,265 2,003 2,589 2,237 2,602
Fin. Cost 637 3,294 805 771 820
PBT (2,357) 15,287 12,429 9,691 7,132
PAT (2,265) 9,097 7,582 6,880 5,064
EPS (PKR) (20.12) 93.14 78.93 72.36 55.32
DPS (PKR) 10.00 15.00 15.00 20.00 20.00
Balance Sheet
PkR mn FY21 FY22 FY23E FY24E FY25E
Fixed Assets 61,186 54,114 59,070 59,570 60,070
Stock in Trade 9,379 17,743 19,963 19,052 20,000
Receivables 13,305 30,279 26,742 25,709 27,322
Cash & ST Inv. 12,051 24,754 17,258 18,645 26,017
Total Assets 103,295 132,906 129,951 130,448 141,329
Payables 47,207 69,644 61,124 58,764 62,450
Other Liab. 5,757 4,231 4,865 5,254 5,570
Total C. Liabilities 55,964 78,874 65,989 64,018 68,019
Total Liabilities 61,583 81,379 71,608 66,523 73,638
Total Equity 41,712 51,527 58,343 63,925 67,691
28
PAKISTAN
Equity Market
Pakistan Cements
Economic slowdown amidst the
expansion cycle may limit performance
Economic down cycle to restrict demand: Pakistan’s
economy is projected to undergo a down cycle over the next
12-18 months. During the fiscal year, we project cement
dispatches to taper off by 15-18% as decades-high interest
rates, record-high construction costs, heavy flooding, and
restricted fiscal space take a toll on construction activity.
Pakistan Cement Dispatches – CY22

mn MT
6.00
“Average cement dispatches
5.00
were down 22% YoY in FY23TD
4.00 as the economic slowdown
3.00 and flooding restricted
2.00 construction activity. Given the
reduction in PSDP amidst
1.00
shrinking fiscal space, we
0.00 think domestic dispatches
Jul-22
Apr-22
Jun-22
Aug-22
Sep-22
Oct-22
Jan-22
Feb-22
Mar-22
May-22
Nov-22
may register at 40.0mn MT in

FY23, a fall of 16% YoY.
Local Export FY22 Avg.
Source: APCMA
New expansion cycle may raise pricing concerns:

Pakistan’s cement industry is going through its 4th expansion
cycle with planned capacity expansions set to touch 91mn MT
by CY24. Concerns over the industry’s pricing power are
emerging as industry utilization is projected to fall. Most
notably, past expansion cycles saw industry utilization
levels fall by 30pps and industry retention levels decline by
30%.
Cement Industry's Expansion Cycles

Capacity (mn MT) %
Time Period
Initial End D
1st Cycle CY94-98 9.10 16.40 80%
2nd Cycle CY05-09 17.30 45.30 162%
3rd Cycle CY17-CY20 46.90 70.50 50%
4th Cycle CY22-CY24 70.50 91.00* 29%
Source: APMCA, Company Notice
* Based on likelihood as announced expansions are higher
29
PAKISTAN
Equity Market
Falling energy prices may support primary margins: The Industry margins
sharp rise in global interest rates and the ensuing PkR/MT USD/MT
5,000 50
recessionary concerns have pulled global commodity prices
4,000 40
to significantly lower levels. Most notably, global crude prices 3,000 30
have declined to pre-war levels and coal is down nearly 50% 2,000 20
from peak levels witnessed during the year. 1,000 10
- -
FY14
FY15
FY16
FY17
FY18
FY19
FY21
FY22
FY20
Global crude oil prices Global coal prices
USD/bbl USD/MT
Cash Margin (PKR/MT) - L.H.S
150 500 Cash Margin (USD/MT) - R.H.S
130 400 Source: Company Accounts
110 300
90 200
70 100
50 -
Jul-22
Sep-22
Jan-22
Mar-22
May-22
Nov-22
Jul-22
Sep-22
Jan-22
Mar-22
May-22
Nov-22
Cement sector EV/MT
Source: Bloomberg Source: Bloomberg EV/MT Discount
USD %
Reduced energy costs will significantly lower the cost of
LUCK 54 -40%
cement production in the coming months. While the
DGKC 40 -55%
industry will likely pass on a portion of the reduced cost
amidst a low-demand environment, we think the cement MLCF 39 -56%
sector may enhance its overall cash margins. Historical PIOC 29 -68%
analysis suggests that low coal costs back in FY 15-16 allowed CHCC 34 -62%
the cement sector to keep cash margins at USD 40/MT, nearly
KOHC 22 -75%
double present levels of USD 22/MT (see graph x of the right).
FCCL 26 -71%
Deep discounts may reverse as early signs of recovery
BWCL 50 -44%
emerge: Pakistan’s cement industry is trading at very low
Source: Company Accounts, PSX
valuation multiples, with the sector trading at an average
discount of 60% to its replacement cost. We think the sector
has the potential to reverse its recent trend once early signs
of economic recovery emerge. Moreover, the sector remains a
prime candidate for buybacks.
30
PAKISTAN
Equity Market
Fauji Cement Company Limited (FCCL) –

Target: PkR 28/sh
Expansions supporting high growth
Fauji Cement Company (FCCL) stands as one of our top picks FCCL vs. KSE100
in the construction space with a Jun23 target of PkR 27.6/sh.
10%
We think FCCL’s amalgamation with Askari Cement and its 0%
planned expansions makes the company a great value pick. -10%
Moreover, the company’s focus on production efficiency -20%
-30%
through renewable resources may further enhance the -40%
company’s prospects.
Aug-22
Dec-21
Oct-22
Feb-22
Apr-22
Jun-22
Targeting to become the 3rd largest cement player KSE100 FCCL
Fauji Cement is targeting to become the 3rdlargest cement

Source: PSX
player in Pakistan. Its amalgamation with Askari Cement
increased its annual production capacity by nearly 80% to
6.4mn MT. Moreover, additional capacity of 2.05mn MT came
online in Nov22 and another 2.05mn MT is in the pipeline.
The management conveyed that after expansion sites
become operational, the company aims to capture the 3rd
highest market share in the country.
Fauji Cement Company (FCCL)
Stock Rating BUY
Heightened focus on production efficiencies
Price Target 27.6
Fauji Cement also aims to become one of the most efficient Closing Price 11.44
cement players in the industry through the use of green Upside 140%
technologies. Presently, the company’s solar generation Mkt. Cap (PKR bn) 28
capacity stands at 20MW and has plans to expand the
Free Float (%) 35%
capacity to 40MW after newer installations at its Wah and
Shares Outstanding (mn) 2,453
Nizampur production sites. 2.7
Avg. Daily Volume (mn)
Additionally, Fauji Cement has a cumulative Waste Heat ADTV (USD mn) 0.2
Recovery (WHR) capacity of 40.5MW, generating nearly 200 52wk range (PkR/sh) 12.45-20.70
million units of electricity in FY22.
Trading at significant a discount to its replacement cost

Fauji Cement is trading at one of the lowest valuations in the
cement industry. At present levels, FCCL’s EV/MT stands at
USD 26, a discount of over 70% to its replacement cost.
Moreover, the stock trades at an FY25 PE of 2.0x, a
considerable discount given its 5yr projected earnings CAGR
of 24%.
31
PAKISTAN
Equity Market
FCCL Financial Overview

Fauji Cement Income Statement
PkR mn FY22 FY23E FY24E FY25E FY26E
Sales 54,243 76,031 95,530 109,122 114,754
COGS 39,844 58,842 74,438 83,299 84,816
Gross Profit 14,399 17,189 21,092 25,823 29,937
Gross Margin (%) 27% 23% 22% 24% 26%
Fin. Cost 1,202 2,200 2,932 1,966 1,001
PBT 11,528 12,352 15,267 19,821 24,442
Taxation 4,416 3,582 4,427 5,748 7,088
PAT 7,113 8,770 10,840 14,073 17,354
EPS (PKR) 2.90 3.58 4.42 5.74 7.08
DPS (PKR) 0.00 0.00 1.00 1.25 1.75
Fauji Cement Balance Sheet

PkR mn FY22 FY23E FY24E FY25E FY26E
Total Assets 113,698 145,268 157,506 161,275 162,461
PP&E 74,126 103,499 109,896 109,731 109,567
Cash & ST. Inv 6,150 6,124 6,709 7,117 7,286
Stock in Trade 3,698 4,030 5,098 5,705 5,809
Others Assets 29,724 31,614 35,803 38,722 39,799
Total Debt 33,146 42,535 41,225 39,222 25,855
Total Liabilities 55,962 76,037 77,435 69,584 56,482
Total Equity 57,736 69,231 80,071 91,691 105,979
Total Liab & Equity 113,698 145,268 157,506 161,275 162,461
Key Stats and Ratios

FY22 FY23E FY24E FY25E FY26E
Capacity (mn MT) 6.4 7.4 8.4 10.5 10.5
Off-take (mn MT) 5.6 5.2 6.2 7.4 7.9
Utilization (%) 88% 71% 74% 71% 75%
EPS (PkR) 2.90 3.58 4.42 5.74 7.08
DPS (PkR) 0.00 0.00 1.00 1.25 1.75
PE (x) 4.0 3.2 2.6 2.0 1.6
Yield (x) 0% 0% 9% 11% 15%
ROE (%) 12% 13% 14% 15% 16%
BVPS (PkR) 23.5 28.2 32.6 37.4 43.2
PB (x) 0.6 0.5 0.4 0.4 0.3
32
PAKISTAN
Equity Market
Fertilizer sector
Strong pricing power and attractive
dividend yield Fertilizer sector vs KSE100 in last 12M
Fertilizer sector has outperformed the benchmark index by 25%

Fertilizer KSE-100
5% during the past 12 months. We have an Outperform 20%
15%
recommendation on the sector because of i) attractive
10%
dividend yield, ii) hedge against macroeconomic shocks 5%
amidst steady business model and iii) higher interest income 0%
amidst rising interest rate. This is on account of stable -5%
fertilizer demand and affordable urea prices. As a reminder, -10%
the discount between the local and urea price has widened -15%
to 70% standing close to PkR 2,450/bag. This year is
08-Jul-22
08-Nov-22
08-Mar-22
08-May-22
08-Jun-22
08-Jan-22
08-Oct-22
08-Dec-21
08-Feb-22
08-Apr-22
08-Aug-22
08-Sep-22
expected to close on a strong note around 6.5mn MT and
normalizing to 6.0mn – 6.2mn MT thereafter. DAP market, on
the other hand, would see a contraction in the backdrop of
record high prices. The sector offers a strong dividend yield
of 13% and 14% for CY23F and CY24F, respectively.
Urea demand to remain stable: We expect the urea demand

to remain stable at 6.0 – 6.2mn MT during our investment
horizon amidst affordable prices and improved farm economics.
To highlight, CY22 is expected to close on a strong note despite
floods at 6.5mn MT which was previously seen in CY09. The
growth is accredited to improved i) farm economics ii)
substitution towards urea from DAP amidst higher price
discrepancy and iii) export of urea through informal channels
by dealers.
Urea off-takes to touch a high of 6.5mn MT in CY22 Discount between international and local prices widened to 70%
7.00 90%
80%
6.00
70%
5.00 60%
50%
4.00
40%
3.00 30%
20%
2.00 10%
1.00 0%
01/07/2017
01/07/2019
01/01/2020
01/04/2020
01/10/2020
01/01/2021
01/04/2021
01/10/2021
01/01/2022
01/04/2022
01/10/2022
01/07/2018
01/07/2020
01/07/2021
01/07/2022
01/04/2017
01/10/2017
01/01/2019
01/04/2019
01/10/2019
01/01/2018
01/04/2018
01/10/2018
0.00
CY22
CY12
CY14
CY13
CY16
CY17
CY19
CY15
CY18
CY20
CY21
Source: NFDC Source: Bloomberg
Strong pricing power: Fertilizer manufacturers have strong

pricing power as they are able to pass on the hike in input cost
pressures. As a result, the sector has maintained decent gross
margins of 30.9% during the past 3yrs. With the IMF’s
negotiations going on and imminent risk of hike in gas prices,
we strongly believe that the players would completely pass on
the cost pressure.
33
PAKISTAN
Equity Market
Superior gross margins in the past 2 decades Urea price has strengthened steadily (PkR/bag)
60% 3,000
50% 2,500
40% 2,000
30% 1,500
20% 1,000
10% 500
0% -
CY22
CY00
CY01
CY12
CY13
CY02
CY04
CY05
CY06
CY03
CY07
CY08
CY09
CY10
CY11
CY14
CY15
CY16
CY17
CY18
CY19
CY21
CY20
CY11
CY02
CY03
CY16
CY17
CY19
CY05
CY01
CY04
CY06
CY07
CY08
CY09
CY12
CY14
CY13
CY10
CY15
CY18
CY20
CY21
-10%
Source: Bloomberg Source: NFDC
Smooth gas supply: Fertilizer manufacturers have signed an

agreement with Mari to ensure smooth gas supply in the long
run. As a reminder, the sector meets almost 70% of its gas
requirement from Mari fields and this would reap long term
benefits for all listed players.
Higher interest income amidst interest rate hike: Companies

under our coverage have liquid investments close to PkR 105bn.
Therefore, the sector remain insulated from interest headwinds
and would gain in an event of interest hikes. Within Ktrade
fertilizer universe, we highlight FFC to benefit the most as 70%
of the total investments belong to the company.
Uniform gas pricing to benefit EFERT: The govt was

contemplating to introduce uniform gas pricing for fertilizer
industry. This would benefit EFERT as most of the feed
requirement falls under expensive petroleum policy. However,
the decision and rate for such a proposal has not been finalized
yet.
Key risks to the sector include i) payment of GIDC payables, ii)

floods amidst climate change and iii) deteriorating farm
economics.
34
PAKISTAN
Equity Market
Fauji Fertilizer
A yield play
Fauji Fertilizer offers i) stable cash flow generation, ii) strong FFC stock details
dividend yield and iii) robust dividend income from various Valuation PKR 135
- Sum of the Parts
subsidiaries. It is the market leader in urea industry with a Last Close PKR 102
sizeable market share of 45%. The company has strong Upside/downside % 34%
pricing power and has been able to pass on the cost Market cap USD mn 607
pressures in the past. Our target price of PkR 135/sh, offers an Free Float % 55
upside of 34% from the last close and a dividend yield of 16%.
We like the stock based on the following reasons:
It is a low risk and steady company. The stock has
outperformed benchmark by 8% over the past 12 months. We
think that it provides a hedge against macroeconomic shocks
because of stable urea demand and steady margins. FFC’s
FFC vs KSE100 in last 12 M
earnings have remained stable during past 10 years.
35%
FFC KSE-100
FFC remains partially insulated from hike in input costs: FFC 30%
25%
with the highest market share of 45% in urea industry has 20%
strong ability to pass cost pressure. This is reflected by price hike 15%
of ~PkR 300/bag in Jul22 to pass on the impact of higher cost 10%
5%
amidst ST & refunds exemption and standardization of GST. The 0%
decision to hike feed and fuel has been facing delays for a very -5%
-10%
long time. As per the management it would have a maximum
-15%
impact of PkR 300/bag and would most likely be passed on.
08-Jan-22
08-Jun-22
08-Dec-21
08-Jul-22
08-Aug-22
08-Mar-22
08-Dec-22
08-Oct-22
08-Feb-22
08-Apr-22
08-May-22
08-Sep-22
08-Nov-22
Other income supports earnings: FFC has a sizeable other
income contributing 30% to the PBT in the past 10 years. This
consists of dividend (from AKBL and PMP) and return on ST
investments. FCCL, on the other hand, skipped dividend in the
past two years as the company is retaining cash to fund its
expansion. This would be compensated by the return on
investments worth PkR 71bn (PkR 56/sh) with the reversal in
interest rates. Onwards, however, other income may fall as the
company clears its GIDC payables balance.
Diversification in Power business to add value: FFC has
ventured into Power sector via TEL at an investment outlay of
PkR 3.3bn and stake of 30%. This offers an ROE of 30.6% for a
period of 30 years. The project is expected to come in Dec22 and
would further add value. It would add EPS of PkR 1.5 and PkR
7/sh to our target price.
Offers dividend yield of 17% against the benchmark’s
dividend yield of 8%: Over the past 10 years, FFC has
maintained a payout of 84%. The stocks offers a dividend yield of
16% and 17% for CY23f and CY24f, respectively.
35
PAKISTAN
Equity Market
Financial Snapshot
Fauji Fertilizer
Income Statement (PkRmn) 2019 2020 2021 2022 2023 2024
Net Sales 105,783 97,655 108,651 109,974 123,112 128,694
Gross Profit 30,737 31,584 38,879 47,030 52,417 55,064
Distribution & Admin 8,288 7,848 8,409 9,732 9,924 10,477
Other Income 7,191 6,429 7,919 12,293 8,544 6,374
Other Charges 3,409 2,639 2,946 3,186 4,725 4,957
Financial Charges 2,477 1,874 2,292 5,031 8,867 7,282
PBT 23,753 29,591 30,340 35,039 35,963 38,723
PAT 17,110 20,819 21,897 21,252 25,534 27,493
EPS 13.4 16.4 17.2 16.7 20.1 21.6
DPS 10.8 11.2 11.8 11.8 16.0 17.3
Balance Sheet (PkRmn) 2019 2020 2021 2022 2023 2024
Cash 5,695 1,153 1,190 16,107 1,383 7,142
ST Investments 48,040 81,902 95,196 70,693 70,693 70,693
Trade Debts 13,460 2,287 833 507 568 593
Stock-in-Trade 6,795 320 1,048 20,648 23,191 24,153
Stores and Spares 3,811 4,434 4,558 5,761 5,905 6,201
Fixed Assets 56,089 61,047 74,737 77,827 80,371 81,699
Total Assets 153,390 172,949 200,940 218,730 209,298 217,669
Non-Current Liabilities 10,947 48,742 41,323 32,453 32,453 32,453
Current Portion of Debt 4,754 4,446 4,504 5,729 4,446 4,446
ST Borrowing 21,803 25,258 38,954 31,381 33,881 32,381
Trade and Other payables 76,009 46,621 62,481 87,089 65,853 68,587
Current Liabilities 106,876 81,671 112,169 135,244 115,224 116,458
Shareholder's Equity 35,567 42,535 47,355 51,034 61,621 68,758
Total Liabilities & Equity 153,390 172,949 200,847 218,731 209,298 217,669
Key ratios 2019 2020 2021 2022 2023 2024
EPS 13.4 16.4 17.2 16.7 20.1 21.6
DPS 10.8 11.2 11.8 11.8 16.0 17.3
Revenue growth 0% -8% 11% 1% 12% 5%
Gross Margin 29% 32% 36% 43% 43% 43%
Dividend Yield 11% 11% 12% 12% 16% 17%
PE 7.58 6.23 5.93 6.11 5.08 4.72
PB 3.05 2.74 2.54 2.11 1.89 1.70
36
PAKISTAN
Equity Market
Engro Fertilizers
Stable business model
EFERT outperformed the benchmark by 15% over the past 12 EFERT stock details
months in anticipation of cost efficiencies and capacity Valuation PKR 90
- Discounted CF
enhancement from BMR plant. The stock offered dividend yield Last Close PKR 82
of 19% in the past 12M in the backdrop of stable fertilizer Upside/downside % 20%
business model. CY22 earnings would take a hit amidst i) one off Market cap USD mn 485.6
Free Float % 45
tax adjustments, ii) lower dispatches because of breakdown of
EnVen plant in Jun22 and iii) closure of Base plant for 3M as it
underwent BMR. We project the company’s earnings to grow in
CY23 to PkR 14.3/sh courtesy cost efficiencies and capacity
enhancement of Base plant. Moreover, implementation of
uniform gas pricing would be a key trigger for the company as
the expensive petroleum policy feed rate would be replaced by
relatively cheaper rate. Our target price for the stock is PkR EFERT vs KSE100 in last 12 M
90/sh, upside of 20% from the last close. The stock also offers 40% EFERT KSE-100
attractive dividend yield of 16% and 17% for CY23f and CY24f, 30%
respectively. 20%
BMR on base plant to improve bottom-line: EFERT undertook 10%
the BMR of its base plant in Sep22 for three months that has 0%
recently achieved completion at an estimated outlay of USD -10%

50mn. This would bring operational efficiencies and enhance -20%
the capacity by ~ 0.2mn MT and would be reflected from 1Q
08-Jul-22
08-Nov-22
08-Jan-22
08-Mar-22
08-May-22
08-Dec-21
08-Jun-22
08-Oct-22
08-Dec-22
08-Feb-22
08-Apr-22
08-Aug-22
08-Sep-22
results. As a reminder, the initial capacity of Base plant was
0.975mn MT. For the capacity enhancement, the company is
also in talks with the govt to allocate incremental gas to run the
plant smoothly.
Uniform gas pricing to benefit EFERT: EFERT currently meets

70% of its feed requirement from the expensive petroleum
policy. Therefore, implementation of uniform gas pricing would
replace the higher feed cost by relatively cheaper uniform gas
price and enhance the bottom-line.
Offers dividend yield of 18% against the benchmark’s

dividend yield of 8%: Over the past 10 years, EFERT has
maintained a payout of 85%. The stocks offers a dividend yield of
16% and 17% for CY23f and CY24f, respectively.
37
PAKISTAN
Equity Market
Financial Snapshot
Engro Fertilizers
Income Statement (PkRmn) CY18A CY19A CY20A CY21A CY22A CY23A CY24A
Net Sales 109,197 121,355 105,846 132,363 143,873 133,443 137,811
Gross profit 35,316 39,540 34,255 44,065 42,967 44,922 45,815
Selling & distribution expenses 8,008 8,736 8,457 8,529 8,226 8,422 9,218
Adminstration Expenses 1,585 1,248 1,907 1,900 2,440 2,173 2,325
Other operating income 2,062 4,352 1,667 1,790 1,509 766 962
Other operating expense 1,432 2,623 1,904 2,641 2,715 2,020 2,103
Finance cost 2,071 3,887 3,236 1,602 2,610 4,953 4,002
PBT 24,282 27,398 21,300 29,884 27,198 26,928 28,037
PAT 17,414 16,871 18,135 21,086 13,967 19,119 19,906
EPS 13.0 12.6 13.6 15.8 10.5 14.3 14.9
DPS 11.8 13.0 13.0 13.5 10.0 13.5 14.3
Balance Sheet (PkRmn) CY18A CY19A CY20A CY21A CY22A CY23A CY24A
Property, plant & equipment 68,204 65,924 65,646 73,031 73,430 74,514 75,266
Intangible assets 4,488 5,071 5,165 5,301 5,291 5,291 5,291
Non-current assets 72,834 71,159 70,893 78,393 79,492 80,576 81,328
Stores, spares and loose tools 5,325 5,301 6,499 6,427 7,420 5,961 6,021
Stock in trade 11,538 12,478 7,533 13,490 21,131 13,339 13,862
Trade debts 9,110 14,175 2,906 3,070 2,966 3,656 3,776
Loans, advances, deposits and prepayments 1,363 2,949 3,016 19 5,290 5,290 5,290
Other receivables 9,081 9,518 10,492 14,914 16,281 15,101 15,595
ST investments 7,739 5,512 26,763 15,238 6,781 6,781 6,781
Cash & short-term investments 730 3,413 3,611 1,267 2,093 10,987 11,319
Current assets 44,887 55,888 60,820 54,444 62,058 61,211 62,740
Total Assets 117,721 127,047 131,713 132,837 141,550 141,786 144,068
Share Capital 13,353 13,353 13,353 13,353 13,353 13,353 13,353
Share premium 3,385 3,385 3,385 3,385 3,387 3,387 3,387
Total equity 45,523 43,279 46,731 47,087 43,029 48,795 50,675
Borrowings 25,715 22,192 13,514 11,460 8,230 7,680 7,130
Deferred taxation - - - 925 7,143 7,143 7,143
Deferred liabilities 7,162 12,182 11,897 12,175 222 222 222
Provision for GIDC - - - 6,364 3,297 3,297 3,297
Non-current liabilities 33,069 34,632 35,975 30,924 19,845 19,295 18,745
Trade and other payables 29,072 37,685 30,219 26,027 29,232 24,252 25,204
Accrued interest/mark-up 492 648 263 263 637 637 637
Current portion of borrowings 5,096 8,760 10,062 5,756 5,946 5,946 5,946
Short term borrowings 1,010 1,986 7,981 17,080 15,235 15,235 15,235
Current liabilities 39,129 49,135 49,007 54,826 78,676 73,696 74,648
Total Equity & Liabilities 117,721 127,047 131,713 132,837 141,550 141,786 144,068
Key ratios CY18A CY19A CY20A CY21A CY22A CY23A CY24A

EPS 13.0 12.6 13.6 15.8 10.5 14.3 14.91
DPS 11.8 13.0 13.0 13.5 10.0 13.5 14.25
Revenue growth 42% 11% -13% 25% 9% -7% 3%
Gross Margin 32% 33% 32% 33% 30% 34% 33%
Dividend Yield 14% 16% 16% 16% 12% 16% 17%
PE 6.29 6.49 6.04 5.19 7.84 5.73 5.50
PB 3.85 4.12 3.65 3.61 4.15 3.41 3.22
38
PAKISTAN
Equity Market
Textile sector
Global recession to keep the demand in
check; rebound expected from 2QFY24
Pakistan’s textile sector underperformed the benchmark Textile sector vs KSE100 in last 12M
index by 19% as global recession fears are mounting amidst 15%
monetary tightening and inflationary concerns. As a 10%
reminder, US Fed and ECB have hiked the interest rate to 5%

0%
4.25% - 4.5% and 2.0%, respectively. Textile exports have
-5%
started to face a slowdown evident from 18% YoY decline in -10%
Nov22. We think that the impact of global recession is yet to -15%
come and would be more profound in 1HCY23 as Fed rate is -20%
expected to hike the rate to 5.0%. We expect the exports to
08-Jul-22
08-Nov-22
08-Mar-22
08-May-22
08-Dec-21
08-Jan-22
08-Jun-22
08-Oct-22
08-Feb-22
08-Apr-22
08-Aug-22
08-Sep-22
contract between 10% - 15% for FY23 closing to ~USD 17.0bn.
However, we anticipate a rebound in 2QFY24 onwards. Key
triggers for the sector include i) continuation of Textile KSE-100
concessionary rates, ii) decent order book and iii) hedge

against currency depreciation.
Sharp rebound expected in FY24: Textile exports, being

cyclical in nature, have historically seen a sharp recovery after
the economic downturn. This was witnessed in FY11 and FY21
when textile exports recorded a double digit growth of 28.4%
and 23.0%, respectively after the economic downturn seen in
CY09-11 and CY20. The growth trajectory continued in FY22 post
pandemic amidst government backed favorable policies. We
expect a similar V-shaped recovery once global tensions ease
off from 2QFY24. Till then, export growth would remain
restricted in the backdrop of local and global macroeconomic
headwinds and as well as inventory pile up in the U.S region.
Textile exports rebound in FY11 Textile exports rebound in FY21
USD mn USD mn
1.50 1.80
1.40 1.60
1.30 1.40
1.20 1.20
1.10 1.00
1.00 0.80
0.90 0.60
0.80 0.40
0.70 0.20
0.60 0.00
Nov-20
Jul-20
Oct-20
Mar-21
Jan-20
Mar-20
May-20
Jun-20
Dec-20
Jan-21
May-21
Jun-21
Feb-20
Apr-20
Aug-20
Feb-21
Apr-21
Sep-20
Oct-10
Jan-10
Jan-11
Jun-11
Feb-10
Apr-10
Jun-10
Dec-10
Aug-10
Sep-10
Feb-11
Apr-11
Nov-10
Mar-10
Jul-10
Mar-11
May-11
May-10
Source: PBS Source: Bloomberg
Concessionary rates to continue: The govt has always

prioritized the sector because of its sizable share of 60% towards
country’s total exports. As a reminder, the sector avails
concessionary rates of USD 9.0/mmbtu and PkR 20/unit for gas
and electricity, respectively. This concession is renewed every
year and remains contingent upon the fiscal space of the govt.
39
PAKISTAN
Equity Market
However, we think that the concessionary rates will continue

with a slight upward revision, to keep our products competitive
in global market.
Reversal in international cotton prices: As per the Cotlook

Index, cotton prices have plunged to Usc 103/lb from the peak of
Usc 173.45 in May22. This is attributed to significant challenges
for the three largest consumers comprising China, India and
Pakistan. As per the recent report on USDA, global cotton
consumption is now projected at its second lowest level in
nearly a decade. On the supply side, the U.S balance sheet
shows higher production and ending stocks in comparison to
previous month. It is projected to grow to 14mn bales, up 0.2mn
bales on YoY basis. Consequently, local cotton prices have
decreased to PkR 16,000 – 17,000/maund from a high of PkR
22,000/maund. This would alleviate the cost pressure for local
players thereby supporting margins.
Cotton prices easing off
200.0 25,000
180.0
160.0 20,000
140.0
120.0 15,000
100.0
80.0 10,000
60.0
40.0 5,000
20.0
0.0 0
01-Jan-22
29-Jan-22
12-Feb-22
23-Apr-22
18-Jun-22
09-Apr-22
21-May-22
02-Jul-22
13-Aug-22
05-Nov-22
19-Nov-22
15-Jan-22
26-Mar-22
08-Oct-22
26-Feb-22
04-Jun-22
10-Sep-22
24-Sep-22
12-Mar-22
27-Aug-22
07-May-22
16-Jul-22
30-Jul-22
22-Oct-22
Intl Cotton Price (Usc/lb) Local Cotton Price (PkR/maund)
Source: PBS
Favorable exchange rate: More than 50% of the revenue is

export based for the leading textile players. The USA and EU are
the two important destinations with a sizeable share of 20% and
45%, respectively. Within Ktrade’s textile universe, ILP is the
dominant export player with a share of 90% towards its top-line.
Since currency has depreciated by 26% CYTD, this would
enhance the top-line.
Bangladesh to graduate from LDC status by 2026: As per

UNCTDA report, Bangladesh would lose USD 5.73bn (14.3%)
worth of exports after its graduation from least developed
country (LDC) status. This is because Bangladesh’s products
would be subject to duties. This would present an opportunity
for Pakistan to increase the share going forward.
Key risks include i) delay in approval of new textile policy, ii)

limited pricing power, iii) period of economic downturn longer
than expected and iv) demand slow down.
40
PAKISTAN
Equity Market
Interloop
Expansions to propel earnings
ILP is our top pick in the sector and our TP stands at PKR ILP stock details
79/sh (upside of 32%). The stock has underperformed the Valuation PKR 79
- Discounted CF
benchmark by 17% over the past 12 months. This is because of Last Close PKR 59
the concerns on global recession as more than 90% of the Upside/downside % 32%
topline is export based. No doubt that exports would come Market cap USD mn 245
Free Float % 15
under pressure and FY23 would be a challenging year, but we
forecast fast recovery in late 2QFY24. We think that the
impact of global slowdown would be more pronounced for
fashion segment and relatively lower for ILP. Our conviction
is based on i) expansion in hosiery segment, ii) strong
customer base, iii) insulation against PkR depreciation, and
iv) strong ESG framework. We expect the company to post a
3yr CAGR of 7% supported by expansion in hosiery division ILP vs KSE100 in last 12 M
and denim segment breaking even. 25%

20% ILP KSE-100
Hosiery division to drive earnings: Hosiery division is its high 15%
margin segment that has maintained superior gross margins of 10%
30% plus. As per the management prices strengthened to USD 5%
6.6/dzn that would enhance the topline amidst 20% capacity 0%

-5%
expansion in 3QFY22. Moreover, hosiery VI project is expected to
-10%
achieve operations in FY24 that would increase the capacity to -15%
90.0mn dozen socks. This expansion would increase the annual -20%
EPS by ~ PkR 2.5-3.0.
08-Nov-22
08-Mar-22
08-May-22
08-Jul-22
08-Jan-22
08-Jun-22
08-Oct-22
08-Dec-21
08-Dec-22
08-Feb-22
08-Apr-22
08-Aug-22
08-Sep-22
Denim to add value in the long run: Denim segment landed in
profits for the first time since inception in 1QFY23. Spot prices
increased to USD 10/pc in Oct22 from USD 8/pc in FY22.
However, global recession might take a toll on its profits, but
recovering in FY24. Additionally, ILP is actively investing in
Apparel division along with achieving cost efficiencies. The
company has access to concessionary loans which would keep a
lid on finance cost.
Strong ESG framework: ILP has strong commitment to ESG
standards. It has invested heavily in renewable energy to reduce
carbon footprint and water consumption. Additionally, the
company is investing in sustainability standards of cotton that
helps in securing orders. Under ILP’s vision 2025, the company is
aiming a 25% reduction in green house gases and increase use
of sustainable raw materials up to 70%.
Key risks include delay in expansion, softening of hosiery prices
and continuation of losses in denim segment.
41
PAKISTAN
Equity Market
Financial Snapshot
Interloop
Income Statement (PkR mn) FY18A FY19A FY20A FY21A FY22F FY23F FY24F
Net sales 31,139 37,478 36,303 54,962 90,894 109,746 116,666
Gross Profit 9,145 11,955 7,864 14,212 26,066 28,656 30,922
Admin Expense 1,131 2,454 454 531 1,121 1,373 1,412
Profit Before Tax 4,006 5,421 2,116 6,873 13,424 12,240 14,601
Net Profit 3,886 5,195 1,796 6,292 12,360 11,041 13,435
EPS 4.16 5.56 1.92 6.74 13.23 11.82 14.39
Balance Sheet (PkR mn) FY18A FY19A FY20A FY21A FY22F FY23F FY24F
Current Asset 16,789 21,357 20,446 34,088 61,091 67,969 73,203
Long term Asset 15,961 19,425 24,922 26,608 35,224 35,785 37,576
Total Asset 32,750 40,783 45,367 60,696 96,315 103,754 110,779
Current Liabilities 19,493 16,791 17,984 27,998 46,837 49,116 50,111
Non current Liabilities 4,174 6,111 10,104 12,183 19,539 18,819 18,135
Total Liabilities 23,668 22,903 28,088 40,181 66,376 67,935 68,247
Total Equity 9,083 17,880 17,280 20,515 29,941 35,818 42,533
Key ratios 2018 2019 2020 2021 2022 2023 2024

EPS 4.2 5.6 1.9 6.7 13.2 11.8 14.4
DPS - 3.0 2.0 3.4 6.6 5.9 7.2
BVPS 9.7 19.1 18.5 22.0 32.1 38.4 45.5
PER 13.2 9.9 28.6 8.2 4.2 4.7 3.8
Dividend Yield 0% 5% 4% 6% 12% 11% 13%
P/BVS 5.7 2.9 3.0 2.5 1.7 1.4 1.2
Gross Margin 29% 32% 22% 26% 29% 26% 27%
Net Profit Margin 12% 14% 5% 11% 14% 10% 12%
ROE 43% 29% 10% 31% 41% 31% 32%
42
PAKISTAN
Equity Market
Automobile Assemblers
Affordability takes a steep downturn
Historically, the auto industry has been most vulnerable to the
interest rate changes as 30% of auto sales are financed through
bank loans. Currently, Pakistan’s economy is gasping under the
highest interest rate in two decades. Due to the skyrocketing
KIBOR, monthly installments of car financing have increased by
approximately 64% YoY in Nov’22. Nation’s favorite Toyota
Corolla, saw an exorbitant increase in monthly installments of
66% YoY. Back in Nov’21, Corolla Altis 1.8CVT’s bank lease hovered
Auto Sector vs KSE100 index
around PkR 83000/month while in this year same period, the
lease stands at PkR 137,000/month, considering a minimum 10%
5%
initial deposit of 30%. 0%
-5%
However, the interest rate is not the only contributing factor to -10%
-15%
rising lease payments. The asset price rose by 47% YoY for Toyota -20%
Corolla, 43% YoY for Honda City and 46% YoY for Suzuki Alto. The -25%
rise in principal alone contributes 72% of the surge in lease -30%
08-Jun-22
08-Dec-21
08-Jul-22
08-Jan-22
08-Aug-22
08-Dec-22
08-Mar-22
08-Oct-22
08-Feb-22
08-Apr-22
08-May-22
08-Sep-22
08-Nov-22
payments. The currency depreciation was the major reason
quoted by the companies for the price increase. Over the last 12
months, PkR depreciated by 28.3% against the USD. OEMs in
Pakistan, are yet to achieve high localization in terms of value. Autos KSE-100
Until then, the auto sector is bound to remain under cost
Source: Bloomberg
pressure from the unstable currency.
Furthermore, the inflationary pressure has reduced the

disposable income at the consumers end. SBP reported how
inflation has surpassed the wage growth rate which is expected
to lower the purchasing power significantly. Thus, coupled with
extremely high prices and rising interest rates, we expect the
affordability of autos to keep deteriorating next year.
Monthly Lease Payments (PkR 000s)
160
140
120
100
80 Nov-21
Nov-22
60
40
20
-
Alto VXL City 1.5 AT Altis 1.8 CVT
43
PAKISTAN
Equity Market
The macroeconomic instability has severely impacted the supply

side as well. Over the concerns of decreasing foreign reserves,
rising debt levels and balance of payment crisis, SBP took strict
measures to curtail imports near the end of FY22. Auto industry
is not allowed to import CKDs more than 50% of their installed
capacity. This led the auto sales to plunge by 53% QoQ in 1QFY23.
Furthermore, due to lower supply, the delivery time has

increased rapidly. Customers have to wait for approximately 8-9
months after booking now, while historically this period
averaged around 3 months. The supply shortage and delay in
deliveries caused a surge in prices of new models in the
secondary market, as dealers began to charge 15-30% premium
on new models specifically. The new Honda Civic was priced
around PkR 7.5mn by the company, while it was trading around
PkR 9.5mn in the secondary market due to high anticipated
demand and low supply. However, this did not last long as the
affordability declined continuously, thus the demand for the Small players reduced to under 10% in Oct’22
higher end models decreased. Currently, KIA Sportage and
Honda Civic are trading at discounts in the secondary market as 5% 3% 1%
sales plunged to merely 200-300 units a month in Oct’22.
24%
What happens after ADP? 10%

57%
Over the past five years, ADP allowed new entrants in the
market. The government reduced the custom duty on CKDs
imported by the new players only. The greenfield investments
Toyota Honda Suzuki
were allowed concessionary duties for five years. As a result, we
saw multiple greenfield investments such as KIA Lucky Motors, KIA Hyundai Others
Hyundai Nishat, Changan Master, Haval, Prince, Proton, MG and
a few other smaller brands. This increased the competition in the
market as KIA and Hyundai combined, gained over 15% of the
market share, mainly from HCAR and INDU.
Once the concessionary duty rates discontinue, these players are

either expected to increase prices or operate at lower margins.
However, an increase in prices will cost them their market share
thus we can also expect a few smaller players to exit the market
under low sales volume.
The government on the other hand has introduced a new auto

policy last year. The Auto Industry Development and Export
Policy (AIDEP) shifts the focus from lowering the barriers of entry
towards promoting hybrid electric vehicles (HEVs) and smaller
cars with engines below 1000cc. This can change the industry
dynamics vastly against the new entrants as they mostly
competed in the sedan and SUV segment. Furthermore, the
duty concessions on HEV imports have incentivized the
companies to establish HEV plants. INDU is the first mover to
invest in an HEV plant and with the help of this policy we might
see HCAR to follow.
44
PAKISTAN
Equity Market
Sector Overview in Graphs

Annual auto Sales vs Interest Rate cycle
300,000 16.00
14.00
250,000
12.00
200,000
10.00
150,000 8.00
6.00
100,000
4.00
50,000
2.00
- -
FY8 FY9 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Auto Sales Interest rate
The boom and bust cycle of the auto industry is underpinned by the interest rate cycle. Currently, the economy is
witnessing one of the highest interest rate levels thus the auto sales are expected to take a downtrend until SBP
starts cutting down the policy rate.
Currency depreciation led to major price hikes New players unable to generate higher volumes
7,000,000 250 1200
6,000,000
200 1000
5,000,000
800
150
4,000,000
3,000,000 600
100
2,000,000 400
50
1,000,000
200
- -
Nov'21 Feb'22 May'22 Aug'22 Nov'22
0
Alto VXR Hyundai Elantra Hyundai Tuscon KIA Picanto
Corolla Altis
KIA Sportage Aug-22 Sep-22 Oct-22
As the currency depreciated nearly 28% YoY, the Hyundai models suffered the highest decline of
auto prices rose substantially. Toyota Corolla saw 78% in the last 3-months. In Oct’22, when other
a major price hike of 47% in just the LTM while models saw a MoM rise, Hyundai failed to register
KIA increased it by 29% only. a growth and sales declined further by 50% MoM.
Hike in monthly lease payments amidst increase in KIBOR and car prices
Altis 1.8 CVT change City 1.5 AT Change Alto VXL change
Nov-21 82,961 67,198 35,257
Jan-22 91,311 10% 73,959 10% 41,064 16%
May-22 114,200 25% 91,101 23% 49,523 21%
Sep-22 135,823 19% 106,694 17% 57,304 16%
Nov-22 137,524 1% 108,031 1% 58,022 1%
SBP increased the policy rate by 875bps and Auto prices were up by nearly 40-45% on average in the LTM. Auto
sales through bank financing saw a severe decline from 30% to just 5-10% amidst a steep hike of 65% in monthly
lease payments in the LTM.
45
PAKISTAN
Equity Market
Indus Motor Company

Macroeconomic risks overplayed
Indus Motor Company posted a rise in profitability by 23% YoY
in FY22 led by the highest ever sales volume recorded in a
year. INDU successfully operated above their capacity to
produce 77,233 units and sold 75,810 units (32% rise YoY)
during FY22. The company has posted a 5-yr average ROE of
28% and has maintained a high dividend payout ratio which INDU Stock Details
stands at a 5-yr average of 64%. Despite the strong KPIs, the Price Target 1,191
stock has underperformed KSE-100 in the last 12 months by
Closing Price 985
12pps, and trades at 21% discount from our target price of PkR
1,191/sh as investors have overplayed the concerns over ADTV (mn) 22.21
import quota and macroeconomic instability. We believe the Avg. Daily Volume (mn) 0.02
stock will perform based on the following reasons: Free Float (%) 17.51%
M.Cap (PKR bn) 76.64
• Firstly, INDU has the strongest order book as compared to its
peers, as Toyota cars are a preferred brand not just in urban M.Cap (USD mn) 341.09
areas but also in the rural areas of Pakistan. Last year, INDU’s Shares Outstanding (mn) 78.60
rural sales stood at 50% of their total sales while its competitor
barely has presence in the rural areas. The healthy order book
is evident by the surge in advances from customers by 118% INDU vs KSE100 index
YoY in FY22.
30%
• Secondly, INDU is the richest in terms of cash and cash 20%

10%
equivalents (PkR 102bn as at 1QFY23) if compared to its peers.
0%
This allows the company to earn hefty other income. In FY22,
-10%
other income increased by 132% YoY to reach PkR 12.9bn. This
-20%
contributed 82% to its overall earnings in the period. We
-30%
expect other income to further rise by 74% YoY to reach PkR
01/12/2021
01/11/2022
01/07/2022
01/12/2022
01/04/2022
01/06/2022
01/09/2022
01/01/2022
01/03/2022
01/05/2022
01/10/2022
01/02/2022
01/08/2022
22.5bn in FY23, amidst high ROI underpinned by policy rate
hikes.
• INDU is the only auto manufacturer which has the strength to KSE 100 INDU
maintain a consistent high dividend payout ratio due to hefty Source: Bloomberg
other income. Even during the pandemic, the company was

able to payout cash dividend of PkR 30/sh in FY20 and
similarly during the current macroeconomic crisis, we expect
the company to payout PkR 66/sh in FY23.
• Moreover, the new auto policy – AIDEP has introduced a shift

from Motor spirit (petrol) engines to Plug in Electric Vehicles
(PHEV) and Hybrid Electric Vehicles (HEV). INDU being the
largest player in the market has successfully invested USD
100mn to establish Pakistan’s first HEV plant. The company
will enjoy the first mover advantage in locally assembled HEV
segment. We expect the new HEV model of Toyota Cross to be
on roads at the end of FY24.
PAKISTAN
Equity Market
Profitability outlook for FY23

Margins to improve as currency stabilizes
INDU’s market share grows steadily in the last 5 yrs INDU’s sales drop by nearly 50% in the last 12 months
40% 8000 18
35% 7000 16
30% 6000 14
12
25% 5000
10
20% 4000
8
15% 3000
6
10% 2000 4
5% 1000 2
0% 0 0
Jan-21
Jan-22
Jan-20
Sep-22
May-17
Sep-18
Sep-17
May-19
Sep-19
May-21
Sep-21
May-18
May-20
Sep-20
May-22
Jan-18
Jan-17
Jan-19
Dec-21
Jan-22
Jul-22
Aug-22
Mar-22
Nov-22
Feb-22
Apr-22
May-22
Oct-22
Sep-22
Jun-22
Toyota Expon. (Toyota) INDU sales Interest Rate
Income Statement
1QFY22 1QFY23 YoY 4QFY22 QoQ 2QFY23E QoQ E
Sales 65,552 37,249 -43% 72,098 -48% 47,886 29%
Gross Profit 7,072 (2,358) 836 (1,343)
Gross Margin 11% -6% 1% -3%
Distribution Expenses 456 372 -18% 878 -58% 417 12%
Administrative Expenses 467 450 -3% 700 -36% 492 9%
Other income 2,047 5,163 152% 5,206 -1% 5,801 12%
PBT 7,683 1,839 -76% 4,262 -57% 3,247 77%
PAT 5,425 1,297 -76% 510 154% 2,305 78%
EPS 69.0 16.5 -76% 6.5 154% 29.3 78%
DPS 34.5 8.2 -76% 3.3 152% 14.6 78%
ROE to jump back up once currency stabilizes Dividend payout ratio to remain consistent in FY23
35% 300 160 70%
30% 250 140 60%
25% 120
200 50%
100
20% 40%
150
80
15%
30%
100 60
10%
20%
40
5% 50
20 10%
0% -
- 0%
FY21 FY22 FY23E FY24E
FY21 FY22 FY23E FY24E
ROE EPS
DPS DPO
PAKISTAN
Equity Market
SYSTEMS
Upgrade to Outperform – consensus estimates still too low
The best thing about Systems is that it is one management SYS stock details
and company which is optimistic and positive about its future. Valuation PKR
- XXXX
This is a rarity in the general mood of gloom and doom in Last Close PKR 487
Pakistan. The financial and operating performance of Systems Upside/downside % XX%
backs this optimism. There is a lot of things going well for the Market cap USD mn 629
Free Float % 58
company. Firstly, the dollar exposure (78% of revenues are not
in PkR) and 86% of costs are in PkR. We expect another round
of significant PkR depreciation in CT23 which bodes well for
Systems. Secondly, we think the acquisition of NDCTech has
created significant growth opportunity in the Middle East.
Third, the company still has the opportunity to make additional
acquisitions. We think Systems (along with Meezan) has
achieved a status of a must have stock for every domestic
portfolio. This quality premium will become even more
pronounced during the current recessionary environment
where there are high risk if earnings downgrades to the rest of
the corporate sector. We are increasing our price target to
PkR571 and upgrading recommendation to Outperform (17%
upside). We believe the stock will perform based on the SYS vs KSE100 index
following reasons: 40%
30%
• Firstly, we expect around 20% PkR depreciation in CY23 and 5% 20%
in CY24. This would lead to a direct translation benefit to 10%
Systems' earnings. Market consensus is estimating around 30% 0%

-10%
earnings growth for Systems in 2023 and 2024 per annum and
-20%
we think that the company can sustain around 40% earnings -30%
growth during these period. Consequently, our earnings
23-Apr-22
23-May-22
23-Jan-22
23-Jun-22
23-Dec-21
23-Jul-22
23-Aug-22
23-Mar-22
23-Oct-22
23-Feb-22
23-Sep-22
23-Nov-22
estimates are 10% ahead of consensus.
• Secondly, we think Systems has a much stronger opportunity

SYS KSE100
now to consolidate the IT services sector. Six months ago when
we downgraded the stock to a neutral, we felt that other IT Source: Bloomberg
services companies will also directly list on PSX and that would
erode the quality premium which Systems enjoys. We think
now that risk is lower due to the lull performance of the market.
It might be more attractive for other IT companies to merge
with Systems. NDC has been an excellent case study for the
company and has benefitted both the seller and the buyer. We
think Systems could sustain 50% CAGR in earnings over the
next three years due to acquisitions.
• Third, we think NDC Tech business has a massive opportunity in

gaining additional business in the banking and fintech space in
Saudi Arabia and the Gulf Region. Temenos is consistently
gaining share as the most popular core banking system and
this would generate additional recurring business and deep
client relationship for Systems. We think demand from the US
will slowdown but the Middle Eastern demand can sustain
strong earnings growth.
• We are valuing Systems at 12x 2024e EPS. We are not modelling

any multiple uplift and for us Systems is mainly a earnings
growth story.
PAKISTAN
Equity Market
TRG
Equity story dragged by board issues
While TRG’s assets, IBEX and Affinti are performing well, the TRG stock details
stock is unfortunately still dragged down by the board issues. Valuation PKR
- XXXX
The company has gone to court against some significant Last Close PKR 111
shareholders on the grounds of takeover rules and there have Upside/downside % XX%
been regulatory inquiries regarding some board decisions. Market cap USD mn 270
Free Float % 70
Such issues will keep institutional investors away from the
stock. We think the management should continue on its plan
of generating liquidity from its underlying assets and paying
out the shareholders of TRG Pakistan. We think that could be
the only catalyst which could help narrow the gap between
TRG Pakistan value and the underlying asset value. TRG
continues to trade at a significant discount to the value of its
holding. We maintain our price target of PkR149 and an
Outperform recommendation on the hope that the board
issues would resolve over the next 12 months.
• Despite the fact that the management of TRG has delivered

on strong operating performance of IBEX, cost rationalization
in Affinti and the purchase of shares of TRG via the SPV, the TRG vs KSE100 index
stock remains vulnerable to board control struggle. There has 30%

been frequent changes in the board of TRG Pakistan. We 20%
think the stock will remain disconnected with its 10%
fundamentals until these issues remain. 0%
-10%
• On the positive side, the fact that multiple shareholder groups
-20%
are trying to gain control of the company shows that all
-30%
parties agree that there is massive shareholder value in the
01/12/2021
01/04/2022
01/11/2022
01/07/2022
01/12/2022
01/06/2022
01/09/2022
01/01/2022
01/03/2022
01/05/2022
01/10/2022
01/02/2022
01/08/2022
stock. Otherwise they wouldn’t be fighting over it.
• However, we think its tough for institutional investors to make

an investment view on the stock until and unless the issues KSE 100 INDU
get resolved. Source: Bloomberg
• So while we continue to like the stock due to the disconnect

between the value of its assets and the current share price, we
find it hard to have a conviction recommendation on the
stock.
• We hope that the issues get resolved over the next 12 months.
Our price target based on a conservative assessment of the
value of their underlying assets is PkR149 per share.
PAKISTAN
Equity Market
50
PAKISTAN
Equity Market
Important Disclosures
Disclaimer: This publication/communication or any portion hereof may not be reprinted, sold or redistributed without the written consent of
KTrade Securities Limited. KTrade Securities Limited has produced this report for private circulation to professional and institutional clients only.
The information, opinions and estimates herein are not directed at, or intended for distribution to or use by, any person or entity in any
jurisdiction where doing so would be contrary to law or regulation or which would subject KTrade Securities Limited to any additional registration
or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be
reliable and complied by our research department in good faith. Such information has not been independently verified and we make no
representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgment of KTrade
Securities Limited at the date of this publication/ communication and are subject to change at any time without notice. This report is not a
solicitation or any offer to buy or sell any of the securities mentioned herein. It is for information purposes only and is not intended to provide
professional, investment or any other type of advice or recommendation and does not take into account the particular investment objectives,
financial situation or needs of individual recipients. Before acting on any information in this publication/communication, you should consider
whether it is suitable for your particular circumstances and, if appropriate, seek professional advice. Neither KTrade Securities Limited nor any
of its affiliates or any other person connected with the company accepts any liability whatsoever for any direct or consequential loss arising from
any use of this report or the information contained therein. Subject to any applicable laws and regulations, KTrade Securities Limited, its
affiliates or group companies or individuals connected with KTrade Securities Limited 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 have provided investment banking, capital
markets and/or other services to, the entities referred to herein, their advisors and/or any other connected parties. KTrade Securities Limited
(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. 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 institutional investor", as so defined; and understands
the whole document. Any such person wishing to follow-up any of the information should do so by contacting a registered representative of
KTrade 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 wishes 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.
Analyst certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities
or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific
recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation
based on overall revenues of KTrade Securities and has taken reasonable care to achieve and maintain independence and objectivity in
making any recommendations.
Rating Definitions
• Outperform >18.5% potential upside
• Neutral: 12.5% to 18.5% potential upside
• Underperform <12.5% potential upside
51

KTrade 2023 Strategy Report - Where To Invest in 2023

Uploaded by

Copyright:

Available Formats

You might also like

KTrade 2023 Strategy Report - Where To Invest in 2023

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

KTrade 2023 Strategy Report - Where To Invest in 2023

Uploaded by

Copyright:

Available Formats

25th December 2023

Where to Invest in 2023?

1. Geostrategic investment from Saudi Arabia.

Ali Farid Khwaja

I think sectors exposed to domestic consumption demand such as

I expect Gold to remain in a bullish run, both domestically as a dollar

The world is transitioning to a state of global fracture, where each

A recessionary year is typically about search for safety. Investors will

KTrade Research Recommendations

Real Estate Prices

KTrade Valuation Summary

KASB | Trade Annual Strategy 2022

Equities may rerate in 2HCY23 as the economic cycle turns:

Themes to look out for in CY23: We think the refinery policy’s

IMF’s suggested policies will be implemented in 1HCY23

Sectors in Brief (cont’d)

Debt management will remain the key

Reserves (SBP) Import Cover (mo)

External financing requirements necessitating debt Pakistan Int'l Bonds

Domestic Debt Sustainability a Concern

Central Government Debt

Shrinking fiscal space necessitating revenue measures or

compelled to introduce another one-off revenue measure,

We expect further pressure on the PkR

1) Complete ban on certain luxury imports 150

Pressure on the Pak Rupee once imports normalize: We

Textile Industry – Pakistan’s largest exporter: Pakistan’s

Technology Industry – Pakistan’s fastest growing industry:

Pakistan’s E&Ps – USD hedged revenues: Pakistan’s energy

Monetary tightening may continue

Buybacks emerging as a theme

ENGRO 70 22.1% 12.1% 40% -18%

BAFL 200 32.2% 11.3% 52% -34%

LUCK 10 8.8% 3.1% 160% 6%

MLCF 25 5.2% 2.3% 85% -4%

NETSOL 2 6.4% 2.2% -27% 47%

We see that despite sharp earnings growth for the majority of

formation, interest rate cycle and resumption of IMF program

Additional hike in policy rate on cards: With inflation nearing

Expansion in NIMs supported by monetary tightening: Hike in

NPL formation risks ahead: Recall that banks considerably

Source: Company Accounts Source: SBP

Risk of higher taxes to meet fiscal targets: We highlight the

Switch to interest-free banking system in five years: The govt

CET1/Tier1 are at comfortable level of 15.03%/16.07% way above 5%

the statutory requirement. 0%

Total provisioning (1,166) (4,186) (8,210) (992) (2,930) (5,740) (6,818)

Key ratios 2018 2019 2020 2021 2022 2023 2024

Total provisions 821 (2,674) (7,330) 5,473 (155) (4,558) (4,399)

Bills payable 17,003 12,795 26,451 26,486 12,003 12,993 14,064

Paid-up capital 11,851 11,851 11,851 11,851 11,851 11,851 11,851

Key ratios 2018 2019 2020 2021 2022 2023 2024

The Energy Chain

Gas price hike another necessary step: Pakistan’s circular

energy sector. As per our projections, we think the sector 80

because of the recent spell of Pak Rupee depreciation

Gas-based overdue receivables