URL: www.we.com.pk

November 2009

Textile Sector

Company Update

AZGARD NINE LIMITEDDIVERSIFIED FAST GROWING

CONGLOMERATE

Company Update

Investment Highlights

Textile segment top line to cross Rs12.65bn

The net sales of the company is expected to surge by 25% to Rs11.36 bil-lion in CY11 as compared to Rs10.11 billion in CY08, the impressiveupsurge in expected net sales was due to favorable Rupee dollar paritywhich helped the company to exploit export markets. However owing to ris-ing cotton prices, increasing fuel cost and higher wage rate cost of goodssold is expected to increase by 45% to stand at Rs9.65 billion in CY11.

DuPont Analysis

CY07A CY08A CY09E CY10F CY11F

Net Profit Margin (%) 16.3 8.9 4.4 5.5 7.4Asset Turn over (x) 0.280 0.369 0.42 0.46 0.49Leverage Ratio (x) 2.43 2.70 2.54 2.36 2.17Return on Equity (%) 11.1 8.9 4.8 6.0 7.9Source: We Research & Company Reports

We have done a DuPont analysis to calculate each component in calculat-ing return on equity (ROE). The ROE which are expected to stand at 8.9%in CY08 are expected to decline to 7.4% in CY11 due to shrink in net profitmargin. Asset turnover is expected to almost remain same, however weassume the leverage ratio to decline as equity is expected to increase whichhas resulted in decline in debt to equity ratio.

Investment in Farital AB

In CY08, ANL acquired 100% ownership in Montebello SRL, owner of anItalian fabric and jeans brand, through Farital AB, and holding companyincorporated in Sweden for a total consideration of Euro 23.75 million.Within that year the company has winded up in Azsoft private limited. Theloss of closure of this company is already incorporated in CY08 incomestatement.

BMRE Plan increase urea market share upto 12%

Currently the urea plant of Pak American Fertilizers is going through BMREand as a result the urea capacity is expected to increase by 35%. The BMREprocess is expected to be completed in 1QCY10. The present urea marketshare of ANL is 7% which is expected to increase to around 12% after thecompletion of BMRE and production capacity of urea increased from 376Ktonnes to 483K tonnes. As a result the bottom line is expected to be understress because of high depreciation and financial charges in the initial years.

Relative Valuation

CY09E CY10F CY11F

P/E multiple (x) 5.10 4.52 4.01P/B multiple (x) 0.73 0.63 0.54P/S multiple (x) 0.41 0.37 0.36EV/ EBIDTA (x) 5.87 5.85 5.56Source: We Research

ANL is not anly attractive in terms of discounted cash flow model but is alsoattractive in relative valuation method. ANL is currently trading at leading P/Emultiple of 5.10x at CY09 earning. The firm is also trading at attractive priceto book value of 0.73x.

KEY DATA

KATS Code ANLReuters Code ANL.KACurrent Price (Rs) 20.82CY09 High, Low (Rs) 39.7, 10.35 CY09 average volume (mn) 3.61Beta 1.20Source: KSE, Reuters & WE Research

Source: We Research & Company Reports

Company Update

Table of Contents

VALUATION---------------------------------------------------------------------------------------------------------------------------------------------4

TEXTILE BUSINESS----------------------------------------------------------------------------------------------------------------------------6

INDUSTRY ANALYSIS------------------------------------------------------------------------------------------------------------------------7

COMPANY ANALYSIS------------------------------------------------------------------------------------------------------------------------9

FERTILIZER SEGMENT-----------------------------------------------------------------------------------------------------------------11

UREA DEMAND & SUPPLY---------------------------------------------------------------------------------------------------------13

SECTOR DEMAND DRIVERS-----------------------------------------------------------------------------------------------------16

RISKS TO VALUATION-------------------------------------------------------------------------------------------------------------------16

FINANCIALS-----------------------------------------------------------------------------------------------------------------------------------------17

Company Update

The Dec09 target price of ANL (consoli-dated) is Rs36.94 per share, offering anupside potential of 39%.

ANL is not anly attractive in terms of dis-counted cash flow model but is alsoattractive in relative valuation method

Valuation

For valuation of ANL (consolidated) we have used free cash flow to firm dueto high leverage. We used 10 year PIB as a risk free rate. Adjusted beta forANL is calculated to be 1.20 and risk premium is assumed at 6.00% whichwe believe is adequate for our capital markets. The Dec09 target price ofANL (consolidated) is Rs36.94 per share, offering an upside potential of39%.

(Rs in million) CY09E CY10F CY11F

Net Income 1,903 2,165 2,433 Depreciation 1,020 1,057 1,200 Interest (1-tax rate) 2,729 2,473 2,371 Working capital requirement 648 (350) (1,137)Capital Expenditure 1,100 4,200 1,000 Free Cash Flow to firm 3,903 1,845 6,140 Discounted Free cash flow to firm 3,903 1,582 4,511 Terminal Value 46,252 Discounted Terminal Value 33,977 Enterprise Value 43,972 Cash 429 Debt 27,601 Free Cash flow to Equity 16,800 FCFE value per share (Rs) 36.94Source: We Research

Sensitivity Analysis (Discount Rate)

We have done a sensitivity analysis in which we have evaluated the impacton discount rate & growth rate on ANL fair value. The firm is quite sensitiveto WACC as probability to see sharp decline in discounted rate is expectedin upcoming monetary policy, which ultimately will put positive impact onANL valuation.

WACC (%)

Growth Rate (%) 19.0 18.0 16.7 16.0 15.0

1.0 14.43 18.69 25.21 28.94 35.17 2.0 18.10 22.86 30.19 34.43 41.56 3.0 22.23 27.58 36.94 40.76 49.01 4.0 26.91 32.97 42.53 48.15 57.82 5.0 32.26 39.20 50.28 56.88 68.39 Source: We Research

Relative Valuation

CY09E CY10F CY11F

P/E multiple (x) 5.10 4.52 4.01P/B multiple (x) 0.73 0.63 0.54P/S multiple (x) 0.41 0.37 0.36EV/ EBIDTA (x) 5.87 5.85 5.56Source: We Research

ANL is not anly attractive in terms of discounted cash flow model but is alsoattractive in relative valuation method. ANL is currently trading at leading P/Emultiple of 5.10x at CY09 earning. The firm is also trading at attractive priceto book value of 0.73x.

4

Company Update

PAFL manufacturing capacity of ureaplant is 346.5k tonnes while that of SSP is7.2k tonnes and the company sells itsproducts under the brand name "Tara"

Introduction

Azgard Nine is a vertically integrated specialised textile company in Pakistanthat manufactures specialised yarn, denim fabric and fabric garments. Inaddition to textile business the company also involve in fertilizer and soft-ware business. Azgard Nine acquired Pak American Fertilizer having a pro-duction capacity of 346,500 tonnes/ year of prilled Urea and 198,000 Mtonnes of Ammonia, later on Pak American also acquired HazaraPhosphate. Now, Pak American fertilizer is able to sell both urea and SSP(Single Super Phosphate) fertilizers. The manufacturing capacity of ureaplant is 346.5k tonnes while that of SSP is 7.2k tonnes and the companysells its products under the brand name "Tara". For SSP production the rockis imported from the Northern African countries.

5

Azgard Nine Pakistan’s largest denim

company

Overseas Acquisition

Value added branded

denim and jeans

Hazara Phosphate

Fertilizer

Single super Phosphate

manufacturing plant

Pak American Fertilizer

Urea manufacturing

plant

Company Update

The decline in bottom line was due tosharp increase in finance cost & increasein cost of doing business which resultedin net profit margin shrink by 251 bps tostand at 2.75% in 9MCY09 as comparedto 5.26% in 9MCY08.

Source: We Research & Company Reports

Textile Business

9MCY09 Review (stand alone)

Rs in Million 9MCY09A 9MCY08A % Chg

Sales 8,639 7,684 12.4Cost of Sales 5,953 5,126 16.1Gross Profit 2,686 2,558 5.0Administrative & Selling expense 525 448 17.2Net Other Operating Income / Expense 9.3 12.5 -25.6Operating Activities 2,152 2,098 2.6Finance Cost 1,827 1,616 13.1Profit before Taxation 325 482 -32.7Taxation 87 78 11.4Profit after Taxation 238 404 -41.2EPS 0.46 0.91 -Source: We Research & Company Reports

Bottom line plunge by 41%

Azgard Nine limited shown a phenomenal decline of 41.2% in its bottom lineas company posted profit after taxation of Rs238 million (EPS: 0.46) in9MCY09 as compared to Rs404 million in same period last year. The declinein bottom line was due to sharp increase in finance cost & increase in costof doing business which resulted in net profit margin shrink by 251 bps tostand at 2.75% in 9MCY09 as compared to 5.26% in 9MCY08.

Top line surge by 12%

Despite of significant decline, top line still surged by 12.4% to stand at Rs8,639 million as compared to Rs 7,684 million in corresponding period lastyear. The increase in top line sales was due to 27% currency depreciationin FY09, however at the same time cost of sales also increased by 16.1% tostand at Rs 5,953 million in 9MCY09 as compared to Rs 5,126 million insame period last year.

6

Company Update

Pakistan's export suffers from seriousstructural issues and one of the majorproblems is textile machinery thesemachines are power intensive, less pro-ductive and carry higher maintenancecost. The other problem is that Pakistanlabors are less productive becauseexporters spend little money on researchand development.

The government announced it's first-evertextile policy with textile export target ofUS$25 billion for five years.

Industry Analysis

Textile Industry- A synopsis

Pakistan textile export being the largest contributor to the local export of thecountry, is vital and the most important sector of the economy. This sectorplays a vital role in growth of the country's economy. However, Pakistan tex-tile performance is declining day by day and the reason for less than satis-factory export performance of textile manufacturers can be attributed to avariety of factors. Firstly, it appears that Pakistan's textile exporters could notcompete with its traditional competitors. Secondly, the discriminating andtied-dumping duty of 5.8 per cent on the bed linen export also affectedPakistan's competitiveness. Thirdly, poor quality of cotton on account of con-taminated cotton issue has also adversely affected the export of spinningindustry. Fourthly, the rise in prima cotton price (a genetically modified ver-sion) which is imported from the US is a critical input for producing higherquality bed wear and fabrics, which made these items less competitive in theinternational market. Pakistan's export suffers from serious structural issuesand one of the major problems is textile machinery these machines arepower intensive, less productive and carry higher maintenance cost. Theother problem is that Pakistan labors are less productive because exportersspend little money on research and development. Pakistan's competitorsare investing heavily and creating better economies of scale. The govern-ment is continuously trying to coupe with the situation by offering manyincentives to the troubled textile industry. These incentives, somehow, willhelp them to compete in international market.

Cotton prices started to recover

International cotton prices descend by 32% last year, due to global financialcrises, tightening lines of credit, slowing global economy and reduced con-sumer spending on textile, clothing and other fiber-based products. Bytouching at low at 39.23 cents a pound it started to recover back and standsat 70.89 cents a pound as global economies start to recover.

Textile policy

The government announced it's first-ever textile policy with textile export tar-get of US$25 billion for five years. To achieve the targets Textile InvestmentSupport Fund of Rs40 billion had already been announced in the BudgetFY10, of which 67 per cent is expected to be utilised for textile and clothingindustry for consolidation and value addition of the sector. The governmentis also focusing to built textile and garment cities, training institutes forhuman resource development to produce value added products. Despite ofthat Pakistan is the fourth largest producer of cotton but is ranked 12th inglobal textile exports. Pakistan is no more known for its premium quality cot-ton and cotton products as value conscious competitors have edged us outin international market.

7

Company Update

8

Porter Five Model

Barriers of Entry

In textile industry, threat of entry is not sohigh but moderate. Although in textileindustry it is not easy to set barriers toentries because of perfect competition

and low concentration ratio.

Threat of Substitutes

In textile industry, threat of substitute canbe explained with respect to different

products & overall threat of substitutes islower.

Buyer Power

In textile industry, buyer power is on thelower side because there are many buy-

ers in the industry. Buyers are usuallyprice takers as textile products prices are

set by demand and supply. There is aperfect monopolistic competition in which

the companies can set textile productprices with its own quality product.

Products are also not standardised sothat buyers can not have any access to

set the price.

Supplier Power

In textile industry, the number of suppli-ers are on the higher side and availabilityof products and raw materials is high as

well; the supply is very much elastic.

Degree of Rivalry

In textile industry, competition is veryhigh that's why concentration ratio is too

low. Low concentration ratio indicatesthat low market shares are held by the

four largest firms in an industry.Competition in an industry is perfectly

elastic and barriers to entry are very low.There are many rivals in an industry butsome specific companies have an oppor-

tunity to get advantage over others bycompetitive moves (for e.g. NML, ANL

etc)

i i

h h

Company Update

The net sales of the company is expectedto surge by 25% from Rs11.36 billion inCY11 as compared to Rs10.11 billion inCY08, the impressive upsurge in expect-ed net sales was due to favorable Rupeedollar parity which helped the company toexploit export markets.

ANL also has both short term and longterm loans however if we analyze the longterm financing, ANL has foreign currencybased loans which is really affected fromdepreciated US-Rupee parity.

ROE which are expected to stand at 8.9%in CY08 are expected to decline to 7.4%in CY11 due to shrink in net profit margin.

ANL acquired 100% ownership inMontebello SRL, owner of an Italian fab-ric and jeans brand, through Farital AB,and holding company incorporated inSweden for a total consideration of Euro23.75 million

Company Analysis

Textile segment top line to cross Rs12.65bn

The net sales of the company is expected to surge by 25% to Rs11.36 bil-lion in CY11 as compared to Rs10.11 billion in CY08, the impressiveupsurge in expected net sales was due to favorable Rupee dollar paritywhich helped the company to exploit export markets. However owing to ris-ing cotton prices, increasing fuel cost and higher wage rate cost of goodssold is expected to increase by 45% to stand at Rs9.65 billion in CY11.

Rising Financial cost

Textile sector normally come under the leverage sector as it is really affect-ed from rising interest rate scenario and currency depreciation as the com-panies found itself uncompetitive in export front due to increase in cost ofdoing business. ANL also has both short term and long term loans howeverif we analyze the long term financing, ANL has foreign currency based loanswhich is really affected from depreciated US-Rupee parity. ANL has alsoincreased their leverage in short term due to increase in working capitalrequirement. In upcoming months we assume that interest rate is likely toease and currency can remain stable which can benefit the bottom line ofthe company.

DuPont Analysis

CY07A CY08A CY09E CY10F CY11F

Net Profit Margin (%) 16.3 8.9 4.4 5.5 7.4Asset Turn over (x) 0.280 0.369 0.42 0.46 0.49Leverage Ratio (x) 2.43 2.70 2.54 2.36 2.17Return on Equity (%) 11.1 8.9 4.8 6.0 7.9Source: We Research & Company Reports

We have done a DuPont analysis to calculate each component in calculat-ing return on equity (ROE). The ROE which are expected to stand at 8.9%in CY08 are expected to decline to 7.4% in CY11 due to shrink in net profitmargin. Asset turnover is expected to almost remain same, however weassume the leverage ratio to decline as equity is expected to increase whichhas resulted in decline in debt to equity ratio.

Investment in Farital AB

In CY08, ANL acquired 100% ownership in Montebello SRL, owner of anItalian fabric and jeans brand, through Farital AB, and holding companyincorporated in Sweden for a total consideration of Euro 23.75 million.Within that year the company has winded up in Azsoft private limited. Theloss of closure of this company is already incorporated in CY08 incomestatement.

9

Company Update

Source: We Research & Company Reports

Source: We Research & Company Reports

Income Statement CY07A CY08A CY09E CY10F CY11F

Sales 6,629 10,114 11,363 11,936 12,657Cost of Sales 4,621 6,660 8,710 9,085 9,656Gross Profit 2,008 3,453 2,654 2,851 3,001Administrative & Selling Expense 435 604 759 763 803Operating Profit 1,573 2,850 1,895 2,088 2,198Other Income 641 620 575 586 598Finance cost 1,062 2,470 1,920 1,952 1,771Profit before taxation 1,152 1,000 552 723 1,026Provision for taxation 72 102 47 62.0 88.0Profit after taxation 1,080 897 505 661 938Payment to preferred share holder 59 59 59 59 59Profit remained for share holder 1,021 838 445 602 879EPS (Basic) 3.26 2.65 1.41 1.90 2.78EPS (Diluted) 3.25 2.65 1.41 1.90 2.78Source: We Research & Company Reports

10

Company Update

Pak American Fertilizer Limited (PAFL)registered growth of more than 69% inbottom line as company posted profit aftertax of Rs 1,156 million in 9MCY09 ascompared to Rs681 million in the sameperiod last year, contributing 83% to con-solidated profit of ANL.

Profitability Ratio CY07A CY08A CY09E CY10F CY11F

Gross Profit Margin (%) 30.3 34.1 23.4 23.9 23.7Operating Profit Margin (%) 23.7 28.2 16.7 17.5 17.4Net Profit Margin (%) 16.3 8.9 4.4 5.5 7.4Return On Equity (%) 11.1 8.9 4.8 6.0 7.9Return On Assets (%) 4.57 3.28 1.9 2.5 3.6Source: We Research & Company Reports

Fertilizer Segment

Azgard Nine Limited (disinvest upto 24.99% in PAFL)

Azgard Nine Limited (ANL) in the meeting held on July 10, 2009 decidedthat it should explore the possibility of disinvesting upto 24.99% of its shareholding in Pak American Fertilizer limited (the wholly subsidiary of Azgardnine limited) through the combination of private placement and initial publicoffering at domestic stock exchange. Pak American Fertilizer limited (PAFL)is located at Iskanderabad (Daud Khel), district Mianwali. The principal busi-ness of the company is the production and sale of urea fertilizer.

Fertilizer segment-substituting the textile segment downfall

Rs in Million 9MCY09A 9MCY08A % Chg

Sales 8,891 5,384 65.1Cost of Sales 5,063 3,174 59.5Gross Profit 3,828 2,210 73.2Administrative & Selling Expense 802 338 137.2Net Other Operating Income / Expense 67.0 36.0 87.0Operating Activities 2,959 1,933 53.1Finance Cost 1,770 1,162 52.4Profit before Taxation 1,189 771 54.2Taxation 33 90 -63.3Profit after Taxation 1,156 681 69.7Source: We Research & Company Reports

Top line surge by 65%

Pak American Fertilizer Limited (PAFL) registered growth of more than 69%in bottom line as company posted profit after tax of Rs 1,156 million in9MCY09 as compared to Rs681 million in the same period last year, con-tributing 83% to consolidated profit of ANL. The growth in bottom line wasdue to top line sale which surged by 65% as fertilizer segment stood at Rs8,891 million in 9MCY09 as compared to Rs 5,384 million in same periodlast year. PAFL produced urea during the period which was 280K tonneswhile it sold 264K tonnes in same period leaving inventory balance to 19.4Ktonnes.

Gross profit to stand at Rs 3,828 million

Gross profit of fertilizer business stood at Rs 3,828 million in 9MCY09 ascompared to Rs 2,210 million in same period last year, with an increase ingross profit margin by 201 bps to 43.1% as compared to 41.1% in same peri-od last year. The surge of gross profit margin was due to increase in ureaprices as well as increase in production number. Finance cost alsoincreased by 52% in 9MCY09 to Rs 1,770 million as compared to Rs 1,162million due to increase in working capital requirement and currency depreci-

11

Company Update

Present urea market share of ANL is 7%which is expected to increase to around12% after the completion of BMRE andproduction capacity of urea increased

from 376K tonnes to 483K tonnes.

The feed gas tariff raise announced bythe GoP at the start of July-09 would nothave any impact on urea manufacturingof the company in the short term sincethe company is being provided gas at asubsidized tariff of Rs36.77/mmbtu. Thissubsidized tariff is expected to continue

till November-09

ation affecting foreign currency loan servicing.

BMRE Plan increase urea market share upto 12%

Currently the urea plant of Pak American Fertilizers is going through BMREand as a result the urea capacity is expected to increase by 35%. The BMREprocess is expected to be completed in 1QCY10. The present urea marketshare of ANL is 7% which is expected to increase to around 12% after thecompletion of BMRE and production capacity of urea increased from 376Ktonnes to 483K tonnes. As a result the bottom line is expected to be understress because of high depreciation and financial charges in the initial years.

('000 tonnes) 2009 2008 2007

Urea 483 376 377SSP 7.6 7.6 N/ASource: Annual Report

Source: We Research & Company Reports

Subsidized gas end at Nov09

The feed gas tariff raise announced by the GoP at the start of July-09 wouldnot have any impact on urea manufacturing of the company in the short termsince the company is being provided gas at a subsidized tariff ofRs36.77/mmbtu. This subsidized tariff is expected to continue till November-09. Furthermore fuel gas tariff has been also reduced by the GoP which isexpected to reduce cost of production. This coupled with higher urea pricesbodes well for the profitability of the company. After the expiration of subsi-dized tariff the margins are expected to decline however higher urea salesvolume is expected to counter that impact.

Management point of view

In PAFL, the gas has been provided by Sui northern gas pipeline companyand according to media report SNGP has decided not to provide gas in win-ter season. According to management point of view the company is goingtowards the annual maintenance in January09 so it didn't really affected theprofit and loss account of CY09.

Phosphates Demand & Supply

In the current year demand of Phosphates has increased considerably thanCY08 due to low prices. The prices have fallen sharply due to decliningdemand in rest of the world which has led to decline in both raw material and

12

Company Update

Urea demand remained robust so muchso that it has led the GoP to import urea

finished goods prices e.g. India has recently been awarded contract price ofphosphoric acid at $530/tonne. This is expected to lead to stable Phosphateproduct prices. As a result the sales of Phosphates are expected to contin-ue to depict this trend.

Source: We Research & Company Reports

Urea Demand & Supply

In the present year thus far urea and phosphate sale has increased fromCY08. Urea demand remained robust so much so that it has led the GoP toimport urea. As a result the agriculture sector also performed well in FY09depicting growth of 4.7% with major crops growing up by 7.7%. The focus ofGoP on agriculture sector bodes well for the fertilizer sector in the future aswell and as a result the sale of fertilizers is expected to be better. In 9MCY09production of Tara urea stood at 280k tonnes while that of Tara SSP hasstood at 78k tonnes. Urea sales occupies major share in total fertilizersales.

Source: We Research & Company Reports

13

Company Update

The phenomenal growth of 17% of urearevenue is expected due to increase in

production capacity because of increasein capacity.

Hazara phosphate expected to con-tribute 11.7% in CY09 to total fertilizer

revenue of Rs 11,791 million.

DAP (imported) revenue contributesalmost 53.7% of total fertilizer revenue in

CY08

"TARA"-building a brand

Pak American Fertilizer having a production capacity of 346K tonnes/ yearof prilled urea sell under the brand name "Tara" having a market share of 7%is expected to increase to around 12% after the BMRE is completed.Revenue from Urea is expected to surge by 3yr CAGR of 17% to touch atRs 7,083 million in CY11 as compared to Rs 4,407 million in CY08. The phe-nomenal growth of 17% of urea revenue is expected due to increase in pro-duction capacity because of increase in capacity.

CY08A CY09F CY10F CY11F

Production capacity (tonnes) 346,500 346,500 467,775 467,775 Produced (tonnes) 376,128 384,872 507,773 507,773 Capacity Utilization (%) 108.55 111.07 108.55 108.55 Off take (tonnes) 372,795 365,987 483,103 483,103 Revenue (Rs mn) 4,407 5,058 6,876 7,083 Source: We Estimates & Annual Report

Hazara Phosphate to contribute 11.7% in total Fertilizer Revenue

Pak American also acquired Hazara Phosphate, which produced SingleSuper Phosphate (SSP) fertilizers. The manufacturing capacity of SSP plantis 7.2k tonnes, however it produced 107K in CY08 having a capacity utilisa-tion of 140%. According to We estimates, Hazara phosphate expected tocontribute 11.7% in CY09 to total fertilizer revenue of Rs 11,791 million.

PAFL to benefit from high Phosphate demand

PAFL is in trading business of fertilizer. In CY08, the company imported 93ktonnes of DAP as compared to sales of 89k tonnes in CY08. The DAPimports are likely to continue in CY09 as the country's local productioncapacity is able to meet only 40-45% of the total requirement. The DAP(imported) revenue contributes almost 53.7% of total fertilizer revenue inCY08.

Fertilizer Business Revenue (Rs mn) CY08A CY09F CY10F CY11F

Urea Business Revenue (core) 4,407 5,058 6,876 7,083SSP Revenue (Core) 0.00 1,376 1,383 1,390Total Core Business Revenue (mn) 4,407 6,434 8,260 8,473

DAP Business Revenue (imported ) 5269.8 2780 2893 3037MAP Business Revenue (imported) 61.8 77.7 - -Urea Business Revenue (imported) 81.4 - - -Other Imported Revenue - 2,500 2,300 2,200Total Imported Business Revenue 5,413 5,358 5,193 5,237

Total Fertilizer Revenue 9,820 11,792 13,452 13,710

Source: We Estimates & Annual Report

Source: We Research & Company Reports

14

Company Update

The fertilizer use in Kharif is over. Theprovisional cumulative nutrient off takeduring Kharif 2009 (April- September)

was about 2,193K nutrient tonnes, whichrepresented an increase of 46% over thesame timeframe of the last year. Of this,

nitrogen off take was 1,684K tonnes,phosphate about 500K tonnes and

potash only 8K tonnes.

The urea supply is expected to exceeddemand from CY10 onwards since theproduction of Engro's new plant andFatima fertiliser would be online. Thecapacities are expected to increase to

6.18 million tonnes in CY10 from currentcapacity of 4.7 million tonnes.

Kharif off take posted a growth of 46%

The fertilizer use in Kharif is over. The provisional cumulative nutrient offtake during Kharif 2009 (April- September) was about 2,193K nutrienttonnes, which represented an increase of 46% over the same timeframe ofthe last year. Of this, nitrogen off take was 1,684K tonnes, phosphate about500K tonnes and potash only 8K tonnes.

NFDC data also showed that urea and DAP off take during Kharif 2009 was3,096K tonnes (18% over Kharif 2008) and 906K tonnes (358% over Kharif2008), respectively. Extra ordinary high off take of DAP as compared to pre-vious Kharif due to higher prices of DAP in previous year.

NP ratio dramatically improves

In Kharif09 the NP ratio stood at 3.4x as compared to 8.4x in Kharif 08. InKharif 09 higher off take of DAP fertilizer enabled a better NP ratio whichalso led to better crop yields, the recommended NP ratio being 2x. The DAPoff take in Kharif09 was higher due to lower DAP prices. Historically farmershave been using more urea because of its lower prices and easy availabili-ty which are leading to declining yields. The potash usage however declinedby 48% to 8.0k tonnes in Kharif FY09.

Expansions Inevitable

The urea supply is expected to exceed demand from CY10 onwards sincethe production of Engro's new plant and Fatima fertiliser would be online.The capacities are expected to increase to 6.18 million tonnes in CY10 fromcurrent capacity of 4.7 million tonnes. The demand supply gap is likely tocontinue as far as the DAP fertilizer is concerned. Of the total urea require-ment in the country, 70% is being met through local production while 30% isbeing imported. The GoP has been providing subsidy on urea fertilizer bothon imported and locally produced. In the imported urea's case the GoP isabsorbing the price differential between international and local price and inthe locally manufactured the subsidy is in form of low gas tariffs.

Fertilizer segment revenue surge by 69.2% in CY08

Rs in million CY08 CY07 % change

Revenue 9,608 5,678 69.2Operating Profit 2,735 2,156 26.9Operating Profit Margin (%) 28.5 38.0 -Other Income-net 627 295 112.6Finance Cost 2,157 1,086 98.7Profit before taxation 1,205 1,365 -11.7Provision for taxation 130 391 -66.8Profit after Taxation 1,075 974 10.4Net Profit Margin (%) 11.2 17.2 -Source: WE Research & Annual Report

The current revenue of fertilizer business in CY08 was Rs9.60 billion ascompared to Rs5.67 billion in CY07, an increase of 69.2% in top line. Theoperating profit margin surged by 2.73 billion as compared to Rs2.15 billion,raise of 27% YoY, however operating profit margin descent by 950bps. Themajor hike has been seen in other income as it hikes by 112.6% to Rs627million in CY08.On the flip side, the finance cost also increased by 98% to Rs2.15 billion inCY08, finally company showed a profit after taxation of Rs1.07 billion inCY08 as compared to Rs0.97 billion in CY07, an increase of 10.4%.

15

Company Update

In order to motivate the farmers to growmore wheat the GoP has raised the

wheat support price from aroundRs625/maund to Rs950/maund. This has

had a positive impact on the farmersalready and the sowing of wheat inSindh and Punjab has increased.

Sector Demand Drivers

Low yields hurting agriculture growth

The cereal crops are the main demand drivers of fertilizers in Pakistan. Thefertilizer demand is high in Pakistan because of agrarian nature of economy.The yield of major crops in Pakistan is low as compared to rest of the world.As a result of declined productivity, Pakistan has been facing shortage ofessential commodities and the food inflation surged to record levels in CY07which continued in CY08 as well. In order to increase yields, the GoP hasbeen emphasizing the balanced use of fertilizers. The lack of balanced fer-tilizer usage is because of lack of application of important farm practiceswhich in turn is due to lack of agriculture knowledge. Historically, the farm-ers had been using more urea fertilizer as compared to other non nitroge-nous fertilizers and the NP ratio has been high.

Farmer's Income

In order to motivate the farmers to grow more wheat the GoP has raised thewheat support price from around Rs625/maund to Rs950/maund. This hashad a positive impact on the farmers already and the sowing of wheat inSindh and Punjab has increased. There has been high rice and cotton pro-duction, better in the current year. Moreover the wheat target has been esti-mated at 25 million tonnes which is expected to be achieved given that theDAP (essential for wheat crop) subsidy and wheat support price has beenincreased. Though there are concerns regarding water availability. Theseare the reasons that are expected to boost the farmer's income and furtherboost the agriculture growth.

Farm Credit up by 5.74% YoY in 2MFY10

Credit disbursement figures show that the disbursement to agriculture sec-tor has increased by 5.74% YoY reaching Rs30.40 billion in first 2MFY10.The State Bank of Pakistan has set the credit disbursement target for agri-culture sector at Rs260 billion for the year FY09.

Risk to forecast

" Below Par Agriculture GrowthIn case there is water shortage the fertilizer off take can decline because ofrevision of growth targets.

" Interest Rate riskMost of the companies are leveraged because of both long term and shortterm financing. The long term financing is availed because of BMRE activi-ties while the short term is used for working capital requirements. The risingdiscount rates and currency depreciation are worrisome for the company ingeneral because they lead to high financial charges.

" Delay in ProjectsThere could be delay in the projects the company is undertaking in joint ven-tures and subsidiaries.

" Gas shortageWe would have to revise our forecast based on any policy change in gaspricing, subsidy or price mechanism.

16

Company Update

Financials (Consolidated)

Income Statement

Rs in million (consolidated) CY06A CY07A CY08A CY09E CY10F CY11F

Sales 6,505 12,309 19,737 23,155 25,388 26,367

Cost of Sales 4,612 7,734 13,062 17,176 19,388 20,107

Gross Profit 1,893 4,575 6,676 5,979 6,000 6,260

Administrative & Selling Expense 554 842 1,089 1,386 1,434 1,522

Operating Profit 1,339 3,733 5,587 4,593 4,566 4,738

Other Income 72 336 370 609 622 636

Excess of fair value of subsidiary's net assets 290 - - -

Finance Cost 1,187 2,152 4,617 3,091 2,805 2,690

Profit before Taxation 214 1,917 1,629 2,111 2,383 2,683

Provision for Taxation 58 463 232 253 286 322

Profit after Taxation 156 1,454 1,397 1,858 2,097 2,361

EPS (Diluted) - 4.40 4.22 4.09 4.61 5.19

Source: WE Research & Annual Report

Balance Sheet

Rs in million (consolidated) CY06A CY07A CY08A CY09E CY10F CY11F

Total Equity 7,952 9,329 9,759 13,000 15,097 17,458

Total Long term Liabilities 12,702 15,253 19,209 18,045 14,352 11,445

Total Current Liabilities 9,934 8,875 16,234 15,520 15,281 15,973

Total Equity & Liabilities 30,847 33,696 45,761 47,120 45,281 45,423

Total Non Current Assets 23,818 24,289 31,368 31,318 30,752 29,644

Total Current Assets 7,029 9,407 14,393 15,802 14,529 15,779

Total Assets 30,847 33,696 45,761 47,120 45,281 45,423

Source: WE Research & Annual Report

Ratio

CY06A CY07A CY08A CY09E CY10F CY11F

Gross profit margin (%) 29.1 37.2 33.8 25.8 23.6 23.7

Operating Profit margin (%) 20.6 30.3 28.3 19.8 18.0 18.0

Net Profit margin (%) 2.4 11.8 7.1 8.0 8.3 9.0

Return on Equity (%) 1.96 15.59 14.32 14.29 13.89 13.5

Return on Assets (%) 0.50 4.32 3.05 3.94 4.63 5.20

Source: WE Research & Annual Report

17

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rate and reliable at the time of publishing. However, we do not accept any responsibility for its accuracy & completeness and

it is not intended to be an offer or a solicitation to buy or sell any securities. WE Financial Services & its employees will not

be responsible for the consequence of reliance upon any opinion or statement herein or for any omission. All opinions and esti-

mates contained herein constitute our judgment as of the date mentioned in the report and are subject to change without notice.

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