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Nauman Khannaum an@investc ap ital.co m
9221-111 111 097 (ext 8636)
Global recovery to overpower pa rad igm shift
Crac k spreads improving on the bac k of quantitative easing
ATRL the c hief beneficiary amongst the loc al p layers
Attock group ATRLs inherent strength
Immune to circular debt
Our Rec ommendation Buy Jun-11 TP of Rs165/ sh.
November 2010
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www.investca pital.com
InvestCap is the brokerage arm of:
Invest Capital Investment Bank Ltd .
Attoc k Refinery- ramping up to full throttle
Buy!
Bloomberg Code ATRL PK
Reuters Code ATRL KA
No. of Shares 85.29mn
Avg. Daily Vol. (1-Y) 1.07mn
Shr. 52 Weeks High, Low R156 Rs76Last Closing Rs120.22
Target Price Rs165.00
Upside Potential 37.25%
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Contents
Attoc k Refinery Limited . - Ra mp ing up to fu ll throttle!
Investme nt Them e 1
Refinery sector 1
Pakistan Refinery sector 3
Pa kista n s oil cha in 7
Rec ent Developme nts 8
Attoc k Refinery Limited 9
Potential Dampeners/Weaknesses 9
Valuation 13
Risk to va luat ion 15
Financ ial High ligh ts 16
Date of c omp letion: Novemb er 10, 2010
November 2010
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Pric es are a s of Nove mb er 08, 2010
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Investment ThemeWe are initiating our coverage with a 'Buy' stance on Atto ck Refinery Limited (ATRL). We
have employed Sum-of-Part (SoTP) method to va lue comp any's core-refinery op erations
along with its strategic investments particularly in National Refinery Limited (NRL) and
Attock Petroleum Limited (APL). Through Discounted Cash Flow (DCF) methodology,using a CoE (Cost of Equity) or WACC (Weighted Averag e Cost of Capital) of 24.75%
(due to debt-virgin ba lance sheet) and terminal growth rate of 3%, we have a rrived a t
company's core-refinery operation value of Rs82/share. Furthermore, we have also
assigned a va lue of Rs83/share to ATRL's investment portfolio, translating into our Jun-11
Target Price (TP) of Rs165/share. At current leve ls, the scrip offers an a ttrac tive upside of
37% from current levels, while trad ing a t a P/BV (Book Va lue) a nd P/SPS (Sales Per Share)
of 0.61x and 0.11x against its historic averages of 1.41x and 0.16x (FY06-10) respectively.
Resurging mid dle d istillate c rac k sprea ds - shifting d irec tions
Substantial dec line in crude o il demand on the b ac k of globa l economic rec ession
along side wa ve of new refinery capa c ity resulted in a shift w ithin the refinery sec tor. The
shift wa s charac terized by a significant dec line in midd le and low d istillate c rac k spreads,
which crea ted ad verse op erating environment fo r c rude oil refineries sec tor ac ross the
globe . However, the rec ent w ave of quantitative ea sing has rejuvenated interest in
commodity markets, including crude oil. As a result, middle distillate crack spreads,
pa rticularly of gasoil (premium product) improved by a significant 172%YoY and 64%QoQ
in 1QFY10. The e nhanc ed spread s have c rea ted a favorab le environme nt for
internationa l as we ll as domestic refineries.
Dom estic refineries - b ene fiting from intl pricing sce narioThe favorable development in the international ma rket is expec ted to b ode w ell for the
domestic refinery sec tor, as the fo rmer holds a major bearing on the latter's operation
and profitab ility. The favo rab le price movements in the international oil prices and
rejuvena ted middle d istillate c rack sprea ds translate into a significant hike in domestic
GRMs (1QFY11 GRMs stood at an average USD2.60/b bl as against fa r below levels of
USD0.40/bbl during FY10).
However, gauging the still wea k co mp etitive p osition o f the sec tor with regards to its
international peers along with domestic issues of notorious-circular debt, we are
compe lled to ma intain our 'Neutral' stance on the sec tor. Saying so, we b elieve ATRL
would stand out compa red to the rest of the sec tor.
ATRL - ramping up to full thro ttleDespite our 'Neutral' stanc e on the sec tor, our liking for ATRL stems from the follow ing:
The c ompa ny holds central position in the o nly cong lomerate o f the c ountry that is
highly integrated throughout the o il cha in. At one end, ATRL forms a vital linkage
between the upstream and downstream companies of the group. On the other
end , the compa ny enjoys a central position in the group's holding pa ttern having
strateg ic investme nts in Nationa l Refinery Limited and Attock Petroleum Limited .
Among st d ome stic ref ineries, we b elieve the c omp any w ould b e the c hiefbe nefic iary of the resurgenc e in the midd le distillate c rac k sprea ds due to its superior
prod uc t m ix. It is wo rth m ent ioning he re tha t, ATRL has the best Yield Effic iency Ratio
(YER) a t 1.84x against the industry ave rage of 1.52x, which is the roo t o f c om pa ny's
sup erior GRMs as c om pared to its industry pee rs. As per our ca lcu lations, ATRL's
1QFY11GRMs stoo d a t USD4.92/ bb l, far ab ove the industry averag e of USD2.97/ bb l.
Due to its low yield of Furnac e O il (FO) in its produc t m ix, ATRL is less exp osed to the
notorious inter-corporate debt, which has trapped the cash flows of the entire
energy chain in the country.
Comp any Desc ription
At tock Ref ine ry i s a
s u b s i d i a r y o f A t t o c k O i l
C o m p a n y , UK, a n d i sp r i n c i p a l l y e n g a g e d i n
proc essing of c rude o il, with
h a v i n g s t r a t e g i c
i n v e s t m e n t s i n NRL a n d
APL. The c om pa ny ha s a
p a id - u p c a p i t a l o f
Rs852mn (USD9.88mn ). `
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Pag e 1 of
Refinery sec torSubstantial dec line in c rude o il de ma nd on the b ac k of wo rst ec onom ic pe riods
observed since the Great Depression, congruent with the recent wave of new
refinery c apa c ity, led to d ep ressed profitab ility of internationa l refinery sec tor of
late. Additional 7.3mn ba rrels pe r da y (bpd) produc tion of refining c apa c ity is further
expec ted to be ad ded by the end of CY15. This ad ditional ca pa c ity is ac co mpanied
with a chang ing refining configuration to wa rds high yields midd le and low d istillate
produc ts, pa rtic ularly in the Asiatic region. The p arad igm is now shifting from hyd ro-
skimming to hydro-crac king tec hnology.
With ea rly signs of econo mic rec ove ry kicking-in, the said pa rad igm shift is expe c ted
to ha ve a ma rk imp lica tion on the midd le and low d istillate s c rac k spread s, as the
sam e could stay lower c ompa red to pre-rec ession levels. With this ba c kground in
p lac e, we no w sta rt our discussion on the g loba l oil refining sec tor.
Fac tors affec ting refinery sec torChang ing g lobal eco nomic dynamics have c hanged the o il market dynamics and
subseq uently, the global oil refining sec tor. Though the trad itiona l econom ic p ower
houses i.e. USA a nd Europe , still co ntribu te 43% of the tota l world refining c apac ity,
the new c ap ac ities with adva nced te chnology are taking their root in the emerging
economies.
Alongside m ovements in the internationa l oil prices, fac tors tha t p lay an imp ortant
role in the determination of spreads are
Refinery outages
Cyc le of the c rude o il i.e. d riving season, winter sea son a nd two lag sea sons Dema nd and supp ly scena rio of the individua l prod uc ts, with respe c tive to
global ec onomic e nvironment a nd c rude o il cycle
Cha nge in technolog y in the refinery op erations tow ards minimizing yield
of loss-making p roduc ts (as evide nt by the sudde n dip in c rac k sprea ds
tow ards the end of CY08 as Relianc e Industry cam e online)
Exploration and prod uc tion
Refineries
Oil marketing c omp anies
Final conusmer
Oil chain
1856
World 1st c rude oil refienry
Basic d istillation proc ess
Early 1900
Boom of auto industry
Thermal c racking
Post wa r rec overy and foc us on e nvironme ntal
issues
Catalytic Processes
Post World w a r II to
19702000's
Rise of emerging economies
Adva nement inHydroskimming and
coaking
Evo lution o f refinery industry
Source : Bloom be rg, InvestCap
WORLDREF. CAPACITY
(000' b p d) C a p . UC Pla n
US 23,636 - -
C a na d a 3,611 135 -
C hina 7,244 549 -
Russia n 6,116 - -
Ja p a n 4,909 - -
Ind ia 3,520 480 -Pa kista n 275 - -
Ot. Asia 17,543 140 800
Euro p e 17,945 - -
La t Am. 6,659 1,380 -
O the rs 3,654 - -
To ta l 95,112 2,684 800
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Pakistan Refinery Sec torOp erationa l issues restrict c ap ac ity exp ansions
Tota l crude o il refinery c ap ac ity of the c ountry stood at 12.95mn tons by the end of
FY10, with five ma jor refineries c ont ributing ~99% of to ta l co untry's c rude oil refining
ca pa city. In a broad er mac roec onomic percep tive, the c ap ac ity is only sufficientto fulfill ~67% of Pakistan's ove ra ll pe troleum p roduc ts dem and.
However, ope rationa l issues (pa rticularly with reg ards to BYCO Petroleum Com pany)
along side imp ac t of exog enous fac tors in a highly regulate d industry have forced
the sec tor to ope rate at an ave rag e 75% (FY05-10) of its nam ep late c ap ac ity.Moreove r, with no substantial ad dition to country's refining c ap ac ity, dep icted by
the last 5-yea r CAG R (Comp ound Averag e Growth Rate) of me re 0.3%, the sec tor
has only been able to fulfill on an average 64% of country's overall petroleum
PAKISTANSMAJORREFINERIES
(mn tons) Ca p a c ity Utiliz.
Attoc k Refinery 1.92 90%
BYCO Industry 1.5 49%
National Refinery 2.71 71%
Pak-Arab Refinery 4.5 73%
Pakistan Refinery 2.1 72%
Others 0.22 86%
12.95 73%
PRLNRL
BYCO
PARCO
ATRL
Sourc e: Ministry of Petroleum & Na tural Resourc es (MoP&N), InvestCa p Resea rch
-
5
10
15
20
25
FY05A
FY06A
FY07A
FY08A
FY09A
FY10E
Refining ca pa cityRefining throughputPetroleum prod. co nsump tion
mn tons Consumption and throughput comparison
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produc ts demand with the last 5-year (FY05-10) CAGR at 5.9%. Therefo re, the c ountry
is also a net impo rter of pe troleum p rod ucts with the p ricing and op erational
dyna mics of the internationa l refineries having a signific ant impa c t on c ountry's
dom estic oil refining industry.
An Oligopo ly - not rea l lyFive refineries co ntribute 99% of country's tota l refining c apac ity. This propo sition
seems to be standing as an 'Oligopoly' from the naked eye. However, the sector
fails to d ep ict tw o e ssentia l cha rac teristics of a n Oligo po ly 1) ab ility to set p rices
and 2) profit maximization c ond itions, a rising out of its we ak position w ith respe c t
to c omp etition dyna mics.
Firstly, the sec tor is highly reg ulated as ex-refinery pric es of e ight p etroleum prod uc ts
are announc ed by the Oil & Ga s Regulatory Authority (OGRA) on a monthly basis
through Imp ort Parity Price (IPP) Formula. Only one prod uc t is unregulate d prod uc t
i.e. Furnac e Oil (FO), how eve r, the d om estic p rices of this produc t a lso tra ils tha t of
the internat ional p rices.
Sec ond ly, Pakistan is a net impo rter of c rude oil. Therefore, the raw ma terial pric ing
is also a func tion of international p ricing. Weak b arga ining po sition o f the sec tor on
either ends limits sec tors ab ility to set p rices and op erate at its ma ximum c ap ac ity.
Hence, it is a misconception that the sector is an 'Oligopoly' as it lacks pricing
po we r which a lso keep s rivalry a mongst the individua l refineries at ba y.
Chang ed dy nam ics in 2002 invok ed ea rnings vola tilityIn Jul-02, the Government o f Pakistan (GoP) abo lished gua rantee d return formula
for the local refineries, in favor of a more market-based return, where ex-refinery
pe troleum p rod uc t prices would be de termined. The c onve rsion linked loca l refinery
profitab ility to internationa l oil dynamic s, and thus invoking vola tility in core-refinery
operation. .
However, understand ing the te chnologica l draw ba ck fac ed by local refineries as
compa red to its international peers, the go vernment emb ed de d a 10% Deeme d
Custom Duty o n HSD and 6% ta riff each on Light Diesel Oil (LDO), Jet Propulsion (JP-
4) and Kerosene (KERO), thus creat ing a favorab le env ironment for the industry.
How ever, when c rude oil prices rallied to their rec ord highs, go v't withdrew tariff on
LDO, JP-4 and KERO, w hile red uc ing 10% ta riff to 7.5% on HSD. Therefo re, keep ing in
view the tec hnologica l pe rspec tive, the embe dd ed dee med duty stand s vital for
sec tor's p rofitab ility. The g raph above illustrate s the same tha t the listed refineries'
GRMs would be slashed by a ma ssive ~99%, in case the de emed duty is completely
abolished.
Petroleum supp ly break- up FY10
0
2
4
6
8
10
MS
Kerosene
JP-1
HSD
LDO
FuelOil
Others
Refinery Imports
(mn tons)
Source: Source: Oil Comp anies Advisory Com mittee (OCAC ), InvestCa p Resea rch
Base
Plus
Back charges
Handling charges
Warfage
Conversion From USD to PKR
Deemed Duty 7.5% on HSD prices
Conversion From M. Ton to Litre
Import Equivalent
Incidents
IPP formula
Monthly Arab
Gulf Mean
Marine Insurance
LC commission
Sourc e: O GRA, InvestCa p Res.
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PARCO hold s the b igg est chunk , ATRL bette r off with u tiliza tion
With respec t to ma rket share, PARCO trad itiona lly enjoys a lion share of a bove 41%.
However, on account of the recent flood scenario, the biggest refinery had to
c lose its op erations for ab out a month w hereby its ma rket share d rop pe d to 26% in
1QFY11. The lost g round wa s prima rily pic ked up by NRL and ATRL increa sing the ir
ma rket sha res to 25% and 23% respec tively, followed by PRL at 21%. BYCO, on the
other hand , witnessed a p lant c losure in Jun-10 and as a result, its ma rket share
stoo d at a mere 2.5%.
For the same pe riod, c ap ac ity utilizat ion of the individua l refineries stoo d at 97% for
ATRL and 86% for NRL fo llowed by PRL with utiliza tion leve l of 74%. Co nve rsely, BYCO
and PARCO's c ap ac ity utiliza tions stoo d a t only 39% and 19% respec tively.
(25)
(20)
(15)
(10)
(5)
0
5
10
15
Sep-05
Feb-06
Aug-06
Feb-07
Jul-07
Jan-08
Jun-08
Sep-08
May-
Dec-09
Nov-10
Without With
NRL GRMs Compa risons(USD/ bb l)
(20)
(10)
0
10
20
30
Sep-05
Mar-06
Oct-06
May-07
Nov-07
May-08
Oct-08
Jun-09
May-10
Without With
ATRL GRMs Comparisons(USD/ bb l)(USD/ bb l)
(25)
(20)
(15)
(10)
(5)
0
5
10
15
20
Sep-05
Feb-06
Aug-06
Feb-07
Jul-07
Jan-08
Jun-08
Sep-08
May-
Dec-09
Nov-10
Without With
BYCO GRMs Comparisons(USD/ b bl)
Sourc e: OGRA, OCAC , MoP&N, Bloom be rg, InvestCa p Resea rch
(25)
(20)
(15)
(10)
(5)
0
5
10
15
Sep-0
5
Mar-0
6
Oct-0
6
May-0
7
Nov-07
May-0
8
Oct-0
8
Jun-0
9
May-1
0
Without With
PRL GRMs Comparisons(USD/ bb l)
Sourc e: MoP&N, OCA C, InvestCa p Resea rch
Cap ac ity utlization
0%
20%
40%60%
80%
100%
120%
ATRL
BYCO
NRL
PARCO
PRL
FY08 FY09 FY10 1QFY11
27%
21%
25%
23%
2% 2%
PARCO PRL NRL
ATRL BOSI Other
Refinery Sha res in 1QFY11
Source: OCA C, InvestCa p Resea rch
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Prod uc t mix - a key to suc c ess
With uniform p ricing struc ture fo r bo th p rod uc t and raw ma terial, the d ifferentiating
factor between the GRMs of various refineries is the product mix of individual
refineries. Refineries with superior p roduc t m ix i.e. having high yields of p rem ium
prod uc ts (MOG AS and HSD) along with low yields of sc rap pricing p rod uc ts (FO) w ill
fare be tter as compa red to the ir pe ers having a n unfavo rab le produc t mix. For thispurpose, we have developed 'Yield Efficiency Ratio' (YER) to gauge the relative
effic ienc y of the individua l refineries a t dom estic front. In simple terms, higher the
ratio, the supe rior the p rod uc t m ix and therefore, supe rior GRMs of a pa rticular
refinery.
GRMs - On route to rec overy
As d iscussed , the parad igm shift in the internationa l refinery operations and g loba l
ec ono mic rec ession bodes hea vily we ll on the d om estic GRMs. The d eve lopm ent
slashed dom estic GRMs by a ma ssive 10.01x from USD7.16/bb l ba ck in FY08 (pre-
rec ession p eriod ), to only USD0.40/bb l in FY10. However, rec en t reviva l in the
internationa l oil p rices has improve d m idd le distillates c rac k spread s. The c hangehas reflec ted positively in the d om estic G RMs, which stoo d at USD2.60/ bb l during
1QFY10 and e xpected to be a round USD2.66/bbl in 2QFY11.
Going forward, we believe that global economic recovery would improve
petroleum product margins. However, the same are expected to remain below
the levels of the pre-recessionary period on account of changing paradigm in
interna tional refinery operations. We e xpec t d om estic G RMs to rec ove r at least to
USD3-4/bbl in FY11 and beyo nd .
PRODUCTMIXOFREFINERIES
A TRL BYC O N RL PA RC O PRL Ind ustry
M OG AS 18% 7% 6% 19% 6% 12%
KERO/ AF 16% 0% 9% 13% 14% 12%
HSD 26% 36% 31% 30% 28% 30%
FO 24% 48% 21% 27% 39% 27%
Na p htha 11% 7% 12% 11% 13% 8%Non-energ y 5% 1% 16% 0% 0% 5%
Othe rs 1% 1% 6% 0% 0% 7%
YER Ra t io 1.85 0.898 1.76 1.83 0.86 1.52(20)
(15)
(10)
(5)0
5
10
15
20
25
Sep-05
Feb-06
Aug-06
Feb-07
Jul-07
Jan-08
Jun-08
Sep-08
M
ay-
Dec-09
Nov-10
NRL ATRL PRLBOSI PARCO
GRMs comparisonsUSD/ bbl
Source : MoP&N, OGRA, Bloom be rg, InvestCap Research
Spread Com pa rison
(40)
(30)
(20)
(10)
0
10
20
30
Naphtha
FO
Kero
HSD
FY08 FY09 FY10 1QFY11
USD/ b bl
(5 )
0
5
10
15
NRL ATRL PRL BYCO
FY08 FY09 FY10 1QFY11
Dome stic GRMs(USD/ b b l)
Sourc e: MoP&M, Bloo mb erg, OGRA, InvestCap Research
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Pakistans oil cha in
ImportsRefinery
Supply
MS
Kerosene
JP-1
HSD
LDO
FuelOil
Others
Others
Power
Transp ort
AgricultureIndustry
Domestic
Demand
1.90.2 0.7
7.4
0.07
9.2
0.8
Domestic E&P
30%
OG DC - 54%
BP - 15%
MO L - 11%
O the rs - 20%
Crude Oil Import
70%
Arab Gulf
Refinery
67%
PARCO - 41%
ATRL - 18%
PRL - 17%
NRL - 16%
BYCO - 8%
Imported
POL
products
33%
Arab Gulf
Oil Marketing
Companies
PSO - 70%
Others - 30%
Domestic
0.4%
Industry
5.2%
Power
43.3%
Agriculture
0.3%
Tran spo rt
47.7%
Others
3.0%
Source : MoP&N, OCAC , InvestCa p Resea rch
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Rec ent DevelopmentsDeregula tion of pricing - oil c hain integration to be leverag e
A rec ent issue tha t is impac ting, d om estic refineries is the revision in IPP formula on
the directive of the apex court of the country. In this regard, the proposal of
de regulation of the pe troleum p rod uct pricing ha s atta ined the c entral stag e. Inadd ition, the scheme a lso e ncom pa sses deregula tion of the IFEM (Inland Freight
Equa liza tion Ma rgin) that is app lied a fter the e x-refinery prices to eq ua lize freight
charge ac ross the c ountry.
As pe r our unde rstand ing, influenc e o f the international refinery dynam ics will restric t
the b enefits for the d om estic refinery sec to r a t the e x-refinery pric es. Furthermore,
the de -reg ulation of the IFEM w ill indirectly impa c t the refinery sec tor whe re the
emerging b ene fit w ill be restricted to refineries that are p art of integ rate d oil cha ins.
Therefore, we deem the chang e in the pric ing formula to ha ve a favorable imp ac t
on refineries tha t can generate positive synergies on a ccount o f their group profiles.
Attoc k Group, in this reg ards, is expec ted to b ene fit the most a s the g roup is bo th
backward and forward integrated (from Oil & Gas Exploration to Refining to
Ma rketing & Distribution).
Turnove r tax - resolving in favo r of refineries
In the federal budget FY11, the GoP enhanced the turnover tax from 0.5% to 1%
(higher of corpo rate o r turnover tax to be p aid). This step had a n ad verse p rofitability
impa c t on the com pa nies plac ed w ithin the quad rant of high-volume-low-margin
businesses (distribution sec tor) inc luding refineries. The effec tive tax rate , as of the
latest q ua rterly results of the refineries, doub led to ~70% from 35%, whic h e rode d
sector's profitability quite significantly. Recently, the Federal Board of Revenue
(FBR) has reverted bac k the turnove r tax to 0.5%, which w ould sca le ba c k sec tor's
profitability with its previous normal-tax levels, going forward.
The Deem ed Duty - a c ata lyst unlikely to g oAnother conc erned fac ed by the loc al refinery sec tor is the reduc tion in the deemed
duty o n HSD from the existing 7.5%, wh ich as mentioned ea rlier is signific antly c rucialfor refinery sec tor's bot tomline (earning sensitivity ana lysis is p rovided in the e nd ).
However, we be lieve tha t the scenario w ithout the d eemed duty is quite imp robab le,
as we term the g ove rnment to b e the chief bene fic iary of this reg ime. The c ountry
meets 45-50% of its pe troleum product d emand through imports, therefore, deem ed
duty o n impo rts is an important source of revenue fo r the government (petroleum
and mineral co ntribute 16% to tota l custom duty c ollec tions). Thus, unde r the c urrent
ec onomic scena rio with high fisc al need s, we b elieve tha t the g ove rnment is not
expe c ted to o pt to red uc e o r elimina te th is vital source of revenue s. Thus, we also
do wnp lay a ny risk of the c hang e in the p reva lent d uty structure in the foreseea ble
future.
Circula r-de bt o nly a n issue for High y ielding FO refineries
Ano ther issues fac ed by the refinery sec tor is of c irc ular debt. Roo t c ause a na lysis ofthe situation revea ls tha t c ircular deb t p rimarily stem s from high c ost o f therma l
generation a rising from our dependency o n FO a nd government inab ility to reco ver
the cost from the final consume r. For this reason, refineries wh ich have h igh yield o f
FO in their p rod uc t mix are ad versely affec ted from the issue, with minimal impa c t
on c om pa ny's having low yield o f FO. Therefore, revisiting the p roduc t mix of the
refineries presented early, PARCO, BYCO and PRL are adversely affected by the
issue, while ATRL and NRL are relat ively imm une to the situa tion.
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Attock Refinery LimitedAbout the com pany
Attoc k Refinery Limited (ATRL), a subsidiary of Atto ck Oil Co mp any Limited , UK, wa s
incorporated in Pakistan o n 08 Nov, 1978 as a private limited compa ny and wa s
later co nverted into a pub lic comp any on 26 Jun, 1979. The c omp any is principa llyengaged in the refining of crude oil with annual refining capacity of 14.784mn
barrels or 1.92mn tons situated at Morgah, Rawalpindi. In addition, the company
ha s a stra tegic inve stment in Nat iona l Refine ry Limited (Rs8.05bn or USD93.4mn)
and Attoc k Petroleum (Rs4.46bn or USD51.7mn).
Part of Attoc k g roup - its inherent streng thenATRL's inherit streng th c om es from its assoc iation with the A tto c k Group wh ich
possesses high business acumen reflecting in well-built balance sheets of their
business ventures so far. The group is the only c ong lome rate in Pakista n tha t is we ll-
integrated througho ut the o il c hain. At one hand , with its investme nt in Pakistan
Oilfields Limited (POL), the g roup has exposure to the up stream sec tor cont ributing
7% and 2% to c ount ry's oil and g as prod uc tion respec tively. On the othe r hand, its
strateg ic ho lding in ATRL, NRL and APL ma kes the group a formidable player in thedow nstream sec tor of the c ount ry. ATRL and NRL, with cum ulative refining c apac ity
of 4.63mn tons, the g roup c ontrols 36% of the tota l refining cap ac ity of the country,
ec lipsing PARCO tha t c ont ributes 34% to sec tor's tota l ca pa c ity. In the d ow nstream
oil sec tor, APL is the fourth largest OM C (Oil Ma rketing Com pany) in the c ount ry,
having a ma rket share of ~8% as of FY10. In a dd ition, the group a lso ha d auxiliary
business in the LPG a nd pow er industries of t he c ountry, p roviding further strength
to the overall group.
With ATRL be ing in the c entral tier of the predominant p yram id holding p atte rns
along side a vital link between the upstream and downstream oil sectors, the
Bloomberg Code
ATRL PK
Reuters Code
ATRL KA
No. of Shares
85.29mn
Avg. Daily Vol. (1-Y)
1.07mn
Shr. 52 Weeks High, Low
R156 Rs76
Last Closing
Rs120.22
Target Price
Rs165.00
Upside Potential
37.25%
Sourc e: Com pa ny Rep orts, InvestCa p Research
Attock
Group
Attoc k Oil
Company
Pharaon
Investment
Pakistan
Oilfields
Attock
Refinery
Limited
Attock
Petroleum
Limited
Attock
Ge n
Limited
NationalRefinery
Attock
Information
Tec hnoloy
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company reaps the maximum benefit arising from the synergies created by the
group compa nies. At one end , the co mp any forms a c ruc ial link betw een POL (E&P)
and APL (OMC), while holds its strategically diversified investments in NRL, APL,
Atto c k Ge n Limited a nd At toc k Informa tion Tec hnolog y Servic es, on the o ther
hand.
Surging mid dle disti llate c rac k sprea dIn addition to the strong group profile, our liking for the company also stems from
the resurge nc e in the midd le d istillate c rac k sprea d . With surge in int'l crude oil
p ric es, Gasoil c rac k spread show ed a significant improve me nt of 65% QoQ, while
surging b y a ma ssive 136% YoY during 1QFY11. On the o ther hand , negative margin-
prod uc t FO, dec lined by a mere 5% QoQ a nd 9% YoY. The said improvem ent w ill
reflec t p ositively on th e d om estic refinery sec to r with ATRL b eing t he c hief
bene ficiary on ac count of its superior YER, as explained ea rlier.
Sup erior prod uc t m ix translating into superior GRMsAs me ntione d befo re, ATRL's YER stands highe r at 1.84x as com pared to the industry
average of 1.52x. This superior YER sta nds prima rily on account of ATRL's ability to
process light-sweet grade crude oil, resulting in low yield of FO and high yield of
Ga soil and Mogas. The recent estima tes revea l ATRL's FO yie ld hovers at 22% aga instthe industry averag e of 27%, while the c umula tive yield o f Mog as and G asoil stands
significantly be tte r a t 44% tha n the industry averag e o f 32%. .
Immune to c irc ular de bt - sti ll a c ash rich b ala nc e sheet
Low FO yields have also minimized ATRL's exposure to the notorious c ircular deb t saga
which has trapped ma ny an ene rgy-sec tor comp any so far. ATRL's balance sheet
continues to show strong cash position while any adverse impa ct of the c ircular debt
has been effic iently managed through e ffective c ash management so far.
Reve rsa l of Turnove r tax- a nothe r question m ark resolvedTurnove r tax w as ano ther issue within the sec tor, ca sting unc ertainty on the
companies' future profitability in the form of inflating effective tax rates. At the
same pa ce, the imp ac t of the said deve lopm ent w as substantially visible on ATRL'sfinanc ial results during 1QFY11, as the c om pa ny's ma nagement op ted conservative
(18)
(13)
(8)
(3)
2
7
12
17
22
Jul-08
Sep-08
Nov-08
Jan-09
M
ar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
M
ar-10
May-10
Jul-10
Sep-10
Nov-10
ATRL Ind ustry
DomesticGRMs(USD/ BBL)Product yield c omp arison
0%
20%
40%
60%
80%
100%
120%
ATRL Ind ustry
MOGAS KERO/ AF HSDFO Na p htha Non-energyOthers
YER 1.82x 1.52xSourc e: Mo P&N, ORGA, InvestCap Research
TURNOVERTAXEFFECT
1QFY11A Def. Ta x 2QFY11E FY11E
6.84 2.07 6.92 28.61
Sourc e: InvestCa p Resea rch
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approach and charged deferred tax assets to the P&L, resulting in increased
effec tive tax ra tes to 42%, over and ab ove c orpo rate ta x rate o f 34%. Therefore,
the reversal of the new tax at the sam e time wo uld reset c ompa ny's bo ttom line to
its pre-tax imposition levels going forward where we expect company's 2QFY11
ea rnings to augm ent by an incrementa l imp ac t o f Rs2.07/share to Rs11.65/share.
ATRL 1QFY10 financ ia l revie w - PAT rec ord ing a massive jum pThe com pany recently a nnounced its 1QFY11 result, posting a profit a fter tax (PAT)
of Rs588mn (EPS Rs6.08) a s c ompared to a LAT of Rs396mn (LPS Rs4.65) in t he
correspond ing p eriod of last year. The turnaround story is in co mp any's core-refinery
op eration that fac ed ad verse op erating environment last year. How ever, rec ove ry
in the internationa l energy prices reflec ted po sitively on com pa ny's GRMs in 1QFY11.
As pe r our calc ulations, co mp any's GRMs stoo d at USD4.89/bbl as com pa red to a
muc h lower USD2.04/bbl in the sam e pe riod last year. The turnaround in the GRMs
pulled com pany's c ore-refinery op era tion from a loss of Rs553mn (LPS Rs6.49) in
1QFY10 to a profit o f Rs583mn (EPS Rs6.08).
Further musc le to the bo ttom line a lso c am e from surge in com pa ny's othe r op erating
income (excluding dividend income from associates), massively up by 68% YoY.
However, the only ea rning d am pe ner was inflated effec tive tax rate a t 42% ove r
and ab ove c orporate tax rate o f 34%. The surge in effective ta x rate wa s on
ac co unt of the c hange in the taxation regime leading to comp any op ting to expense
out its defe rred ta x asset.
ATRL1QFY11FINANCIALHIGHLIGHTS
(Rs mn) 1QFY11A 1QFY10A Yo Y
Net Sa les 25,041 19,256 30%
Cost of Good So ld 24,164 19,779 22%
Gross Profit 877 (523) N/ A
Ad im, tra ns. & Selling exp ense 72 67 8%
Op era ting Profit 804 (590) N/ A
Fina nc ia l Cha rg es 42 128 -68%
Other c ha rg e s 82 5 1544%
Other inc o me 321 191 68%
Profit Befo re ta x 1,001 (532) N/ A
Ta xa t io n 418 21 1883%
Profit After Ta x (Core-refinery) 583 (553) N/ ANon-refinery inc ome - 157 N/ A
Net Inc ome 583 (396) N/ A
EPS @ 86m n sha res 6.84 (4.65)
Sourc e: Com pa ny Rep orts, InvestCa p Research
13%
5%
5%
58%
11%
4%4% Assoc iated Cos.
Individuals
NIT/ ICP
Joint Stock Cos.Others
Foreign Investors
Financ a l Ins.
Sharehold ing pa tterns
Sourc e: Com pa ny Rep orts, InvestCa p Research
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Future p lansUnderstand ing the changing trends in the internationa l refining op eration, ATRL has
formulated a c omp rehensive plan that no t only enco mp asses cap ac ity by anothe r
12,400bp d, but a lso a ims a t improving c om panies Moga s and HSD yields by an
0.3mn to ns) and 0.6mn tons respec tively. As pe r new s repo rts the e stima ted c ost of
the se p rojec ts is USD100mn. The brief o f the se p rojec ts are:
Due to te ntative nature of these p rojects, we have not incorporated in the p roject
in to our financ ial mode l for the c ompa ny, how ever any positive develop ment in
this front will have a significa ntly positive imp ac t on com pa ny's valuat ion.
FUTUREPLANS
Projec t Aim Benefit
Prefla sh Unit Crud e p roc essing c a p a c ity enha nc ement 12,500p b s
Isomeriza tion Unit To inc rea se the g aso line RON a nd red uc e b enzene a nd aroma tic s 0.3mn tons
Diese l Hyd ro -Desulp huriza tion Diese l Hyd ro -Desulp huriza tion (HSD) Unit , Ca pa city 0.6mn tons
Sourc e: Com pa ny site, InvestCa p Research
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WACC
Risk Fre e Ra te 14.25%
Risk Preimum 7.0%
Adjusted Beta 1.50
Cost of Eq uity 24.75%
Cost of Deb t -
WACC 24.75%Source: InvestCa p Resea rch Resea rch
WEIGHTEDAVERAGECOSTOFCAPITAL(WACC)
Rs/ sh. 19.75% 22.25% 24.75% 27.25% 29.75%
1% 171 167 163 160 157
2% 173 168 164 160 158
3% 175 169 165 161 158
4% 176 170 166 162 159
5% 179 172 167 163 160Source : InvestCa p Research Research
TER.GROWTHRATE
Sensitivity Analysis
Sourc e: Com pa ny Rep orts, InvestCa p Research
FREECASHFLOW PROJECTIONS
(Rs mn) FY08A FY09A FY10F FY11E FY12E FY13E FY14E FY15E
EBIT 4,131 2,542 127 2,641 3,737 3,449 3,971 5,004
Adjustments
(+) Dep rec ia tion 392 127 124 304 304 286 255 281
(-) O ther Inc ome 578 994 983 1,282 540 293 514 561
Less
Ta x 880 667 294 783 1,149 1,036 1,206 1,550
Cha ng e NWC 8,032 (12,554) (3,033) 359 (5,252) 119 (2,358) (1,398)
Ca p ex (354) (114) (76) (621) (255) (257) (263) (269)
Free Ca shflows 10,744 (11,658) (4,135) 618 (3,154) 2,268 (116) 1,507
Disc ounted Ca shflows - - - 618 (2,527) 1,456 (60) 622
Te rmina l va lue 7,137
D isc o u n te d Te rm in a l v a lu e 2,945
Firm va lue 3,054
Less: Long term Debt -
Ad d : Ca sh b a la nc e 3,964
Enterp rise Va lue 7,018
Investment (40% Discoun t ) 7,053
Tota l Va lue o f Eq uity 14,071
Eq uity Va lue p er sha re 165
Valuation - BUYWe ha ve e mp loyed Sum of the Parts (SOTP) Disc ounte d Ca sh Flow m od el to va lue
the c ompa ny. Unde r this valuation scheme , we ha ve p rojec ted cashflows for the
next 5 years (FY10-15) inco rpora ting a Co st o f Equity of 24.75% (Weighte d Average
Cost of Ca pita l also stands at 24.75% due to no de bt o n compa ny's ba lance sheet ).We have ap plied a terminal growth rate of 3%, while ha ve sc aled up the beta to
1.5x, to c apture the vo latility in the sc rip . We ha ve a rrived at per sha re va lue from
FCFE of Rs82 from com pany's core refinery op erations. Furthermo re, we have arrived
at a va lue of Rs83/ sh for c ompa ny's investme nts, yielding a targe t va lue for the
company of Rs165/ share. We rec om mend a 'Buy' on the scrip, with our Jun-11 TP of
Rs165/ sha re
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Sourc e: Com pa ny Rep orts, InvestCa p Research
-1
4
9
14
19
24
29
34
39
44
49
Jan-06
Sep-06
May-07
Jan-08
Sep-08
May-09
Jan-10
Sep-10
ATRL PBV Band s
0.3x
0.9x
1.5x
2.5x
3.5x
(Rs bn)
-1
4
9
14
19
24
29
34
Jan-06
Sep-06
May-07
Jan-08
Sep-08
May-09
Jan-10
Sep-10
ATRL PS Bands
0.035x
0.1x
0.15x
0.25x
0.34x
(Rs bn)
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COMPANY UPDATEA Public ation o f InvestCap Research
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Risk to va luationsWith little ma neuverab ility in compa nys plant set-up firmly plac ed in, the major risk to
our ea rning a rise from pricing scena rios. We have c lassified the ma jor pric ing risk that
ca n have an adverse impac t on companys valuation.
Change in the internat ional c rude oi l pr ic esTo b e c onservat ive, we have assumed c rude o il prices at USD70/bbl in FY11, with
contango effec t coming into p lay from FY13. Any deviation in the crude oil prices from
our base case scena rio, will imp ac t our earning expec tation. Sensitivity ana lysis with
respe ct to c rude oil prices is given b elow.
Change in c rac k spread
Another risk to our valuation is the subdued midd le distillate c rack spreads, which we
have emp loyed to generate future petroleum p roduct prices. However, we have also
conducted scenario analysis with regards to middle distillate crack spreads. For this
purpose, we have used crack spreads that were preva lent in the FY09 pe riod , as they
are the lowest in the rec ent history.
Abolishment of deem ed dutyThough we have downp lay the risk of deemed duty ab olishment, we c annot c omp lete
rule o ut the said scenario. The d evelopment w ould ha ve nega tive imp lications for
ATRL's profitability and would result in a down-ward revision o f our TP. The ea rning impact
of deemed d uty at various levels is presented be low a longside its impa ct on the scrip TP
Currenc y risk
With bo th product and raw-material be ing priced in USD terms, it provides a na tural
hedge for the organizat ion aga inst the c urrenc y risk. However, any ab rupt c hang e in the
PKR/USD parity (as in the case w as in FY08), will adversely a ffec t c ompanys ea rning.
However, this would be a short term phenomena, with companys cash rich balance
sheet ac ting a s its buffer.
DEEMEDDUTYSENSITIVITY
Rs/ sh. FY11 FY12 FY13 FY14 FY15 CR TP
10% 20.51 5.58 5.31 6.12 7.64 111
7.5% 17.82 4.58 4.13 4.81 6.18 165
4% 13.64 3.03 2.30 2.78 3.91 34
3% 11.93 2.39 1.55 1.94 2.97 26
0% 9.07 1.33 0.30 0.55 1.42 N/ A
Source : InvestCa p Research Research
CRUDOILPRICESSENSITIVITY
Rs/ sh. FY11 FY12 FY13 FY14 FY15 CR TP
-10 16.08 3.90 3.49 4.11 5.19 65
-5 16.95 4.24 3.81 4.46 5.68 74
Base 17.82 4.58 4.13 4.81 6.18 82
5 18.69 4.92 4.45 5.16 6.68 91
10 19.56 5.26 4.77 5.50 7.17 99
CRACKSPREADSSENSITIVITY
Rs/ sh. FY11 FY12 FY13 FY14 FY15
Base c ase 17.82 4.58 4.13 4.81 6.18
FY09 sp rea d s 1.83 1.64 0.80 0.44 1.76
Source : InvestCa p Research Research
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COMPANY UPDATEA Public ation o f InvestCap Research
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ATRL - FINANCIALREVIEW& FORECAST
(Rs m n) FY08A FY09A FY10F FY11E FY12E FY13E FY14E FY15E
Net sa les 93,654 77,260 88,184 96,652 102,489 114,766 120,837 127,029
Cost of Sa les 89,647 75,344 88,694 94,675 98,639 110,881 116,616 121,781Gross Prof. 4,007 1,917 (510) 1,978 3,850 3,885 4,221 5,248
Op t. Pro f. 3,789 1,673 (780) 1,571 3,422 3,408 3,721 4,722
Ref. op era tion Inc . 2,007 404 (476) 1,520 391 352 410 527
Non-Ref. Inc . 377 611 602 714 853 942 1,004 1,004
PAT 6,147 1,015 126 2,234 1,243 1,295 1,414 1,531
EPS Rs @ 85m n sha re 27.95 11.90 1.48 26.20 14.57 15.18 16.58 17.95
Source : Comp any Repo rts, InvestCap Research
KEYRATIOS
FY08A FY09A FY10A FY11E FY12E FY13E FY14E FY15E
Basic Share Information (Rs)
Ea rning Per Sha re 27.95 11.90 1.48 26.20 14.57 15.18 16.58 17.95
Boo k Va lue Per Sha re 136.22 141.45 142.94 169.13 174.44 179.39 184.71 190.65
Free Ca shflow p er sha re 130.11 (135.35) (47.59) 14.52 (33.99) 29.60 1.72 20.83
Ca sh p er sha re 221.79 79.70 46.47 73.16 39.03 65.16 65.38 84.17
Business Perfo rma nc e
Return on Ca p ita l Emp loyed 23% 14% 1% 12% 15% 12% 12% 14%
Return on Eq uity 53% 8% 1% 15% 8% 8% 9% 9%
Return on Asset 12% 2% 0% 3% 2% 2% 2% 2%
Gross Ma rg in 4% 2% -1% 2% 4% 3% 3% 4%
Op era ting ma rg in 4% 2% -1% 2% 3% 3% 3% 4%
EBITDA m a rg ins 5% 3% 0% 3% 4% 3% 3% 4%
Net ma rg ins 7% 1% 0% 2% 1% 1% 1% 1%
Ea rning Gro wth 722% -83% -88% 1668% -44% 4% 9% 8%
Ope rationa l Performa nce
Gross Refine ry Ma rg ins (USD/ BBl) 9.29 1.82 1.77 5.71 6.05 6.41 6.41 6.41
Pla nt Ut liza tion 104% 89% 91% 95% 95% 95% 95% 95%
Ea rnings Qua lity (x)
Ca sh Rea liza tion Ra tio 1.81 (11.37) (32.11) 0.55 (2.33) 1.95 0.10 1.16
Ta x Ra t e 30% 62% -161% 34% 34% 34% 34% 34%
Ne t d e b t-to Eq uity Ra t io 1.68 2.12 3.48 3.08 3.38 3.54 3.63 3.61
Inte rest Co vera g e 3.32 1.73 0.41 7.80 10.41 8.58 9.38 11.25
Stand ard Valuat ions (x)
Pric e to Ea rning Ra tio 5.04 13.01 56.00 4.59 8.25 7.92 7.25 6.70
Pric e to Sa les p er sha re 0.13 0.17 0.08 0.11 0.10 0.09 0.08 0.08
Pric e to Book Va lue 1.03 1.09 0.58 0.71 0.69 0.67 0.65 0.63Free Ca shflow Yie ld 0.92 (0.87) (0.57) 0.12 (0.28) 0.25 0.01 0.17
EV/ EBITDA 3.11 5.27 56.49 4.77 3.48 3.77 3.33 2.66
Source : Comp any Reports, InvestCa p Resea rch
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COMPANY UPDATEA Publica tion of InvestCap Research
Pakistan Equity Resea rch
RESEARCH (92-21) 111 111 097
Khurram Schehzad Eco nomy, Strateg y and Oi l
Fa rha n Ba shir Kha n Fertil izers, Cem ents, Construction a nd Telec om
Munib a Sa eed Ba nks, Po we r a nd Te xt ile s
Na um a n Kha n E& P, Re fine rie s a nd C he mic a ls
M a zha r A . Sa b ir In su ra nc e a nd M ut ua l Fun d s
Abdul Azeem Autom ob ile , G as Dist ribu tion , Text iles and Techn ica l s
Sa ee d Kha lid C om mo d it ie s, FM CG s a nd Pa p er & Bo a rd
Akhta r Na wa z Da ta b a se Inc ha rge
Asim Abb as Resea rc h Distrib ut ion
MONEY MARKET DESK
(92-21) 3520 8751, 3520 8757, 3520 8767
Naeem-ul-Hasan
Aa mir Saeed Khan
Mob in Wahid
Asif Hussa in
Na sir Suria
Mehmood Qureshi
EQUITY SALES DESK
(92-21) 3520 8727, 3520 8735, 3520 8730-31
Sha hrukh Na qvi
Noureen Mo in Khan
Nabe el Jafa r
Irfan A li Muha mm ad
FOREIGN EXCHANGE DESK
(92-21) 3520 8778-87
Imran Choha n
Atif Ali
Syed Atif Abbas Naq vi
Syed Ali Yazdan
Mohammad Waqa s
Moham mad Zain
COMMODITY SALES DESK
(92-21) 3521 35226-28
Ali Kazmi
Juna id Zakaria
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This repo rt is for information p urposes only a nd w e a re not soliciting a ny ac tion b ased up on it. The m at erial isba sed o n information we b elieve to b e reliable but we d o not gua rantee that it is ac curate and co mplete.Invest Ca pital Investment Bank Ltd. will not be respo nsible for the c onseq uenc e o f reliance upo n a ny op inion o rstate ment herein or for any omission. This rep ort or any p art of it ma y not b e reprod uce d or pub lished withoutprior permission.
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