PakistanFederalBudgetFY14:ANewBeginninginDifficultTimes

Equities|FixedIncome|AssetManagement|CorporateFinance&Advisory|Treasury|Commodities|Research|RealEstate

Federal Budget 2013-14

Table of Contents
Executive Summary Economy and Fiscal Space: Moving in the Right Direction Capital Markets: A mix bag of triggers Sectors at a glance Sector Outlook
Cements : Volumetric gains to drive growth outlook Autos: Hefty taxes; Volumes in danger OMCs & Refineries: No incentives granted Electricity: Promises Made Implementation remains the key Fertilizer: Much ado about nothing Textile: Taxes imposed; Outlook remains upbeat Banks: Good riddance to a hanging sword E&P: Muted again Telecom: Nothing New FMCG: Taxing the end consumer

2 3 6 7

10 11 12 13 14 15 16 17 18 19

ExecutiveSummary
BudgetFY14:Firststepintherightdirection

Federal Budget 2013-14

The Budget FY14 has addressed the need of the hour which is to increase the revenue collection for achieving fiscal space, pursue arenas for nontax revenues, cut untargeted power subsidies, restructure loss making public sector entities and increase development spending to kick starttheeconomy The government envisaged a budget outlay of PKR3.99trn to be financed through a revenue target of PKR3.4trn up 21% from revised revenue estimate of PKR2.8trn for FY13. Though we believe the government may remain short of such an aggressive revenue collection targets the newlyintroducedtaxmeasures(STandFED)willprovideenoughsupporttocarryonwithdevelopmentexpenditure Althoughthegovernmenthasalreadygivenarelativelyhigherfiscaldeficittarget(6.3%ofGDP),webelievetheactualnumberwouldbehigher by80bpstoendat7.1%ofGDP,whichwouldalsobefinancedthroughbankborrowings We also term the GDP target of 4.4% for FY14 announced by the government to be optimistic. However, if PSDP expenditure is materialized in full,thegovernmentmaybeabletostayclosetothatnumber

Lowerthananticipatedtaxtoleadtoareliefrally With no increase in FED on cement, no additional taxes announced on raw material imports, no change in GIDC and gas tariffs, no additional taxesonintercorporatedividends,statusquoondividendincometobanksanda1%reductionincorporateincometax,webelievethemarket mayenjoyareliefrallyespeciallyinthesesectors:Cements,Textiles,E&Ps andBanks However, the finance bill has restored turnover tax to 1% from 0.5% announced in Budget FY13, which we believe will be negative for distributionandmarketingbusinessesexceptfor OMCs, refineries and gas marketing companies. Hence if not lowered later (as was the case in FY12),thesectorslikesmalltextilemanufacturersandretailbusinessesmayhavetotakeahitontheirprofitability

Whatsinitforthecapitalmarkets? Except for the increased income tax and FED incidence (Tobacco and Sugar companies), the finance bill FY14 remained muted for the capital markets.However,lowerthananticipatedtaxincreasesmayturnpositiveforthemarket Assurance of cut in subsidies through power tariff increase, clarity on one time adjustment of circular debt and higher PSDP allocation will kick start the economic activity. This may push our energy heavy KSE100 index further up by attracting fresh interest from local as well as foreign investors We reiterate our bullish stance on the market, advising investors to stick to strong dividend yield plays including POL, PPL, HUBC, KAPCO, NPL, NCPLandAPL

EconomyandFiscalSpace:MovingintheRightDirection
BudgetFY14:RevenueReceipts
Estimated Provincisl Surplus, 1 %

Federal Budget 2013-14

Within twelve days of forming the government, the incoming finance minister Mr. Ishaq Dar representing the majority party PMLN, announced his first budget yesterday. The Budget FY14 addressed the need of the hour to increase tax revenues from the right areas, following up by deferred nontax revenues, restructuring loss making public sector entities, increasing development budgetandtocutsubsidies.WepresentthekeyhighlightsoffinancebillFY14. Revenuecollectionandtaxmeasures
Net Revenue Receipts 53%

Estimated Provincial Surplus 1 % External Recepits 5% Net Capital Receipts 1 4%

Addressing the basic issue of ever declining fiscal space, the government envisaged a budget outlay of PKR3.99trn with an increase of 15% over fiscal year 2013, while projecting the total revenuetojumpupby21%toPKR3.4trn. OfthisPKR3.4trn,thegovernmentprojectsFBRtocollectPKR2.47trn(9.5%taxtoGDP) up 23% tobagsupportfromincreasedtaxrates.Majortaxationavenuesinclude:
9 9 9 9 9

0.5%increaseinturnovertaxto1% A1%increaseinGeneralSalesTax(GST)to17% IncreaseinFederalExciseDutyonfewsectors A2%WHTontheproductvaluetobechargedifsoldtounregisteredbuyers WithdrawaloftaxholidayonincometaxesfromcompaniesoperatinginwartornKPKand Baluchistanprovinces Increaseofincometaxslabstoincreasedirecttaxcollection PKR120bn(USD1.2bn)from3Gauction PKR79bn(USD800mn)fromEtisalat PKR357bnthroughprojectloansandaids PKR99bnthroughChinaSafeDeposits

Source: MoF Pakistan, BMA Research

Whiletherestofthistargetistobemanagedthroughnontaxrevenueswhichinclude:
9 9 9 9

Ofthistotalprojectedrevenue,PKR1.5trnwillbedisbursedtoprovincesunderNFCawardleaving federalgovernmentwithPKR1.9trn.

EconomyandFiscalSpace:MovingintheRightDirection
BudgetFY14:ExpenseAllocation
Pension 5%

Federal Budget 2013-14

Outlaytoitsbestuse Themedasroutingfiscalexpendituretowardsthegrowthoriented arenas,themajorhighlightsofthe outlayis: Development spending of PKR780bn (23% of total revenues) establishing our view of positive spending. This includes PKR540bn (68% of development spending) expected to be spent for Public Sector DevelopmentProjects(PSDP). Themajorprojectsofwhichinclude:
9
Defence Affairs & Services 1 7%

Subsidies 7% Subsidies, 7%

Inerest Paymnets 32%

Others 1 5%

PKR115bnfornewdamsandwaterrelatedprojects PKR63bntoNationalHighwayAuthority(NHA)forMotorway PKR57bnforNandipur Powerproject(capacity440MW) PKR51bnforWAPDApowergridupgradation

9 9 9

Federal PSDP 1 5%

PSDP:MajorAllocations
Revised FY1 3 Budget FY1 4

Theotherconventionalexpenditureswouldinclude:
9 9 9

DebtservicingofPKR1.0trn(52%offederalrevenues) IMFandotherloanrepaymentsofPKR367bn(19%ofrevenues) Subsidy of PKR240bn (13% of federal revenues), of which power sector would share 92% orPKR220bn The disbursement for defense would increase by 10% to PKR627bn (33% of federal revenues)

Provinces

WAPDA/NHA New Dev.Initiatives Water & Power

Others 0 1 00 200 300 400 500 600 700

With these outlays and expected revenue measure along with adjusting for provincial surplus of PKR23bn, the government estimates a deficit of PKR1,651bn (6.3% of GDP) in their finances, whichwouldbefinancedthroughbankborrowings

Source: MoF Pakistan, BMA Research

RealisticandAttainable

TaxtoGDP&Inflation
RealGDPGrowth(%) 16 14 12 10 8 6 4 2 0 20102011 201112 201213 201314 201415F 201516F Inflation(%)

Federal Budget 2013-14

Our microscopic look into the budget and its aggressive targets (revenue collections, PSDP allocation,lowersubsidies)compelustotermthebillasthefirststepintherightdirection. However, contrary to news flows, the quantum of additional taxes which were supposed to be introduced in the finance bill didnt materialize along with a 1% reduction in corporate income tax,bodingwellfortheindustries. With regards to taxes, we believe the additional measures taken (discussed earlier) have the ability to increase collection. However, targets seem to be aggressive even if implemented in truespirit. On tax revenue front, we believe assumption to increase direct and indirect taxes by 25% and 21% respectively will be demanding given nominal GDP growth of 1213%. Hence we believe government will fall short by PKR65bn and PKR85bn in both direct and indirect taxes respectively. Pertaining to the nontax revenue targets, we believe the projection for issuance of Euro Bonds (PKR49bn or USD500mn) seems difficult as no ground work has been done and is unlikely to be materializedinFY14. Moreover, conditionality of land title transfers (309 properties) set by Etisalat on the remaining amount of PTCL privatization proceed (USD800mn or PKR79bn) makes it a difficult bet and thus weassignsalowprobabilitytothesame. Though, the incoming government has remained prodevelopment spending, (looking at their historic trend in Punjab province), we project nonmaterialization of these revenue targets would compel government to reduce spending. We believe federal PSDP spending to remain in tune of ~PKR450bn which even then would be 19% higher than revised spending for FY13, bodingwellfortheeconomicgrowth. NewsflowofanoticeableincreaseinpowertariffsjustifiesthelowersubsidytargetsetforFY14 (keptatPKR240bn)againstrevisedtargetofPKR367forFY13.However,webelieveinthetarget mayexceedby~PKR50bnheretoo. Trimming the governments aggressive targets both in terms of revenues and expenditures, we opine that fiscal deficit would clock at 7.1% which is 80bps higher than the governments own targetof6.3%

TaxRevenueas%ofGDP
TaxRevenueas%ofGDP

14 12 10 8 6 4 2 0 20102011 201112 201213 201314 201415F 201516F

Source: MoF Pakistan, BMA Research

CapitalMarket:Amixbagoftriggers
KSE100Index:PriceVolumeGraph
KSEVolumes mn(RHS) 24,000 22,000 20,000 18,000 16,000 14,000 12,000 Apr13 May13 Mar13 Jan13 Feb13 Dec 12 Oct12 Nov12 Sep12 Jun12 Jul 12 Aug12 KSE100 Index(LHS) 700 600 500 400 300 200 100 0

Federal Budget 2013-14

Surprisingly when nobody was pinning hopes on the Budget FY14, it has turned out to be positiveforthecapitalmarkets. The finance minister has proposed to reduce the corporate tax rate by 1% to 34% for FY14 and further progressively reduce it to 30% in the next couple of years. The step has been taken to support across the board corporate sector against SECPs proposal to provide this relief to listed sectoronly.Nonetheless,itwillbebeneficialforlistedcompaniesonKarachiStockExchange. To increase tax collections, the finance bill FY14 has also proposed to increase minimum tax (turnover tax) to 1% of net turnover from earlier tax rate of 0.5%, boding negative for listed distributionbusinesses. ThiswouldnegativelyimpactallthecompanieswhichoperateatlowermarginsincludingOMCs, Refineries (amid volatile margins), small textile companies operating in losses or minimal profits andotherretailoutlets. Capital Gains Tax, CVT and FED on broker commission remained intact. However, the bill has withdrawn FED exemption on service provided by asset management companies and a 10% WHTonprofit/interest earnedonmarginfinancingbybrokershasbeenintroduced.

BMAUniverseValuationSnapshot
FY12A PER PBV Div.Yield EPSGrowth 10.0x 2.2x 5% 10% FY13E 8.6x 1.9x 7% 17% FY14E 7.3x 1.7x 8% 18%

RegionalValuations 2013PER
Malysia Indonesia Singapore Thailand India Vietnam China Pakistan 15.0x 13.7x 13.5x 12.6x 12.1x 11.0x 9.3x 8.5x

KSE:Eventsandtriggerstowatchoutfor
Event MonetaryPolicy IMFMissiontoPakistan CSFPayment Triggers ForeignFlows ResultRally Date 21Jun13 19Jun13 June13end

Slabsofcapitalgainstax
Lessthan6Mholding TaxYear 2011 2012 2013 2014 2016 Rateoftax 10.0% 10.0% 10.0% 10.0% NA Holding<6M/>12M TaxYear 2011 2012 2013 2014 2016 Rateoftax 7.5% 8.0% 8.0% 8.0% 10.0%

Source: Bloomberg,KSE Website, BMA Research

SectorsataGlance
Sector
CapitalMarkets

Federal Budget 2013-14

Impact Neutralto Positive BMAStance

BudgetAnnouncement Corporatetaxratecutby1%to34% Tobeprogressivelyreducedto30%innextcoupleofyears Turnovertaxincreasedto1%from0.5% CVT,CGTandFEDonbrokeragechargesmaintained 10%FEDimposedonmarginsfinancingprofitorincome taxedat35%startinginFY14,willnowcontinuetobetaxedat25%

Banks

Dividend income to banks through money market instruments, previously scheduled to be Neutral Smallbusinessloanstoindividuals rangingbetweenPKR100,000to PKR2mn(50,000 loan to
bedisbursed)toberaisedthroughthebankingsystem

Marketweight

Cements

FederalPSDPraisedby50%toPKR540bn.TotalPSDPupby32%toPKR1,155bn Turnovertaxjackedupto1%comparedto0.5%inFY13 GSThikedto17%,tobechargedbasedonprintedretailpricesofcements WHT levied on distributors reduced from 0.5% to 0.1% of sales; to be collected by manufacturers. Additionally, manufacturers will withhold 2% sales tax on supplies to unregisteredparties

Positive

Overweight

Textile

Increasetheminimumtaxongrossturnoverfrom0.5%to1.0% Neutral 2%hikeintaxrateonsuppliestounregisteredpersons Reduced WHT on distributors to 0.1% to be deducted by the manufacturers (acting as withholdingagents) GSTraisedto17%,tobechargedbasedonprintedretailpricesoffertilizer WHT levied on distributors reduced to 0.1% of sales, which will be collected by manufacturers. Additionally, manufacturers will withhold 2% sales tax on supplies to unregisteredparties Corporatetaxratereducedby1%to34% Neutral

Marketweight

Fertilizer

Marketweight

SectorsataGlance
Sector Explorationand Production OilMarketing Companies Refineries BudgetAnnouncement

Federal Budget 2013-14

Impact BMAStance Overweight

Dividend target of PKR1011/sh and PKR1213/sh set for FY14 from OGDC and PPL Neutral respectively PossibilityofasecondaryofferinPPL Turnovertaxmaintainedat0.5% PKR120bnsetaspetroleumlevytarget GovernmentexpectsPKR1112/shdividendfromPSO Turnovertaxmaintainedat0.5% NochangeindeemeddutyonHSD Neutral

Marketweight

Neutral

Marketweight

Electricity

PKR220bnallocatedforsubsidiestopowersectoroutofatotalPKR240bn;making94%of Neutralto theentireamount. Positive A comprehensive Energy Policy to be announced soon by the government following the resolutionofcirculardebtinthenext60days Increaseinsalestaxfrom16%to17% ImpositionofWHTonpurchaseofnewcars Relaxationofdutyonimportofhybridcarsdependingonenginecapacity 10%FEDoncarsabove1800cc Negative

Overweight

Automobile& Parts

Marketweight

Telecom

Noincreaseinsalariesofgovernmentemployees PKR120bnallocatedas3Gauctionrevenue GSTontelecomservicestoremainunchangedat19.5%

Neutral

Overweight

FMCGs

FED on aerated beverages raised to 9% from 6% earlier; capacity based taxation of Neutral aeratedbeveragemanufacturersintroduced Cigarettes to be taxed as per a two tier rate structure, as opposed to three tier structure previously Corporatetaxratereducedby1%to34%,GSTraisedby1%to17%

Marketweight

SECTORS

Cements:Volumetricgainstodrivegrowthoutlook
BudgetImpact: Positive
Sector: Cements SectorStance: Overweight

Federal Budget 2013-14

KeyBudgetaryMeasures
FederalPSDPraisedbywhopping50%toPKR540bn.TotalPSDPupby32%toPKR1,155bn Turnovertaxjackedupto1%comparedto0.5%inFY13 GSThikedto17%.Also,itwouldnowbechargedbasedonprinted retailpricesofcements WHTleviedondistributorsreducedfrom0.5%to0.1%ofsales;tobecollectedbymanufacturers. Additionally,manufacturerswillwithhold2%salestaxonsuppliestounregisteredparties Amaximumof25%initialdepreciationisnowallowedonplant and machinery in the first year of COD,downfrom50%allowedpreviously

BMACoverage
Target Current Price Price 205 191 80 128 80 131 Total Return 12% 3% 7% Ratings Add Neutral Add

Impact:Positive
The unprecedented rise in PSDP, coupled with PMLN regimes sound track record of conceiving andcompletingmegainfrastructureprojects,drivesourconvictionofaggressivecementdemand boost going ahead. We expect volumes to rise by at least 8% annually in FY14 and onwards, comparedto6%EinFY13 Turnover tax hike to deflate earnings estimates by 1.5%3.0% across BMA Cements Universe, withLUCKandDGKCremainingtheleastaffectedandACPLthemost GST hike & retail price based imposition, together with other taxes levied on dealers to jack up retaildomesticcementpricesbyPKR1015/bag(completepassonassumed)

LUCK DGKC ACPL

Valuations
Cements FY12 P/E PB Div.Yield ROE Ear.Growth 3.8x 0.6x 7% 17% 155% FY13E 5.9x 1.3x 5% 22% 52% FY14E 5.6x 1.1x 5% 21% 5%

Outlook:Underutilizedplantsremainfavorite
Higher PSDP allocation to benefit underutilized players the most. We suggest exposure to Lucky, Fauji and Maple Leaf Cement. Improvement in local to export ratios and demand driven price hikestoplayinthefavorofDGKhanCementintheNorthandAttockCementintheSouth MaintainOverweightonBMACementUniverse

10

Autos:Heftytaxes;volumesindanger
BudgetImpact: Negative
Sector: Autos SectorStance: Marketweight

Federal Budget 2013-14

KeyBudgetaryMeasures
Increaseinsalestaxfrom16%to17% ImpositionofWHTonpurchaseofnewcars Relaxationofdutyonimportofhybridcarsdependingonenginecapacity 10%FEDoncarsabove1800cc Corporatetaxrateslashedto34%from35%

Impact:Negative
BMACoverage
Target Current Price Price 333 340 180 149 Total Return 4% 24% Ratings Neutral Buy

TheWHTonnewpurchasesofcaralongwith increaseinsalestaxandimpositionofFEDtotrigger aprebuyingphenomenoninJun13escalatingsalesvolumesforthemonth. However, on a broader scope the said measure will make cars expensive squeezing the buyers powerandlocalmanufacturers pricingpoweralike. We dont see any impact on margins as the price increments would be passed on to end consumers The hybrid cars make up a small portion of the industry demand and thus relaxation of import dutyonthesamewouldnotmakeasignificantimpactonexisting manufacturers

INDU PSMC

Valuations
Autos FY12 P/E PB Div.Yield ROE Ear.Growth 4.7x 0.8x 11% 16% 49% FY13E 8.8x 1.1x 5% 13% 16% FY14E 6.7x 1.0x 7% 15% 32%

Outlook:MarginstostrengthenonthebackofJPYdepreciation
The budget failed to provide any direction to the auto industry (no discussion on AIDPII). Moreover, it decreased the pricing power of the assemblers by imposing hefty taxes (33%233% asperenginecapacity) Beyond FY13, we expect strong earning rebound based on JPY depreciation against 13% CYTD (marginimprovement) Though, the budgetary measures resulting in car price increases will keep the volumes under pressure,reducedinfluxofimportedvehicleswillprovidesomesupport. WeflagPSMCasourfavoritepickinthesector,offeringatotalreturnof24%

11

OMCs &Refineries:Noincentivesgranted
BudgetImpact: Neutral
Sector: OMCs &Refineries SectorStance: Marketweight

Federal Budget 2013-14

KeyBudgetaryMeasures
Increaseinturnovertaxby0.5%to1.0% GovernmenthaskeptatargetofPKR120bnforpetroleumlevy Dividend income from PSO may have been targeted at PKR9.011.0/sh (as we await detailed documents) Governmenthaskeptdeemeddutyintactforrefineries

Impact:Neutral
BMACoverage
Target Current Price Price 309 315 523 230 215 557 237 198 Total Return 0% 1% 8% 12% Ratings Neutral Neutral Add Add

The budget has amended section 113 which does not cover OMCs, Refineries and Utilities (coveredundersection9ofSecondSchedulePartIII). Hencethesaidsectorsareexpectedfromtherecentincreaseinturnovertaxandwillcontinueto pay0.5%inturnovertax. Recall, OMCs and Refineries were paying 0.5% turnover tax in FY12 despite the presence of 1.0% turnovertaxrate. ThePKR9.011.0/shdividendfromPSOwillremaindependentontheintensity ofcirculardebt

PSO APL NRL ATRL

Valuations
OMC FY12 P/E Div.Yield Refinery FY12 P/E Div.Yield 6.2x 6% FY13E 6.1x 7% FY14E 6.7x 8% 7.5x 5% FY13E 6.9x 4% FY14E 6.4x 5%

Outlook:Liquidityistheprimetrigger
The elimination of circular debt through one time settlement will finally resolve the longstanding liquidity issue of midstream oil companies. Improved liquidity position will result in smooth operation,betterpayoutsandreducedrelianceonbankborrowing forworkingcapitalfinance Recentimprovementingrossrefiningmarginmaybodewellforrefinerysector. We maintain our liking towards ATRL and APL with better product mix and low exposure to circulardebt PSO, the prime beneficiary of circular debt resolution, may continue its upward rally as the energychainmovesclosertogradualreductionofcirculardebt

12

Electricity:Promisesmade;implementationisthekey
BudgetImpact: NeutraltoPositive
Sector: Electricity SectorStance: Overweight

Federal Budget 2013-14

KeyBudgetaryMeasures
PKR220bn allocated for subsidies to power sector out of a total PKR240bn; making 94% of the entireamount. The amount allocated to be utilized in improving plants efficiencies and upgradation of certain existingprojects. A comprehensive Energy Policy to be announced soon by the government following the resolutionofcirculardebtinthenext60days Improvementinfuelmixasapartofamediumtermplan

BMACoverage
Target Current Price Price 56 63 58 29 26 63 34 34 Total Return 0% 3% 1% 16% Ratings Neutral Neutral Neutral Reduce

Impact:NeutraltoPositive
TheallocatedamountofPKR225bnis36%lowerthanlastyearsbudget Againstexpectations,thebudgetslightlytoucheduponthesubjectofcirculardebt Much now relies upon the energy policy to be announced later by the government where an increaseinelectricitytariffishighlyexpected Governments insistence to hire professional management to run the inefficient Gencos alongwith stepstobetakentolowertheT&Dlosseswillincreasetherecoveryratioforthesector

HUBC KAPCO NCPL NPL

Valuations
Electricity FY12 P/E PB Div.Yield ROE Ear.Growth 5.0x 0.1x 16% 27% 19% FY13E 7.2x 2.1x 11% 30% 17% FY14E 6.8x 2.0x 12% 30% 5%

Outlook:Bullishnessprevails
The budget remained a nonevent for the power sector though it clearly indicated governments willtoresolvetheenergycrisis.However,implementationremainsthekey The resolution of circular debthas manypositive implications on the sector where opening up of thechokedupbankinglinesandincreaseincapacityutilizationarethefewimportantones Weremainbullishontheentirepowersectoreyeingkeypowersectorreforms.

13

Fertilizer:Muchadoaboutnothing
BudgetImpact: Neutral
Sector: Fertilizer SectorStance: Marketweight

Federal Budget 2013-14

KeyBudgetaryMeasures
Subsidy on imported urea raised by 15% to PKR30bn. Pertinently, only PKR10bn was spent on ureasubsidiesinFY13asopposedtoallocationofPKR26bn GSTwouldnowbechargedbasedonprintedretailpricesoffertilizer WHT levied on distributors reduced from 0.5% to 0.1% of sales, which will be collected by manufacturers. Additionally, manufacturers will withhold 2% sales tax on supplies to unregisteredparties A maximum of 25% initial depreciation is now allowed on plant and machinery in the first year ofCOD,downfrom50%allowedpreviously GSThikeby1%to17%andcorporatetaxratereductionby1%to 34%willalsoapply

BMACoverage
Target Current Price Price 120 114 174 44 37 141 40 26 Total Return 19% 23% 25% 52% Ratings Buy Buy Buy Buy

FFC ENGRO FFBL FATIMA

Impact:Neutral
We dont see any impact on margins of fertilizer manufacturers from these budgetary measures. Retail urea prices would rise by ~PKR1215/bag to account for higher & retail price basedGST Webelieve relief in WHT implied fordealers wouldbe absorbed. The quantum of unregistered buyersoffertilizeristoosmalltomateriallyimpactretailprices Corporatetaxrelieftotranslateinto1.5%higherearningsacrossthesector

Valuations
Fertilizer FY12 P/E PB Div.Yield ROE Ear.Growth 8.8x 0.1x 10% 29% 28% FY13E 7.7x 2.6x 10% 34% 23% FY14E 6.9x 2.2x 10% 33% 11%

Outlook:ExpectreliefrallyinFaujis Marketweight maintained

Anticipation of feed gas price hike had kept the entire fertilizer sector (ex. FATIMA) under pressure recently; leading ENGRO, FFC and FFBL to underperform the broader index by 4% in justoneweek We thus expect reliefrally to reignite interest in these scrips. Currently Faujis provide enticing dividendyieldsofover13.5% BUY!Havingsaid,wemaintainENGROasourtoppick

14

Textile:Taxesimposed;Outlookremainsupbeat
BudgetImpact: Neutral
Sector: Textile SectorStance: Marketweight

Federal Budget 2013-14

KeyBudgetaryMeasures
Thebudgethasproposedtheturnovertaxtoberaisedto1.0%. Onapositivenote,WHTonexportsaleshasnotbeenincreased. Ithasalsobeenproposedthat the rate of depreciation on Plant and Machinery (for tax reporting purposes)willbereduced25%(previously50%) Onsuppliestounregisteredpersonsfurther2%taxhasalsobeenimposed The WHT collected by manufacturers on supplies to distributors, dealers and wholesalers will be reducedto0.1%(previous0.5%)

BMACoverage
Target Current Price Price 109 103 65.4 59 Total Return 11% 19% Ratings Add Buy

Impact:Neutral
The increase in turnover tax to 1.0% will lead to a downside impact of 6%8% in our earnings estimatesofNMLandNCLonanannualizedbasis. Theimpositionofadditional2%taxonsuppliestounregisteredpersonswillnothaveanynotable impactoncompanies sales The reduction in WHT deducted on supplies to distributors/wholesalers may bode positive as many distributors shifted towards unregistered manufacturers last year to evade taxes when 0.5%WHTwasimposedinFY13budget

NML NCL

Valuations
Textile FY12 P/E PB Div.Yield ROE Ear.Growth 3.5x 0.5x 6% 13% 9% FY13E 5.8x 0.9x 6% 16% 41% FY14E 5.2x 0.8x 7% 16% 12%

Outlook:FY14tobeanothereventfulyear
Drivenby,1)betterexportprospects(Chinayarn import boom + EU duty waiver), 2) steady yarn cotton spreads plus strengthening fabric prices and 3) improvement in gas/electricity supply (on possible resolution of circular debt), we believe the sector is all set to witness another eventful yearinFY14afterwitnessingrobustrecoveryinFY13. At current trading levels, both NML and NCL are trading at PER of 3.1x and 3.0x to our FY14 core EPSestimatesrespectively

15

Banks:Goodriddancetoahangingsword
BudgetImpact: Neutral
Sector: Banks SectorStance: Marketweight

Federal Budget 2013-14

KeyBudgetaryMeasures
Dividend income to banks through money market instruments, previously scheduled to be taxed at35%startinginFY14,willnowcontinuetobetaxedat25% Small business loans to individuals ranging between PKR100,000 to PKR2mn (50,000 loan to be disbursed)tobeprovidedthroughcommercialbanks. Aimingtopavewayforreductionininterestrates

BMACoverage
Target Current Price Price 225 311 45 113 100 19 34 44 114 111 18 30 Total Return 23% 19% 10% 2% 22% 23% Ratings Reduce Buy Add Neutral Buy Buy

Impact:Neutral
FY12 FY13E 9.1x 1.4x 8% 15% 6% FY14E 7.8x 1.3x 10% 16% 18%

MCB NBP HBL UBL BAFL BAHL

Stable taxes on dividend income to bring a sigh of relief across the sector, as the hanging sword ofpotentiallytakingthemupto35%seemstohavebeenremovedpermanently To reduce tax liabilities, the banks preferred to recieve stock dividends instead of cash from moneymarketfunds Small business loans and mortgages, to be made available through the banking system, may help kickstartrelativelylowrisklending,whichhasbeenhithertostagnant Having said, the finance minister hinted at paving way for further slide in interest rates, which bodes negative for the entire banking system especially when SBP has increased rates on minimumsavings

Valuations
Banks P/E PB Div.Yield ROE Ear.Growth 6.0x 1.0x 10% 17% 7%

Outlook:NeutralSelectiveexposuretohighyieldsadvised
While the banking sector continues to face the catch 22 situation of ever decreasing spreads and stale advances, we advice exposure to select undervalued and clean books. Also, attractive yield playsandstrongnoninterestincomeheavyP&Ls mustntbeignored Resultantly,UBL,BAHLandBAFLremainourtoppicksinBMABankingUniverse Having said, IMF program reentry in 1HFY14 may pave way for DR hike, reversing fortunes for theentiresector

16

E&Ps:Mutedagain
BudgetImpact: Neutral
Sector: Oil&Gas SectorStance: Overweight

Federal Budget 2013-14

KeyBudgetaryMeasures
The budget has not yet disclosed the details of dividend income targets. However, a PKR3.8bn YoY higher total dividends target to PKR68.4 in FY14 suggest that the govt. may have set PKR10 11/shandPKR1213/shinrevenuefromOGDCandPPLrespectively Thegovernmenthasalsoindicatedtopursueprivatizationofprofitablestateownedentities.This mayresultinresurgenceofsecondaryofferinginPPL

Impact:Neutral
BMACoverage
Target Current Price Price 233 249 223 510 219 509 Total Return 3% 9% 10% Ratings Neutral Add Add

As expected the budget largely remained a non event for the exploration and production companies Asperourestimates,OGDCandPPLwillpayoutPKR12/shandPKR15/shrespectivelyinFY14 We expect robust growth in earnings (owing to steady volumetric additions) will allow the companiestoeasilyfundthetargeteddividendpayouts Given the strong fundamentals and favorable outlook, we believe the secondary offering will haveaneutralimpactonstockpriceperformance

OGDC PPL POL

Outlook:Positive
Valuations
E&P FY12 P/E PB Div.Yield ROE Ear.Growth 6.5x 2.3x 6% 35% 41% FY13E 9.5x 2.9x 5% 31% 9% FY14E 7.3x 2.4x 7% 33% 30%

In FY14, earnings growth will be mainly driven by robust volumetric growth. As per our estimate incomingoilproductionwillcontribute25%35%toexistingproductionofOGDC,PPLandPOL. Notable production growth coupled with stable oil/wellhead prices and weaker PKR/USD will furthersupportthegrowthinearnings Based on lowest FY14E PER of 6.5x in the sector, aggressive E&D activities and exposure to unconventionaltightgasreserves,wehaveastrongconvictiontowardsPPL Whereas, highest dividend yield, immunity to circular debt and robust hydrocarbon production growthformsourinvestmentthesisonPOL

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Telecom:Nothingnew
BudgetImpact: Neutral
Sector: Telecom SectorStance: Overweight

Federal Budget 2013-14

KeyBudgetaryMeasures
Noincreaseinsalariesofgovernmentemployees PKR120bnallocatedas3Gauctionrevenue GSTontelecomservicestoremainunchangedat19.5%

Impact:Neutral
BMACoverage
Target Current Price Price 33 22 Total Return 60% Ratings Buy

Salaryexpenseconstitute28%ofthecostofgoodssoldandnoincreaseinsalarywouldtranslate positivelyintoanearningsimpactofPKR0.27/shespeciallypost VSS 3G auction to augur well for the overall sector, as transition to highmargin data services from lowmarginvoiceserviceswouldstartimpactingearnings Reductionincorporatetaxrateby1%tojackupearningsbyPKR0.4/sh Thecompanytoremainundercorporatetaxratenet

PTC

Valuations
Telecom FY12 P/E PB Div.Yield ROE Ear.Growth 17.1x 0.6x 0% 3% 42% FY13E 5.9x 1.2x 13% 20% 435% FY14E 9.0x 1.1x 7% 13% 34%

Outlook:ICHladenresultstocontinuedrivingmomentum
The much awaited auction of 3G license is good news for PTC in terms of improving ARPU. However,theinvestmentrequiredforacquisitionoftheselicenses(USD1bn)mightagainimpose ariskondividendpayoutinCY13 The turnaround story in LDI segment alongwith tremendous potential in the companys BroadbandandUfone segmentmakesthestockastronginvestmentcase PTCL remains our top pick in the sector providing an amazing total return of 60% from current tradinglevels

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FMCG:Taxingtheendconsumer
BudgetImpact: Neutral
Sector: FMCG SectorStance: Marketweight

Federal Budget 2013-14

KeyBudgetaryMeasures
FED on aerated beverages raised to 9% from 6% earlier; capacity based taxation of aerated beveragemanufacturersintroduced Cigarettes to be taxed as per a two tier rate structure, as opposed to three tier structure previously Corporatetaxratereducedby1%to34%,GSTraisedby1%to7%

Impact:Neutral
Addedtaxtomildlyraiseretailpricesofsoftdrinks,Murree Breweryisonelistedplayer Higher taxes on cigarettes to further inflate prices, with no material impact on manufacturers anticipated HigherGSTtoslightlyraiseendproductpricesacrosstheboard exceptexemptitems.Also,lower corporatetaxtoincreaseearningsby1.5%

BMACoverage
Target Current Price Price 136 146 Total Return 7% Ratings Reduce

EFOODS

Valuations
FoodProducers FY12 P/E PB Div.Yield ROE Ear.Growth 17.9x 4.7x 2% 26% 191% FY13E 26.3x 7.9x 0% 30% 63% FY14E 19.0x 5.6x 0% 29% 38%

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AnalystCertification
ResearchTeam
FurqanPunjani AffanIsmail FaridAliani ZoyaAhmed SaminaSherAliKanji NaseemAkhtarKhattak Economy,Strategy,Politics&Banks E&P,Refineries,Chemicals&Textiles Fertilizer,Cements,Insurance&Food OMCs,Power,Autos,Telecom DatabaseIncharge Layout&ProductDistribution +9221111262111Ext.2064 +9221111262111Ext.2058 +9221111262111Ext.2059 +9221111262111Ext.2053 +9221111262111Ext.2061 +9221111262111Ext.2060

Federal Budget 2013-14

furqan.punjani@bmacapital.com affan.ismail@bmacapital.com farid@bmacapital.com zoya.ahmed@bmacapital.com skanji@bmacapital.com nakhtar@bmacapital.com

InstitutionalSalesTeam
OmairBegChaghtai Azher AliShahzad JunaidShaharyarGodil MuzammilKhan SyedImranRizvi HeadofInternationalSales DomesticSales DomesticSales DomesticSales DomesticSales +92213246449632464358 +922132444465 +922132444465 +922132444465 +922132444465 omair.chaghtai@bmacapital.com ashezad@bmacapital.com jsgodil@bmacapital.com mkhan@bmacapital.com Imran.rizvi@bmacapital.com

DISCLAIMER ThismemorandumisproducedbyBMACapitalManagementLimitedandisonlyfortheuseoftheirclients.Whiletheinformationcontainedhereinisfromsources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressed may be revised at any time. This memorandumisforinformationonlyandisnotanoffertobuyor sell,orsolicitationofanyoffertobuyorsellthesecuritiesmentioned. ANALYSTCERTIFICATION We, Furqan Punjani, Muhammad Affan Ismail, Farid Aliani and Zoya Ahmed, hereby certify that this report represents our personal opinions and analysis of information. All views are accurately expressed to the best of our knowledge. We certify that no part of our remuneration is linked either directly or indirectly to recommendationsoranalysiscoveredinthisreport.

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