Financial market,

institutions &
instruments
PROJECT REPORT 1

Hamza Javed & Sami Ahmed

 Report phase 1

 Fundamental analysis:
 We have used top down approach.

 Current economic condition.

There are high chances of global recession as from the start of 2020 economist were predicting
the movements of share prices and long term bonds. Yield for long term bonds have been
constantly falling which is an early sign of recession.
  Global oil prices
In the month of March Kingdom of Saudi Arabia initiated a price war with Russia. Due to the
corona virus pandemic there was a decreasing demand for oil, OPEC & Russia could come to a
decision to reduce production. By the low demand of oil the prices fall in US by 34% and could
drop 17 years lowest price.

 Corona virus pandemic

Last year in December china alerted WHO of a pneumonia that has effected Wuhan city. World
Health Organization (WHO) has declared a pandemic over a new coronavirus which causes an
illness known as COVID-19 that has spread to at least 170 countries and territories. The disease
has killed more than 31,000 people and infected some 678,000. UNCTAD expect that corona
virus has estimate cause loss of $ 1 Trillian to the global economy. Nearly 3.3 million American’s
has claimed to lost their jobs till 21 march 2020. Stock prices in all the stock exchanges have
been drastically decreasing. USA has decided to inject $ 2.2 Trillian dollar in the economy to
stop the economy from crash.

 Pakistan economy
Pakistan’s economy has been suffering from the start of this year due to bad macroeconomic
policies by the government. The interest rate by SBP has been really high of 13.25 by which the
economy is not growing and small business have been suffering, more over the unemployment
has been 6% which is more than
expected. Economy have been
facing isolation from global
financial system because it
was placed in FATF grey list
.Pakistan has taken huge loans
from IMF by which they are
dictating our economic
policies, due to economic
tightening small & medium
businesses has suffered
hugely .The inflation has
been 12.3% which is really high
and have affected the price of consumer goods. In the past 6 months PSX have decreased from
44000 points to 27800 points which is the lowest in 6 years, and in the last month trading at
PSX has been halted around daily to stop the market from crashing. After the increase in cases
of corona virus it was expected that government has announced a relief package of RS 1.2
Trillian from which RS960 billion will be used to support industry while SBP has lowered the
interest rate to 11% which have given a negative impact on economy as billions of hot money
have been taken out in the time of crises.

 Pakistan’s sector assumptions

These are the sectors we think that will be safe and outperform in these uncertain time
of crises.

 Fertilizer sector
Pakistan is an agriculture country and government have always a soft corner for farmers
in Pakistan, so they heavily subsidies this sector and this sector always perform in
recession as agriculture farming is always needed. Pakistan’s fertilizer industry, having
the 7th largest production capacity in the world, stands at the crossroads to become
one of the biggest fertilizer exporters in the region in years to come. The industry has
witnessed a decline in its net earnings by 8% to 27.8 billion for the nine months ended
September 30, 2019 due to a hike in input prices which led to lower fertilizer offtake. 
This reflects the increase in the cost of production plus price adjustment after the
exchange rate depreciation. Fertilizer industry has been keenly in line with KS 100 and
will outperform in future as urea and fertilizer prices increase.
  Tobacco sector
Pakistan is second largest cigarette consumer in south Asia. It is a great source of revenue for
major players and for Pakistan economy. It gives the highest revenue to government in terms of
taxes. Pakistan Tobacco Company is dominated by two major players Pakistan Tobacco
Company and Philip Morris. However the consumption of cigarettes is more than the official
data mainly due to no record of smuggling and unregistered cigarettes manufacturers, the
companies have enough capacity but they do not utilize that capacity. Pakistan Tobacco
Company produced 40.5 billion sticks out of a capacity of 45.1 billion during 2010-2011. Philip
Morris produced 22.4 billion sticks from capacity of 50.1 billion during the same year. As the tax
base expands tobacco industry will be showing potential by sharing their true production, and
inflation won’t be effecting the sales of cigarettes in Pakistan.

 Pharmaceutical sector

At the time of independence in

1947, there were no
pharmaceutical firms in
Pakistan. Today, the country
boasts more than 700
pharmaceutical manufacturing
units. In terms of monetary
value, the size of the pharmaceutical industry in Pakistan is $3.10 billion (Rs. 325, 596 billion, as
per IMS). Given that the total size of the global pharmaceutical market is estimated to be over $
1 trillion, Pakistan is hardly 0.5 percent of the market. The sale of the pharmaceutical products
has seen a healthy growth over time. Between 2012 and 2017, for example, the Compounded
Annual Growth Rate (CAGR) has been estimated to be around 10 to 12 percent. In recessionary
period pharma industry is one of the industries that grow and their sales increase. Also due to
corona virus people have been buying medicines in bulk by which sales have increased.
  Food sector

Pakistan is home to the world’s sixth largest population with a growing middle class.
As of 2018, there are approximately 17 million middle class households and 102
million middle class individuals. The food and beverage processing industry is the 2nd
largest industry of Pakistan after textiles, accounting for 27% of the value-added
production and 16% of employment in the manufacturing sector. Food processing
accounted for an annual average of $223.5m in FDI from 2012-2018.The three major
industry groups are frozen food, value addition in major food crops and fruits,
vegetables and intermediate products Pakistan was awarded the Generalized Scheme of
Preferences (GSP) Plus Status (Zero to Low Duty) by the European Union in 2014 which
has the potential to greatly uplift the exports of processed food products. In difficult
times government is ensuring that food supplies in the country and in recessionary
period food stocks won’t be effected so much.

 Technical analysis:
We focus on economy and on-going Covid-19 virus simultaneously. We also kept in view of
government policies and there impacts from last 2 years. Like KIBORE rate being 13.25 though it
has now decline by only some basis because of an economy hit by Corona, and government
decisions Like development budget has been cut and we haven’t seen a major project initiated
by government as they tend to present that we don’t have funds. By this our construction
industries have faces billions of losses. We have analyzed the share prices and volumes of each
day to have an idea weather company is worth risking for or not. We have shortlisted 75
companies from 12 to 13 sectors. We didn’t even look up to automobile industry as they have
been in losses because of low demand. We even not try to look up to Banks, Investment banks
and insurance companies. As we consider these sectors are badly hit when recession took
place. We have studied and analyses. Cement, Chemicals, Engineering (Steels), Fertilizers, Food,
Glass & Ceramics, Oils & Gas Exploration and Marketing, Power Generations, Refinery and
Textile Composite. We also look some specific companies also apart from highlighting a sector.
We also check Murree Brewery, Pakistan Tobacco and Ghandara Industries. The basic approach
was to see their performances, financials, looking at historical share prices. We have seen the
highs and lows of all 75 companies having their averages. Than looking the data of 1 month, 6
month and 1 year, and lastly 5 years also. Well people think 5 years of highs and lows are
irrelevant. But in our view by looking at last 3 to 4 years when stock market was at its peak and
KSE100 averages were 50000, we can see the potential of companies’ stocks which gain the
highest capital gains. By this approach we know how company will perform in future when
markets start to stabilize. After that we shortlisted 20 companies out 75 and out 20 we choose
10 from which 5 are listed and 5 are our backup plan which is from cement steel and oil sector.
We are predicting that these sectors would be hit in recession period that’s why we stand with
basic fundamentals by choosing pharmaceuticals and fertilizers with food sector. It’s a difficult
job to predict where will market shift as there is a lot of uncertainty prevailing. We hope for the
best.
THE 5 Companies we have selected are:

Engro food GlaxoSmithKline Ferozesons Pakistan Engro

Healthcare Tobacco fertilizers.

1. Ferozesons
Ferozsons Laboratories Limited was established in 1956 as one of the first Pharmaceutical
manufacturing companies in Pakistan, and now it is entered in seventh decade of serving the
cause of health and well-being in Pakistan. It was the first pharmaceutical company to be listed
in stock exchange of Pakistan. It is now currently trading at 165. We have analyzed its historical
data to know the share price of Ferozesons monthly basis, semi-annual and annual basis to
know it’s high and low. We have also acknowledged the fact when 4 years back it was trading at
1250. So the potential of growth in this stock can’t be over seen. But we have to see the current
market dynamics and scenario that we are in a recessionary phase, due to any reasons but the
major one is of Covid-19 virus which has shaken the economies all over the world. That’s the
primary reason we are focusing on pharmaceutical sector. In this period people can’t ignore
health related industries.

EPS was highest in 2016 and then it tends to decline. But after 2018 we have seen a positive
growth in the company because of its demand. With one year from y18 till y19 EPS increase
with 5.16. And in 2020 with just 2Q now Ferozesons had an EPS of 5.90. Means the predictions
of EPS at the end of annual we would witness more than 10Rs.

2015 and 2016 were the years of Ferozesons as they were giving high dividends with high
payout ratio. Afterward it took a dip and then after 2018 we have seen a constant growth. In
this year it’s been expected that pharmaceutical companies would be stable despite of having
recession at this time.

2. GlaxoSmithKline Healthcare
It’s one of the biggest pharmaceuticals company in Pakistan which has the widest range of
products. You name it and they produce it. They have divided their products into three
categories, consumer health products, prescription medicines and vaccines and lastly stiefel
dermatology. Currently it’s trading at 198. From last 6 month it has touch it has lowest at 190
and highest at 300. We have noticed its consistent growth over last 5 years.

You may witness that its EPS is constantly rising from last few years. In 2020 growth may be
halted but it will tend to rise as markets start to recover.

After 2016 we have seen a phenomenal growth in this stock. Their price to sales and market
capitalization has been in a constant growth. From last 2 years Glaxo is issuing a dividend of
Rs5. Before that they weren’t issuing dividends. It’s expected to payout also in this financial
year.

Well there are others pharmaceutical companies which are also in high demand because of
their growth in recent years. We have decided to choose only 2 companies from this sector.
Highnoon, Abbot and Searle are the other well-known we have short listed. Highnoon have the
highest share price in this particular sector. After few weeks of trading we might shift to
Highnoon but after analyzing the market scenario. It is the only stock trading more than Rs500
3. Pakistan Tobacco
It is the biggest company to manufacture tobacco in Pakistan. It is subsidiary of British American
Tobacco. It incorporated right after independence of Pakistan in 1947. It is currently trading at
1655. In 1 month it reaches its high of 1920 and low of 1620. But if we see the historical data of
1 year its low as 1600 and high was 2700. We have selected this stock as a defensive approach.
We have analyse that Corona would make markets bearish. So to have minimum capital loss it’s
the best company to rely on. Though they don’t have significant competition but always tend to
increase market share.

If we just look at past 2 years we have seen a drastic increase in EPS of Pakistan Tobacco. From
40.46 to 50.45 in 2019 it’s an increase of 20%. Well in stock markets 20 to 25% rise is always
heavens for investors.

Dividends and Payout

ratios from last 3 years are
increasing rapidly, showing
the growth potential of this
company. Though
government taxes were
huge burden on this sector
but still they manage to
maintain their market
share and local demand.

4. Engro Foods (Frieslandcampina)

It was established in 2005 and since that within a decade Engro food have capture a huge
market share. They provide wide range of products which are highly in demand. Olper ,Omore
is some of their products. They tend to face a fierce competition in market with multi nationals
like Nestle and local company like Fauji foods. They have a stable share price which is currently
trading at 54.5.

Though we can clearly see that EPS

went down but it was not with this
specific company the whole sector
has faces its consequences. In Stock
market usually Engro faces
competition with Fauji foods in
terms of trading in this industry.
There is a reason behind this Fauji
having low share price attracts a
huge volume, while Engro having average price regarding this sector also enjoys investors liking.
We have seen for months and years that these two stocks are highly in demand.

This is the EPS of Fauji Foods. We won’t like to

take that much risk in this recessionary period.
That’s why we have selected Engro Foods. Fauji
is having continuously negative EPS, especially
in 2019 -10.96 is scary figure for any investor.

5. Engro Fertilizer
As we know how important is the fertilizer industry to our economy. It’s directly related to our
agriculture sector which is said to be backbone of our economy. There only 3 major companies
which have made their names in this sector. One of is Engro, other are Fauji fertilizer and Arif
Habib corporation. As per today their respective share prices are 57.66, 13.25 and 25.89. Well
Engro always faces a tough competition with Fauji, specifically not in this sector almost every
sector these two corporations always battle towards having highest volumes per day. Well
Engro always have this advantage of fewer share prices which attracts investors to trade and
could fulfil their greed of highest capital gain in less time. But this is a fact that no other
corporation is well established than Engro. We have selected this stock over Fauji because we
believe in long run results rather gamble in short term.

Engro EPS from last 2 years have been within 12 to 14 which indicate the good demand of its
shares in market. If we see its share prices from last 6 months to 1 year its highest was only 77
but interesting thing is that its lowest always been around 50 which in current scenario is in
50s. We predict that there would be buying in this company which will eventually raise its share
price.

Engro have been consistent

in giving dividends. The most
attractive part is that their
dividends always increase by
every year. That’s what an
investor wants from an
established organization.

Stocks Rupees
Fund: Rs 250,000
Engro Fertilizers Limited 50000
Retain: Rs 25000
Allotment: Rs 225,000 Ferozesons Laborities Ltd. 50000

Glaxo SmithKilne Healthcare 50000

Pak Ltd.
Pakistan Tobacco Co Ltd. 50000

Frieslandcampina Engro 25000

Pakistan Ltd.
Bibliography:
 PSX.Com
 Scstrade.com
 http://documents.worldbank.org/curated/en/498131560807146415/pdf/Pakis
tan-Overview-of-Tobacco-Use-Tobacco-Control-Legislation-and-Taxation.pdf
 https://mettisglobal.news/how-green-is-the-fertilizer-industry
 http://www.ppma.org.pk/wp-content/uploads/2017/09/Final-Report-Pharma-
Industry_August-10.pdf
 https://epaper.dawn.com/
 http://invest.pk/app/Stock?
stock=FCEPL&period=1m&symname=&_action_lookup=Lookup
 https://www.investopedia.com/