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

FY09 FY10 FY11E
GDP growth 1.20% 4.1% 1.7% - 1.9%
Headline Inflation 20.80% 11.7% 15.0%
Workers' Remittances (USD Billion) 7.8 8.9 11.1
Imports (USD Billion) 31.3 31.0 35.5
Trade Balance (USD Billion) -12.2 -11.4 -14.5
Fiscal Deficit (% of GDP) 5.2% 6.3% 5.8% - 6.1%
Current Account Deficit (% of GDP) 5.7% 2.0% 3.9% - 4.2%

Chart 1: Real GDP Growth (YoY) Chart 2: Large Scale Manuf. (YoY) Chart 3: Fiscal Deficit (PKR bn)
15% FY09 FY10
10%
10% Cumulative Cumulative
8% 5% PKR 680 PKR 929
303
0% billion 275 billion
6% -5% 224 223
-10% 180
156
4% -15%
138
112
-20%
2%
-25%
May-08

May-10
May-09
Jan-09
Jan-08

Jan-10
Sep-08

Sep-10
0% Sep-09

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10
FY01

FY03

FY06

FY08
FY09
FY02

FY04
FY05

FY07

FY10

Source: FBS Source: Ministry of Finance Source: SBP

Chart 4: Deficit Monetization (YoY) Chart 5: Currency in Circulation (YoY) Chart 6: Inflation (YoY)
Headline Food
40% Post-f 19%
30% lood 17% 25%

20% Pre-flood 15% 20%

10% 13%
0% 11% 15%
9%
-10% 10%
7%
-20%
4-Jun-10

4-Jul-10

4-Aug-10

4-Nov-10
4-Sep-10

4-Dec-10
4-Oct-10

5%
1-Jul-09
1-Sep-09

1-Jul-10
1-Sep-10
1-Nov-09
1-Jan-10

1-Nov-10
1-May-10
1-Mar-10

Jan-09

Jul-09

Jul-10
Jan-10
Oct-09

Apr-10
Apr-09

Oct-10
Source: SBP Source: SBP Source: Federal Bureau of Statistics
Chart 7: World Inflation (YoY) Chart 8: Key Interest Rates Chart 9: External Account (USD bn)
World Food Inflation (LHS) 1-Jan-10 31-Dec-10 CAD TD Remit.
Oil Prices (RHS) 20
14.0%
80% 160 13.6% 15
60% 13.4%
110 10
40% 12.5% 12.6%
12.4%
20% 60 12.1% 12.2% 5
0% 0
10
-20%
Dec-06
Jun-07
Dec-07
Jun-08
Jun-05
Dec-05
Jun-06

Dec-08
Jun-09
Dec-09
Jun-10

-40% -40
Discount

Defence
6M-TBill
KIBOR

Saving
Nov-07
Jun-07
Jan-07

Jul-09

May-10
Feb-09
Apr-08

Oct-10
Dec-09
Sep-08

6M-
Rate

Figures are 12-month moving sum

Source: FAO, Bloomberg Source: SBP Source: SBP

January 27, 2011 2

Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead

Banking
Key Banking Ratios
Pakistan’s banking sector comprises of 48 banking companies out of Sep- Sep-
which local private banks are 25. Despite a large number of players, CY08 CY09 09 10
YoY YoY QoQ QoQ
market is highly concentrated with top five banks holding more than
Asset Growth 8.8 15.8 0.3 (2.3)
50% of the market share (National Bank, Habib Bank, United Bank,
Loans Growth 18.0 2.1 (1.8) (2.0)
MCB Bank and Allied Bank). Between FY03-08 banking sector
Deposit Growth 9.4 13.5 (1.7) (2.1)
enjoyed supernormal growth owing to higher economic productivity,
Investments Growth (14.8) 59.9 13.1 (1.0)
stable interest rates and healthy purchasing power of consumers thus
Equity Growth 3.4 17.3 3.0 (1.9)
strong credit appetite. However, after 2008, the slowdown in
Capital Adequacy Ratio 12.2 14.0 14.3 13.8
economic activities also took its toll on the banking system, especially
Capital to Total Assets 10.0 10.1 10.5 9.9
in the form of declining loans growth. Deterioration of borrowers’
Gross Infection 10.5 12.6 12.4 14.0
repayment capacity resulted in increased credit risk and significant
Net Infection 3.4 4.1 4.1 4.5
growth in Non-performing Loans (NPLs). Situation worsened further
ROA (Before Tax) 1.2 1.3 1.6 1.6
due to the flash floods during July-August 2010, which may cause
ROE (Before Tax) 11.4 13.2 15.1 16.2
banking sector to face ~PKR 54 billion loan losses.
Liquid Assets/ Total Deposits 37.7 44.5 42.7 44.4
Advances to Deposit Ratio 75.2 67.7 69.6 63.1
According to the latest data available, both asset and deposit base
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 Total
compared to 14.3% a year ago. PKR Million Public Private
Banks 37,252 15,109 52,361
The economic slowdown and government’s high credit demand has Microfinance Sector - 2,156 2,156
resulted in the shift of asset mix from corporate loans to investment in Leasing - 1,333 1,333
government securities & public lending. As a result, liquidity profile of 1,289
Insurance - 1,289
banks gradually eased off as their balance sheet composition steadily
Total 37,252 19,887 57,139
shifted towards liquid assets, which is also evident from sector’s
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,
international credit rating agency, Moody’s, downgraded the local 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 5%
5%
sector was able to record higher ROE on the back of improved net 500 4%
interest incomes. 400 4%
3%
300 3%
Going forward, banking sector’s profitability is expected to remain 2%
200 2%
satisfactory on the back of increase in net interest margins. However,
100 1%
mid and small size banks would continue to face difficulties in raising 1%
0 0%
low cost funds. Banks are expected to keep improving their risk profile;
Mar-07

Mar-08

Mar-09

Mar-10
Jun-07
Sep-07
Dec-07

Jun-08
Sep-08
Dec-08

Jun-09
Sep-09
Dec-09

Jun-10
Sep-10

thus government securities will remain the favorite investment option.

Moreover, the recent enactment of SBP Amendment Bill 2010 compels
the government to bring down deficit monetization to 10% of its 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

 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
Strengths and  One of the highest banking spreads in the world
Opportunities  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
Weaknesses and Threats 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
Credit Strategy be given to banks with low net infection ratio and higher liquid asset base. Short term
commercial papers are also good investment avenues

January 27, 2011 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 YoY Growth Pattern
total exports, accounts for 46% of the total manufacturing, provides LSM
FY10 3MFY11
employment to 38% manufacturing labor force and contributes around
Textile 32.6% -4.1% -10.3%
8.5% to the GDP.
Cotton yarn 17.4% -4.3% -12.5%
Cotton cloth 10.1% -0.7% -2.4%
Last couple of years proved extremely challenging for the sector. Domestic
Cotton ginned 4.5% 5.8% 0.0%
demand shrank at a fast pace due to increasing inflation and declining
Other items 0.7% -22.3% -25.7%
purchasing power. Furthermore, increasing fuel cost, law & order issues,
Source: SBP
electricity outages and increasing cost of financing created supply-side
bottlenecks. Global economic slowdown also had a significant, though Monthly Textile Exports
brief, impact on textile exports. However, textile exports quickly found their
USD mn
feet as soon as the signs of slow economic recovery became visible in
1050
Pakistan’s exporting markets and international cotton prices started rising. 1000
Trikcle down of global slump in
import demand
Moreover, most of our textile exports are low-value added goods having 950
relatively inelastic demand. 900

Pakistan’s textile sector performed marvelously in FY10. Most of the 850

companies were able to increase their net sales while improving the gross 800

margins. Listed spinning, weaving and composite units registered 750

700
impressive earning growth with the spinning sector being the star Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10
Oct-08
Apr-07

Oct-07

Apr-08

Apr-09

Oct-09

Apr-10

Oct-10
performer. Spinning sector achieved this feat on the back of increasing
cotton prices worldwide.
Source: SBP
2011 will not be without challenges. In an increasing interest rate scenario,
companies would find it difficult to grow their businesses. Moreover, with
International and Domestic Cotton Prices
the stabilizing international cotton prices, cotton exports are not expected
to repeat FY10 performance. Power availability and increasing prices of Local Prices, PKR/Maund (LHS)

electricity will also keep hurting profit margins. Cotlook A, USD/lbs (RHS)
180
9,500
Another looming threat is government’s possible withdrawal of textile 160
exemptions. The extension given by IMF has delayed RGST 7,500 140
implementation until next fiscal year. However, government is reportedly 120
5,500 100
planning to take away existing exemptions given to textile sector in order to
3,500 80
make up for revenue shortfall. If exemptions are withdrawn, textile sector 60
becomes liable to pay input tax on domestic sales as well. This will not only 1,500 40
Feb-10
Apr-10
Aug-09

Dec-09

Jun-10
Aug-10

Dec-10
Oct-09

Oct-10
FY07
FY09

strain cash flows but will also increase the prices of domestic textile goods
thereby affecting the sales of especially high value textile. Note that export-
oriented companies will mostly remain sheltered against such withdrawal.
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

 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
Strengths and exports being goods with relatively inelastic demand
Opportunities  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

 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
Weaknesses and Threats 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

 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
Credit Strategy 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 86%
80% 80% 81%
(APCMA) acts as a governing body when it comes to pricing and supply 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 FY04 FY05 FY06 FY07 FY08 FY09 FY10

production capacity caused the prices to fall significantly. Moreover, input 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%
200 Peaked at USD 177
180 25%
160 2nd highest at USD 15%
140 128
120 5%
100
80 -5%
60
40 -15%
20 Richards Bay Coal Spot/SA
0 -25%
Feb-09
Apr-09

Feb-10
Apr-10
Dec-08

Jun-09
Aug-09

Dec-09

Jun-10
Aug-10
Oct-08

Oct-09

Oct-10
1-Dec-05

1-Aug-06
1-Dec-06

1-Aug-07
1-Dec-07

1-Aug-08
1-Dec-08

1-Aug-09

1-Aug-10
1-Dec-10
1-Dec-09
1-Apr-06

1-Apr-07

1-Apr-08

1-Apr-09

1-Apr-10

Source: Bloomberg Source: SBP

January 27, 2011 7

Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead

Cement Sector: SWOT Analysis

 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.
Strengths and  Post flood reconstruction activities will also provide growth impetus, though the sluggish flow of
Opportunities 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.

 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
Weaknesses and Threats 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

 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
Credit Strategy
and strong sponsor support

January 27, 2011 8

Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead

Power
Power Generation Snapshot
Until early 90’s, there were two major publically owned power companies
Current Installed Capacity (MW) 19,786
WAPDA and KESC, which were involved in Generation, Transmission and
Actual Generation (MW) 16,500
Distribution of electricity in the country. In 1998, WAPDA’s power wing was Demand (MW) 18,900
unbundled into (a) 3 generating companies (comprising 11 of WAPDA’s Gap (MW) 2,400-4,500
generating plants) (b) 8 distribution companies (c) National Transmission Expected Capacity Enhancement (MW)
and Dispatch Company (NTDC) and (d) Pakistan Electric Power Company 2011 314
(PEPCO). Moreover, Independent Power Producers, including HUBCO and 2012 876
KAPCO, are also established under different power policies during 1990’s. 2013 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
power demand from industrial, commercial and household sectors. However, 2% r
no major power generation capacity was added to the system. Performance 2%
of transmission and distribution sectors also deteriorated due to the lack of
Oil
timely investments. In addition, exogenous factors including skyrocketing oil Gas 32%
prices also increased the cost of power production. As a result of these 31%

factors, power deficit rose at a fast pace and currently stands at around
2,400-4,500MW.

There are three major sources of power generation in the country including Hydro
33%
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. 3,554
3,235
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 inter-
corporate 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
FY11 FY12 FY13 FY14
private power generation. In addition, Enhanced Partnership with Pakistan
Act (2009), approved by US Senate in October 2009, also encourages 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

 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
Strengths and
income stream for producers.
Opportunities
 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 13-
14%.
 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
Weaknesses and Threats 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’
Credit Strategy cash flows. We recommend taking selective exposure. Independent Power Producers with
strong sponsor support can be a good option

January 27, 2011 10

Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead

Fertilizer
Urea Supply and Demand
Agriculture sector forms the backbone of economy with strong forward and
backward linkages particularly with industrial sector. It provides Supply Demand
Million Ton
employment to approximately 45% employed labor force and contributes 7.5
21% in GDP. Pakistan fertilizer industry comprises of nine urea plants, 7.0
having a total production capacity of 5,886 thousand tones per annum. 6.5
6.0
There are three major private sector fertilizer producers operating in the
5.5
country namely (i) Fauji Fertilizer (ii) Engro Chemical Pakistan Limited (iii) 5.0
Fauji Fertilizer Bin Qasim. Urea plants are running at 100 percent plus 4.5
capacity utilization levels but the country is still facing shortfall in urea 4.0

2012
2006

2007

2008

2009

2010

2011

2013
supply. As a result, dependence on imports to meet the national
requirement is intact.
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 Fertilizer Use in the Country
affected due to floods. As a result, urea and DAP off-take declined by Domestic
000 Production Imports
5%YoY and 13%YoY during July-November 2010 respectively. However, Tonnes
increase in land fertility may trigger fertilizer demand beyond 2011. 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 Dawood
Fatima
under gas load management plan, fertiliser manufacturers were forced to Fertilizer Hercules
Pak Arab
10% 9%
raise urea price by Rs 190 per 50 kg bag. 2%

Global fertilizer demand will remain strong on the back of limited inventory Agritech
9%
pileup and increasing demand from emerging markets. This will provide Engro
Corp
room for higher international prices going forward. In the domestic markets, 19%
urea prices will mostly be driven by the availability gas shortage. Despite
government’s watchfulness, industry has a considerable pricing power owing FFC Bin
to the unavailability of alternative products. Qasim FFC
12% 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

 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)
Strengths and  The manufacturers have an assured demand for the products. Even if they produce more than
Opportunities 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
Weaknesses and Threats 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
Credit Strategy
leveraging position provides good investment options

January 27, 2011 12

Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead

Telecommunication
Telecommunication sector of Pakistan is regulated by Pakistan Telecom Revenues
Telecommunication Authority (PTA). There are three key business segments PKR bn FY07 FY08 FY09 FY10
namely Fixed Local Loop, Cellular and Wireless Local loop out of which
Cellular 133 182 212 236
cellular holds by far the largest share (94%). PTCL is the major player in Fixed
Local Loop 68 64 63 61
Wireline while it also holds a sizeable share in Cellular segment through its
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
Following the economic boom in the country, telecom sector in Pakistan also
witnessed supernormal growth during FY03-08. With the help of investor Total 236 279 334 358
Source: PTA
friendly policies, foreign investment made its way into the telecom sector and
at one point (FY06), half of the total FDI came only in the telecom sector.
During FY03-08, telecom penetration in Pakistan outpaced regional 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 Share in Total FDI (LHS)
regional economies. 60% 2000
50%
However since FY09, teledensity growth has slowed down considerably 1500
owing to a number of factors including economic slump, deteriorating law and 40%
order situation and saturation in telecom industry. Number of subscribers in 30% 1000
fixed line segment decreased to 3.4 million in FY10 from 3.5 million in FY09 20%
500
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% 0
FY02
FY03

FY04

FY05
FY06

FY07

FY08

FY09
FY10
(96.1%), also witnessed a decline in its subscriber base due to tough
competition from other segments.

Cellular segment is also experiencing slowdown in the growth of cellular 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 Telecom Segmentation
Revenue Per User (ARPU) till 2009. However, as companies have started Wireles
Fixed
recovering their fixed costs and reducing operating expenses, ARPUs have s Local
Wire
Loop
increased to USD2.46 in June 2010 from USD2.30 a year ago. Despite this Line
2%
4%
increase in ARPU, Pakistan is among those emerging markets that are facing
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
countries witnessing high annual broadband growth. There are around 13 94%
broadband service providers including PTCL, Wateen, WorldCall, Witribe, and
Link Dot Net. PTCL (53%) covers half of the broadband market followed by
Source: PTA
Wateen (21%) and WorldCall (11%). This segment offers considerable growth
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 Cellular Industry ARPUs Broadband in Pakistan

2.46 Subscribers, '000 (LHS)
62% 64% 64%
59% 2.42
2.39 2.39 Penetration (RHS)
44% 1000 0.6%
2.31 2.30 0.5%
2.31 2.28 800
2.26
0.4%
26% 600
0.3%
400
12%
2.14
0.2%
4% 6% 2.14
200 0.1%
0 0.0%

Jun-09
Jun-08

Jun-10
Mar-08

Mar-09

Mar-10
Dec-07

Sep-09
Sep-08
Dec-08

Dec-09

FY06

FY07

FY08

FY09

FY10
Oct-10
FY06
FY07
FY08
FY03
FY04
FY05

FY09
FY10

Source: PTA Source: PTA Source: PTA

Telecommunication Sector: SWOT Analysis

 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
Strengths and  WLL penetration level is very low, which provide growth opportunity. WLL requires very low
Opportunities 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%)

 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
Weaknesses and Threats 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

 On the back of high price-based competition, saturation in urban areas and limited potential of
Credit Strategy 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
Production of Oil in the Country
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 '000 bbl/day
commodities and therefore, fluctuations in the price of oil have strong impact
75
on world trade and balance of payments. In 2010, oil prices increased by
70
~18% due to higher demand from Asian economies and according to Reuters,
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
expected in the coming year. Previously, the Government of Pakistan was
55
providing subsidy on the gasoline. However, with the global increase in the oil
price in FY08 the Government started doing away with this subsidy causing 50

FY07
FY00
FY01
FY02
FY03
FY04
FY05
FY06

FY08
FY09
FY10
the domestic prices of gasoline to follow international price.

Oil Industry Overview Source: Pakistan Energy Yearbook, PBIC Research

Pakistan’s petroleum industry is highly segmented, with each sector Oil Reserves Position
performing a specific task in the supply chain, with hardly any integrated
setups spanning throughout the value chain from exploration to marketing of Million bbls
oil. Exploration and Production (E&P) is a separate sector, with all E&P 380
companies only involved in that area. From there, the product is branched out 360
340
in to two separate streams- the refineries and the gas transmission and 320
distribution companies. Refineries buy the oil produced in the country as well 300
280
as import crude oil, refine and sell it to the Oil Marketing Companies (OMCs),
260
which then sell it to retailers. Pakistan has two integrated gas transmission 240
and distribution companies, which buy gas from the E&P sector. The transport 220
200
sector is by far the largest user of petroleum products, followed by power
FY01

FY04
FY00

FY02

FY03

FY05

FY06

FY07

FY08

FY09

FY10
generation, industry, agriculture and residential sector. High Speed Diesel
and, Light Speed Diesel and Furnace Oil dominate the Oil consumption in the
Source: Pakistan Energy Yearbook, PBIC Research
country.

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-1 766 725 6%
Currently, oil production in the country stands at 65,000 barrels per day JP-4 / JP-8 166 233 -29%
compared to around 55,000 barrels per day a year ago. KEROSENE 136 175 -22%
HOBC 12 10 19%
In FY10, Pakistan’s E&P sector missed the oil and gas well drilling target as
MS 1,338 1,288 4%
planned activities could only be completed on 38 wells as against the target
HSD 3,136 3,261 -4%
of 52. However, in the 11MFY10, the E&P sector had a success ratio of 55%
LDO 77 95 -20%
as 11 discoveries were achieved out of 20. This is well above the country’s
Furnace Oil 2,484 3,080 -19%
historical average of 29%. Total 8,114 8,866 -8%
Source: OCAC
There are five oil refineries currently operating in Pakistan namely; Pak-Arab
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 Others
10% 7%
APL
Caltex
7%
ARL 5%
PARCO
15% 35%

Shell
12%
PRL
17% PSO
69%
NRL
23%

Source: Pakistan Energy Yearbook, PBIC Research Source: Pakistan Energy Yearbook, PBIC Research

January 27, 2011 16

Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead

Oil Sector: SWOT Analysis

 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
Strengths and
results in terms of new discoveries and project execution for E&P sector
Opportunities
 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

 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
Weaknesses and Threats 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
Credit Strategy debt is the major issue. Companies with relatively higher liquidity are better options. Moreover,
companies that are seeking vertical integration can also be explored.

January 27, 2011 17

Jan
Pakistan Credit Strategy
Research Unit, Treasury Group
A Testing Year Ahead

Pharmaceutical
Pharmaceuticals Production in Pakistan
There are about 600 pharmaceutical companies in Pakistan, of which 370
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%
is good for antibiotics, vaccines, analgesics, tranquilizers, hormones, anti-
hypertensives, anti-ulcerants, cardiovascular, anti-cancer, psychiatric, 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%
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 Galenicals (`000' Litres) 46 31 48%
Source: FBS
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
Pharmaceutical Imports (USD million)
below the global average (7.14%). Widespread poverty and a weak
477
healthcare system underlie the poor health status of the population. The
problems of poor nutrition and sanitation are compounded by Pakistan’s large 399
342 354
and fast growing population. Other issues include the continuing prevalence 329
287 276
of communicable diseases, low health manpower levels and the under
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, FY04 FY05 FY06 FY07 FY08 FY09 FY10
enforcement of IPR protection laws has remained very weak to date; despite 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
the floods. 38 38
34
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
uncertainty and flooding would be the key defining factors. In addition, 13
7 6 5
reconstruction activities in the country would drain government funds and in
turn limit the expenditure on health. Espicom, an international pharmaceutical
analysis firm, expects the sector to grow at a fairly high single digit CAGR
FY06
FY02

FY03

FY04

FY05

FY07

FY08

FY09

FY10

during next five years. However, it will remain one of the smallest
pharmaceutical markets in the Asia Pacific region in terms of size during the 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

 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
Strengths and
 The pharmaceutical industry is capable of producing a vast range of medicines (125 categories
Opportunities
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
Weaknesses and Threats
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
Credit Strategy
market should remain our priority within the sector.

January 27, 2011 19

Jan
Treasury Group

Ahmed Ateeq
Head of Treasury
(+92-21) 5361370-3
[email protected]

Haider Hussain
Unit Head, Research
(+92-21) 35361215-9 Ext. 141
[email protected]

Zubair Humayun
Analyst
(+92-21) 35361215-9 Ext. 150
[email protected]

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