Portfolio Analysis by M.Yasir

8/9/2019 Portfolio Analysis by M.Yasir

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INVESTMENT AND PORTFOLIO MANAGEMENT

YEAR2010

PORTFOLIO ASSESSMENT


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ANALYSIS OF COMPANIES PORTFOLIO

PREPARED BY:

MUHAMMAD YASIR YAQOOB ROLL # 1400060HUMAIRA ZAHEER ROLL # 1400059TANZEELA AHSRAF ROLL # 1400058

FAIZA AMJAD ROLL # 1400092MEHR-UN-NISA ROLL # 1400074SOBIA KHALID ROLL # 1400076

In this report we have analyzed six sectors and made a portfolio of six companiesyielding a handsome return and also it is a well diversified portfolio.


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THE FERTILIZER SECTOR

Introduction

Pakistans Population Demographic secure demand dynamics:

Pakistan has a young population that is expected to grow at 2% per annum more rapid than theworld populating growth rate of 1.19%. Pakistan with relevance to its past remain a net foodimporter with an average of 10% of the total imports in FY03-09. given the rapid populationgrowth and limited reserves of good agriculture land, we can expect continued focus onagriculture as the population grows and the nation strives towards its aims of food selfsufficiency.

Fiscal policy makers increasing focus on agriculture:

While the agriculture sector accounted for 21% of GDP in FY08, down from almost 40% in2000s, its growth is critical from an employment perspective. Mostly peoples are divertingthemselves from agriculture to industrial sector for their jobs. The decline in percentagecontribution of the agro sector to GDP has been inversely proportional to the increase in themanufacturing and services base which is nevertheless heavily dependant on agriculturalcommodities such as cotton. However agriculture growth is heavily dependant on weatherpatterns, water and power supply.

Population growth compared to GDP growth in production of food crops

Agriculture growth versus GDP growth


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ECONOMIC ANALYSIS

Pakistan has made a phenomenal growth in fertilizer use development. It started with annual1,000 tonnes of Nitrogen, in 1952-53; the total fertilizer off take/consumption reached onemillion tonnes in 1980-81, two million tonnes in 1992-93 and crossed three million tonnes in

2002-03. The consumption in 2007-08 was 3.2 million tonnes.

Provincial crop areas and fertilizer deliveries (Estimated)Province Cropped

area (million

ha)

Percentof total

FertilizerDeliveries

(000 tonnes)

Percentof total

Punjab 16.1 72.8 2 063 68.3

Sindh 3.16 14.4 674 22.4

NWFP 2.01 9 204 6.7

Balochistan 0.85 3.8 77 2.6

Total 22.12 100 3 019 100

Market dynamics

Demand- supply situation:The fertilizer industry in Pakistan has an oligopolistic in structure. The product is differentiatedand there are 9 firms in the industry. The entry or exit of a single player can affect pricing. Thereis no single dominant industry leader. The four largest firms are deemed to be price setters.However, government regulations and subsidies to farmers prevent this firm from exploitingtheir market power to arrange price setting agreements.

Demand-supply Gap


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The current situations in the industry are one of excess demand. Currently, domestic supplycapacity is 5.8mntpa (million tons per annum) and demand is 6.8mntpa. Overall industrycapacity has shown much growth in their supply then demand in the recent decades. Given thesame pace, the situation is expected to reverse in the year 2010.

Market Players:The table below shows industry concentration measures. The 4 firms concentration ratio, whichis the sum of the market shares of the four largest producers, is 94.5%. The market is dominantby the four largest firms. Entry by a new firm is unlikely to significantly decrees concentration.The two market leaders are Fauji Fertilizer Company Ltd. and Engro Chemicals Pakistan Ltd.Both have market share more than 70%. So for investment prospective these both companies willbe taken in consideration in rest of this document.

INVESTMENT CONSIDERATION

Fundamental support to fertilizer consumption:

Fertilizer demand and profitability is expected to remain strong in FY09 and beyond. The need toincrease food production to meet the requirements of is large and fast growing population;limited land, water and power measures and rising per capita incomes provide incentives forhigher yields and increasing crop production. The emphasis is given to policymakers on longterm food security. We are overweighting on the fertilizer sector with FFC and ENGRO beingthe top leaders.

Profitability

Firms concentration


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Fertilizer manufacturers saw a rise in operating profits in Yr. 08 with a steep and unprecedentedrise in urea and DAP sales price per bag. However, in upcoming years we expect operatingprofits to rise.

Operating Profit Growth

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

FFC 10% 7% 12% -1% 42% 17% 7% -15% -17% -22%ENGRO 12% 19% 18% 4% 61% -5% -10% 87% 72% 6%FFBL 25% 36% 42% -1% 1% 92% 36% 9% 9% 10%

From 2010 ENGRO will take the lead based on expansion of its urea and other subsidiaries andits operating profit will soar. FFCs operations are not expected to grow much in future afterindustry faces excess supply as its market share is expected decline. It will derive more profitsfrom non-core earnings.We expect gross profit margins to remain stable in the near future. However, FFBLs gross

margin is expected to rise sharply on the back of internationally rising DAP prices.

It is projected that over the next 10 years fertilizer nutrient consumption will grow at the rate of 2to 3 percent per annum.

BENEFITS ON ECONOMY BY THE INDUSTRY

The major benefit that industry is providing is the Employment, as with increase in plantsof the industry all the related network is also expanding like increase in warehouses,transportation and so. This will increase employment.

Companies also participating in social welfare activities. For example in education,helping earth quake victims, supporting infrastructure and in health sector.

ECONOMIC IMPACT ON THE INDUSTRY

The economy of the country does have considerable impact on the fertilizer industry in thefollowing ways:

The cost of this industry is quite high which is very difficult for the economy of thecountry to support especially in current circumstances.

Gross Profit Margin


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Natural Gas is the main requirement of this industry and it is very difficult to fulfill that.Recently the government has announced the cut in the supply of the Natural Gas in theshape of load shedding.

When there is a boom in the agriculture sector of the economy, the demand of thefertilizers also gets increased which puts positive effects on the industry.

INDUSTRY ANALYSIS

The industry size and its geographic locations with respect to their total production are tabledunder:

The companies in fertilizer sector are 6 and their total plants numbered to 14 but still there isvery much lacking in the production of these plants because they are not meeting the totaldemand, so there is need for some other plants to meet the desired demand which is growing dayby day.

Lack of availability of funds may be a reason for this shortage, so a handsome investment willmake a positive impact on this sector.


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The following analysis has been conducted to analyze the industrys strengths, weaknesses,

opportunities and threats.

SWOT ANALYSIS

Strengths

The players operating in this sector are financially strong and they can start production ofnew product line. Adding some new unit can enhance the production capacity of theplants.

All the fertilizer plants are producing at more than 100 per cent installed capacity ofutilization.

Demand is heavy because, being an agriculture country and due to increasing awareness

about the balanced use of fertilizer, demand for the fertilizer will increase.

Fertilizer industry peruses an innovative education oriented advertising policy utilizingelectronic/ print media and road side advertisement.

All companies in the industry have developed a well planned network field warehouses toensure that fertilizers are available to the farmers uninterrupted.

Weakness

Due to the existence of black market and heavy demand, farmers have to pay above thenthe stated price.

Demand is more and capacity of plants to produce fertilizers is less.

Fertilizer sector is backward in technology and also lack in resources.

Low advertising campaigns as growers and farmers are not educated and lives in villages,so they dont exactly know the balanced use of fertilizer.

Opportunities


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If the quality is good customer will buy your product. By improving the quality ofproducts, industry can attract more customers and can retain customers by satisfying theirneeds.

There is no quota restriction by WTO since 2005, so there are more chances of export.

Availability of gas from Iran can increase the production of plants and industry can fulfillthe demands.

Government is giving support to fertilizer sector.

As demand is high comparing to supply, fertilizer sector has an opportunity to expand thecapacity to fulfill the local demand.

As Pakistan is an agricultural country and farmers are getting awareness about thebalanced use of fertilizer, demand of fertilizer has increased.

Threats

As natural gas is the main raw material, load shedding of natural gas is big threat.

Imported fertilizer is available at cheap prices than local fertilizer.

Unstable political condition in the country is also a big threat to fertilizer industry.

Prices of fuel and gas have increased enormously.

Global prices of fertilizer products are also increasing which is causing increase infertilizer prices in the country.

Bio fertilizer is the main threat to the industry because it is cheap and also environmentfriendly.

Government policies are not consistent regarding fertilizer industry.

COMPANY ANALYSIS

Engro Chemical Pakistan Limited is the second largest producer of urea fertilizer in Pakistan.The company was incorporated in 1965 and was formerly known as Exxon Chemical PakistanLimited until 1991. Exxon decided to divest their fertilizer business on a global basis and soldoff its equity of 75% shares in the company to the employees of Engro. Post acquisition by theemployees the company was renamed as Engro Chemical Pakistan Limited.

Vision:

"To be the premier Pakistani enterprise with a global reach, passionately pursuing value

creation for all stakeholders."

Market Share:

The market share of Engro Chemicals Pakistan Limited is 18%

Engro Chemicals Market Share


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Companys overall performance:

Assets: Engro fixed assets have increased sharply in 2007 & 2008, depicting firms strategy to

acquire fixed assets for future growth. Also Engro had made significant investments inlong term investments in order to earn from long term projects.

In the last two years we see a significant rise in Stock in Trade account. This is due tolarger inventory levels which the firm is carrying.

Fixed Assets have increased more compared to current assets in percentage amountEquity:

In shareholders equity there is one thing which catches our attention and that is theinappropriate profit account. The firm retained earning balance has increased rapidly overthe years.

The total value of equity has risen by four times in eight years. This is not a significantincrease considering the overall growth of Engro.

Liabilities:

Analyzing non-current liabilities we see a policy shift from equity to debt as principlesource of financing. As the company retired its long term loans 2005-06. However tofinance its expansions the firm took large amount of long term loans.

During the last two years, creditors and accrued liabilities account has doubled.

Companys Ratios Analysis:


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LIQUIDITY RATIOS:

CURRENT RATIO

Engros current ratio has shown a growth considering the eight years. This persistent growth inthe ratio has been due to a gradual rise in the level of current assets as Engro is keeping higherlevels of inventory and there are more advances, loans & prepayments. The decline in 2008 isattributed to a decrease in levels of trade debts. Engro is well placed to meet its obligations

QUICK RATIO

Engros quick ratio has shown variability over the past eight years and its difficult to analyzeany trend. Since the firm is having sizable amount of inventory over the last several years, its

significant impact is seen in this ratio. The ratio has decline in the year 2008 but its still withinthe acceptable range. The firm is at par with the industry and quite capable of meeting its currentobligations.

CASH FLOW LIQUIDITY RATIO

This ratio touched its peak in 2007 as Engro witnessed high growth due to booming demand inboth local & export market. However in 2008 the ratio has declined considerably in 2008 asEngro cash flow from operating activities was negative. This was due to:

Decline in cash generated from operations


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Interest paid has increased almost five times in FY08 due to expansionsAVERAGE PAYABLE DAYS

Over the course of eight years the numbers of days have declined which shows the firm hasenhanced its capacity to pay off its suppliers. In 2008 it just took eight days for Engro to pay itsaccount payable. Engro may be gaining valuable creditor discounts by paying promptly. Engros

payable have decline considerably.

TURNOVER / EFFICIENCY RATIOS:

RECEIVABLE TURNOVER

The receivable turnover rate has shown a sharp increase in 2008. It shows that the firm iscollecting its receivable quickly and in 2008. The average receivable of the firm is collected 89times during FY08 which is a positive sign.

PAYABLE TURNOVER

Engros payable days has been increasing gradually and consistently over the years however theratio dipped in FY05 but it did recovered thereafter. Engro is repays its creditors too quickly.

SOLVENCY / LEVERAGE RATIOS:DEBT RATIO

Engro debt ratio has seen an increasing trend in the last couple of years. This increase meanshigher interest payment as we have evident from the income statement. This leads to decreasedprofits and as a result fewer amounts of dividends would be paid to share holders. This increaseis primarily due to increase in non-current liabilities especially long term loans which the firmmight have taken to finance its expansions and support its dropping sales. Engro debt ratio hasincreased but is at par with the industry.

DEBT TO EQUITY RATIO

We see a particular trend regarding this ratio. The ratio declined from FY02 to FY06 and then itstarted rising from FY07 to FY08. However for this aggressive approach to finance its growth

with debt Engro had to bear higher interest expenses. This shows that the preferred mode offinancing is debt as it has increased especially due to long term loans Engro is highly debtfinanced.PROFITABILITY RATIOS:

GROSS PROFIT MARGIN

Engros gross profit margin has shown a mixed trend over the years. In Fy08 the ratio increasedto 27%. The reasons behind the increase are:

A decline in COGS as the company has been able to control costs.

The company has also raised prices of some of its products.NET POFIT MARGIN

An internal analysis reveals a positive picture for Engro. This ratio has been on an increasing

trend over the years which are a positive sign for investors. The major reasons for an increase in2008 are:

High levels of Other income

A reduction in tax charges in 2008CASH FLOW MARGIN

Engros cash flow margin has shown a trend opposite to its net profit margin. Since expenses andpurchases of assets are paid from cash, this is an extremely useful and important profitabilityratio. So Engro has less cash available from sale. A negative ratio indicates that even as Engro is


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generating sales revenue, it is losing money. The company will have to borrow money or raisemoney through investors in order to keep on operating. This is real cause of concern. . This maybe due to higher finance charges that Engro has paid in 2008.

MARKET RATIOS:

EARNING PER SHAREThe earnings per share of the company which is considered as the most important ratio by aninvestor has shown an increasing trend over the eight years. Engros income has risen steadilyover the years. As Engro has preferred debt over equity, we see a rise in EPS.

DIVIDEND YIELD

Dividend yield is a way to measure how much cash flow you are getting for each rupee in anequity position. Over the years we have seen Engros dividend yield stream to remain steadyshowing an average of around seven percent. This is a positive sign for an investor who hasinvested in Engro as it is a confidence building measure. An investor will get a stable cash flowstream by investing in Engro.

EXPANSIONS:In order to take advantage of the current fertilizer shortage scenario, the company planned toestablish a 1.3mntpa urea plant, taking its aggregate capacity to 2.275mntpa by mid CY10. Thisexpansion will make the company the market leader in urea business in Pakistan, with anestimated market share of 34%. The planned expansion will be the worlds largest single trainurea plant. The expansion along with benefiting the company will also result in meeting thedemand of the local market thus reducing the amount of invaluable foreign exchange spent bythe GoP on import.The new plant along with being fuel-efficient (expected to consume 15% less gas than theexisting plant), will also bring in various other synergies, especially with regards to labor cost.The expansion will require hiring of a further 300 employees at the plant complex of which 260will be devoted to the plant while approximately 40 will be required for managerial positions,translating into 38% increase in labor count (current workforce is 771). Marketing anddistribution is another area where the company will benefit as it already has a well laid outdistribution network and does not need any substantial investment in further building newchannels for sales.

INSIGHT FOR INVESTORS:

Engro is currently undergoing huge expansions and is a giant diversified conglomerate. As itsexpansions are to come online in 2010 we are witnessing a decline in its ratios particularly theturnover ratios and the return on assets.I would suggest investors not to lose faith in Engro and off load their holdings because of thefollowing reasons:

Engros results are bound to improve in 2010 due to expansion effect.

Its a giant in its industry and will always look after its position in the industry

Engros will to always stay ahead and give a tough time to its competitors

SECURITY ANALYSIS OF ENGRO CHEMICALS


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In KSE100 Index the company is performing well. The index is showing a positive trend whichmeans that the stock has the potential to give higher return in near future. Investors mustconsider this in a favor of the stock to invest in it, because it will improve and will give higherbenefits.

The analysis of Engro chemicals is presented as under. This security is statistically analyzed byits past data of 10years and then on the basis of these results the expected return and riskinvolved is also analyzed.

Security 1 (Engro Chemicals)

Actual Return

Year

OPEN

RATE (Po)

CLOSING

RATE (P1) Dividend R R-R (R-R)2000 65.00 69.00 7.00 0.169 -0.124 0.015

2001 69.00 51.75 7.50 -0.141 -0.435 0.189

2002 51.75 92.05 7.50 0.924 0.630 0.397

2003 92.05 92.80 8.00 0.095 -0.198 0.039

2004 92.80 129.30 8.50 0.485 0.192 0.037

2005 129.30 164.45 11.00 0.357 0.064 0.004

2006 164.45 169.00 9.00 0.082 -0.211 0.044

2007 169.00 265.75 7.00 0.614 0.321 0.103

2008 265.75 96.46 6.00 -0.614 -0.908 0.824

2009 96.46 183.27 6.00 0.962 0.669 0.447

Retun ( R ) = 0.293 2.100

or 29.33% (Risk) = 48.3%

Interpretation:

From the above data we have seen a high risk with a high return from this security. As thedividend is declining in the last years so the return has declined but it is expected to improve infuture years because the factors which have affected this sector like irrigation, power, tariffs etcare now improving. As far as the risk of 48.3% is concerned, it seems relatively high but it is

Engro Price Performance Vs KSE100 Index


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expected to decrease in near future as all the important factors and natural resources like watercrises will improve so the fertilizer sector is also predicted to improve

Expected Return

Year R P RP (R-R) (R-R) (R-R)P

2010 0.25 0.25 0.06 -0.16 0.024 0.0060

2011 0.35 0.35 0.12 -0.06 0.003 0.0011

2012 0.55 0.40 0.22 0.15 0.021 0.0084

Return = 0.405 0.0155

or 40.50% Risk = 12.4%

Interpretation:

As the factors affecting the fertilizer sector are improving so there are high chances for thesecurity to generate high return in future with risk getting lowered. In Yr.2010 the return will be25% and it is expected to continuously increase up to 55% in the Yr.2012 because thegovernment is taking actions to improve agriculture sector.The yield will improve up to 40.5% and the risk will alternatively decline to 12.4% which is duethe positive growth in this sector.

SECURITY ANALYSIS THROUGH CAPMThe Capital Asset Pricing Model (CAPM) is a very highly accepted model among investors, sothe results predicted are very much reliable.

Calculation of CAPM for

ENGRO CHEMICALS

=[ NXY - (X)(Y) / NX2 - (X)2]

Engro Security MR = x S1 = y

Years MR = x S1 = y xy x

2000 0.070 0.169 0.012 0.005

2001 0.016 -0.141 -0.002 0.000

2002 1.122 0.924 1.036 1.259

2003 0.655 0.095 0.062 0.429

2004 0.391 0.485 0.189 0.153

2005 0.537 0.357 0.192 0.288

2006 0.051 0.082 0.004 0.003

2007 0.402 0.614 0.247 0.162

2008 0.260 -0.614 -0.160 0.0682009 0.077 0.962 0.074 0.006

3.580 2.933 1.654 2.372

= 0.554

CAPM = Rf + (Rm - Rf) Rf = 11.50% Rm = 19.17%

CAPM = 15.75%


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The beta of Engro Chemicals is 0.554 and the return which the security is incurring is 15.75%,which is very much attractive for the real investors because in these days of recession andundergrowth situation the yield is much attractive. So it is highly recommended to invest in thissecurity. Beta for the security is 0.554 which a positive trend with the changes of market but with

a 50% less change than the change in market prices. So this means that the relation betweensecurity and market is half in proportion, whichshows the strength of security itself.

THE POWER SECTOR

Pakistans energy infrastructure is under-developed, insufficient and poorly managed. PresentlyPakistan has been facing severe energy crisis. Despite strong economic growth and rising energydemand during the past decade, no serious efforts have been made to install new capacity ofgeneration. Consequently, the demand exceeds supply and hence load-shedding is a commonphenomenon through power shutdown. Pakistan needs around 14,000 to 15,000 MW electricity

per day, and the demand is likely rise to approximately to 20,000 MW per day by 2010.Presently, it can produce about 11,500 MW per day and there is a shortfall of about 3000 to 4000MW per day. This shortage is badly affecting industry, commerce, daily life and posing risks tothe economic growth.

At time of partition Pakistan capacity of power generation is 119MW.This is now increased19420MW. Pakistani power sector is mixer of Thermal, Hydral, Nuclear and other. Due to


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shortage of natural gas in Pakistan low value of domestic coal and low water level in rivers mostexisting and upcoming thermal power project are furnace oil base, which is most important meanof electricity generating in Pakistan

ECONOMIC ANALYSIS

CONSUMPTION OF ELECTRICITY:

In 1990/91 and 2003/04, total consumption increased by more than 84%, from 31 TWh to 57TWh. After recording at an average rate of 6.1 percent per annum since 1999-00 to 2007-08, theelectricity consumption by different sectors increased merely by 0.7 percent during July-March2008-09 against the comparable period last year. With the exception of Other GovernmentSector, all remaining sectors witnessed a negative growth during July-March 2008-09 over thesame period last year.Demand and Supply

The growth in power sector has been in the 7 8 percent range for the past decade peaking atapproximately 17,000 MW as of June 2009. With available power generation in the high 14,000MW range there is a gap of 3,000 MW at peak times and 2,200 MW at low times.

Forecasted Demand and Supply Gap

With the growth in demand expected to touch 25,000 MW by 2015, the Government of Pakistanhas devised various strategies and plans to meet this challenge.

Power sector and Economic Development of Pakistan:


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Electricity is a main source of economic activity and industrial growth. Reliable, secure andcheaper electricity supply is needed to run any commercial activity. In developing country it ismain source of employment, revenue for government.Pakistan has 18GW of electric generating capacity. Thermal plants use oil, natural gas, and coalaccount for about 70 percent of this capacity with hydroelectricity (hydro) making up 28 percent

and nuclear 2.5 percent. The main distribution channel of electric supply in public sector utilitiesare Water and Power Development Authority (WAPDA) and Karachi Electric SupplyCorporation (KESC).Along with two nuclear power plants KANUPP and CHANUPP, and anumber of independent power producers (IPPs) and small power producers (SPPs) establishedsince 1994.Total 16 independent power producers that contributes significantly Producingelectricity in Pakistan.

Inflation Effect:From 2007 Pakistan facing rotating black (load shedding) for 6-8 hour. It is just because ofincrease in gap between demand and supply and increasing in globally price and political instability. As price are going increasing and they also pushed inflation and as a result price of

electricity is also increased .Power sector of Pakistan serve 16 billion customer and the price ofelectricity supply is 60%greatre then Pakistan and 40%then Bangladesh.

Effect on Economy:In Pakistan the current energy crisis stems from the decline in hydro sources of energy and overreliance on the expansive source of electricity. Presently, oil-based thermal plants accounts for68% of generating capacity, hydroelectric plants for 30% and nuclear plants for only 2% Thishas led to a huge generation costs, which in turn adversely affect the economy over the past eightyears. Rise in the oil prices pushing electricity tariff very high. As a result, manufacturing costsand inflation are at the rising trend, export competitiveness is eroded and the pressure on thebalance of payments is increasing. These factors adversely affect the present growth trajectory ofthe economy.

Political Effect:

The power sectors are facing losses for many years. The electricity shrunk by 50%in recent year.But the major crisis was start from 2007 after the death of Benazir Bhutto. Production fell by6000 Megawatts and massive blackouts followed suit. Load shedding has been served inPakistan. The main problem with Pakistan's poor power generation is raising political instability,together with rising demands for power and lack of efficiency. So the need of electricity is onincreasing yearly. The shortage of electricity causes many unrecoverable losses. The major lossis in industrial sector.

EXPANSION OF GENERATING CAPACITIES (FUTURE OUTLOOK):To minimize future supply deficits, Pakistan has adopted a systematic development plan calledVision 2025 that targets a long-term capacity increase of around 35,000 MW by the year 2025.That would be nearly twice as much power as was available at the end of 2002. Around twothirds of the additional power (22,563 MW) is slated to come from hydroelectric power plants.


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The planned expansion will cost approximately US$ 30 billion. In view of Pakistan's highnational debt and persistent budget deficit, the government is intensifying its efforts to attractprivate investors.

Investment Attractiveness:

Beside expected fairly decent economic growth, following are some key rational as to why oneshould make investment in power sector in Pakistan.

Robust demand for Electricity: Presently the demand is outstripping supply of electricityand by 2010 demand is expected to exceed supply by approximately 5,500 MW.

Predictable Long term Tariff: A long term tariff of 25 years will be contracted with thepower purchaser. The IPPs are not subjected to the market risk for their output. Theprojects are expected to provide good and stable return on equity.

Pass through of the fuel cost and additional taxation: Any variation in price of fuel wouldbe passed through to the power purchaser. Similarly any additional taxation over andabove the tariff assumption is liable to be passed on to the power purchaser.

Risk of Exchange Rate Variation: To cover the exchange rate variations risk, varioustariff components are indexed for variations in the Pak Rupee and US $ exchange rates.Keeping in view, surging trade deficit, it is expected that Pak Rupee is likely todepreciate against greenback. In such a scenario the sectors provides a perfect tool toinvestors particularly foreign investors for hedging exchange rate risk.

Available GOPs Guarantees and protection: GOP guarantees the performance obligationof its entities such as the power purchaser, fuel supplier, etc. and provinces. GOP alsoprovides protection to sponsors and lenders in case of termination of the project.

The Government of Pakistan guarantees protection against changes in taxes & duties andspecified Political risks

Industry Analysis

The power Sector in Pakistan is operated by Water and Power Development Authority(WAPDA) and Karachi Electric Supply Corporation (KSEC) With additional contribution of 16Independent Power Producer (IPPs)WAPDA is responsible is supplying electricity in Pakistan Where KESC supply electricity in

Karachi and neighboring area.16 IPPs are operated in Pakistan under a Build OwnOperate(BOO) basis. The Power Sector is regulated by National Electricity power RegulatoryAuthority (NEPRA) including power generation, transmission and distribution. It alsoresponsible determining electricity rate in country.The power sector is mix of Thermal, Hydral, Nucluer and other. These are operated bydistributer of electricity.WAPDA operate most Thermal and Hydral Power Generator WhereNuclear power Generator are operated by Pakistan Atomic Energy Commission.


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Hydel Power Generation:WAPDA control country major hydrel plant. The largest hydrel plant is Tarbela Plant with

installing capacity 3046MW.Tarbelais largest hydel plant in Asia. Additional hydroelectric plants in operation include Mangla(1000)MW,Warsak(240MW) and Chashma(184MW).ForSwat River the Private Power and Infrastructure Board(PPIB) is reviowing six additional hydropower projects. If they are approved then they provide several hundreds MW of additionalhydroelectricity to country.

Thermal:Pakistan Satisfied most of its power need by Thermal means(65%).Majority of thermal plant areoperated by WAPDA, with 5000MW installed capacity. The largest thermal plant Guddu plant isoperated by WAPDA having capacity of 1650MW.

Independent Power Producer:

The Thermal Power generation are now come from IPPs some of these are funded by foreigninvestor. The two largest IPPs in Pakistan are Kot Addu Power Company (1600MW) and HubPower Company(1200MW) they are supply power to WAPDA. Following are major IPPsoperated in nation.


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Nuclear Power Generation:

Pakistan has two nuclear power plants, CHASHMA-1 and KANUPP with 300 MW and 125MWinstalled capacity. These plants are operated by Pakistan Atomic Energy Commission. Pakistanis currently working 3rd nuclear power plant (CHASHMA-2) with the help of China NationalNuclear Corporation. The plant will have 325MW of installed capacity.

Karachi Electricity Supply Corporation:KESC use thermal power for generation of electricity with 1400MW Installed Capacity. KSECSupply electricity around 6000 square kilometers. KESC Serve 1.5 million people and most ofthem are lived in urban area. In 2009 KESC Face short falls of 450MW for the coverage itdepend on WAPDA.

Investment Attractiveness:Beside expected fairly decent economic growth, following are some key rational as to why oneshould make investment in power sector in Pakistan.

Robust demand for Electricity: Presently the demand is outstripping supply of electricityand by 2010 demand is expected to exceed supply by approximately 5,500 MW.

Predictable Long term Tariff: A long term tariff of 25 years will be contracted with thepower purchaser. The IPPs are not subjected to the market risk for their output. Theprojects are expected to provide good and stable return on equity.

Pass through of the fuel cost and additional taxation: Any variation in price of fuel wouldbe passed through to the power purchaser. Similarly any additional taxation over andabove the tariff assumption is liable to be passed on to the power purchaser.

Risk of Exchange Rate Variation: To cover the exchange rate variations risk, varioustariff components are indexed for variations in the Pak Rupee and US $ exchange rates.Keeping in view, surging trade deficit, it is expected that Pak Rupee is likely todepreciate against greenback. In such a scenario the sectors provides a perfect tool toinvestors particularly foreign investors for hedging exchange rate risk.


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Available GOPs Guarantees and protection: GOP guarantees the performance obligationof its entities such as the power purchaser, fuel supplier, etc. and provinces. GOP alsoprovides protection to sponsors and lenders in case of termination of the project.

The Government of Pakistan guarantees protection against changes in taxes & duties and

specified Political risks

Company Analysis

The Hub Power Company Limited (HUBCO) operate an oil-fired power station with acapacity of 1,200 MW. The plant is located at the Hub river estuary in Baluchistan. The MainConsumer of HUBCO are WAPDA. The HUBCO is listed on Karachi, Lahore andIslamabad and has the largest market capitalization of any private company in Pakistan.HUBCO has over 17000 Pakistani and international shareholders.HUBCO plant operated at an average load factor of 75.9 and an average complex availability

of 83%. 2011GWH electricity sold to WAPDA.

Financial Performances:In 2005 Sales of the company have been increase. An increase of 33% from RS 62 million toRS 82 million in 2009.This increase was due to higher tariff profit, bonus generation andcurrency devaluation.From 2002-05 Profitability ratios is low from 2005 it start improve. In 2009 Gross profitmargin, net profit margin and return on assets is 7.36%,4.5%and 4.19%.Return on commonequity 12.80% in 2009 from 9.13% in 2008. This increase was due to increase 45% on netprofit in 2009.In 2009 the company pay short term borrowing from long term loan of 5BN for Narowal

project. The current asset increased 81% where as current liabilities increase 83%.In 2009 Debt on asset is 67.3% from 54.6% in 2008. the reason of this increase is increase incurrent liabilities.Financial cost was higher by 7% in 2009 as compared to 2008.Timesintresed earned is 2.81 in 2009 as against 2.32 in 2008.Long term debt to equity to 38.54%in 2009 from 25.66% in 2008.this was due to 56%increasin long term loans.Inventory turnover was higher because of stock of oil and higher trade debts owed byWAPDA. Days sales outstanding is 203 in 2009 as against of 143 in 2008 increasedis41%.This resulted longer operating cycle for the compant it mean that it took 214 days in2009 for converting its raw material into cash from sales as compared to 152 days in 2008.Earning per share is Rs 3.27 in 2009 improved from Rs 2.25 in 2008.The company

announced Rs 2 per share cash dividend with the results taking cumulative dividends to Rs3.35/share for 2009

Security Analysis:In KSE100 Index the company is performing well. The index is showing a positive trendwhich means that the stock has the potential to give higher return in near future. Investorsmust consider this in a favor of the stock to invest in it, because it will improve and will givehigher benefits


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Security 2 (Hub Power Company)

Actual Return

Year

OPEN

RATE

(Po)

CLOSING

RATE

(P1)

Dividend R R-R (R-R)

2000 21.35 19.95 1.20 -0.009 -0.287 0.082

2001 19.95 15.50 1.05 -0.170 -0.448 0.200

2002 15.50 40.10 2.80 1.768 1.491 2.222

2003 40.10 38.45 1.70 0.001 -0.276 0.076

2004 38.45 32.10 1.60 -0.124 -0.401 0.161

2005 32.10 24.00 3.90 -0.131 -0.408 0.166

2006 24.00 27.00 3.10 0.254 -0.023 0.001

2007 27.00 30.50 2.85 0.235 -0.042 0.002

2008 30.50 14.09 2.60 -0.453 -0.730 0.533

2009 14.09 31.08 2.74 1.400 1.123 1.261

Return (R) = 0.277 4.704

or 27.72% (Risk) = 72.3%

Interpretation:This security of HUBCO is generating a return of 27.72% which is quite attract-full in thissituation of recession especially in power sector. Hence the security has a very high risk involvedbut as the recession will over; it will generate a handsome return.

Expected Return


2010 0.30 0.40 0.12 -0.21 0.044 0.0176

2011 0.25 0.30 0.08 -0.26 0.065 0.0195


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2012 0.45 0.30 0.14 -0.20 0.038 0.0114

Return = 0.330 0.0486

or 33% Risk = 22.0%

Interpretation:

As the recession has started declining and the power sector has started its growth so we expectthat the coming years will generate a return of 33% with a decrease in risk to 22% which is quiteaffordable for the investors to invest in.In coming years power sector will improve further and as it is the main backbone of the economyand the whole industry relies on it, so the future return will improve further and this will show apositive growth in this security.

ANALYSIS THROUGH CAPM

HUBCO Security MR = x S2 = y


2000 0.070 -0.009 -0.001 0.005

2001 0.016 -0.170 -0.003 0.000

2002 1.122 1.768 1.983 1.259

2003 0.655 0.001 0.001 0.429

2004 0.391 -0.124 -0.048 0.153

2005 0.537 -0.131 -0.070 0.288

2006 0.051 0.254 0.013 0.003

2007 0.402 0.235 0.095 0.162

2008 0.260 -0.453 -0.118 0.068

2009 0.077 1.400 0.107 0.006

3.580 2.772 1.960 2.372

= 0.887

CAPM = Rf + (Rm - Rf) Rf = 11.50% Rm = 19.17%

CAPM = 18.30%


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Interpretation:

The yield is 18.30% in HUBCO security and beta is 0.887 which is less than 1, which means thatit is less volatile than the market return. The stock generally follows the market changes but witha relatively less ratio. The reward on this stock is relatively better than the other industriesbecause Pakistan is facing through a recession nowadays.


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TEXTILE SECTOR

HISTORICAL BACKGROUND

No one exactly knows when the Textile actually starts its roots. It has been said that people knew

how to weaven even 27000 years ago. The oldest fragment of cloth was found in SouthernTurkey. History reflects that Chinese textile was considered to the significant in internationaltrade. China silk reached ancient Greece and Rome in 2nd century B.C later many importantinnovations take place like spinning machines, automobile looms, and cotton gin, which improvequality and output of fabrics. These innovations provided the technological base forindustrialization of textile industry. Textile industry was fully machined by the early part of 19th

century. The next major development was the chemist laboratory. Experiments proved thatcertain natural materials could be dissolved in chemical solvent and reformed into fibrous form.

ABOUT TEXTILE

A textile is a cloth, which is either woven by hand or machine. Textile is normally meant is awoven fabric. This term comes from the Latin word TEXERE which mean TO WEAVE.At the time of independence only 6 textile units were operating that have80,000 Spindles and3,000 looms which only meet the 8% demand of the country.Initially Government of Pakistan set the objective to promote the textile industry as an importsubstitute and later when the necessary imports to build the textile infrastructure strong enough,Government change its policy and start operating as a major Export substitute. The strongpolicies and wide decisions of Government made the textile sector to grow at the rapid speedduring 1950s to 1960s.

WHY TEXTILE SECTOR FOR INVESTMENT

Textile and clothing industry is the backbone of Pakistan economy. Pakistan is the 4 th largestproducer in Cotton and 3rd largest exporter of Raw Cotton and a leading exporter of Yorn in theworld. Exports of textile sector and its products have shown a significant increase in recentyears. Global textile and clothing trade is set at $356 billions in 2000 with textile trade at $199billion (WTO REPORT).Pakistan has a strong presence and increase its share in international markets with share of $4.53billions export in textile and 2.144 billions exports in clothing (2000)

ECONOMIC REVIEW OF TEXTILE SECTOR

Fiscal year 2008-2009 was a difficult year as the economic meltdown continued from fiscal year2007-2008. Several political and economic events both on domestic and external fronts werehindrances in achieving growth in business. Pakistan has facing many challenges that have led tofurther detoriation of business climate. Issues such as on going energy crisis, business closuresand declining long term foreign investment have been multiplied by Pakistans role as a frontline state in the war on terror. This has led to supply shocks, as well as soaring oil and food


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prices. According to the trade policy the trade performance of Pakistan in the year 2008-2009witnessed economic downturn especially in our major markets of exports that is USA &EU.Consumption decreased in the developed world and global trade shrank by 9%. The globalrecession adversely affect exporting countries and Pakistan is no exception to that. Exports fromPakistan decline to US$17.8 billion as compared to previous years exports of US$19.1 billion.

During 2008-2009 the exports of textile which accounts for around 54% of Pakistans totalexports dropped from US$10.6 billion to US$9.6 billion. The major losers in this regard were ArtSilk & Synthetic Textiles, which dropped by 22.1%, Ready made garments by 21.7%,cotton yarnby 15%, bed linen by 10.2% and cotton fabric by 4.0%.

According to economic survey of Pakistan the manufacturing sector contributes 18.4% in GDP.The process of deceleration in growth that started in fiscal year 2004-2005 continued unabatedparty because of acute energy shortages and more importantly owing to structural problems. Theout put of Pakistan manufacturing sector has contracted by 3.3% in 2008-2009 as compared toexpansion of 4.8% last year and against an ambitious target of 6.1%.

However after a critical phase of a weak domestic macroeconomic situation and softenedexternal demand owing to the global financial crisis, Pakistan economy is now in a recoveryphase, foreign exchange reserves have strengthened to USD 14.3 billion from USD 6.5 billionhelping to support Pakistan rupee.The textile and clothing industry has been the main driver of the exports based industry for thelast 50 years in terms of foreign currency earnings and employment generation. Its share inexports declined from 66 % in 2004 to 53.7% in current financial year.

Textile industry is still growing every year and its total worth is 400 billions. A variety of fabricis used world wide in different applications such as household textiles, furnishing, and medicalequipment and in technical products etc.Share of developing countries into textile exports is improving from 5 to 15 %

Textile Share in Pakistans Exports

VALUE IN '000' US$

CATEGORIES 1999-2000 2000-200 2001-2002 2002-03 2003-042004-05

TEXTILE

& GARMENTS 5,858,861 6,115,070 5,996,910 7,457,748 8,252,4039,030,000

OTHER

CORE

CATEGORIES 1,878,643 2,134,186 2,079,826 2,252,498 2,410,729 3,086,000

DEVELOPMENTAL

CATEGORIES 479,642 566,218 615,917 851,597 832,147 867,000

ALL OTHERS 351,453 386,121 441,915 598,403 818,006 1,427


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ECONOMIC VARIABLES THAT HITS TEXTILE SECTOR

The main key macro economic factors that affect the textile sector are here under:These are the main variable that hit the textile sector very badly and strengthens

our competitors. International markets want to do business with India and Chinadue to

GOVERNMENT OF PAKISTANInstable governments, lack of policies and procedures, political instability, terrorismare main economic issues that effect every industry incorporated in Pakistan. Noappreciation from the part of the Govt to promote Research &Development in thissector.

BACKWARDNESS OF ECONOMYEconomy is moving backward undue influence, instability, terrorism discourage foreigndirect investment , foreign resources shifting abroad , expensive exports make reductionin foreign reserves . Lack of infrastructure and heavy imports make our economy

dependent on foreign aid

SHORTAGE OF ELECTRICITYElectricity failure is the key variable now a day that hits the textile industry very badly.Industrial units starting shutting down, industrial production comes down, lack of naturalresources make our economic conditions even worse

LACK OF MACHINERYMachinery that used in textile sector is quite outdated. Lack of machinery and newtechnology make us more labor intensive country. Imposition of tariff and quotas makethe imports so costly.

DEVALUATION OF RUPEE

Normally in Pakistan the value of currency depreciate in order to promote exports. Butnormally it makes imports costly . So the infrastructure and machinery that is required topromote exports remain deficient . Moreover it creates inflation in the economy.

UNION ACTIVITIESStrong labor unions always discouraged in every economy. There is a strong influenceof labor unions on textile sector that often result in strikes, and low production.

MANAGEMENT INSTABILITYLabor strikes, high turn over ratio, unsatisfied environment, low wage rate etcshows the instable management .

ENVIRONMENT DEGRATIONTextile processing is a water intensive process. Almost 0.08-0.15 m (cube) of water is

consumed on producing 1kg of finished fabric and 1000-3000 m (cube) of waste waterper day against production of 12-20 ton per day of finished fabric. This chemical waterinclude toxic elements that cause significant environment degradation.

IMPOSITION OF TEXTILE QUOTASAlthough the domestic pricing system is reformed after the imposition of textile quotabut it have a negative impact on exports because it will create competition in theinternational markets.


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SOME OTHER ISSUES

Shortage of raw material is emerging for future export orders.

Cotton production is declining after 2007 to 2008 of 14.4 million bales.

Increase in the prices of petroleum effect the exports of textile products.

Farmers are switching to other cash crop like sugar cane due to the low cotton prices Due to the increased in cost of production exporters will loosing the buyers in the world

market.

INDUSTRIAL ANALYSIS

GEOGRAPHICAL LOCATIONSMain markets in which textile industry is performing are

USA

EUROPE

MIDDLE EAST SAUDI ARABIA

HONG KONG

RUSSIAN REPUBLIC

PRODUCTION TRENDS

COTTON AREA UNDER CULTIVATION, PRODUCTION

AND YIELD

Year Area

Production

Yield Hectare million bales Kgs/Hec

1999-00 2983 11.24 6412000-01 2927 10.732 6232001-02 3116 10.613 5792002-3(pro) 2796 10.211(9.7) 621

ATTRACTIVE INDUSTRYTextile is an attractive industry in terms of profitability and growth potentials for investors andgovernment.

INDUSTRY SENSTIVENESSTextile is the sensitive industry in terms of Govt policies, electricity failure, labor strikes, andmajor economic issues like change in currency rates and reduction of exports.


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COMPETITIVE FORCES COMPARISION

Pakistan

Textile exports atUSD 10.8bn

Perceived as a lowqualitymanufacturer ofsemi-finished goods

Hardly anyinvestment in thedownstream over

the last 5 years

No investment inproductdevelopment

Lack of skill Finishing processes

China

Textile exports atUSD 144bn

Ability to offer fullrange products in thetextile value chain

Largest purchaser oftextile machinery inthe world

Skill development forall products in thetextile value chain

Continuous focus onproduct development

Runseducation/innovation

India

Textile exports atUSD 15.2bn

Continuousproductdevelopmentadding to theproduct portfolioof the country

Various textile

institutes to focuson the entiretextile valuechain

Continuous focus

COUNTRIES MARKET SHARE CHINA $55 BILLION

INDIA $45 BILLION

KOREA $35 BILLION

TAIWAN $16 BILLION

INDONESIA $9 BILLION

Percent Share of Leading

Cotton Producers


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SUPPLIER POWERSupplier has a high bargaining power because of foreign investment and having lowconcentration. They act in groups of investors on same project.

BUYER POWERBuyers are large in numbers but dont affect price level so no bargaining power is there

SUBSTITUTE PRODUCTSSubstitute products are not available or less in numbers

SWITCHING COSTBuyer switching cost is low because of demand of cotton fabrics

ENTRY AND EXITThere is open entry and exit in the textile industry but it requires huge capital investment toutilize economies of scales

BRAND REPUTATIONBrand reputation is high so there is low exit of customers, moreover there is high price

fluctuation and competition is on the basis of price and qualitySWOT ANALYSIS OF TEXTILE SECTOR

STRENGTHS AND OPPURTUNITY Pakistan is the 4th largest producer of Cotton in the World.

It ranks 2nd in export of yarn & 3rd in export of cloth.

It has large spinning and weaving capacity

Large, well equipped finishing sector

Availability of cheap labor

Large domestic market

Good and clear investment policies Strong presence in international market.

Volumes of yarns with synthetic fibers in various blends & counts are increasing.

Production of commodity products at good quality levels

Improvement in marketing skills and countrys image

WEAKNESSES Research and Development


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More dependence on cotton

Labor productivity is low

Poor Infrastructure

Poor Quality standers

Unstable political situation

THREADS WTO and quotas

Sales tax on cotton

DTRE (Duty and Tax Remission for Exports)

Lack of Infrastructure

Lack of synergy

Inefficient industry

Cotton

CONCLUSION

Textile industry is the backbone of Pakistans economy .we have to analysis the strengths andweaknesses of this sector so that to make it more competent among its rivals. We should have towork out the plan and implement it accordingly although much work has been done by the Govt ,it also be the responsibility of the Entrepreneur to cooperate and foresee the challenges andopportunity ahead, we can always win the race as it is never to late to grow this vital andpromising sector of our economy.

COMPANY ANAYSIS

After the detail industry analysis I have chosen the GUL AHMED TEXTILE COMPANY forinvestment. As the overall textile sector is not much progressing after 2007 yet it is still the moreprogressing sector for investment.

GUL AHMED TEXTILE achieved growth in sales by 18.6% which includes growth in exportsof RS.1.15 billion and retail sales growth of RS 739 billion. Gross profit as compared to lastfiscal year is more encouraging amounting of RS2.338 billion whereas in 2008 it is 1.775 billion.

However the increase in cost of sales, distribution expenses and finance cost were the mainfactors eroding the net profit margin. The profit before taxation is RS 170 million where as in2008 it is RS 202 million.In current economic environment it is important for the company to not only maintain but alsoimprove the liquidity position, therefore the directors of GUL AHMED TEXTILE MILL LTDdecided to pass over the dividend for the current year.There are no significant doubts upon the company ability to continue as a going concern.


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VISION

OUR INVESTMENT IN PEOPLE, TECHNOLOGY AND BRANDS ENABLED US TOFACE THE MULTIPLE CHALLAENGES IN 2009 WITH DETERMINATIOM,

DISCIPLINE AND INNOVATION

Gul Ahmed Textile Mills Limited


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RATIOS ANALYSIS


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INTERPERTATION OF RATIOS

Financially ratios can for convenience be divided into four basic groups or categories: liquidratios, activity ratios, debt ratios, and profitability ratios. Liquidity, activity, and debt ratios

primarily measure risk, profitability ratios measure return.


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Liquidity Ratios

The liquidity of a business firm is measured by its ability to satisfy its short term obligations asthey come due. Liquidity refers to the solvency of the firms over all financial position the case

with which it can pay its bills.

Current Ratio:

The current ratio is one of the most commonly cited financial ratios, measures of the firmsability to meet its short-term obligations.In 2008 current ratio is 0.90In 2009 current ratio is 0.95

Quick Ratio (Acid Test)

A measure of liquidity calculated by dividing the firms current assets minus inventory bycurrent liabilities.

IN 2008 Quick ratio is 0.42IN 2009 Quick ratio is 0. 39

Inventory Turnover

Commonly measures the activity, or liquidity of a firms inventory. Inventory turnover can easilybe converted into an average age of inventory by dividing it into 365 days. The number of daysin a year.IN 2008 inventory turn over is 95 daysIn 2009 inventory turn over is 107 days

Fixed Asset Turnover

The fixed asset turnover measures the efficiency, with which the firm has been using its fixed, orearning, assets to generate sales. It is calculated by dividing the firms sales by its net fixedassets:Fixed asset turnover = sales / net fixed assetsIn 2008 fixed asset turnover ratio is 2.00In 2009 fixed asset turnover ratio is 2.27This means that the company turns over its net fixed asset 2.00 times in a year 2008 and in 2009the net fixed asset turnover is 2.27 times which shows that the higher fixed asset turnover arepreferred, since they reflect greater efficiency of fixed asset utilization. This difference may befor operating efficiencies

Total Asset Turnover


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TO CONCLUDE

Ratios 2008 2009 Time series

LiquidityCurrent ratioQuick ratio

0.900.42

0.950.39

GoodOk

ActivityInventory turnover in daysFixed assets turnoverTotal assets turnover

952.01.05

1072.271.07

PoorOkOk

DebtDO indebtedness ratios 98% 95% OK

ProfitabilityGross profit marginOP marginEPS

15.14%12.49%1.86

16.81%13.37%1.45

GoodOKOk

GRAPHICAL REPRESENTAION


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SECURITY ANALYSIS OF GUL AHMED TEXTILE MILL

In KSE100 Index the company is performing well. The index is showing a positive trend whichmeans that the stock has the potential to give higher return in near future. Investors mustconsider this in a favor of the stock to invest in it, because it will improve and will give higherbenefits


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ACTUAL RETURN AND RISK

Security 3 (Gul Ahmed Textiles)

Year

OPEN

RATE

(Po)

CLOSIN

G RATE

(P1)

Dividend R R-R (R-R)

2000 17.00 29.50 7.00 1.147 0.906 0.821

2001 29.50 31.00 5.00 0.220 -0.021 0.000

2002 31.00 50.00 5.00 0.774 0.533 0.284

2003 50.00 53.00 3.00 0.120 -0.121 0.015

2004 53.00 76.20 4.25 0.518 0.277 0.077

200576.20 55.05 1.25 -0.261 -0.502 0.252

2006 55.05 25.50 1.00 -0.519 -0.760 0.577

2007 25.50 38.10 0.00 0.494 0.253 0.064

2008 38.10 48.70 1.00 0.304 0.063 0.004

2009 47.70 29.21 0.00 -0.388 -0.629 0.395

0.24 2.489

Here Actual return is 0.24 or 24 %

And Actual Risk is 52.6%

Interpretation:

From the above data we have seen a high risk with a high return from this security. As thedividend is declining in the last years so the return has declined but it is expected to improve infuture years because the factors which have affected this sector are improving

EXPECTED RETURN AND RISK


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Year R P RP(R-R)

(R-R) (R-R)P

2010 0.20 0.50 0.10 -0.11 0.011 0.0055

2011 0.45 0.30 0.14 0.15 0.021 0.0063

2012 0.35 0.20 0.07 0.05 0.002 0.0004Return = 0.305 0.0122

or 31% Risk = 11.1%

Here expected return is 0.305 or 31%

And expected risk is 11.1%

Interpretation:

As the factors affecting the textile sector are improving so there are high chances for the securityto generate high return in future with risk getting lowered. In Yr.2010 the return will be 20% andit will continuously increase up to 35 % in the Yr.2012 because the government is taking actionsto improve agriculture sector. Moreover the security showing risk is 11.1%, mean there are 89%chances that the return in future will be 31%

CALCULATION AND DATA FOR CAPM

MARKET RETURN RATES


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2001 2002 2003 2004 2005 2006 2007 2008 2009

7% -15.56% 112.2%

65.53%

39.06%

53.68%

5.06% 40.2% 25.5% 19.17%

http://www.slideshare.net/jawadiqbalkhan86/is-kse-100-index-inflated

Calculation of CAPM

=[ NXY - (X)(Y) /NX2 - (X)2]

1) Security

MR =

x S1 = y

Years MR = x S1 = y xy x2000 0.070 1.147 0.080 0.005

2001 0.016 0.220 0.003 0.000

2002 1.122 0.774 0.869 1.259

2003 0.655 0.120 0.079 0.429

2004 0.391 0.518 0.202 0.153

2005 0.537 -0.261 -0.140 0.288

2006 0.051 -0.519 -0.026 0.003

2007 0.402 0.494 0.199 0.162

2008 0.260 0.304 0.079 0.068

2009 0.077 -0.388 -0.030 0.006

3.580 2.411 1.315 2.372

= 0.415

CAPM= Rf + (Rm - Rf) Rf =

11.50% Rm =

19.17%

CAPM= 14.68%

Interpretation

Here the beta of the security is 0.415 and yield is 14.68%, which is quiet acceptable for the investors toinvest in. CAPM is a very well known model and very much acceptable among investors. The rate ofreturn of 14.68 % means that the security is giving a dividend at this rate.
http://www.slideshare.net/jawadiqbalkhan86/is-kse-100-index-inflatedhttp://www.slideshare.net/jawadiqbalkhan86/is-kse-100-index-inflated


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THE AUTOMOBILE SECTOR

Introduction:

Pakistan Automobile Industry produced its first vehicle in 1953, at the National Motors Limited

established in Karachi to assemble Bedford Trucks. Subsequently buses, light trucks and cars wereassembled in the same plant. The industry was highly regulated until the early 1990s.Afterderegulation major Japanese manufacturers entered in the market thereby creating some competition inthis sector.

Pakistan auto industry observed a Preparation Phase 1985-05 which was based on the formulationand implementation of compulsory local content conditions, commonly referred as deletion programThe auto industry has recently entered into a Development Phase 2005-12 where the consolidationof initial achievements has started taking place alongside the development of strategy to shape theindustry in the new competitive environment.

MAIN PRODUCERS IN PAKISTAN

Suzuki Motors Honda

Toyaota

Dewan Motors

Daihatsu

MARKET SHARE

MARKET SHARE (%)

Suzuki

61%

Toyota

26%

Honda

10%

Hyundai

3% Nissan

0%

Kia

0%


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ECONOMIC ANALYSIS

Pakistan is an emerging market for automobiles and automotive parts offers immense business and

investment opportunities. The total contribution of Auto industry to GDP in 2007 is 2.8% which is likelyto increase up to 5.6% in the next 5 years. Total gross sales of automobiles in Pakistan were Rs.214billion in 2006-07 or $2.67 billion. The industry paid Rs.63 billion cumulative taxes in 2007-08 that thegovernment has levied on automobiles. There are 500 auto-parts manufacturers in the country thatsupply parts to original equipment manufacturers (PAMA members). Auto sector presently, contributes16% to the manufacturing sector which also is expected to increase 25% in the next 7 years, ascompared to 6.7 percent during 2001-02.Vehicles manufacturers directly employ over 192,000 peoplewith a total investment of over $ 1.5 billion. Currently, there are around 82 vehicles assemblers in theindustry producing passengers cars, light commercial vehicles, trucks, buses, tractors and 2/3 wheelersThe auto policy is geared up to make an investment of $ 4.09 billion in the next five years thus, makinga target of half a million cars per annum achievable. Government of Pakistan had undertaken two major

initiatives in the form of National Trade Corridor Improvement Program (NTCIP) and Auto IndustryDevelopment Program (AIDP) for the development of the automotive industry in Pakistan.

Engineering Development Board (EDB) is actively implementing the AIDP to increase the GDPcontribution of the automotive sector to 5.6%, boost car production capacity to half a million units aswell as attract an investment of US$ 3 billion and reach an auto export target of US$ 650 million.Automotive engineering is a driving force of large scale manufacturing, contributing US$ 3.6 billion tothe national economy and engaging over 192,000 people in direct employment.

The Auto parts manufacturing is $ 0.96 billion per annum. The demand for auto parts is highest in themotor cycle industry which is 60%, then is for cars which constitutes to 22% and the rest 18% is

consumed by trucks, buses & tractors. This demand is met by Imports which caters 22% while theremaining 78% is supplied by the local manufacturers. Due to the increase in demand for sophisticatedmachinery, the government has allowed duty free import of raw material, sub components, componentsassemblies for manufacturers & assemblers. Total import bill of machinery stands at $2.195 billion inthe current fiscal year of 2007-08 which is 12.77% higher than that of the preceding year. Theimpressive growth in the machine tools and automation sector is directly proportional to the growth ofthe automotive industry which has become the fastest growing industry of Pakistan and contributes $3.6billion annually to the countrys GDP.


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The aftermarket for spares has also witnessed immense expansion over the same period, with importedparts playing an important role in meeting local demand. The spare parts market is given further impetusby a total vehicle population of approximately 5.4 million

Pakistan has the second highest number of CNG-powered vehicles in the world with more than 1.55million cars and passenger buses, constituting 24% of total vehicles in Pakistan with improved fuelefficiency and conforming to the latest environment regulations.

Current Investment, Contribution to GDP and Revenue to GOP:

Decline in Sales and Revenue:

Unfortunately, the recent downward trend in auto sales (cars + LCVs) continued as auto sales stood at27,034 units for July-September 2008, showing a decline of 44 percent year-on-year, the data releasedby Pakistan Automobiles Manufacturers Association (PAMA). Automobile grew from 2001-2007, theindustry and the government of Pakistan fixed a target of over half million units production by the year2011-12 that now seems out of reach. The industry slightly fell short to achieve the targeted productionsin 2006-07 when 1,95,688 cars were manufactured against a target of 2,26,620 units. However, therewas some growth in production that year. In 2007-08 the production declined to 1,87,634 units against aprojected target of 2,66,543 units. In the current fiscal year they said the production is expected todecline to 1,50,107 units that are half the projected target of 3,13,486 units. Despite an additional levy of5 per cent excise duty, the revenues from automobile sector would decline by over 25 per cent this year

due to declining demand. The industry paid Rs.63 billion cumulative taxes that the government haslevied on automobiles. This year, despite additional duty the sector would hardly contribute Rs50 billionin the national exchequer.

Once a burgeoning industry, our auto manufacturing has gone through a bumpy drive during the last oneand a half year or so. The consumer credit crunch triggered partly by the global financial meltdown andpartly by our political and economic inaptitude has thrown the industry in a tailspin. The worst hit hasbeen the cars segment, which recorded a 46 per cent drop in production during FY09. The drop inproduction followed a matching drop in sales. The industry posted a mammoth job loss. The followingtable presents a two-year comparative view of auto production.

VEHICLE NOS.

PRODUCEDYEAR 2008-09

NOS.

PRODUCEDYEAR 2007-08

MINUS

PLUS %

NOS.

PRODUCEDJUNE 2009

NOS.

PRODUCEDJUNE - 2008

Cars,Jeeps,L.C.Vs 101,398 187,654 -46 8,153 13,825

Motor Cycles 912,067 1057,751 -14 102,265 81,173

Description 2007-2008

Total Investment Rs. 100 Billion

Total Contribution to GDP 3.5%

Total Revenue to GOP 10%


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Tractors 60,107 53,607 +12 6446 5665

Trucks 3,135 4,993 -4 369 623

Buses 657 1,146 -4 84 89

For any industry, a number of variables ascertain the demand level. In case of our automobile industrythe demand level is a function of population and family income. We have a negligible size of export

market due mainly to the lack of any competitive edge. The production capacity is variable and can bescaled up or down, should there be no social or economic constraints. There are generally no socialconstraints attached to owning or driving a car, a motor cycle, a truck, a bus, or a LVC, but there are anumber of economic constraints. The major constraints include raw material, technological, and skilledlabor. These major issues contribute to the high-cost production in the industry.

Auto industry's reliance on imported parts and material when seen in the backdrop of a depreciatingrupee vividly explains its low share in the export market. By default, it is a self-sufficient industry fullycatering to the domestic market. Our domestic market has great potential for the auto sector to develop.The ever-deteriorating and now almost intractable public transport system has awakened the masses tothe need of owning personal transport means, even at the cost of food and clothing.

Until 2007, the easy access to consumer credit drove the herds of masses to the doorsteps of banks andfinancial institutions. As a result, the auto industry went into the boom cycle. This brought about apositive social change in the society. Economic pundits criticized that era as unsustainable consumption-based-growth era. They might be feeling relieved to see their prophecy come true. However, let me saythis relief is not genuine. It was not the consumption-led-growth theory that failed rather it was theincongruity and hollowness of our political and economic systems that brought about the untimelydownfall of this industry, the negative contribution of the financial global meltdown notwithstandingThe potential of the industry - with its reliance on domestic market - is still intact. The bank liquidity isimproving, the illogically high bank rate is under an all-round fire and is bound to come down to therealistic level. The banks have learned a lot about how to ensure the quality of their assets. The highratio of auto finance NPL was not an outcome of a bad-borrower selection policy, rather it was caused

by an unexpected fall in disposable incomes and ever-rising cost of debt servicing. Auto financing is thesurest form of bank lending, as the default-driven repossession of asset invariably suffices the liabilitywrite-off. A number of positives on both domestic and international fronts herald a better economic eraThe auto industry is set to revisit the recent past. The South Asia

The need for a development program for the auto industry was realized at the time of elimination oflocal content conditions when the tariff policy has been a major instrument to push for the developmentof parts and components locally alongside encouraging the assembly of vehicles. The industry whileembracing the TBS and entering in the development phase was faced with the issues of competitiveness productivity of level and scale, low technology level, research and development, supply chain andhuman resource management. This was coupled with the challenge of continuing rapid growth phase of

last 5 to 6 years. The expectations of the government on taking the industry global and achieving thescales in production and meeting the objectives of job creation, skill development, investment andstimulating the innovation without any cogent plan, would have been difficult to realize. Developing thequality and safety standards and producing environment friendly vehicles, meeting the consumersexpectations remains the cornerstone of policy framework which would be facilitated throughgovernment intervention. While formulating the AIDP following objectives were agreed;

Long term investment

Encourage growth

Promote domestic competition


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Enhance competitiveness

Stimulate innovation

Facilitate auto industrys integration into the global supply chain

The used vehicles import policy will be regulated so as not to impede the growth of the localindustry while protecting consumer interest

VISION 2012: The Future of Pakistan Auto Industry

Product 2007-8 VISION 2012

Cars (nos.) 164,710 500,000

2 wheelers 1.06 million 1.7 million

Investment (Billion) 98 225

Contribution to GDP (%) 2.8 5.6

Contribution to manufacturing sector (%) 16 25

Direct Employment 192,000 500,000

Gross sales turn over (Billion) 214 600

Dewan Farooque Motors Limited has one of the most advanced automobile assembly plants of SouthAsia. Located at Dewan City, Sujawal, Thatta, with a total project cost of Rs. 1.8 billion, the plant isbuilt on an area of 42,000 square meters. Selection of the site reflects the commitment of Dewan Grouptowards building of a prosperous Pakistan and its contribution to national wealth. The project hasprovided direct employment to over 700 personnel. The plant is the first automobile manufacturing uniin Pakistan to be independently invested by 100% Pakistani investors. The annual capacity of the plantis 10,000 units on a single shift basis. The groundbreaking ceremony for the plant was held in June1999, and the first Kia Classic rolled-out in a record time of six months. Today the modern state-of-the-art plant is rolling-out cars every day. This is the first and only automobile assembly plant in Pakistanwith state of art robotic equipment.

INDUSTRIAL BACKGROUND

In 1968, the Dewan Family, under the leadership of Dewan Mohammad Umer Farooqui, ably supported by his younger brother, Dewan Salman Farooqui, decided to enter the industrial arena.The firsindustrial unit was set up in 1970 under the name and style of Dewan Textile Mills Limited with acapacity of 25,080 spindles which has since been increased to 61,704 spindles. The Group strengthenedits footing in the textile field by taking over another textile unit in 1975, now known as Dewan MushtaqTextile Mills Limited with an installed capacity of 25,776 spindles. Thereafter, the Group establishedanother spinning unit Dewan Khalid Textile Mills limited, consisting of 26,624 spindles.

The Group manifested its decision to diversify into automobile industry of Pakistan through theincorporation of Dewan Farooque Motors Limited on December 1998. Within this month, two moremilestones were reached: the signing of Technical License and Exclusive Distributor agreements withHyundai Motor Company, Korea's No. 1 and world's seventh largest automobile manufacturer.1999marked another important year in the history of the Group when Dewan Farooque Motors signed theTechnical Collaboration Agreement with Kia Motors Corporation of South Korea, in July 1999.

Dewan Farooque Motors is now a key player in the automobile industry of the country offering animpressive line up of passenger cars and commercial vehicles. Its state-of-the-art plant has a capacity of


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10,000 vehicles per annum on single shift basis and is equipped with the latest facilities, which includeCED paint system and robots for the final coat.

June, 2000, marked another important milestone in the history of the Group when its flagship companyDewan Salman Fiber Limited, acquired Dhan Fiber Limited and fully merged and incorporated itsfacilities into its operations .The total output of Dewan Salman Fiber Limiteds 3 polyester units is 700tons per year.

FINANCIAL ANALYSIS


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STRATEGIC ANALYSIS


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CAPACITY: In case of DFML, its overall capacity 20000 units per year, but it is presently operating at8000 units per year. According to DFML Comral1y sources, during the next year they will double theirproduction up to 20,000 units per year, which. Reduces their per unit cost. Hence in the short run thecompany probably will produce more than market demand at the current price and may reduce its pricehoping that it can recoup its cost from a greater number of sales, within the country as well as outsidethe country.

THREAT OF SUBSTITUTION: In effort, all corporations within an industry compete with firms inother industries that produce substitute products. Substitute products appear to be different but cansatisfy the same need as another product. In case of DFML, the substitute of its products Pak SuzukiMotors Company. It has posed and posing a great threat to DFML because of following reasons.

CHANNEL OF DISTRIBUTION: DFML has a manufacturer-sponsored retailer franchise systemThey license dealers to sell the cars. The dealers are independent business people who agree to meetvarious condition:, of sales and service.In this context, they have established a network of 39 dealers allover the country.The groundbreaking concept has revolutionized automobi1e marketing in Pakistan. Themotivation behind this concert is to provide the best help to customer, according to its corporate

phi1osophy customer satisfaction.This innovated concert revolves around the "Hyundai & KiDealership", which Encompasses three critical areas; sales, services and spare parts all under oneroof.All the 39 dealerships have been sent up with latest facilities, repair, equipment and machinery,manned by highly skilled and trained individuals, in order to provide the customers, a higher tounknown level of service. The dealership has already access to genuine spare parts.

SWOT ANALYSIS:

STRENGTHS

One of its strength is its location is near to Karachi. Most of its vendors are located in KarachiDFML get tires from General Motor, which is also located at Port Qasim. So DFML saves a lot of

transportation cost. DFML has installed latest technology in its plant, which is almost computerized.

DFML has set up a paint system, which is considered no 3 in Asia. As installed in 2000 the stateof art Quadrant Measuring Machine to maintain its consistence quality checks and to insure qualitystandard.

DFML, Labour force is also its strength, which is efficient and well trained. It is obvious fromthe fact that employee turnover rate is only 3% and absenteeism rate is only 5%.

WEAKNESSES

DFML has not yet achieved appropriate economies of scale as compared to its competitors.

DFML has total capacity of 20000 units. But at present they are producing 8000 units.

According to DFML sources, all major decisions are made in Korea by the holding company,they send instruction about their decisions in Pakistan and this process delays the policy making atcorporate level by the top management.

OPPORTUNITIES

Political stability in Afghanistan will increase demand for commercial vehicles in the CentralAsian States. So this is an opportunity for them to export the commercial vehicles as well aspassenger cars to Central Asian Republics, for the Central Asian republics, Karachi being thei


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nearest port the opening of trade routes in these countries, will lead to an inevitable growth in thetransport sector.

According to Manager Imports Mr. Farhan Asrar from DFML. There is an opportunity to expandmarket of Shehzore in Nepal and Bhutan, if India gives way through its trade root to Pakistan by anagreement.

According to sources from DFML, if engineering board of Pakistan makes the industry specificdeletion policy this will provide an opportunity for the development of vendor industry. At present,

there are 180 vendors in the vendors industry, if they remain and increase in vendor industry, thiswill enforce localization of cars.

THREATS

The government tax policies are threat to DFML. DFML have to pay 6.25% capital value addedtax (cvt). Apart from this, they have to pay 35% important duty on CKD kits (the main component ofcars), that is imported from Korea. That has increased its costs.

The law and order situation in the country especially in Karachi is threat to DFML. Which hascaused diminishing of companies production and demand in the country in demand of locallymanufactured cars.

Exchange rate fluctuation is also a threat to DFML Devaluation of Pak rupee has acted like athreat to the company.DFML imports CKD kits from Korea, when devaluation in the country takesplace, it increases the CKD cost.

The severe competitions in the upper segment market are also a threat to DFML. The analystshave projected that the market for larger sized engine cars will grow at a rate of 5% which is lessthan 9% for small sized engine market; this slow growth puts dampening effect on DFMLperformance, giving

SECURITY ANALYSIS

Actual Return

Security 6 (Dewan Motors)

Actual Return

YearOPEN RATE

(Po)

CLOSING

RATE (P1)Dividend R R-R (R-R)

2000 8.20 6.90 4.00 0.33 -0.22 0.05

2001 6.90 4.05 5.50 0.38 -0.17 0.03

2002 4.05 9.85 4.20 2.47 1.92 3.68

2003 9.85 13.40 4.80 0.85 0.30 0.09

2004 13.40 15.50 4.50 0.49 -0.06 0.00

2005 15.50 9.85 5.32 -0.02 -0.57 0.332006 9.85 12.30 3.00 0.55 0.00 0.00

2007 12.30 13.00 3.20 0.32 -0.23 0.06

2008 13.00 2.01 2.00 -0.69 -1.24 1.55

2009 2.01 1.49 2.20 0.84 0.28 0.08

Retun ( R ) = 0.552 5.86

or 55.2% (Risk) = 80.7%

INTERPRETATION:


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The above data clearly shows a high risk verses high return is associated with this security. Dividendyield has got down in the last couple of years which resulted in low returns due to some internal andexternal factors like the political instability of Pakistan, poor economical situation, heavy taxation onimports prolong decision making of foreign management and import of costly CKD from Korea, buthese problems are now in the solution phase.

Expected Return


2010 0.28 0.35 0.10 -0.03100 0.00096 0.00034

2011 0.34 0.45 0.15 0.02900 0.00084 0.00038

2012 0.30 0.20 0.06 -0.01100 0.00012 0.00002

Return = 0.31 0.00074

or 31% Risk = 2.7%

INTERPRETATION:

The above figures show a positive indication for the investors as they can expect some high returnsagainst low risk. Government has taken some valuable steps to strengthen the Auto Industry andsimilarly companys management has also cover up its some of the key weaknesses as mentioned abovewhich will assert a positive impact on the financial performance of the company.

CAPITAL ASSET PRICING MODEL

Dewan Security MR = x S6 = y


2000 0.070 0.329 0.023 0.005

2001 0.016 0.384 0.006 0.000

2002 1.122 2.469 2.770 1.259

2003 0.655 0.848 0.556 0.429

2004 0.391 0.493 0.192 0.153

2005 0.537 -0.021 -0.011 0.288

2006 0.051 0.553 0.028 0.003

2007 0.402 0.317 0.127 0.162

2008 0.260 -0.692 -0.180 0.068

2009 0.077 0.836 0.064 0.006

3.580 5.516 3.576 2.372

= 1.468

CAPM = Rf + (Rm - Rf) Rf = 11.50% Rm = 19.17%

CAPM = 22.76%

INTERPRETATION:From the above results we can extract that the security is yielding a return of 22.76% with a positiverelation i.e. beta of 1.468 which states a direct and more impact of market price changes. This shows that


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the change in securitys return is very much fluctuant than the change in market return, so it will yieldmore return than the market.


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PORTFOLIO ANALYSIS

After considering all the above securities which we have analyzed individually, now the portfolio containing all the above securities will be analyzstatistically and through Capital Asset Pricing Model (CAPM) to show the net results and strength of our portfolio.

Portfolio Risk and Return

Total Amount = 600000 Securities = 6 Investment per security = 100000 17%

Portfolio Return:Rp (Rw) = (0.2933)(0.17)+(0.2772)(0.17)(0.2411)(0.17)+(0.866)(0.17)+(0.202)(0.17)+(0.552)(0.17)

0.4134 41.34%

Portfolio Risk:

SecuritiesEngro HUBCO Gul Ahmed Texties Lucky Cement PTCL Dewan Motors

Engro (0.483)(0.483)(0.17)(0.17) (0.483)(0.723)(0.17)(0.17)(0.804) (0.483)(0.526)(0.17)(0.17)(0.018) (0.483)(0.878)(0.17)(0.17)(0.884) (0.483)(0.503)(0.17)(0.17)(1.157) (0.483)(0.807)(0.17)(0.17)(0.6

HUBCO (0.723)(0.483)(0.17)(0.17)(0.804) (0.723)(0.723)(0.17)(0.17) (0.723)(0.526)(0.17)(0.17)(-0.022) (0.723)(0.878)(0.17)(0.17)(0.672) (0.723)(0.503)(0.17)(0.17)(0.655) (0.723)(0.807)(0.17)(0.17)(0.8

G ul A hme d T extie s (0 .526) (0. 483)( 0.17 )(0. 17)( 0.0 18) (0. 526) (0. 723)( 0.17) (0. 17)( -0. 022) (0. 526)( 0.52 6)(0. 17) (0. 17) (0. 526)( 0.878) (0. 17)( 0.17 )(0. 035) ( 0.52 6)(0. 503) (0. 17)( 0.17) (0. 2) ( 0.526 )(0. 807) (0. 17)(0 .17) (0. 1

L ucky Ce ment (0 .878) (0. 483)( 0.17 )(0. 17)( 0.8 84) (0. 878) (0. 723)( 0.17) (0. 17)( 0.672 ) (0. 878)( 0.52 6)(0. 17) (0. 17)(0 .035) (0. 878)( 0.878) (0. 17)( 0.17 ) ( 0.87 8)(0. 503) (0. 17)( 0.17) (0. 710) ( 0.878 )(0. 807) (0. 17)(0 .17) (0. 5

PTCL (0.503)(0.483)(0.17)(0.17)(1.157) (0.503)(0.723)(0.17)(0.17)(0.655) (0.503)(0.526)(0.17)(0.17)(0.2) (0.503)(0.878)(0.17)(0.17)(0.710) (0.503)(0.503)(0.17)(0.17) (0.503)(0.807)(0.17)(0.17)(0.7

D ew an M otors (0 .807) (0. 483)( 0.17 )(0. 17)( 0.6 97) (0. 807) (0. 723)( 0.17) (0. 17)( 0.841 ) (0. 807)( 0.52 6)(0. 17) (0. 17)(0 .194) (0. 807)( 0.878) (0. 17)( 0.17 )(0. 565) ( 0.80 7)(0. 503) (0. 17)( 0.17) (0. 795) ( 0.807 )(0. 807) (0. 17)(0 .17)

Securities Engro HUBCO Gul Ahmed Texties Lucky Cement PTCL Dewan Motors

Engro 0.00674 0.00811 0.00013 0.01083 0.00812 0

HUBCO 0.00811 0.01511 -0.00024 0.01233 0.00688 0

Gul Ahmed Texties 0.00013 -0.00024 0.00800 0.00047 0.00153 0

Lucky Cement 0.01083 0.01233 0.00047 0.02228 0.00906 0

PTCL 0.00812 0.00688 0.00153 0.00906 0.00731 0

Dewan Motors 0.00785 0.01418 0.00238 0.01157 0.00933 0

Portfolio Risk = 0.283 or 28.33%

Through the calculations above we can see that the portfolio is generating a return of 41.34% with a risk of 28.33%. In the current situatioprevailing globally in which every country is facing an economy of depression and especially in Pakistan the situation is also worse we suggest ththis portfolio is best to invest in because the risk is not much higher with relevance to the return.


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Furthermore we also have calculated the Return and Risk of our portfolio through Capital Asset Pricing ModelCAPM to give a clearer picture to our investors, who are willing to invest in our portfolio.

Calculation of Portfolio CAPM

p = w1 + w2 + w3 + w4 + w5 + w6

Securities w w

1 0.554 0.17 0.09

2 0.887 0.17 0.15

3 0.415 0.17 0.07

4 0.760 0.17 0.13

5 1.166 0.17 0.20

6 1.468 0.17 0.25

0.89

p = 0.89

CAPM = Rf + (Rm - Rf) Rf = 11.50% Rm = 19.17%

CAPM = 18.35%

And after analyzing the whole portfolio through CAPM the return for our portfolio is 18.35% and thecoefficient of correlation i.e. beta is 0.89 which shows a positive relation between market price changes and thechanges in security return. It also states that if a price of 1 Rs. Will change in market then it will impact the

portfolio at 0.89 Rs, i.e. a little bit lesser than the change in market. Same is the

Documents

Portfolio Analysis by M.Yasir