Pakistan Credit Strategy
January 2011
A Testing Year Ahead
Highlights of the Report
Economy 1
Banking 3
Textile 5
Cement 7
Power 9
Fertilizer 11
Telecommunication 13
Oil 15
Pharmaceutical 18
Treasury Group, Pak Brunei Investment Company
A Testing Year Ahead
Highlights
Economy – Prospect of growth is grim. FY10 fiscal deficit was already at an
alarming level at PKR 929 billion (6.3% of GDP) and may cross PKR 1,100 billion in
FY11. Government will continue to monetize the deficit, which, coupled with
increasing international food and oil prices, hints inflation stickiness. Moreover,
government is also eyeing to tap other domestic borrowing sources, which restricts
credit supply to private sector. To counter inflation, monetary policy will remain
contractionary; but limited support from fiscal policy would make its effectiveness
questionable. External account has so far performed well, but it will continue to rely
on remittances and debt flows. Get ready for another tough year.
Credit Strategy

Banking – Banking sector TFCs are the safest investments within corporate
bond market. Priority should be given to banks with low net infection ratio and
higher liquid asset base. Short term commercial papers are also good
investment avenues

Textile – Debt obligations faced by the sector is the key issue, which led to a
number of defaults last year. We recommend avoiding long term exposures at
first place, but if necessary, companies’ export performance and sustainability of
operating cash flows should form the basis for investment/financing.

Cement – Sector’s leveraging is the primary issue and new long term
exposures should be very carefully selected. Working capital lines can be
provided to the companies with improving liquidity ratios and strong sponsor
support.

Power – Highly inelastic demand and demand-supply gap makes power
production one of the most attractive businesses. However, inter-corporate debt
is the biggest problem hurting companies’ cash flows. We recommend taking
selective exposure. Independent Power Producers with strong sponsor support
can be a good option

Fertilizer – Dynamics of the sector are very strong, which keeps our likeness
for the sector intact. Overall, players that are current in their debt obligations
and those having relatively benign leveraging position provides good investment
options

Telecommunication – On the back of high price-based competition,
saturation in urban areas and limited potential of growth in high-end services,
we do not recommend exposure in telecom

Oil – Sector enjoys a highly inelastic demand. However, similar to power
sector, inter-corporate debt is the major issue, therefore companies with higher
liquidity are better options.

Pharmaceutical – Because of the sector’s inherent strengths, it should
remain in the top order in the list of our preferred investments. Companies
having good repayment history and having developed a niche market should
remain our priority within the sector.

Here, we define Credit as Investment in Redeemable Capital Instruments and/or Advances.
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Economy
When you face one shock after another, everything seems going out of control and when short term prudence becomes more important
than long term planning, business decisions require extreme vigilance. After enjoying a joyride until 2007, Pakistan’s economy has
been travelling between a narrow course of gloom and cautious optimism (chart 1). If we are not forced to find (sometimes invent!)
colorful reasons to keep ourselves happy, there are a number of factors which warrant attention.
Weak growth prospects
Prospect of growth seems grim in 2011. Large Scale Manufacturing growth has once again slipped into the negative zone (chart 2).
Extent of agriculture losses is estimated at PKR 854.8 billion, which means agriculture growth may turn out to be negative in FY11.
Increasing international input prices, power shortage and high cost of financing have created enough trouble for businesses to operate
smoothly. Private sector is also facing a stiff competition from government in domestic credit market. Most of these factors will remain
there in 2011 as well. For private sector, consolidation is becoming more important than expansion.
Fiscal anomalies
FY10 fiscal deficit was already at an alarming level at PKR 929 billion (6.3% of GDP) while flood losses are hinting that the deficit may
cross PKR 1,100 billion in FY11 (chart 3) . In the absence of required foreign funding and inherently weak tax mobilization, government
has been monetizing the deficit big time (chart 4). Despite being under IMF umbrella, we expect government borrowing (both from
central and commercial banks) to remain high in FY11. This is also intensified by political pressures to prevent oil price and power tariff
hikes. Transaction demand for money also seems to be increasing (chart 5), which means people are desiring to hold cash in hand.
This is partly explained by low return on deposits, and partly by high inflation expectations, which is leading to people preferring current
consumption over future spending.
Inflation to remain sticky
Throughout 2010, inflation mostly remained untamed primarily on the back of high food inflation (chart 6). Story will not be much
different in 2011 as international food and oil prices have started rising again (chart 7). Global demand is expected to remain high given
the increase in emerging-market consumption, population growth and the impact of bio-fuels production. Moreover, increasing global
urbanization has brought a structural shift in the form of diminishing arable land. As for Oil, a rebound in global consumption coupled
with OPEC supply constraint will keep oil prices downward sticky. Furthermore, speculators are expected to continue to invest in oil,
given near-zero global interest rates and robust growth in developing economies. In addition, domestic prices also suffer from
administrative loopholes, which have proved to be uncontrollable by and large.
Where will the interest rates stop?
Discount Rate is once again on upward trajectory and market interest rates have also been following course (chart 8). In FY11, 50 bps
increase in discount rate is imminent while 100 bps increase shouldn’t be surprising as well. Very tough to place a bet on SBP’s likely
policy stance after June 2011; but even if monetary easing is going to take place, it will take place very slowly.
A healthy external account is not without some predicaments
Current account position has improved significantly – it recorded a USD 26 million surplus during 1HFY11 compared to USD 2.5 billion
deficit same period last year – thanks to continuous flow of remittances and stable exports (chart 9). Next year, however, we will
definitely see increasing international food and oil prices, which will have their toll on our import bill. Moreover, sporadic donor funding
would keep our FX reserves dependant mostly on IMF inflows. Recent extension of IMF program may push debt repayment pressure
further into 2012, but this shouldn’t be too ecstatic given a vulnerable state of income & investment flows.
…But the stock market was performing!
Unfortunately, performance of Pakistan stock market is hardly reflecting true economic picture. Even more amazing is the fact that
performance of listed companies actually presents a conflicting state in some cases. For example, net profitability of major listed textile
companies depicts a multi-fold increase in FY10. However, FBS data shows that textile sector has actually contracted by 4.1%YoY in
the same year. Shaping our business decisions (beyond equity investments) based on share price performance could be a terrible
mistake.
January 27, 2011
1
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Key Economic Projections
FY10
FY11E
1.20%
20.80%
4.1%
11.7%
1.7% - 1.9%
15.0%
7.8
8.9
11.1
Imports (USD Billion)
Trade Balance (USD Billion)
31.3
-12.2
31.0
-11.4
35.5
-14.5
Fiscal Deficit (% of GDP)
Current Account Deficit (% of GDP)
5.2%
5.7%
6.3%
2.0%
5.8% - 6.1%
3.9% - 4.2%
Chart 2: Large Scale Manuf. (YoY)
Chart 3: Fiscal Deficit (PKR bn)
15%
10%
5%
0%
-5%
-10%
-15%
-20%
-25%
Source: SBP
Chart 5: Currency in Circulation (YoY)
Chart 6: Inflation (YoY)
40%
19%
17%
15%
13%
11%
9%
7%
Source: SBP
1-Jan-10
CAD
13.6%
12.5%
60
Oct-10
Jul-10
Apr-10
Oct-09
Jan-10
Remit.
15
13.4%
12.4%
12.1%
12.6%
12.2%
Source: SBP
5
Jun-10
Jun-09
Dec-09
Dec-08
Jun-08
Dec-07
Jun-07
Dec-06
Jun-06
Jun-05
Dec-05
Defence
Saving
6M-TBill
6MKIBOR
Discount
Rate
-40
10
0
10
Jan-07
Jun-07
Nov-07
Apr-08
Sep-08
Feb-09
Jul-09
Dec-09
May-10
Oct-10
TD
14.0%
110
January 27, 2011
Jul-09
Chart 9: External Account (USD bn)
31-Dec-10
20
160
Source: FAO, Bloomberg
Apr-09
Source: Federal Bureau of Statistics
Chart 8: Key Interest Rates
World Food Inflation (LHS)
Oil Prices (RHS)
5%
Jan-09
4-Dec-10
4-Nov-10
Source: SBP
Chart 7: World Inflation (YoY)
80%
60%
40%
20%
0%
-20%
-40%
10%
4-Oct-10
1-Nov-10
1-Sep-10
1-Jul-10
1-May-10
1-Mar-10
1-Jan-10
1-Nov-09
1-Sep-09
1-Jul-09
-20%
4-Sep-10
-10%
15%
4-Aug-10
0%
20%
4-Jul-10
10%
Food
25%
4-Jun-10
Pre-flood
20%
Headline
2Q10
1Q10
4Q09
3Q09
Source: Ministry of Finance
Chart 4: Deficit Monetization (YoY)
30%
223
112
Source: FBS
Post-f
lood
303
180
156
2Q09
Sep-10
May-10
Jan-10
Sep-09
FY10
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
0%
May-09
2%
138
Jan-09
4%
FY10
Cumulative
PKR 929
billion
224
Sep-08
6%
May-08
8%
FY09
Cumulative
PKR 680
billion
275
Jan-08
10%
1Q09
Chart 1: Real GDP Growth (YoY)
3Q10
Workers' Remittances (USD Billion)
4Q10
GDP growth
Headline Inflation
FY09
Figures are 12-month moving sum
Source: SBP
2
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Banking
Pakistan’s banking sector comprises of 48 banking companies out of
Key Banking Ratios
MCB Bank and Allied Bank). Between FY03-08 banking sector
enjoyed supernormal growth owing to higher economic productivity,
stable interest rates and healthy purchasing power of consumers thus
strong credit appetite. However, after 2008, the slowdown in
economic activities also took its toll on the banking system, especially
in the form of declining loans growth. Deterioration of borrowers’
repayment capacity resulted in increased credit risk and significant
growth in Non-performing Loans (NPLs). Situation worsened further
due to the flash floods during July-August 2010, which may cause
banking sector to face ~PKR 54 billion loan losses.
According to the latest data available, both asset and deposit base
Sep10
QoQ
15.8
0.3
(2.3)
2.1
(1.8)
(2.0)
CY09
YoY
Asset Growth
8.8
Loans Growth
18.0
market is highly concentrated with top five banks holding more than
50% of the market share (National Bank, Habib Bank, United Bank,
Sep09
QoQ
CY08
YoY
which local private banks are 25. Despite a large number of players,
Deposit Growth
9.4
13.5
(1.7)
(2.1)
(14.8)
59.9
13.1
(1.0)
Equity Growth
3.4
17.3
3.0
(1.9)
Capital Adequacy Ratio
12.2
14.0
14.3
13.8
Capital to Total Assets
10.0
10.1
10.5
9.9
Gross Infection
10.5
12.6
12.4
14.0
Net Infection
3.4
4.1
4.1
4.5
Investments Growth
ROA (Before Tax)
1.2
1.3
1.6
1.6
ROE (Before Tax)
11.4
13.2
15.1
16.2
Liquid Assets/ Total Deposits
37.7
44.5
42.7
44.4
Advances to Deposit Ratio
75.2
67.7
69.6
63.1
Source: SBP
witnessed contraction on the back of higher transaction demand for
money and flow of funds towards National Savings Schemes.
Estimated Loan Losses due to Floods
Moreover, decline in equity base has resulted in a slight weakening in
Loan Losses
capital adequacy ratio, which has come down to 13.8% in Sept-10
compared to 14.3% a year ago.
The economic slowdown and government’s high credit demand has
resulted in the shift of asset mix from corporate loans to investment in
government securities & public lending. As a result, liquidity profile of
banks gradually eased off as their balance sheet composition steadily
shifted towards liquid assets, which is also evident from sector’s
Total
PKR Million
Public
Private
Banks
37,252
15,109
52,361
Microfinance Sector
-
2,156
2,156
Leasing
-
1,333
1,333
Insurance
-
1,289
1,289
37,252
19,887
57,139
Total
Source: Wrold Bank-ADB Flood Damage Need Assessment Report, Nov-10
improved liquid assets to total deposits ratio. This, however, has
eroded the depth of the banking system’s asset base and as a result,
Growth in Infected Bank Loans
currency deposit and financial strength ratings of the five major
NPLs, PKR bn (LHS)
Pakistani banks in December 2010. On the other hand, despite the fact
Net Infection Ratio (RHS)
that earnings of relatively small banks came under strain, banking
600
sector was able to record higher ROE on the back of improved net
500
interest incomes.
400
100
the government to bring down deficit monetization to 10% of its
Jun-10
Sep-10
Mar-10
Dec-09
Sep-09
Jun-09
Mar-09
Dec-08
Moreover, the recent enactment of SBP Amendment Bill 2010 compels
Jun-08
Mar-07
thus government securities will remain the favorite investment option.
Sep-08
0
low cost funds. Banks are expected to keep improving their risk profile;
Mar-08
mid and small size banks would continue to face difficulties in raising
200
Dec-07
satisfactory on the back of increase in net interest margins. However,
300
Jun-07
Going forward, banking sector’s profitability is expected to remain
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
Sep-07
international credit rating agency, Moody’s, downgraded the local
Source: SBP, PBIC Research
revenues from current 60% during next five years. This will also
increase government’s dependence on banking system in mid to long term.
January 27, 2011
3
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Banking Sector: SWOT Analysis
Strengths and
Opportunities
Weaknesses and Threats
Credit Strategy
January 27, 2011
 Improved capital adequacy
 Strong regulatory environment of SBP, thus limited risky exposures
 In an increasing interest rate environment, net interest margins (of especially big banks) are
expected to improve
 One of the highest banking spreads in the world
 Banks continue to consolidate their risk profile
 Strong liquidity profile, caused by the shift of assets composition from advances to investments
 SBP’s stress testing suggests that the banking system has adequate capacity to withstand any
extraordinary shocks in the key credit as well as market and liquidity risk factors.
 Rising NPLs in the backdrop of flash floods and increasing interest rates
 Focus on conventional products
 Re-pricing of the investment portfolio which is largely concentrated in risk-free government
securities in a rising interest rate environment
 Credit concentration in commodity financing and in other government controlled enterprises
 Banking sector TFCs are the safest investments within corporate bond market. Priority should
be given to banks with low net infection ratio and higher liquid asset base. Short term
commercial papers are also good investment avenues
4
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Textile
Pakistan is world's fourth largest cotton producer and the third largest
Textile Sector Performance
consumer of the same. Cotton based textiles contribute over 60% to the
Share in
LSM
total exports, accounts for 46% of the total manufacturing, provides
employment to 38% manufacturing labor force and contributes around
8.5% to the GDP.
Last couple of years proved extremely challenging for the sector. Domestic
demand shrank at a fast pace due to increasing inflation and declining
purchasing power. Furthermore, increasing fuel cost, law & order issues,
YoY Growth Pattern
FY10
3MFY11
Textile
32.6%
Cotton yarn
17.4%
-4.1%
-4.3%
-10.3%
-12.5%
Cotton cloth
Cotton ginned
Other items
10.1%
4.5%
0.7%
-0.7%
5.8%
-22.3%
-2.4%
0.0%
-25.7%
Source: SBP
electricity outages and increasing cost of financing created supply-side
2011 will not be without challenges. In an increasing interest rate scenario,
companies would find it difficult to grow their businesses. Moreover, with
the stabilizing international cotton prices, cotton exports are not expected
to repeat FY10 performance. Power availability and increasing prices of
electricity will also keep hurting profit margins.
Source: SBP
International and Domestic Cotton Prices
Local Prices, PKR/Maund (LHS)
Cotlook A, USD/lbs (RHS)
Another looming threat is government’s possible withdrawal of textile
7,500
implementation until next fiscal year. However, government is reportedly
5,500
The
extension
given
by
IMF
has
delayed
180
160
140
120
100
80
60
40
9,500
RGST
exemptions.
Jul-10
cotton prices worldwide.
Oct-10
700
Apr-10
impressive earning growth with the spinning sector being the star
Jan-10
750
Jul-09
margins. Listed spinning, weaving and composite units registered
Oct-09
800
Apr-09
companies were able to increase their net sales while improving the gross
Jan-09
850
Jul-08
Pakistan’s textile sector performed marvelously in FY10. Most of the
Oct-08
900
Apr-08
950
relatively inelastic demand.
Jan-07
Moreover, most of our textile exports are low-value added goods having
performer. Spinning sector achieved this feat on the back of increasing
Trikcle down of global slump in
import demand
1000
Oct-07
Pakistan’s exporting markets and international cotton prices started rising.
USD mn
1050
Jan-08
feet as soon as the signs of slow economic recovery became visible in
Monthly Textile Exports
Jul-07
brief, impact on textile exports. However, textile exports quickly found their
Apr-07
bottlenecks. Global economic slowdown also had a significant, though
planning to take away existing exemptions given to textile sector in order to
oriented companies will mostly remain sheltered against such withdrawal.
Dec-10
Oct-10
Aug-10
Jun-10
Apr-10
Feb-10
Oct-09
Dec-09
thereby affecting the sales of especially high value textile. Note that export-
Aug-09
strain cash flows but will also increase the prices of domestic textile goods
1,500
FY09
becomes liable to pay input tax on domestic sales as well. This will not only
3,500
FY07
make up for revenue shortfall. If exemptions are withdrawn, textile sector
Source: APTMA, Bloomberg,
One big positive trigger will be the availability of concessions on textile
exports to EU. Pakistan requested EU to grant duty-free treatment and tariff-rate quotas for around 75 products including cotton yarn
and finished textile goods for three years. In the last meeting of Council for Trade in Goods (CTG, WTO) most of the members
expressed support for granting of waiver except India, Vietnam, Bangladesh and Peru. The next meeting of CTG is expected to be held
in late Jaunary 2011 probably with a modified package. Currently, Pakistan exports around USD 4.6 billion to EU out of which textile
exports amounts to USD 3.1 billion (68%).
January 27, 2011
5
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Textile Sector: SWOT Analysis
Strengths and
Opportunities
 Most important manufacturing industry (32% share in large scale manufacturing) and highest
export revenue earner (57% of total exports)
 Pakistan has a fair chance of keeping its export base intact going forward given the presence of
a significant demand-output gap in Pakistan’s major exporting countries and major chunk of our
exports being goods with relatively inelastic demand
 Rupee depreciation provides added advantage for exporters
 Possible granting of export concessions by EU
 International demand recovery will trigger consumption of high value added textile goods, which
provides opportunity for some of the big market players having developed a niche market
abroad
Weaknesses and Threats
 Availability and increasing cost of electricity coupled with increasing oil prices will continue to
haunt cost effectiveness
 Sector is highly leveraged with debt being the major source of financing operations. Companies
have also been facing difficulties in remaining current on their debt obligations. According to
MUFAP, Out of total seven textile TFCs currently in the market, four have been placed under
non-performing category due to debt defaults
 Withdrawal of sales tax exemptions is a major threat for companies having a significant
presence in domestic market
 Value added sector face a stiff competition against China, India, Bangladesh and Vietnam since
the removal of quota regime in 2005. Companies in these countries have a significant cost
advantage
Credit Strategy
 Debt obligations faced by the sector is the key issue, which led to a number of defaults last year.
We recommend avoiding long term exposures at first place, but if necessary, companies’ export
performance and sustainability of operating cash flows should form the basis for
investment/financing.
January 27, 2011
6
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Cement
Cement Industry
There are 29 cement manufactures in the country (21 listed) with capacity
of producing around 45 million tons while local demand stands at around 24
Million Ton
FY06
FY07
FY08
FY09
FY10
million tons. The industry is geographically segmented with approximately
Production
21.4
30.3
37.2
43.2
44.8
81% of the total capacity concentrated in the North zone. The cement
Dispatches
18.4
24.2
30.1
31.3
34.2
industry constitutes 4.1% of overall manufacturing sector output, contributes
Local
16.9
21.0
22.3
20.5
23.5
3.2% in export earnings (major export markets: Afghanistan, India, Africa,
Exports
1.5
3.2
7.8
10.8
10.7
and Middle East), and contributes between 4-6% in the form of indirect
Source: APCMA
taxes to the National Exchequer. The cement industry is strategically
located in geographical proximity to limestone quarries and major markets
Cement Sector Capacity Utilization
which are essential for commercial feasibility. It is largely unregulated and
93%
oligopolistic in nature and All Pakistan Cement Manufacturer’s Association
80%
(APCMA) acts as a governing body when it comes to pricing and supply
86%
80% 81%
69%
72% 76%
decisions. The cement industry went through a major expansionary phase
started in FY06, which led to around 11% augmentation in supply. This,
coupled with the improved access to international markets, more than
doubled cement exports in FY08.
FY10 proved to be a tough year for cement sector in terms of profitability.
Although total dispatches did recorded an increase of 9%YoY on the back of
uptick in domestic demand, the excess supply due to the increase in
FY03
production capacity caused the prices to fall significantly. Moreover, input
FY04
FY05
FY06
FY07
FY08
FY09
FY10
Source: APCMA
prices have also increased in general; particularly electricity charges that
have increased by 24%. This led to the erosion in profitability of the cement sector. On the other hand, cement sector enjoyed
considerable export growth until FY09. However, due to the expanding capacity of neighboring countries, the local cement industry was
unable to hold its ground in international market.
Going forward, we expect cement sector profitability to remain under stress. Around 39% of the production cost comprises coal, which
has been witnessing significant growth in international prices. Although post flood reconstruction activities would provide uptick in the
domestic dispatches, selling prices may increase only marginally owing to the prevailing excess supply. On the other hand, export sales
are also expected to remain under stress due to the improved supply in international markets. Overall, we expect cement sector to
record a muted growth in 2011.
International Coal Prices
YoY Growth in Domestic Production
USD per Tonne
35%
Peaked at USD 177
200
180
160
140
120
100
80
60
40
20
0
25%
2nd highest at USD
128
15%
5%
-5%
-15%
Source: Bloomberg
January 27, 2011
Oct-10
Aug-10
Jun-10
Apr-10
Feb-10
Dec-09
Oct-09
Aug-09
Jun-09
Apr-09
Feb-09
Dec-08
Oct-08
1-Dec-10
1-Apr-10
1-Aug-10
-25%
1-Dec-09
1-Aug-09
1-Apr-09
1-Dec-08
1-Apr-08
1-Aug-08
1-Dec-07
1-Apr-07
1-Aug-07
1-Dec-06
1-Aug-06
1-Apr-06
1-Dec-05
Richards Bay Coal Spot/SA
Source: SBP
7
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Cement Sector: SWOT Analysis
Strengths and
Opportunities
 Improving global outlook provides exports to gain some ground.
 Government’s aim to achieve benchmark 5% real GDP growth would require heavy public
investments in the infrastructure in medium term.
 Post flood reconstruction activities will also provide growth impetus, though the sluggish flow of
funds may defer it
 Worsening energy crisis has necessitated public investment in dams. It is expected that
government would set aside a sizeable portion of resources for construction of dams in
successive budgets, which will boost cement demand.
Weaknesses and Threats
 Competition Commission of Pakistan (CCP) has increased its vigilance to curb cartelization,
which has led to reduced margins in 2008. Later on, although margins recovered somewhat,
government’s watchfulness remains on cartelization.
 Increasing competition and capacity enhancements in the region. Plant expansions in India,
China, Iran and Middle Eastern countries by 2012 would start a war of prices and quality. Most
of these economies will also aim to increase their exports as their domestic demand is more or
less satiable at current production levels.
 Rupee depreciation would increase sector’s input cost, as coal is imported from Indonesia and
South Africa.
 International coal prices have been increasing fast and will keep profit margins in check.
Nevertheless, some normalization in coal prices may take place after mid 2011.
 Sector is highly debt-driven. Increasing interest rates will keep straining companies’ bottom-lines
Credit Strategy
January 27, 2011
 Sector’s leveraging is the primary issue and new long term exposures should be very carefully
selected. Working capital lines can be provided to the companies with improving liquidity ratios
and strong sponsor support
8
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Power
(PEPCO). Moreover, Independent Power Producers, including HUBCO and
Power Generation Snapshot
Current Installed Capacity (MW)
19,786
Actual Generation (MW)
16,500
Demand (MW)
18,900
Gap (MW)
2,400-4,500
Expected Capacity Enhancement (MW)
2011
314
2012
876
KAPCO, are also established under different power policies during 1990’s.
2013
Until early 90’s, there were two major publically owned power companies
WAPDA and KESC, which were involved in Generation, Transmission and
Distribution of electricity in the country. In 1998, WAPDA’s power wing was
unbundled into (a) 3 generating companies (comprising 11 of WAPDA’s
generating plants) (b) 8 distribution companies (c) National Transmission
and Dispatch Company (NTDC) and (d) Pakistan Electric Power Company
480
Source: PPIB, ADB
The 1994 Power Policy helped in the induction of a number of power plants,
which resulted in surplus power in the country between 1996 and 2002. Until
Sources of Power Production
FY07, country witnessed phenomenal economic growth resulting in higher
Coal Nuclea
2%
r
2%
power demand from industrial, commercial and household sectors. However,
no major power generation capacity was added to the system. Performance
of transmission and distribution sectors also deteriorated due to the lack of
timely investments. In addition, exogenous factors including skyrocketing oil
Oil
32%
Gas
31%
prices also increased the cost of power production. As a result of these
factors, power deficit rose at a fast pace and currently stands at around
2,400-4,500MW.
Hydro
33%
There are three major sources of power generation in the country including
hydel (33%), oil (32%) and gas (31%). Electricity based on coal and nuclear
energy is also part of the system but their share is almost negligible.
Source: NEPRA
Increasing prices of oil and availability of gas are the two important issues
faced by the sector. Moreover, circular debt issue still remains at large in the
Projected Demand-Supply Gap
power sector as the government has been dealing with the political pressure
4,549
not to pass on the increasing cost of electricity production to consumers. It is
estimated that the circular debt currently stands at around PKR 220 billion.
3,235
3,554
According to some estimates, government had to increase the power tariff
2,774
up to 65% by increasing tariff at a rate of 2% per month to deal with intercorporate debt. Nevertheless, this issue may stand unresolved in 2011 since
the political pressure against such hikes will remain strong.
Given the supply-demand gap, potential for private investment in the sector
is huge. GoP also has a very supportive power policy in place to encourage
private power generation. In addition, Enhanced Partnership with Pakistan
Act (2009), approved by US Senate in October 2009, also encourages
FY11
FY12
FY13
FY14
Source: NEPRA, PBIC Research
public private partnership in energy generation projects.
January 27, 2011
9
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Power Sector: SWOT Analysis
Strengths and
Opportunities
Weaknesses and Threats
Credit Strategy
January 27, 2011
 Electricity is one of the commodities having almost inelastic demand
 Huge demand gap in years to come, which makes investment in power sector extremely
attractive
 Pakistan is endowed with a hydel potential of approximately 40,000MW (as against a mere
6,500MW installed capacity), most of which lies in the Khyber Pakhtonkhwa, Northern Areas,
AJK and Punjab. However, hydel potential is still untapped due to its high setup cost and
hydrological risks.
 Power Purchase Agreements (PPA) between producers and government ensures consistent
income stream for producers.
 PPA also provides a hedge against exchange rate depreciation; power projects’ cash flow
increases with the exchange rate depreciation.
 Power projects are usually considered to have an Internal Rate of Return (IRR) of above 1314%.
 Huge potential of coal-based electricity production. In developed economies including UK, USA
and Australia, coal based power generation constitutes around 65% of the total electricity
supplied
 Circular debt is the biggest challenge undermining power sector’s cash generation.
 Pilferage and line losses are major issues for the sector. For example, line losses in only KESC
area have jumped to ~36% in FY09 after remaining stable at around 34% during last few years.
 Lack of political consensus on building dams, thus undermining cheap hydel-based power
generation
 Rapid depletion of gas reserves with slow progress on the availability of alternatives including
LNG.
 Heavy reliance on expensive Furnace Oil (FO) based power generation
 Highly inelastic demand and demand-supply gap makes power production one of the most
attractive businesses. However, inter-corporate debt is the biggest problem hurting companies’
cash flows. We recommend taking selective exposure. Independent Power Producers with
strong sponsor support can be a good option
10
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Fertilizer
provides
employment to approximately 45% employed labor force and contributes
21% in GDP. Pakistan fertilizer industry comprises of nine urea plants,
having a total production capacity of 5,886 thousand tones per annum.
There are three major private sector fertilizer producers operating in the
country namely (i) Fauji Fertilizer (ii) Engro Chemical Pakistan Limited (iii)
Fauji Fertilizer Bin Qasim. Urea plants are running at 100 percent plus
capacity utilization levels but the country is still facing shortfall in urea
Supply
Demand
Million Ton
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
supply. As a result, dependence on imports to meet the national
requirement is intact.
2013
It
2012
sector.
2011
industrial
2010
with
2009
particularly
2008
linkages
2007
backward
Urea Supply and Demand
2006
Agriculture sector forms the backbone of economy with strong forward and
Source: NFDC, PBIC Research
The country faced the worst floods to date during July-August 2010. It is
estimated that 15-20% of arable land and 14-27% of kharif crops were
affected due to floods. As a result, urea and DAP off-take declined by
5%YoY and 13%YoY during July-November 2010 respectively. However,
Fertilizer Use in the Country
Domestic
Production
000
Tonnes
increase in land fertility may trigger fertilizer demand beyond 2011.
Imports
Urea
DAP
Urea
DAP
FY05
4,611
408
307
811
Fertilizer sector not only enjoyed preferential treatment when it comes to
FY06
4,804
433
825
1,171
gas supply, but also in the form of gas subsidy. However, during October
FY07
4,732
398
281
935
2010, government announced gas load shedding for a period of 45 days as
FY08
4,925
356
181
1,072
compared to the previous 25-30 days under gas load management plan.
FY09
4,922
534
905
207
Bearing in mind the importance of gas as both fuel and feed requirements
FY10
5,155
626
1,525
1,080
for the production of Urea, the load shedding is expected to result in higher
Source: NFDC
cost and thereby reduced sales of fertilizer. In addition, curtailment level of
20% has been announced on the Sui network and 12% on the Mari network,
Urea Market Share
which will limit fertilizer supply going forward. After suspension of gas supply
under gas load management plan, fertiliser manufacturers were forced to
raise urea price by Rs 190 per 50 kg bag.
Global fertilizer demand will remain strong on the back of limited inventory
pileup and increasing demand from emerging markets. This will provide
Pak Arab
2%
Dawood
Hercules
9%
Fatima
Fertilizer
10%
Agritech
9%
Engro
Corp
19%
room for higher international prices going forward. In the domestic markets,
urea prices will mostly be driven by the availability gas shortage. Despite
government’s watchfulness, industry has a considerable pricing power owing
to the unavailability of alternative products.
FFC Bin
Qasim
12%
FFC
39%
Source: NFDC, PBIC Research
January 27, 2011
11
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Fertilizer Sector: SWOT Analysis




Strengths and
Opportunities




Weaknesses and Threats
Credit Strategy
January 27, 2011
Pakistan is primarily an agri-based economy. Demand for fertilizer will remain strong
High capacity utilization, resulting in cost efficiencies
Fertilizer produced in Pakistan is equivalent to the international standard
The industry has a priority in gas supply as the government has dedicated some gas fields to
supply gas exclusively to fertilizer manufacturers (e.g. Mari gas field)
The manufacturers have an assured demand for the products. Even if they produce more than
the local demand it can easily be exported as Pakistan also enjoys a unique geographical
advantage (i.e. access to some potentially lucrative markets)
High pricing power of fertilizer manufacturers (recent increase in the urea prices of Rs 190/bag)
The dealer network of the industry is pretty strong and its coverage is pretty good
Zarai Taraqiati Bank Limited is providing loans within three days to farmers under the
instructions of the Government of Pakistan, which makes access to product easier
 Gas shortage is one of the key issue hampering production. Gas load shedding for fertilizer
manufacturers has been increased from 25-30 days to 45 days
 Mostly unskilled Labor; manufacturer has to spend a lot on training
 Machinery and equipment used in plants aren’t produced locally and high costs have to be
incurred against procurement/maintenance
 Removal of subsidy on gas would result in a sharp increase in prices, as natural gas constitutes
more than 50% of total manufacturing costs
 Worsening fiscal situation of the country might shift government’s focus away from the fertilizer
sector in the form of reduced subsidies
 Dynamics of fertilizer sector are very strong, which keeps our likeness for the sector intact
Overall, players that are current in their debt obligations and those having relatively benign
leveraging position provides good investment options
12
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Telecommunication
Telecommunication
sector
of
Pakistan
is
regulated
by
Pakistan
Telecommunication Authority (PTA). There are three key business segments
Telecom Revenues
PKR bn
FY07
FY08
FY09
FY10
Cellular
133
182
212
236
Local Loop
68
64
63
61
subsidiary Ufone. Cellular segment is dominated by Mobilink (33%) followed
LDI
16
22
48
47
by Telenor (24%), Ufone (19.7%) and Warid (17%).
WLL
3
3
3
3
Value Added
16
8
8
10
Total
236
279
334
358
namely Fixed Local Loop, Cellular and Wireless Local loop out of which
cellular holds by far the largest share (94%). PTCL is the major player in Fixed
Wireline while it also holds a sizeable share in Cellular segment through its
Following the economic boom in the country, telecom sector in Pakistan also
witnessed supernormal growth during FY03-08. With the help of investor
friendly policies, foreign investment made its way into the telecom sector and
Source: PTA
at one point (FY06), half of the total FDI came only in the telecom sector.
Foreign Investment in Telecom
economies including India, Bangladesh, Sri Lanka, & Nepal. Telecom
FDI in Telecom, USD mn (RHS)
penetration in Pakistan was 59.0% in FY08 compared to average 26.0% in
50%
due to the availability of other low cost options like cellular and wireless local
10%
loop service. PTCL, which has the highest share in the fixed line segment
0%
competition from other segments.
Cellular segment is also experiencing slowdown in the growth of cellular
500
0
FY10
20%
FY09
fixed line segment decreased to 3.4 million in FY10 from 3.5 million in FY09
1000
FY08
30%
FY07
order situation and saturation in telecom industry. Number of subscribers in
1500
FY06
40%
FY02
owing to a number of factors including economic slump, deteriorating law and
(96.1%), also witnessed a decline in its subscriber base due to tough
2000
FY05
However since FY09, teledensity growth has slowed down considerably
Share in Total FDI (LHS)
60%
FY04
regional economies.
FY03
During FY03-08, telecom penetration in Pakistan outpaced regional
Source: SBP, PBIC Research
subscriber base, as the teledensity of this segment has reached 61% in FY10
from 40% in FY07. Cellular industry also witnessed dropping Average
Revenue Per User (ARPU) till 2009. However, as companies have started
recovering their fixed costs and reducing operating expenses, ARPUs have
increased to USD2.46 in June 2010 from USD2.30 a year ago. Despite this
increase in ARPU, Pakistan is among those emerging markets that are facing
Telecom Segmentation
Wireles
s Local
Loop
2%
Fixed
Wire
Line
4%
low ARPUs due to a heavy tilt towards low usage prepaid subscriptions.
One area which has shown enormous potential recently is broadband. Until
FY08, broadband was available only in three cities with total subscriber base
standing at 168,000. However, the number of broadband users has increased
to more than 900,000 in FY10. Moreover, Pakistan stands among the top ten
Cellular
94%
countries witnessing high annual broadband growth. There are around 13
broadband service providers including PTCL, Wateen, WorldCall, Witribe, and
Link Dot Net. PTCL (53%) covers half of the broadband market followed by
Wateen (21%) and WorldCall (11%). This segment offers considerable growth
Source: PTA
opportunities considering very low penetration (0.55%). However, declining
broadband service prices may trigger mergers and acquisitions going forward.
January 27, 2011
13
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Teledensity in Pakistan
59%
Cellular Industry ARPUs
Broadband in Pakistan
2.42
2.39
Penetration (RHS)
2.39
1000
44%
2.31
2.31
2.28
2.30
600
400
Source: PTA
FY10
FY09
FY08
FY07
0
FY06
Jun-10
Mar-10
Dec-09
Sep-09
Jun-09
200
Mar-09
Dec-08
2.14
Jun-08
Mar-08
Oct-10
FY10
FY09
FY08
FY07
FY06
FY05
Source: PTA
Dec-07
2.14
Sep-08
12%
4% 6%
FY04
0.6%
0.5%
0.4%
0.3%
0.2%
0.1%
0.0%
800
2.26
26%
FY03
Subscribers, '000 (LHS)
2.46
62% 64% 64%
Source: PTA
Telecommunication Sector: SWOT Analysis
Strengths and
Opportunities
 High correlation with economic development
 High degree of deregulation and investment friendly policies
 Most of the players have recovered their fixed costs while operating expenses are also coming
down
 WLL penetration level is very low, which provide growth opportunity. WLL requires very low
capex, which is a big plus point given the destruction of infrastructure caused by recent flash
floods
 Growth in broadband is exemplary. Potential for further growth exists due to a very low
penetration level at present (0.55%)
Weaknesses and Threats
 Fierce price-based competition in Cellular and WLL segments means no operator is in a position
to improve profitability through prices
 High level of saturation in urban areas
 Low cellular ARPU means negligible opportunities for new entrants while muted revenue growth
for existing players
 Mass concentration towards low-end cellular services like prepaid cellular subscription. Growth
in high-end services including data services would remain very slow due to low per capita
income and high inflation
 Broadband penetration is mostly concentrated in urban areas. Potential for growth in rural areas
is low
 With the increase in number of market players, prices of broadband services will also come
down
Credit Strategy
 On the back of high price-based competition, saturation in urban areas and limited potential of
growth in high-end services, we do not recommend exposure in telecom
January 27, 2011
14
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Oil
Being the primary source of energy, Oil is predominantly the most important
commodity in the world. It has strong trickle down effects on almost all other
commodities and therefore, fluctuations in the price of oil have strong impact
Production of Oil in the Country
'000 bbl/day
75
on world trade and balance of payments. In 2010, oil prices increased by
70
oil is expected to reach $86 (average) a barrel next year. In addition, decline
65
in the oil inventories is also a major factor in the upward price movement
60
Oil Industry Overview
Source: Pakistan Energy Yearbook, PBIC Research
Pakistan’s petroleum industry is highly segmented, with each sector
Oil Reserves Position
FY10
FY09
FY08
FY07
FY06
FY05
the domestic prices of gasoline to follow international price.
FY04
50
FY03
price in FY08 the Government started doing away with this subsidy causing
55
FY02
providing subsidy on the gasoline. However, with the global increase in the oil
FY00
expected in the coming year. Previously, the Government of Pakistan was
FY01
~18% due to higher demand from Asian economies and according to Reuters,
performing a specific task in the supply chain, with hardly any integrated
and, Light Speed Diesel and Furnace Oil dominate the Oil consumption in the
country.
FY10
FY09
generation, industry, agriculture and residential sector. High Speed Diesel
FY08
sector is by far the largest user of petroleum products, followed by power
FY07
and distribution companies, which buy gas from the E&P sector. The transport
FY06
which then sell it to retailers. Pakistan has two integrated gas transmission
FY05
as import crude oil, refine and sell it to the Oil Marketing Companies (OMCs),
FY04
distribution companies. Refineries buy the oil produced in the country as well
FY03
in to two separate streams- the refineries and the gas transmission and
380
360
340
320
300
280
260
240
220
200
FY02
companies only involved in that area. From there, the product is branched out
FY01
oil. Exploration and Production (E&P) is a separate sector, with all E&P
Million bbls
FY00
setups spanning throughout the value chain from exploration to marketing of
Source: Pakistan Energy Yearbook, PBIC Research
The E&P sector of Pakistan consists of four major listed companies which
Refineries' Production
include; Oil and Gas Development Company (OGDC), Pakistan Petroleum
000 Tonnes
FY10
FY09
% Change
Limited (PPL), Pakistan Oil Fields (POL), and Mari Gas Company (MARI).
JP-1
JP-4 / JP-8
KEROSENE
HOBC
MS
HSD
LDO
Furnace Oil
Total
766
166
136
12
1,338
3,136
77
2,484
8,114
725
233
175
10
1,288
3,261
95
3,080
8,866
6%
-29%
-22%
19%
4%
-4%
-20%
-19%
-8%
Currently, oil production in the country stands at 65,000 barrels per day
compared to around 55,000 barrels per day a year ago.
In FY10, Pakistan’s E&P sector missed the oil and gas well drilling target as
planned activities could only be completed on 38 wells as against the target
of 52. However, in the 11MFY10, the E&P sector had a success ratio of 55%
as 11 discoveries were achieved out of 20. This is well above the country’s
historical average of 29%.
There are five oil refineries currently operating in Pakistan namely; Pak-Arab
Source: OCAC
Refinery (PARCO), National Refinery Limited (NRL), Pakistan Refinery Limited (PRL), Attock Refinery Limited (ARL), and Byco.
Current crude oil production of the country stands at 65,000 to 67,000 barrels per day and the total capacity of the refineries stands at
287,000 barrels per day. PARCO has the highest production capacity of 100,000 barrels per day in the industry and also holds the
highest market share of 41%. Fluctuation in the oil price has declined in FY10 as compared to the last year. However, stabilization in
prices was not sufficient enough for refineries to maintain profitability; therefore they could not be able to make profits in the fuel
January 27, 2011
15
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
segment of their operations. The unresolved circular debt issue has been a major problem for the past two years and continues to
hamper the liquidity position of the refineries.
Major players in the Oil Marketing Companies (OMC) sector are PSO, Shell, Caltex, and Attock Petroleum Limited (APL). These four
companies have a combined market share of 93%. Products sold in the sector include Furnace Oil, High Speed Diesel, Motor Spirit,
Asphalt, Carbon Oil, Kerosene, Jet Fuel and Lubricants. Pakistan is one of the few countries where prices are regulated, yet the effect
of international price increase is passed on to the local consumers with in an average time lag of one month. This generally benefits
downstream companies in terms of inventory gains.
Capacity of Major Oil Refineries
OMCs Market Share
Byco
10%
ARL
15%
PARCO
35%
Caltex
5%
Others
7%
APL
7%
Shell
12%
PRL
17%
PSO
69%
NRL
23%
Source: Pakistan Energy Yearbook, PBIC Research
January 27, 2011
Source: Pakistan Energy Yearbook, PBIC Research
16
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Oil Sector: SWOT Analysis
Strengths and
Opportunities
 Demand for oil products is highly inelastic. Broad consumer base makes this a very lucrative
sector.
 Surge in oil prices will not have any significant short/mid term impact on demand due to limited
availability of alternative energy solutions
 Numerous Furnace Oil (FO) powered IPPs are coming online in 2011, which is a major
opportunity for FO sales
 High success ratio (in 2010) for Oil Exploration Companies. 2011 is expected to bring positive
results in terms of new discoveries and project execution for E&P sector
 E&P companies face low regulatory risk as compared to OMCs and Refineries
 Consistent income stream from and increase in avenues for Naphtha exports is a plus for
Refineries.
 Further growth opportunities in non-fuel segment for refineries
 OMCs enjoy wide coverage networks in the country and have strong marketing plans. Bio-fuel
marketing will add to the diverse portfolio of OMCs






Weaknesses and Threats



Credit Strategy
January 27, 2011
Lack of vertical integration in the oil sector, which undermines cost effectiveness
Inter-corporate debt is a major drag on profitability and liquidity of various companies
Regulatory risk arising from government’s deliberation of streamlining domestic oil prices
High volatility in prices leads to uncertainty in future outlook for Oil sector
E&P companies were unable to explore several high potential areas due to security concerns in
the region
Incidental charges including wharfage, bank charges, handling charges etc. are nor longer the
part of ex-refinery prices, which means Oil Refineries will have to bear these costs
PKR depreciation leads to expensive imports for both Refineries and OMCs. OMCs have a high
dependency on import of major products including HSD and FO.
Increasing interest rates will make financing costly
OGRA’s decision of fixation of OMC margins is a drag on profitability, especially in the backdrop
of rising oil prices. However, some OMCs (PSO, APL) will have a relatively lesser hit owing to a
major portion of their revenues coming from deregulated products
 Oil sector enjoys a highly inelastic demand. However, similar to power sector, inter-corporate
debt is the major issue. Companies with relatively higher liquidity are better options. Moreover,
companies that are seeking vertical integration can also be explored.
17
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Pharmaceutical
There are about 600 pharmaceutical companies in Pakistan, of which 370
Pharmaceuticals Production in Pakistan
manufacturing units including 30 multinationals are producing drugs. The
FY10
FY09
%
current industry size stands at around PKR 80.1 billion of which the local
companies have 59% of the market share. Approximately 20% of Pakistan's
Tablets (Million Nos)
21,059
18,984
11%
total consumption of pharmaceuticals depends on imported. Market potential
Liquids (`000' Lit)
75,331
70,233
7%
Capsules (Million Nos.)
2,153
1,873
15%
contraceptives and birth control drugs.
Injections (Million Nos.)
775
903
-14%
The pharmaceutical sector in Pakistan is fully regulated by the Government as
Ointments (`000' Kgs.)
1,925
1,490
29%
46
31
48%
is good for antibiotics, vaccines, analgesics, tranquilizers, hormones, antihypertensives,
anti-ulcerants,
cardiovascular,
anti-cancer,
psychiatric,
maximum retail price of medicine is controlled. Healthcare in Pakistan is still in
the early stages of development. According to some estimates, around 45% of
the population has limited or no access to health facilities while public
expenditure on health as a percentage of GDP stands at 1.73%, which is well
below the global average (7.14%). Widespread poverty and a weak
Galenicals (`000' Litres)
Source: FBS
Pharmaceutical Imports (USD million)
477
healthcare system underlie the poor health status of the population. The
399
problems of poor nutrition and sanitation are compounded by Pakistan’s large
and fast growing population. Other issues include the continuing prevalence
of communicable diseases, low health manpower levels and the under
287
276
FY04
FY05
329
342
354
FY06
FY07
FY08
utilization of primary health facilities in Pakistan.
One of the key issues facing pharmaceutical sector is weak Intellectual
Property Rights (IPR). As a signatory to the Trade-Related aspects of
Intellectual Property Rights (TRIPS) agreement, Pakistan had been given until
2004 to meet WTO requirements to improve patent laws. However,
enforcement of IPR protection laws has remained very weak to date; despite
FY09
FY10
Source: SBP, PBIC Research
the fact that government recognizes IPR protection as a key issue.
The recent flooding disaster in August 2010 would continue to further
FDI in Pharmaceutcal Sector (USD million)
deteriorated the health situation in the country, communicable diseases
46
especially water-borne ones may result in more casualties in the aftermath of
38
the floods.
34
38
30
Given the level of healthcare service penetration, demand for pharmaceutical
goods will remain intact in the long term. However, in the short term, political
13
6
FY03
reconstruction activities in the country would drain government funds and in
7
FY02
uncertainty and flooding would be the key defining factors. In addition,
5
pharmaceutical markets in the Asia Pacific region in terms of size during the
FY10
FY09
FY08
FY07
FY06
during next five years. However, it will remain one of the smallest
FY05
analysis firm, expects the sector to grow at a fairly high single digit CAGR
FY04
turn limit the expenditure on health. Espicom, an international pharmaceutical
Source: SBP, PBIC Research
period in question.
January 27, 2011
18
Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead
Pharmaceutical Sector: SWOT Analysis
Strengths and
Opportunities
Weaknesses and Threats
Credit Strategy
January 27, 2011
 With 9.3% growth, pharmaceutical sector was one of the best performing manufacturing sectors
in FY10
 Sector is inherently immune to the economic downturns. Demand for pharmaceuticals is
inelastic.
 Margins in the Pharmaceutical business are high in Pakistan (between 35% - 40%), which
makes the Pharmaceutical companies cash rich.
 Unique geographical position of the country: Strategic position for the market access to
Afghanistan, Middle East, Africa and Asian states. Currently Pakistan exports pharmaceutical
products to more than 100 countries
 Broad distribution system country-wide
 The pharmaceutical industry is capable of producing a vast range of medicines (125 categories
of medicines are produced locally)
 With 168 million population, consumer base is quite large. Around 45% of the population still has
very limited or no access to healthcare.
 Availability of Chinese machinery which is much cheaper as compared to other countries
 One of the major opportunities lies in the area of herbal medicines. Pakistan has huge
intellectual property in this area.
 Default or poor repayment cases in the industry are almost negligible.
 Most of the financial institutions rank Pharmaceutical within high-priority industries for credit
facilities
 Highly regulated industry with the government following strict price control policies
 Export base is narrow compared to other countries
 Prices of Pakistani products are considerably higher than those of the Indian and the Chinese
products
 Raw material for medicines is mostly imported, thus the exchange rate risk is high
 Lack of research and development facilities and lack of proper quality controls and assurance
tests
 Limited government control on the flow of smuggled goods in and out of the country as well as
presence of counterfeit drugs in the market.
 There is no proper understanding and implementation of patents and Intellectual Property Rights
(IPRs)
 Because of the sector’s inherent strengths, it should remain in the top order in the list of our
preferred sectors. Companies having good repayment history and having developed a niche
market should remain our priority within the sector.
19
Jan
Treasury Group
Ahmed Ateeq
Head of Treasury
(+92-21) 5361370-3
ahmed.ateeq@pakbrunei.com.pk
Haider Hussain
Unit Head, Research
(+92-21) 35361215-9 Ext. 141
haider.hussain@pakbrunei.com.pk
Zubair Humayun
Analyst
(+92-21) 35361215-9 Ext. 150
zubair.humayun@pakbrunei.com.pk
Disclaimers: This report is published solely for information purposes. It is not to be construed as a solicitation or an offer to buy or sell any
securities or related financial instruments nor should it be regarded by recipients as a substitute for the exercise of their own judgment. The
information and opinions contained in this report have been compiled or arrived at from sources believed to be reliable, but no representation or
warranty, express or implied, is made as to their accuracy, completeness or correctness and are subject to change without notice. PBIC does not
accept any loss or liability whatsoever arising from the use of the material or information contained herein. PBIC may from time to time hold
positions in, and may effect transactions in, the companies, sectors and/or securities mentioned herein.
© Copyright 2011, Pak Brunei Investment Company (PBIC). All rights are reserved. PBIC prohibits the redistribution of this material in whole or in
part without the consent of PBIC and PBIC accepts no liability whatsoever for the actions of third parties in this respect. Please cite source when
quoting.
Pak Brunei Investment Company Limited,
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