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Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Finance www.arifhabibltd.com A Cautious Walk towards Growth Pakistan Budget Review|FY16

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REVIEW OF PAKISTAN budget in detail.

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Page 1: Pakistan Budget Review FY16

Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Financewww.arifhabibltd.com

A Cautious Walk towards Growth

Pakistan Budget Review|FY16

Page 2: Pakistan Budget Review FY16

Equity Brokerage, Research, Inter-Bank Brokerage, Forex & Corporate Financewww.arifhabibltd.com

B u d g e t B r i e f F Y 1 6

2

Pakistan Economy• A Cautious Walk towards Growth 3

• Budget at a Glance 4

• Key Statistics 5

• Gradual Move towards Direct Taxation 6

• Tightening the Belt 7

• More Growth- Prone Expenditure the better 8

• Shifting Financing from Domestic to Foreign 9

• Key Revenue Measures 10

• Key Relief Measures 11

• Key Income Tax Measures 13

• Sales Tax and Federal Excise Duty 14

Capital Market• KSE: Neutral to Negative in Short - term 16

• KSE: Companies with Potential higher Dividend 17

• Companies with Reserves over 100% of Paid- up 18

• Key Measures & Expected Impacts 19

• Impacts on Key Sectors, Recommended Stance 20

Key Sectors• Cement – Positive 22

• Power / IPPs– Positive 23

• Automobile & Parts – Neutral to Positive 24

• Textiles – Neutral to Positive 25

• Fertilizer – Neutral 26

• E&P, OMCs – Neutral 27

• Banks – Neutral to Negative 28

• Other Sectors in the Limelight 29

• Recommendation Sheet 32

• Disclaimer 33

Contact• • Contact List 34

Budget FY16

Content

Page 3: Pakistan Budget Review FY16

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B u d g e t B r i e f F Y 1 6

Budget FY16

A Cautious Walk towards GrowthDespite the government missing some tax targets, we feel intentions to keep overall expenditure growth under control should augur well in FY16. Much of the fiscal consolidation the government is hoping will come by way of reducing current expenditures rather than the optimistic increase in the tax revenues. Based on this, the government projects fiscal burden to come down to 4.3% of the GDP. That, in our view, remains a far-fetched proposition as FY16 budget lacks clear and key policy reform measures, as originally envisaged, to broaden tax net and encourage investments via incentives from companies to boost capital investments. Similarly, we do not expect massive cuts that seem to be on the gov’t agenda, which could lead to cost overruns, ultimately causing the government to miss its fiscal deficit target.

Expenditure reduction - limited scope to cut aggressively: We believe there is limited scope for the government to undertake drastic measures to reduce the current expenditure in FY16. The government foresees a current expenditure-GDP ratio of 10.3%, which is lower than historical average of 11.5-12.5%. The only credible way to bring down expenditure to this low is through sharp reduction in subsidies, which can be inflationary in nature but affordable in a presently weak inflation scenario. Major cut in development expenditure, if any, will come at a cost of growth, which certainly is not on the government agendas this time around. Henceforth, we don not see a meaningful reduction in government’s expenditures, in FY16.

Increase in tax-to-GDP: The decline in tax revenues during FY15, despite a pick-up in growth rate is rather alarming. For FY16, the government targets a tax-GDP ratio of 11.1% in FY16, which again is higher than historical average of 10%. However, webelieve, given a economic recovery and imposition of one-time tax burdens in FY16 could lift tax-GDP ratio towards target levels.

Policy reforms to boost productive growth: Other than Textiles and Agriculture sector, overall budget lacked a clear cut incentives for companies to boost capital investment and policy measures on broadening tax net, thus jeopardizing government’s own investment-GDP ratio targets. These policy reforms and incentives were much-needed to ensure a transition into higher growthlevels. We initially viewed FY16, a decisive year for the government to implement such reforms at a pace faster than previously expected, given favourable economic environment and improving fiscal space on account of weak oil prices and stable/improvingexternals.

3

Page 4: Pakistan Budget Review FY16

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B u d g e t B r i e f F Y 1 6

Budget FY16

Budget at a GlanceRevised fiscal deficit of FY15 stands at 5.0% of GDP, slightly higher than initially budgeted number at 4.9%, mainly due to tax revenues falling short by 8%, or PKR 219bn. For FY16, the government is targeting a 4.3% fiscal deficit, or PKR 1.3trn. This is expected to be achieved only through a combination of removal of tax exemptions, marked reduction in subsidies, and an upbeat approach to bringing more economic resources under the tax net, in our view.

Budget FY16 at glance Total Outlay is projected at PKR 4.3trn, up by 9% YoY.

Tax Revenues are projected at PKR 3.4trn (3.1trn by FBR), which is 17.5% higher than revised tax collection of PKR 2.9trn for FY15.

Current Expenditures are estimated at PKR 3.2trn, relatively unchanged from last year (-1% YoY), 40% of which has been allocated for debt repayments and 25% for defense, while 4%, or PKR 138bn, is set aside for subsidies (all inclusive), way lower than last year’s revised amount at PKR 243bn.

Public Sector Development Program expenditure is estimated to go up by 27%, to PKR 1.5trn (Federal PKR 700, Provincial PKR 814bn).

Provincial Surplus is projected to grow by 110%, to PKR 297bn.

Total Fiscal Deficit for FY16 is projected at PKR 1.3trn, or 4.3% of the GDP, compared to PKR ~1.4trn, or 5.0% of the GDP for FY15.

In order to meet the expenditure domestic borrowing has been estimated at PKR 982bn, or 70% of total deficit financing.

Exhibit: FY15, Budget snapshot taken as %age of GDP

Source: MoF, AHL Research

4

12.4%

14.2%

14.4%

14.1%

14.4%

15.2%

14.2%

13.3%

7.6%

5.9%

5.0%

4.3%

0.0% 5.0% 10.0% 15.0%

FY13 A

FY14 A

FY15 A

FY16 B

Fiscal Deficit / GDP Total Expenditure / GDPGross Revenues / GDP

Page 5: Pakistan Budget Review FY16

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B u d g e t B r i e f F Y 1 6

Budget FY16

Key Statistics

5

PKRbn FY13 A FY14 A FY15 R FY16 B FY14 A FY15 R FY16 B Net Receipts 1,616 2,184 2,378 2,463 35% 9% 4%Total Outlay 2,837 3,597 3,952 4,313 27% 10% 9%

- Tax Revenue 2,125 2,514 2,910 3,418 18% 16% 17%- Non-tax Revenue 712 1,083 1,042 895 52% -4% -14%

Total Expenditure 3,299 3,871 3,902 4,089 17% 1% 5%Current Expenditure 2,720 2,935 3,185 3,166 8% 9% -1%

- Debt Servicing 1,029 1,187 1,270 1,280 15% 7% 1%- Defence 570 630 720 781 10% 14% 8%- Subsidies 367 323 243 138 -12% -25% -43%

Development + net Lending 579 936 717 923 62% -23% 29%Federal PSDP 388 425 542 700 9% 28% 29%

Fiscal Balance (1,683) (1,687) (1,524) (1,625) 0% -10% 7%Provincial Surplus (62) 183 142 297 -394% -23% 110%Consolidated Fiscal Balance (1,745) (1,504) (1,383) (1,328) -14% -8% -4%GDP 22,909 25,402 27,384 30,672 %age of GDP Total Outlay 12.4% 14.2% 14.4% 14.1%

- Tax Revenue 9.3% 9.9% 10.6% 11.1%- Non-tax Revenue 3.1% 4.3% 3.8% 2.9%

Current Expenditure 11.9% 11.6% 11.6% 10.3%Development + net Lending 2.5% 3.7% 2.6% 3.0%Consolidated Fiscal Balance -7.6% -5.9% -5.0% -4.3%

7.6%

5.9%5.0%

4.3%

2.0%

4.0%

6.0%

8.0%

FY13 A FY14 A FY15 A FY16 B

Fiscal Deficit / GDP

Page 6: Pakistan Budget Review FY16

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B u d g e t B r i e f F Y 1 6

Budget FY16

Gradual Move towards Direct TaxationRevenuesThe government has set a tax collection target of PKR 3.4trn for FY16, which is higher by 17.5% YoY when compared with the revised FY15 collection PKR 2.9trn. Basis of higher growth in revenues are expected to be a) 22% YoY increase in direct taxes to PKR 1.3trn, b) 17% increase in indirect taxes to PKR 1.8trn. Non-tax revenue is targeted at PKR 0.89tn, down by 14% YoY.

Given a recovery in growth and imposition of one-off tax burdens, we think, this should help increase tax revenues in the short-term to uplift Tax-GDP

The government has set a tax collection target of PKR 3.13trn for FY16, which is 17.5% YoY higher when compared with the revised FY14 collection target of PKR 2.9trn.

This growth in tax collection is estimated on the back of substantial 22% YoY increase in direct taxes to PKR 1.3trn with a major push from 21% YoY growth in income tax to PKR 1.3trn.

Indirect taxes are projected to grow by 17% YoY to PKR 1.8trn, with sales tax contributing almost 72%, followed by 17% contribution through custom duties.

Non-tax revenues are targeted at PKR 0.89trn (PKR 1.0trn in FY15) on account of lower receipts from civil admin.

Tax-GDP is estimated at 11.1% for FY16 against 10.6% in FY15.

Exhibit: Ambitious on tax revenue collection

Source: MoF, AHL Research

6

75% 70% 74% 79%

25% 30% 26% 21%

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

100.0%

FY13 A FY14 A FY15 A FY16 B

Non - Tax Revenues Tax Revenue

Page 7: Pakistan Budget Review FY16

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B u d g e t B r i e f F Y 1 6

Budget FY16

Tightening the Belt… ExpendituresFY15’s revised total expenditure was down by 1% to PKR 3.9trn. For FY16, the government is targeting total expenditure to PKR 4.1trn or 13.3% of GDP, compared to 14.6% average during FY13-15 period.

Total expenditures higher-than-budgeted in FY15, but expected to decline in FY16

Current expenditure is estimated at PKR 3.43trn, mainly led by higher interest repayments of PKR 1.3trn (down by 4% YoY), and defense expenses worth PKR 0.8trn (up by 8%YoY)

Subsidies are reduced by PKR ~105bn, to PKR 138bn versus PKR 243bn last year.

Overall Development expenditure is estimated to go up by 27% to PKR 1.5trn in FY16 compared to revised PKR 1.18trn.

Exhibit: Expenditure is forecasted to decelerate

Source: MoF, AHL Research

7

1.0 1.2 1.3 1.3

0.60.6

0.7 0.80.40.3

0.2 0.1

-

0.5

1.0

1.5

2.0

2.5

FY13 A FY14 A FY15 A FY16 B

Subsidies Defense Debt Servicing(PKR trn)

Page 8: Pakistan Budget Review FY16

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B u d g e t B r i e f F Y 1 6

Budget FY16

More Growth-prone Expenditure the betterPublic Sector Development Program Given the better FY15 fiscal stance as a starting point, we believe government stands a good chance of enhancing Public Sector Development Projects (PSDP) expenditure.

Significant growth in overall PSDP allocation

Overall size of PSDP is targeted at PKR 1.51trn, or 4.9% of the GDP, which is higher by a significant 27% YoY compared to PKR 1.18trn, or 4.3% of the GDP.

Of this, federal PSDP is targeted at PKR 0.70trn, up by 29% YoY, and provincial share of PKR 0.8trn, up by 26% YoY.

Exhibit: A massive increase in motorways and hydro power plants in FY16, is where much of the PSDP will be allocated.

Source: MoF, AHL Research

8

Public Sector Development Expenditure PKRbn FY15B FY15R FY16B %YoY Federal 525 542 700 29%- WAPDA 64 49 112 128%- National Highway Authority 112 109 160 46%Provincial 650 646 814 26%Total PSDP 1,175 1,188 1,514 27%PSDP %age of GDP 4.0% 4.3% 4.9%Source: Ministry of Finance

2.2%

2.8%

2.5%

2.8%

2.0%2.1%2.2%2.3%2.4%2.5%2.6%2.7%2.8%2.9%

FY13 A FY14 A FY15 A FY16 B

Development Budget / GDP

Page 9: Pakistan Budget Review FY16

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B u d g e t B r i e f F Y 1 6

Budget FY16

Shifting Financing from Domestic to Foreign Deficit Financing Financing burden is finally shifting to foreign inflows, gradually. This is expected to ease-up domestic borrowing requirement, where we may see a systematic decline in government security issues. Moreover, lowering domestic financing would also bode well in terms of private sector credit off-take. We think this financing mix would provide just about the right balance to support long-term objective of sustained economic growth.

Lowering domestic burden should support long-term objective of sustained economic growth, going forward

For FY16, though deficit financing is still skewed towards mobilizing domestic financing sources worth PKR 932bn (70% versus 75%).

However, in FY16, government has increased the portion of external financing sources for budgetary financing to PKR 346bn (26%), from PKR 327bn (24%) last year.

Since FY14, there has been a systematic decline in government domestic borrowing requirement, due to increase in foreign inflows.

The rest is expected from Privatization of government-owned entities, with 4% of fiscal financing expected from this source, compared 1% last year.

Exhibit: Deficit financing through domestic sources would eventually decline owing to better realization of foreign inflows

Source: MoF, AHL Research

9

22% 24% 26%

64%75% 70%

14%1% 4%

0%10%20%30%40%50%60%70%80%90%

100%

FY13 A FY14 A FY15 A

Privatisation Domestic External

Page 10: Pakistan Budget Review FY16

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B u d g e t B r i e f F Y 1 6

10

Revenue receipt: Gross revenue receipts of the federal government for FY15 are estimated at PKR 4,313bn compared to revised figures of PKR 3,952bn for FY14, showing an increase of 9.1%.

Provinces’ share: Share of provinces is PKR 1,849bn, compared to revised estimate of PKR 1,575bn for FY14, an increase of 17.4%.

Net resources of federal gov’t: Net resources of federal government are PKR 2,463bn compared to revised estimate of PKR 2,378bn for last year.

Removing SROs: Here also, the government has focused on reducing concessions relating to customs, sales tax and income tax of PKR 120bn compared to last years PKR 105 bn.

New Taxes: Imposition of new taxes including super tax in case earnings exceed PKR 500mn , and increase in cost of doing business for non-filers

Budget FY16

Key Revenue Measures

Page 11: Pakistan Budget Review FY16

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B u d g e t B r i e f F Y 1 6

Agriculture Sector Tax Holiday for Agricultural Delivery Chain: Income Tax Holiday for 3 years is being introduced for new industrial

undertakings engaged in setting up and operating Cold chain facilities Warehousing facilities for storage of agriculture produce.

The exemption for 4 year for Halal’ Meat Production: Companies which set up ‘halal’ meat production plant and obtain ‘halal’ certification by 31st December 2016

Relief to Rice Mills: In order to provide relief to Rice Mills suffering from low global demand, exemption from minimum tax for the Tax Year 2015 is being granted.

Section 13: All notifications issued under section 13 (Exemptions) shall stand cancelled at the end of financial year. The power to issue notifications from now onwards rests with the Federal Government with the approval of the National Assembly.

Exemption on Supply of Fish: Exemption from withholding tax on supply of agricultural produce is to be extended to supply of fish.

Import and Local Supply of Agricultural Machinery and Equipment: Non-adjustable sales tax is reduced rate of 7% instead of existing rate of 17%.

Import of Agricultural Machinery: At present Customs duty, Sales Tax and withholding tax on import of agricultural machinery in aggregate ranges from 28% to 43% are being cumulatively reduced to 9% as under:

Customs duty from existing rate of 5-20% to 2%; Sales Tax from 17% to non-adjustable Sales Tax at 7%; and WHT from 6% to 0%

Interest Free Loans for Solar Tube Wells: Interest free loans of up to Rs.1 Million for setting up new or replacing solar tube wells.

11

Budget FY16

Key Relief Measures

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B u d g e t B r i e f F Y 1 6

12

Budget FY16

Key Relief MeasuresConstruction Sector Housing Credit: Mark-up on housing loans obtained by individuals from banks and other institutional lenders for construction or

buying a house to be allowed as a deduction against income up to 50% of taxable income or Rs. 1 million. Suspension of Minimum Tax on Builders: The minimum tax on builders levied for the business of construction and sale of

residential and other buildings is being suspended for a period of three years. Real Estate Investment Trust (REIT) Development Schemes: Capital Gains of any person who sells a property to a REIT

development scheme formed for the development of housing sector will be exempt from Income Tax up to 30.6.2018. If a development REIT Scheme for the development of housing sector is set up by 30.6.2018, for the first three years the rate of Income tax chargeable on dividend income of such REIT shall be reduced by 50%.

Bricks and crushed stone: Supply of bricks and crushed stone will be exempted from Sales Tax for three years up to 30.6.2018.

Reduction in customs duty on import of Construction Machinery: Customs Duty is reduced to 10% on import of construction machinery registered with Pakistan Engineering Council and SECP.

LNG terminal: Exemption of profit and gains derived by LNG Terminal Operators and Terminal Owners for a period of 5 years beginning from the day when commercial operations are commenced. They are also eligible for exemption from minimum tax under section 113.

Page 13: Pakistan Budget Review FY16

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B u d g e t B r i e f F Y 1 6

13

Budget FY16

Key Income Tax Measures Reduction in Tax Rate for Companies: Corporate tax rates further reduced to 32% for Tax Year 2016. Exemption to Electricity Transmission Projects for a period of 10 years provided that the project is set up by June, 2018. Tax Credit for new investment in shares: To encourage saving and investment in new companies quoted on stock exchange

the limit for individual investors is being enhanced to 1.5 million. Tax Credit for Enlisting: To encourage enlisting of companies on stock exchange, credit is being be enhanced to 20% from 15%. Reduction in Withholding Tax On Token Tax and Transfer of Vehicles: To encourage investment from car assemblers due to

higher demand. Relief to Small Taxpayers: Salaried taxpayers earning PKR 400,000 to PKR 500,000 are reduced to 2% instead of 5%. Non-

Salaried individual taxpayers and Association of Persons earning taxable income from PKR 400,000 to PKR 500,000 reduced to 7% tax compared to 10 %.

Exemption from Customs Duty and Sales Tax: It is proposed that Customs Duty, sales tax and withholding tax in respect of various items used in Aviation Sector may be reduced to zero subject to certain conditions

Customs Tariff Reforms: Maximum general tariff rate of 25% reduced to 20%. Substitution of 1% duty slab with 2% customs duty.

Capital Gains Tax increased : <1 year from 12.5% to 15%; 1-2 years, from 10% to 12.5%; 2-4 years, from 0% to 7.5%

Taxation of Dividend: It is proposed that the rate be increased to 12.5%. Consequently, in case of non-filers the rate of tax is proposed to be increased from 15% to 17.5% of which 5% shall continue to be adjustable. For Mutual Funds, the existing rate of 10% shall continue.

Small Company: Income Tax Ordinance provides a reduced rate of 25% for taxing the income of a small company as an incentive for ‘going public’.

Payments in respect of advertisement expenses to print/electronic media: Exemption from WHT on payments to electronic and print media in advertising services may be withdrawn.

Reduced rate for cash withdrawals by exchange companies: Cash withdrawals by exchange companies are subject to withholding tax rate of 0.15% instead of being exempt.

Page 14: Pakistan Budget Review FY16

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B u d g e t B r i e f F Y 1 6

14

Budget FY16

Key Sales Tax and Federal Excise Duty Excise Duty : An dumping duty of 20% imposed on imported cement. Rationalization of sales tax on steel sector melters, re-rollers and , ship breakers The rate of further tax for supplies to unregistered persons is being enhanced to 2%. Increase in the rate of sales tax on mobile phones to PKR 300, 500 and 1000, from PKR 150, 250 and 500, respectively,

depending on features in the mobile set, whereas Regulatory Duty on mobile phones has been slashed Restricting zero-rating on dairy products to milk only baby formula. Enhancement of rates of Federal Excise Duty on locally produced cigarettes. Average tax incidence to increase from 58% to

63% The rate of Federal Excise Duty on aerated waters is being enhanced from 9% to 12% of retail price Sales Tax on Steel Sector: Fixed sales tax of PKR 4/unit of electricity has been increased to PKR 7/unit on Steel Sector. Also

the sector’s demand of collection of withholding tax on purchase of their electricity bills at PKR 1/unit has been accepted Telecom services tax reduced by 1ppt to 18.5%. FED & Withholding Income Tax (WIT) rate on Telecom: FED rate on Telecom services to reduced from 19.5% to 18.5%, as well

WIT on telephone services from 15% to 14%

Page 15: Pakistan Budget Review FY16

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Capital MarketPakistan Budget Review|FY16

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B u d g e t B r i e f F Y 1 6

Increase in Capital Gains Tax (CGT) to 12.5%/15% (below 1yr/between 1-2yrs), with a new slab introduced (7.5% on gains between 2-4yrs), is negative and may trigger selling/booking gains by companies/individuals having gains on books older than 2 years before the measure comes into effect from Jul-15. In addition, increase in corporate tax rate – reduction of 1% as planned while addition of 3% for 1-yr to support on-going operation against insurgency ,called Zarb-e-Azb and FATA/IDPs, resulting in 35% for non-banking, and 39% for banking companies - will put pressure on corporate profits (5.2% YoYaverage decline in profit growth for CY15/FY16), which may impact market in short term.

Further, 2.5% increase in dividend tax rate to 12.5% (though 7.5% dividend tax on power projects/IPPs stays intact, as per certain explanations) with no relief on bonus tax (5%) will also keep dividend/bonus-loving investors relatively at bay compared to earlier.

Conversely, mandatory dividend payout for companies having reserves at/over 100% of paid-up (post cash payout in a year, otherwise taxed at incremental 10%), is positive, though needs amendments on definition of ‘reserves’ (whether total earned in a year net of payout). Assuming reserves as ‘profit for the year’, average payout is expected to be 71% from 34% or paying additional tax will result in ~4% EPS impact (AHL Universe, see next slide for detail). However, if reserve is declared as accumulated, companies with huge accumulated reserves may announce one-time bonus issues to convert it into paid-up (better pay 5% one-off than 10% every year for cash to be retained), which is negative.

16

Budget FY16

KSE: Neutral-to-Negative in Short-term Federal Budget FY16 turns out to be Neutral-to-Negative for the capital market. Major changes in the taxes on investors – 2.5% increase in Capital Gains Tax (CGT) with additional slab of 7.5% (on 2-4yr gains), 3% additional corporate tax rate in general (for 1yr), and 4% on banking companies in particular (for 1yr), alongside increase in dividend tax by 2.5% (to 12.5%) with no relief on bonus tax (5%) - are all expected to keep KSE on the lower side in the short-term, though long term attraction of Pak equities remains intact.

Cement, Power / IPPs, Automobiles, and a select in the Textiles and Transportation sectors remain in our focus with top picks as LUCK, DGKC, FCCL, HUBC, KAPCO, PSMC, PNSC and NML.

Exhibit: CGT and Dividend TaxCapital Gains Tax

Current Below Above 12M but Below 24M

Between12M 24M-48M

Old (FY2015) 12.5% 10.0% -New (FY2016) 15.0% 12.5% 7.5%

Dividend TaxFilers Non-Filers

Old (FY2015) 10.0% 12.5%New (FY2016) 15.0% 17.5%Source: AHL Research, Federal Budget FY16

-20%

-10%

0%

10%

20%

CY04

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12

CY13

CY14

CY15

KSE100 returns, before and after budgetMay June

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B u d g e t B r i e f F Y 1 6

17

Budget FY16

KSE: Companies with Potential Higher Dividend

*Companies with Reserves at/over 100% of Paid-up Capital, to be additionally taxed at 10% if leftover reserves/earnings from payout clocks in at/over 100% of the Paid-up Capital (excluding Banks, Modarabas and Public sector companies where government stake is at/over 50%). ^Assuming other KSE100 companies keeping at least same growth in profits.

AHL Universe* FY16 EPS FY16 Payout Additional DPS over Paid-up

Revised Payout Revised DY Or Additional

Tax at 10%Additional 10%

Tax Impact on Yearly EPSINDU 119.4 41.9% 59.9 92.0% 8.6% 6.0 5.0%PSO 62.9 23.9% 38.4 84.9% 13.9% 3.8 6.1%ENGRO 40.7 24.6% 21.2 76.7% 10.6% 2.1 5.2%LUCK 39.9 27.6% 19.4 76.2% 6.3% 1.9 4.9%PSMC 36.5 27.4% 17.0 74.0% 6.2% 1.7 4.7%KOHC 23.6 25.4% 8.1 59.8% 7.5% 0.8 3.4%DGKC 16.2 30.8% 1.7 41.4% 5.0% 0.2 1.1%

Other KSE100 Cos.* Last Full-year EPS^ Payout Base Case

Additional DPS FY16 (PKR)

Revised Payout Revised DY Or Additional

Tax at 10%Additional 10%

Tax Impact on EPS

RMPL 264.3 53.0% 114.8 96.4% 2.9% 11.5 4.3%BATA 171.9 44.8% 85.4 94.5% 5.1% 8.5 5.0%IDYM 107.2 14.0% 82.7 91.1% 9.7% 8.3 7.7%SRVI 62.4 40.1% 27.9 84.8% 7.8% 2.8 4.5%PSEL 41.9 0.0% 32.4 77.3% 6.9% 3.2 7.7%MARI 41.6 9.1% 28.4 77.2% 6.7% 2.8 6.8%ATBA 41.3 24.2% 21.8 77.0% 4.7% 2.2 5.3%MUREB 40.5 14.8% 25.0 76.6% 3.0% 2.5 6.2%SHEZ 34.7 28.8% 15.2 72.6% 2.8% 1.5 4.4%COLG 34.3 49.6% 7.8 72.3% 1.5% 0.8 2.3%THALL 16.3 46.0% 4.0 70.9% 4.2% 0.4 2.5%ATRL 28.9 0.0% 19.4 67.2% 9.2% 1.9 6.7%PKGS 28.5 31.6% 10.0 66.7% 3.4% 1.0 3.5%ABOT 27.9 27.9% 10.6 66.0% 3.0% 1.1 3.8%ICI 17.9 44.7% 0.4 46.9% 2.0% 0.0 0.2%POML 15.0 23.3% 2.0 36.8% 3.6% 0.2 1.4%BNWM 13.4 0.0% 3.9 29.3% 9.3% 0.4 2.9%SEARL 11.9 0.0% 2.4 20.3% 0.9% 0.2 2.0%NRL 11.7 0.0% 2.2 18.6% 0.9% 0.2 1.9%Source: Company Financials, AHL Research

Page 18: Pakistan Budget Review FY16

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Budget FY16

Companies with Reserves over 100% of Paid-upAHL Universe Paid-up Capital (PKR mn as of

Mar-15)Reserves (PKR mn as of

Mar-15)Reserves* to Paid-up

RatioPNSC Pak National Shipping Corp 1,321 22,000 16.7 DGKC D. G. Khan Cement Co. 4,381 42,705 9.7 NML Nishat Mills Ltd. 3,516 33,308 9.5 ENGRO Engro Corporation Ltd. 5,238 17,497 3.3 PPL Pak Petroleum Ltd. 19,717 52,845 2.7 NPL Nishat Power Ltd. 3,541 6,814 1.9 Other KSE100 Companies PKGS Packages Ltd. 864 44,766 51.8 IDYM Indus Dyeing Manufacturing Co. Ltd. 181 5,022 27.8 ATRL Attock Refinery Ltd. 853 19,493 22.9 SHEZ Shezan International Ltd. 73 1,099 15.1 ATBA Atlas Battery Ltd. 174 1,478 8.5 ARPL Archroma Pakistan Ltd. 341 2,803 8.2 BNWM Bannu Woollen Mills Ltd. 95 706 7.4 MTL Millat Tractors Ltd. 443 3,264 7.4 IGIIL IGI Insurance Ltd. 1,227 8,471 6.9 ATLH Atlas Honda Ltd. 1,034 6,879 6.7 EFUG EFU General Insurance 1,600 9,513 5.9 PSEL Pakistan Services Ltd. 325 1,869 5.7 GHGL Ghani Glass Mills Ltd. 1,232 5,947 4.8 AHCL Arif Habib Corporation Ltd. 4,538 21,213 4.7 CHCC Cherat Cement Company Ltd. 1,051 3,813 3.6 OLPL Orix Leasing Pakistan Ltd. 821 2,162 2.6 SNGP Sui Northern Gas Ltd. 5,766 14,458 2.5 GATM Gul Ahmed Textile Mills Ltd. 1,828 3,580 2.0 GLAXO Glaxosmithkline (Pak) Ltd. 3,185 6,184 1.9 JGICL Jubilee General Insurance Co. Ltd. 1,569 2,750 1.8 SHEL Shell Pakistan Ltd. 1,070 1,711 1.6 KTML Kohinoor Textile Mills Ltd. 2,455 3,714 1.5 NESTLE Nestle Pakistan Ltd. 453 516 1.1 SRVI Service Ind. 120 124 1.0 Source: Company Financials, AHL Research

*Total Accumulated Reserves as of Mar-15 Financials

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Budget FY16

Key Measures & Expected Impacts Furthermore, mandatory cash dividend stands against

accumulation of reserves, thus business expansion needs will be hindered by insufficient cash accumulations. Moreover, if applied in its proposed form, its can be legally challenged on the basis that it is being applied retrospectively (on past earnings), so we believe gov’t will review it.

Thus, we expect the new Finance Act to incorporate the amended form of the mandatory dividend clause soon as: 1) dividend out of free reserves which are to be accumulated out of profit only from Jul-15 onwards with addition from unappropriated profit accumulating the base for dividend or additional tax or bonus considerations, or 2) the same would be subject to a hurdle payout i.e. 50% to avoid additional tax instead of all accumulated reserves for dividend.

Few other positives, such as, increased tax incentive for new enlistment to 20% should help increase breath and depth of the market (more IPOs), and indirect measures like 47% YoYreduction in power subsidies, 29% YoY higher PSDP allocation alongside commitment on privatization program (PKR 50bn) will keep the KSE buoyant in the long term.

We believe, increased documentation and improved macros (higher growth, weak CPI, reduced interest rates, stable externals with improved fiscals) are larger positives. KSE remains attractive with PER at 8.7x (36% disc. to region) while offering massive DY of 5.9% (56% disc. to region).

Key Measures Potential Impact

Corporate tax rate effectively increased to 35% (3% super tax)for non-banking (with profits at/over PKR 500mn) and 39%(including 4% super tax) for banking companies for 1 year.

Negative

New slab for investment between 2-4 years levied with CGTat 7.5%. Negative

35% uniform tax rate levied on all income of banks. Negative

Mandatory cash payout for corporate having reserves 100% inexcess of their paid-up capital (accumulated reservesexcluding capital reserve, share premium reserves andreserves required under any law, rules & regulation, asdefined in the Finance Bill 2015).

Negative

Tax on dividend income increased by 2.5% to 12.5%. Negative

Tax on bonus shares unchanged at 5%. Neutral

Tax rate on shares sold within a year and between 1-2 yearsincreased by 2.5% to 15% and 12.5%, respectively. Neutral

Tax Credit to be enhanced to 20% in FY16 from 15% previously on newly listed companies, while tax credit for investment in an industrial undertaking established before July 1, 2011, with 100% new equity raised through issuance of new shares, has been enhanced from 4 to 5 years.

Positive

Tax credit limit for individual investors for investment in newcompanies quoted on stock exchange is proposed to beenhanced from PKR1.0mn to PKR1.5mn.

Positive

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Budget FY16

Impacts on Key Sectors, Recommended StanceSector Budgetary Impact Stance Top Picks

Cement Positive Overweight LUCK, DGKC, FCCL

Power / IPPs Positive Overweight HUBC, KAPCO

Automobiles Neutral to Positive Market-weight PSMC

Textile Neutral to Positive Market-weight NML

Transportation Neutral to Positive Market-weight PNSC

Fertilizer Neutral Market-weight ENGRO, EFERT, FFBL

Telecom Neutral Market-weight PTC

E&Ps Neutral Market-weight POL, PPL

Oil Marketing Natural Market-weight PSO

Banks Neutral to Negative Market-weight UBL, MCB

Other Sectors

Neutral to Positive for Foods & Beverages, Textile Clothing & Footwear and Power, Neutral to Negative for Media & Technology

Market-weight EFOODS, NESTLE, UPFL, GATL, ADMM, CHBL, DLL, SFL, BATA, SRVI

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Key SectorsPakistan Budget Review|FY16

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Cement – Positive

22

Budgetary Measures Impact Comment

The government has allocated PKR 700bn for federal PSDP for FY16B - 29% higher than the revised PSDP target of PKR 542bn in FY15. Total PSDP for FY16B is PKR 1.5trn, including provincial share, versus revised budgeted/estimated PKR 1.2trn for FY15.

Positive With strong correlation of 0.96x between PSDP and cement demand, we expect the decision to increase PSDP allocation would be pivotal in generating cement demand. The key allocation to China-Pak Economic Corridor stands at PKR 146bn alongside other key projects i.e. Basha Dam (initial phase), Dasu Hydropower project, Tarbela IV extension, Karachi-Lahore Motorway.

Imposition of import duty on imported coal has been increased by 5%, from 1% previously.

Neutral This would eventually increase coal prices by ~USD 2.9/ton while to pass-on this impact local manufacturers need to increase cement price by ~PKR 2.5/bag. In case of no pass-on of the same, the companies would take an annualized earnings impact of 1.3%-2.2% on their bottomline.

Imposition of import duty on imported cement by 20%.

Positive According to our estimates the imported cement comprises only 1% of total market (~200k tons). We believe the development would be positive for the local cement manufacturers but the quantum will be too small.

Reduction in corporate tax rate by 1% to 32% and imposition of super tax by 3% for 1 year.

Negative This should decrease the bottomline by a net 3% for the sector.

Top Picks (1Yr - Fwd)Company P/E P/B DY (%) RoE (%) Target Price Current Price Upside (%)DGKC 8.4 0.8 3.7 10.2 167.5 135.4 23.7 LUCK 12.1 2.0 2.3 17.9 596.9 483.5 23.5 FCCL 9.3 2.6 8.0 29.1 41.8 34.5 21.0 Source: KSE, AHL Universe

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Power / IPPs - Positive

23

Budgetary Measures Impact Comment

A steep cut in the subsidies of power sector in the budget FY16, to PKR 118bn compared to the revised target of PKR 221bn for FY15.

Positive

The gov’t is targeting PKR 118bn for power subsidies (PKR 98bn for WAPDA and PKR 20bn for KEL) during FY16, massively down 47% as compared to FY15 revised target of PKR 221bn (PKR185bn for WAPDA and PKR 36bn for KEL). By lowering the subsidy target, the gov’t will pass the actual cost to end consumers, therefore be able to manage circular debt more effectively, thereby helping improve IPPs liquidity positions and positive impacts on companies’ payouts.

Reduction in corporate tax rate by 1% from 33%and imposition of super tax at 3% for 1 year. Negative

Power sector has exemptions from corporate/income tax. However, only KAPCO is subject to corporate tax and would have net negative 3% impact on the bottomline for FY16.

Withholding tax on the dividends from power sector to be kept at 7.5%.

PositiveRate of withholding tax on dividend from power projects (IPPs)remain unchanged at 7.5%, which bodes well for the high dividend-yielding stocks i.e. KAPCO, NCPl and NPL.

Top Picks (1Yr - Fwd)Company P/E P/B DY (%) RoE (%) Target Price Current Price Upside (%)KAPCO 7.9 2.6 11.5 33.8 89.5 87.0 3.0 HUBC 9.5 3.3 10.2 35.7 94.1 97.0 (3.0)Source: KSE, AHL Universe

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Automobiles Assemblers – Neutral to Positive

24

Budgetary Measures Impact Comment

Reduction in withholding tax on token tax and transfer of vehicles. Rate of advance income tax to be reduced by ~20-25% for filers.

PositiveReduction in tax should make automobiles cheaper for consumers, and increase demand of all three major local assemblers’ products (INDU, PSMC, HCAR).

Reduction in corporate tax rate by 1% to 32% and imposition of super tax of 4% on income for tax year 2015.

NegativeThis is a one-time tax (for FY16/CY15), which will nevertheless have a downward earnings impact (~2-3% on annualized EPS) on the sector.

Reduction in sale tax on agricultural machinery from existing 17% to 7% (reduced rate on particular parts of the tractor industry).

PositiveThis should augur well for tractor companies, namely MillatTractors (MTL) and Al-Ghazi Tractors (AGTL) in boosting sales volumes.

Sales tax on Tractors has been kept unchanged at 10%.

Neutral This should help sustain Tractor companies’ sales volumes.

Top Picks (1Yr - Fwd)Company P/E P/B DY (%) RoE (%) Target Price Current Price Upside (%)PSMC 9.0 1.6 2.3 19.1 425.2 435.1 (2.3)Source: KSE, AHL Universe

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Textiles – Neutral to Positive

25

Budgetary Measures Impact Comment

Under Textiles Policy 2014-19 financial package of PKR 64.15 billion has been approved in order to double the textiles exports by the year 2019.

Positive

Will provide further incentives to the manufacturers, e.gsubsized machinery import, increase in rebate, lower gas rates and higher availability of gas. NML stands to benefit the most as company’s exports make up over 70% of the topline.

Since 1st July 2015, Export Refinance Facility and Long Term Finance Facility will be available for textile-exporters at reduced rates i.e. at 4.5% (6% earlier) and 6% (7.5% earlier), respectively.

PositiveAvailability of cheaper financing will encourage exporters to boost exports. In this regard, NCL will benefit the most as its debt-equity stands highest at 2.12x followed by NML.

The Custom Duty on import of textile machinery under SRO 809 is zero for the FY16 as well.

Positive This measure should encourage production and lead to creation of competition in the industry and internationally.

The benefit of drawback of local taxes and levies scheme shall remain available for the textile exporter in the FY16 under which they shall be entitled to the drawback on FOB values of their enhanced exports if increased beyond 10% of their previous year’s exports.

NeutralThis is similar to last year, however should help textile manufacturers to avoid under invoicing. This would at least help to maintain exports at current levels.

In order to facilitate and incentivize the investments in plants and machinery, Technology Up-gradation Fund Scheme will be launched in the FY16, as per the provisions of Textiles Policy 2014-19.

Neutral Will encourage manufacturers to upgrade their machinery, thus will improve efficiency and competitiveness of the sector.

Top Picks (1Yr - Fwd)Company P/E P/B DY (%) RoE (%) Target Price Current Price Upside (%)NML 7.6 0.6 4.4 7.5 145.0 113.9 27.3 Source: KSE, AHL Universe

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Fertilizer – Neutral

26

Budgetary Measures Impact Comment

Allocation of PKR 25bn for urea imports up 5% YoY as compared to revised target of PKR 23.7bn in FY15.

Neutral

Due to higher demand and lower production, the demand is being met through urea imports. We estimate that gov’t will be able to import 600k tons of urea from aforementioned allocation (local prices at 15% discount to int’l).

The gov’t kept the Gas Infrastructure Development Cess (GIDC) target at PKR 145bn, same levels as revised target of last year.

Neutral

Despite stay on the bill by the court during FY15, the fertilizer companies have been accruing (FFC, EFERT) while paying partially (FFBL) GIDC on feed and fuel stocks. The recent reinstatement of the bill by the Parliament and the Senate has already been incorporated by the market.

Reduction in corporate tax by 1% to 32% and imposition of super tax by 3% for 1 year.

Negative Fertilizer manufacturers should have a negative impact of 3% on their bottomline (impact taken for 2015 being the tax year).

Income tax exemption of 4-yr for the companies which set up ‘halal’ meat production plants and obtain ‘halal’ certification by 31-12-2016.

Positive

FFBL through its 100% owned subsidiary Fauji Meat Limited (FML) is currently in process of setting up halal meat facility and have to obtain ‘halal’ certification. It is expected that FML will fall under this scheme of 4-year income tax exemption.

Sales tax reduced to 7% from 17% on agriculture machinery and equipment coupled with interest-free loans for solar tube-wells for the Agriculture sector in the budget FY16.

Positive Support to farmers and incentive for agriculture would support fertilizer offtake

Top Picks (1Yr - Fwd)Company P/E P/B DY (%) RoE (%) Target Price Current Price Upside (%)ENGRO 10.0 2.1 2.7 21.2 411.1 295.4 39.2 EFERT 8.1 3.0 6.9 41.7 110.5 87.4 26.5 FFBL 8.9 3.4 10.1 36.8 61.6 49.4 24.7 Source: KSE, AHL Universe

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E&Ps, OMCs - Neutral

27

Budgetary Measures Impact Comment

Sharp cut in subsidies to PKR 118bn in FY16 compared to revised target of PKR 221bn for FY15.

Positive

Higher subsidies remain major reason for filling wide gap between cost of electricity and selling price, which has been the major cause for circular debt, currently ~PKR 200bn. Lower subsidies hint toward higher cost pass-on, while improving the liquidity for the energy chain and thus lower the intensity of circular debt.

RD on Crude Oil, Motor Spirit, HSD, FO and other petroleum products has been slashed. Also, RD has been replaced by custom duty of 2% for both MS and Crude Oil. Conversely, custom duty for FO has remained flat at 5%. Lastly, custom duty/deemed duty on Diesel is unchanged at 7.5%.

Neutral

Concern on margin dent for companies on HSD removed.Imposition of custom duty on Motor Spirit/High Speed Diesel will be passed on to consumer, thus OMC margins are to be intact. Lastly, 5% custom duty on FO is already incorporated in price, thus again the margin dent for OMCs is not a concern.

Petroleum Levy' (PL) is targeted at PKR 135bn for FY16B versus revised target of PKR 126bn for FY15R. Neutral PL is a pass-through item for the OMCs.

Reduction in corporate tax rate by 1% to 32%, and imposition of super tax by 3% for 1 year.

Negative The companies in E&P and OMCs would have negative impact of ~3% on their bottomline for the year FY16.

Federal Budget is more of a non-event for E&P companies as their major profitability aspects are driven through Petroleum Policies. Furthermore, the gov’t disclosed its dividend expectations for FY16 of PKR 10/share, PKR 13.5/share and PKR 9.0/share from OGDC, PPL and PSO, respectively.

Top Picks (1Yr - Fwd)Company P/E P/B DY (%) RoE (%) Target Price Current Price Upside (%)PPL 8.2 1.5 7.3 19.6 230.4 170.4 35.2 PSO 6.1 1.0 3.9 17.7 461.2 382.7 20.5 POL 8.1 2.5 11.5 31.9 450.8 389.7 15.7 Source: KSE, AHL Universe

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Banks – Neutral to Negative

28

Budgetary Measures Impact Comment

Income of banks from all sources, including dividendand capital gains, are to be tax at a uniform rate of35%.

Negative

While banks in general were already paying an effective tax rate of 32-34%, exclusion of tax benefit on capital gains (over 1 year at 12.5%) and dividends (10%-25%) should pull down earnings by ~3-6% on average (AHL Universe Banks).

Imposition of super tax of 4% additional on income of banking companies for 1 year (tax year 2015). Negative

Imposition should impact all the banks with this additional tax for the year 2015 (we expect banks to charge the liability retrospectively for full-year 2015). This should trim down earnings by a good 4-5%, but only for tax year 2015! Cumulative earnings impact of both the tax measures for 1yr i.e. 35% on all income with additional 4% super tax, ranges 8-12%, with NBP (12%), ABL (11.5%) being the most affected, followed FABL (9.1%), BAFL (9%), HBL (8.7%), MCB (8.3%), with UBL (8%) being the least affected.

0.6% on banking transactions by non-filers in excess of PKR 50K/day

Neutral A further increase in WHT would not cause a significant impact to banks since it’s a pass-on item.

Top Picks (1Yr - Fwd)Company P/E P/B DY (%) RoE (%) Target Price Current Price Upside (%)MCB 13.6 2.2 4.8 16.6 301.5 272.8 10.5 UBL 10.0 1.5 6.5 15.8 179.0 169.7 5.5 Source: KSE, AHL Universe

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Other Sectors in the Limelight

29

Budgetary Measures Impact Comment

Dairy products, except milk, proposed to be treated as exempt goods instead of zero rated. Further dairy products (other than milk) sold as retail product is chargeable to tax at 10%. Duty on imported skimmed milk reduced from 25% to 20%.

Neutral to Positive for Foods

While the 10% tax is a negative for EFOODS, due to the low proportion of processed dairy products in its sales mix, the impact is not significant as such. On the other hand, reduction of duty on skimmed milk will help boost margins for the company’s main brand i.e. Olpers. Similar impacts may take place for NESTLE and UPFL.

The government has slashed import duty on skimmed milk powder from 25% to 20%.

Positive for Foods

Currently, there is a 20% import duty on skimmed milk, while reduction in import duty should result in margin accretion for EFOODS.

Sales tax at 5% on second-hand and worn clothing and footwear has been imposed.

Positive for value-added Textiles and Footwear

This step should help increase demand of new clothing and footwear, as cost of second-hand clothing and footwear items goes up, making new clothing (GATL, ADMM, CHBL, DLL, SFL) and footwear (BATA, SRVI) more attractive.

Sales tax of 16% on TV/Radio ads has been imposed.

Negative for Media Companies

TV channels may suffer from this measure as advertisements become more expensive, reducing demand for ad slots (negative for HUMNL, MDTL) unless it is passed on.

Sales tax of 18.5% on call centers, 16% on “services provided by software or IT based system development consultants” has been imposed.

Negative for Technology Stocks

These taxes should be a potential negative for the technology-based companies, such as TRG (internet based consultant and call center), NETSOL (internet based consultant), SYS and AVN.

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Other Sectors, Cont’d…

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Budgetary Measures Impact Comment

Reintroduction of the ‘rationalized’ International Clearing House (ICH) arrangement. Further, 14% sales has been imposed on internet prepaid card / prepaid telephone card or sale of units through any electronic medium.

Neutral for Telecom

Despite the failure of the original ICH arrangement in curbing grey traffic, as well as decreasing international calling minutes, the government has announced ‘rationalizing’ calling rates in new ICH scenario. This will be highly positive for telecom operators, PTC in particular as all international calls were routed through PTC’s network in the last ICH arrangement. However, the actual calling rates will be key factor to determine the true impacts on company’s profits. Imposition of 14% sales tax on prepaid internet cards should be a pass-on item thereby not impacting company’s profits.

Allocation of PKR 12bn of PSDP to Ports and Shipping has been made.

Positive for Marine Transport

Government’s focus of growth via international trade is evident through PKR 12bn allocation of PSDP for ports and shipping. All companies in marine transport (PICT, PNSC and to a lesser extent, PIBT as its not yet operational) stand to benefit from increased investment allocation for the sector.

Zero rating regime for import of specific machinery, tools and other equipment for aviation sector. The government is also looking to open airline routes in remote areas and with that aim in mind, have exempted areas like Gilgit, AJK, etcfrom FED and WHT.

Positive for Airlines

Exemption from customs duties and sales tax on airlines is a distinct positive for the aviation sector (especially for PIAA). Furthermore, to increase aviation sector’s contribution to GDP, the government is opening up air routes to remote areas which will again provide a much-needed boost to the industry.

Increase in FED on aerated drinks from 9% to 12%.Positive for Food & Beverages

Increase in FED on carbonated drinks (Pepsi, Coke etc.) will naturally boost sales of substitute products like Fruit Juices, Fruit Juice concentrates, Flavored Milk, etc. Companies to benefit from this development include NESTLE, MUREB, SHEZ, EFOODS, MFFL, QUICE and RMPL.

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Other Sectors, Cont’d…

31

Budgetary Measures Impact Comment

Increase in duty on MEG from 1% to 2%. However, duty on Ethylene has been reduced to 2% from 5%.

Neutral for Chemicals

Since MEG is the raw material to produce PSF, this duty increase on MEG is expected to bode negative for ICI, while positive for EPCL as Ethylene is a raw material to produce EDC (Ethylene Dichloride) where the duty has been slashed.

Tax exemption has been given to the Electricity Transmission Projects for a period of 10 years, if the project is setup by Jun’18.

Neutral to Positive for Electricity Transmission

This should bode well for transformer sales. In particular, this development bodes well for PAEL, as sales of company would augur given 42% contribution of power business to the total company sales.

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2014 2015 2016 2014 2015 2016 2014 2015 2014 2015 2014 2015 2014 2015

E&P 1 Pakistan Petroleum Ltd. PPL 170.4 230.4 35% Buy 1,972 26.08 20.50 20.80 11.00 12.50 12.50 6.53 8.31 6.5% 7.3% 1.85 1.66 31.0% 21.1% KSE100, KSE30, KMI30 & MSCI2 Oil and Gas Dev Co. OGDC 187.5 229.3 22% Buy 4,301 28.81 22.91 23.00 10.50 12.50 12.50 6.51 8.18 5.6% 6.7% 2.04 1.80 35.0% 23.3% KSE100, KSE30, KMI30 & MSCI3 Pakistan Oilfields Ltd. POL 389.7 450.8 16% Buy 237 54.48 38.64 47.86 60.10 35.00 45.00 7.15 10.09 15.4% 9.0% 2.62 2.70 37.8% 26.4% KSE100, KSE30, KMI30 & MSCI

Banks4 Fay sal Bank Ltd. FABL 16.3 20.5 26% Buy 1,043 2.37 3.74 3.87 - - 0.50 6.87 4.35 - - 0.65 0.60 10.2% 14.3% KSE1005 Allied Bank Ltd. ABL 102.5 118.3 15% Buy 1,145 13.11 12.85 14.82 6.50 7.00 9.00 7.82 7.98 6.3% 6.8% 1.45 1.34 20.4% 17.5% KSE100 & BKTI6 United Bank Ltd. UBL 169.7 179.0 5% Hold 1,224 17.91 17.02 19.08 11.50 11.00 12.00 9.47 9.98 6.8% 6.5% 1.66 1.51 19.4% 15.8% KSE100, KSE30, BKTI & MSCI7 MCB Bank Ltd. MCB 272.8 301.5 11% Buy 1,113 21.85 20.09 22.33 14.00 13.00 14.00 12.48 13.58 5.1% 4.8% 2.33 2.18 20.2% 16.6% KSE100, KSE30, BKTI & MSCI8 Meezan Bank MEBL 45.5 51.5 13% Buy 1,003 - - - - - - - - - - - - 0.0% 0.0% KSE1009 Bank Alfalah BAFL 26.5 26.7 1% Hold 1,587 3.55 3.81 3.34 2.00 2.30 2.00 7.45 6.94 7.6% 8.7% 0.94 0.88 14.7% 13.1% KSE100, KSE30 & BKTI

10 Habib Bank Ltd^^ HBL 209.1 200.9 -4% Hold 1,467 21.69 19.13 21.82 12.00 11.00 12.00 9.64 10.93 5.7% 5.3% 1.82 1.68 20.6% 16.0% KSE100, KSE30, BKTI11 National Bank of Pakistan NBP 55.0 50.1 -9% Hold 2,128 7.06 4.91 6.13 5.50 4.00 5.00 7.79 11.21 10.0% 7.3% 0.66 0.64 9.0% 5.8% KSE100, KSE30, BKTI & MSCI

Fertilizer 12 Engro Corporation ENGRO 295.4 411.1 39% Buy 524 14.89 29.55 40.71 6.00 8.00 10.00 19.83 9.99 2.0% 2.7% 2.15 2.08 12.2% 21.2% KSE100, KSE30 & MSCI13 Fauji Fert. Bin Qasim FFBL 49.4 61.6 25% Buy 934 4.30 5.53 6.32 4.00 5.00 5.00 11.48 8.92 8.1% 10.1% 3.17 3.40 28.4% 36.8% KSE100, KSE30 & KMI3014 Engro Fertilizer EFERT 87.4 110.5 26% Buy 1,318 6.23 10.76 12.75 3.00 6.00 7.00 14.04 8.12 3.4% 6.9% 3.91 2.98 29.7% 41.7% KSEALL15 Fauji Fertilizer Co. FFC 142.7 147.8 4% Hold 1,272 14.28 13.76 15.43 13.65 13.00 15.00 9.99 10.37 9.6% 9.1% 7.16 6.81 72.0% 67.4% KSE100, KSE30, KMI30 & MSCI 16 Fatima Fertilizer Company * FATIMA 39.0 NC na NC 2,100 4.41 na - 2.75 na na 8.85 na 7.0% na na na 26.6% na KSE100, KSE30 17 Arif Habib Corporation Ltd.* AHCL 39.6 NC na NC 454 5.08 na - 2.50 na na 7.79 na 6.3% na na na 9.1% na KSE100

Cem ent 18 Fecto Cement FECTC 69.5 96.8 39% Buy 50 11.86 12.85 13.99 2.50 3.00 4.00 5.86 5.41 3.6% 4.3% 1.47 1.21 27.8% 24.5% KSEALL19 Attock Cement Ltd. ACPL 190.9 282.0 48% Buy 115 17.59 22.22 22.91 13.00 12.00 14.00 10.86 8.59 6.8% 6.3% 2.59 2.27 24.7% 28.2% KSE100 20 Lucky Cement Ltd. LUCK 483.5 596.9 23% Buy 323 35.08 38.11 39.91 9.00 10.00 11.00 13.78 12.69 1.9% 2.1% 3.14 2.33 25.0% 21.1% KSE100, KSE30, KMI30 & MSCI21 Kohat Cement Company KOHC 187.5 220.1 17% Buy 155 20.42 20.74 23.64 2.00 4.00 6.00 9.18 9.04 1.1% 2.1% 3.37 2.49 43.1% 31.7% KSE100, KSE30 & KMI3022 D.G. Khan Cement Co. DGKC 135.4 167.5 24% Buy 438 13.62 15.17 16.22 3.50 4.00 5.00 9.95 8.93 2.6% 3.0% 0.96 0.89 10.9% 10.4% KSE100, KSE30 & KMI3023 Fauji Cement Company FCCL 34.5 41.8 21% Buy 1,331 1.97 3.06 3.69 1.50 2.50 2.75 17.48 11.26 4.3% 7.2% 2.91 2.82 16.6% 25.4% KSE100, KSE30 & KMI3024 Maple Leaf Cement Factory MLCF 77.1 69.8 -9% Hold 528 5.36 6.84 7.22 - 2.00 3.00 14.38 11.28 - 2.6% 4.17 3.05 34.3% 31.2% KSE10025 Pow er Cement* POWER 8.1 NC na NC 366 (0.20) - - - na na nm na - na 2.08 na -5.1% 0.0% KSEALL

Oil Marketing 26 Pakistan State Oil PSO 382.7 461.2 21% Buy 272 80.31 37.77 62.86 8.00 14.00 15.00 4.77 10.13 2.1% 3.7% 1.32 1.16 31.0% 12.2% KSE100, KSE30, KMI30 & MSCI27 Attock Petroleum Ltd. APL 539.9 579.4 7% Hold 83 52.16 38.22 54.89 45.00 32.50 50.00 10.35 14.13 8.3% 6.0% 3.25 3.04 31.1% 22.2% KSE100, KSE30 & KMI30

Autos 28 Indus Motor Company INDU 1279.3 1165.0 -9% Hold 79 49.28 120.83 119.36 29.50 55.00 50.00 25.96 10.59 2.3% 4.3% 5.05 4.11 20.6% 42.8% KSE100 29 Pak Suzuki Motor Co. PSMC 435.1 425.2 -2% Hold 82 27.22 48.09 36.55 4.00 10.00 10.00 15.99 9.05 0.9% 2.3% 1.86 1.61 12.1% 19.1% KSE100

Power 30 Kot Addu Power Co. KAPCO 87.0 89.5 3% Buy 880 8.78 10.33 11.07 6.50 8.50 10.00 9.91 8.42 7.5% 9.8% 2.77 2.69 29.1% 32.4% KSE100 & KSE30 31 Hub Pow er Company HUBC 97.0 94.1 -3% Hold 1,157 5.66 7.50 10.19 6.50 7.26 9.85 17.13 12.94 6.7% 7.5% 3.62 3.55 20.6% 27.7% KSE100, KSE30, KMI30 & MSCI32 Nishat Pow er Limited NPL 55.1 47.5 -14% Hold 354 8.24 8.49 8.77 4.00 6.00 7.00 6.69 6.49 7.3% 10.9% 1.89 1.66 29.8% 27.2% KSE10033 Nishat Chunian Pow er Ltd. NCPL 61.2 49.7 -19% Hold 367 7.90 8.18 8.20 6.50 7.40 7.80 7.75 7.48 10.6% 12.1% 3.19 2.93 40.5% 40.9% KSE100

Textiles 34 Nishat (Chunian) Ltd. NCL 35.1 KSE100 & KSE3035 Nishat Mills Ltd. NML 113.9 145.0 27% Buy 352 15.68 10.83 15.02 4.00 4.00 5.00 7.27 10.52 3.5% 3.5% 0.61 0.55 8.5% 5.2% KSE100, KSE30 & KMI30

Chem ical36 Engro Poly mer & Chem. EPCL 9.3 KSEALL37 Lotte Chemical Pak Ltd. LOTCHEM 6.5 8.9 37% Buy 1,514 (0.73) (0.45) (0.17) - - - nm nm - - 1.07 1.09 -10.6% -7.4% KSEALL

Fixed Line Telecom36 Pak Telecom Co. Ltd** PTC 20.6 KSE100, KSE30 & KMI30

Industrial Transporation37 Pak. National Shipping Corp PNSC 108.0 170.0 57% Buy 132 16.27 13.89 17.20 1.50 1.50 1.50 6.64 7.78 1.4% 1.4% 0.63 0.57 10.0% 7.7% KSEALL

Cable & Electrical Goods38 Pak Elektron Ltd PAEL 72.8 78.5 8% Hold 398 5.63 6.33 7.86 - 1.00 1.50 12.92 11.49 - 1.4% 2.63 2.20 25.5% 20.8% KSE100, KSE30

Health Care Equipment & Services

39 Shifa Int'l Hospitals SHFA 270.4 299.9 11% Buy 51 9.18 11.10 17.91 3.00 4.00 5.00 29.46 24.37 1.1% 1.5% 7.23 5.94 26.7% 26.8% KSE100, KSEALL

Price* Target Price

Dec-15

Upside/ Downside

Under Review

Under Review

Under Review

* Group Company , **Earning Consolidated Basis, ^based on new number of shares, Closing price as of Jun 05, 2015.

P/B ROEIndicesStance

Shares (mn)

EPS DPS P/E Div. YieldS.No Company Symbol

Recommendation Summary

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Analyst certification: The analysts for this report certify that all of the views expressed in this report accurately reflect their personal views about the subject companies and their securities, and no part of the analysts’ compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Disclosures and disclaimer: This document has been prepared by investment analysts at Arif Habib Limited (AHL). AHL investment analysts occasionally provide research input to the company’s Corporate Finance and Advisory Department.

This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for distribution to current and potential clients of the Company who are assumed to be reasonably sophisticated investors that understand the risks involved in investing in equity securities.The information contained herein is based upon publicly available data and sources believed to be reliable. While every care was taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. Theinformation given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. AHL reserves the right to makemodifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or keep the information current. AHL is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his or her own advisors to determine the merits and risks of such investment. AHL or any of its affiliates shall not be in any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in this report. We and our affiliates, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the securities thereof, company (is) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as advisor to such company (is) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. AHL generally prohibits it analysis, persons reporting to analysts and their family members from maintaining a financial interest in the securities that the analyst covers.

© 2015 Arif Habib Limited: Corporate Member of the Karachi, Lahore and Islamabad Stock Exchanges and Pakistan Mercantile Exchange Limited. No part of this publication may be copied, reproduced, stored or disseminated in any form or by any means without the prior written consent of Arif Habib Limited.

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Disclaimer

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34

Shahid Ali Habib Chief Executive Officer [email protected] +92 -21-3240-1930

Research TeamKhurram Schehzad EVP- Director, Research & Investment Strategy [email protected] +92-21-3246-0742Shahbaz Ashraf, CFA VP- Deputy Head of Research [email protected] +92-21-3246-2589Saad Khan AVP- Senior Investment Analyst [email protected] +92-21-3246-1106Tahir Abbas AVP- Senior Investment Analyst [email protected] +92-21-3246-2589Ahmed Lakhani Investment Analyst [email protected] +92-21-3246-1106Rao Aamir Ali Manager Database [email protected] +92-21-3246-0742Ovais Shakir Officer- Database [email protected] +92-21-3246-1106

Equities Sales TeamM. Yousuf Ahmed SVP- Equity Sales [email protected] +92-21-3242-7050Syed Farhan Karim VP- Equity Sales [email protected] +92-21-3244-6255Farhan Mansoori VP- Equity Sales [email protected] +92-21-3242-9644Afshan Aamir VP- Equity Sales [email protected] +92-21-3244-6256Atif Raza VP- Equity Sales [email protected] +92-21-3246-2596Azhar Javaid AVP- Equity Sales [email protected] +92-21-3246-8312Furqan Aslam AVP- Equity Sales [email protected] +92-21-3240-1932Usman Taufiq Ahmed AVP- Equity Sales [email protected] +92-21-3240-1932

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