LEAD MANAGERS & ARRANGERS BOOK RUNNER

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2 LEAD MANAGERS & ARRANGERS BOOK RUNNER All communication, inquires and requests for information relating to the IPO of Hascol Petroleum Limited should be addressed to: Umair Aijaz, FCCA Liaquat Ali, FCA SVP / Head Partner Investment Banking Avais Hyder Liaquat Nauman Chartered Accountants AKD Securities Limited Tel: Tel: Fax: Fax: [email protected] [email protected] Mohammad Yasir Khan Syed Saquib Moiz Senior Associate Assistant Manager Investment Banking Avais Hyder Liaquat Nauman Chartered Accountants AKD Securities Limited Tel: Tel: Fax: Fax: [email protected] [email protected] 1

3 DISCLAIMER This Information Brief ( IB ) has been prepared by AKD Securities Limited ( AKDS ) Avais Hyder Liaquat Nauman Chartered Accountants ( AHLN ) (hereinafter referred to as Joint Lead Managers & Arrangers). The information provided and opinions herein have been compiled or arrived at based upon information obtained from Hascol Petroleum Limited ( HPL or the Company ) documents and / or communications and / or other sources believed to reliable in good faith. Although, the information has been verified, to the extent possible, we make no expressed or implied representation or warranty as to its accuracy, completeness or correctness. The information is not meant to be a substitute for the recipients personal judgment. All such information, representation and opinions contained in these documents assume certain economic conditions and industry developments and constitute only current scenarios. The recipient of this information is cautioned to exercise his / her own independent judgment and analysis at all times. This IB includes certain statements, estimates, analysis and projections with respect to the anticipated future performance of HPL. Such statement, estimates and analysis reflect certain assumptions concerning the anticipated result, which assumption and / or anticipated results may or may not prove to be correct. Neither the Joint Lead Managers, nor any of their affiliates have independently verified these estimates, analysis and projections and accordingly they do not express any opinion or provide any form of assurance with regard to such estimates, analysis and projections. The Joint Lead Managers expressly disclaim any and all liability that may be based on any errors or omissions from, or mistake in assumptions with respect to any information, estimates, analysis or projections contained in this IB or any other written or oral communication transmitted to any potential investor in the course of its evaluation of the possible investment. 2

4 Table of Contents Serial Contents Page # 1 Transaction Overview 04 2 OMC Sector Dynamics 06 3 Hascol Petroleum Limited 10 4 Profile of Directors 20 5 Investment Rationale 24 6 Management Projections & Valuation 29 3

5 SECTION I TRANSACTION OVERVIEW 4

6 Transaction Overview The purpose of this Information Brief ( IB ) is to solicit the interest of potential institutional and individual investors for participation in the Initial Public Offering of Hascol Petroleum Limited ( HPL or the Company ). The Company intends to issue 25 million Ordinary Shares (27.59% of post-ipo Paid-up Capital) through an Initial Public Offering via the Book Building process at a Floor Price of PKR per share. Moreover, a total of million Ordinary Shares (75% of the Issue) will be issued in the Book Building portion and subsequently 6.25 million Ordinary Shares (25% of the Issue) will be issued in the General Public portion at the Strike Price determined via Book Building. HPL was incorporated in Pakistan as a Private Limited Company on March 28, 2001 and was converted in to a Public Unlisted Company on September 12, The principal business of HPL is distribution and marketing of petroleum products along with blending and marketing of foreign branded lubricants "FUCHS". The Company obtained its oil marketing license from the Ministry of Petroleum & Natural Resources in 2005 while the commercial operations were initiated in September The purpose of this Initial Public Offering is to utilize the raised proceeds in completion of a storage facility at Machike in the province of Punjab. Further to this, the proceeds would also be used for the construction and commissioning of 50 retail fuel outlets. It is also pertinent to highlight that prior to the IPO a pool of strategic investors have purchased 3,875,000 Ordinary Shares of HPL (5.91% of the existing total paid-up capital) from a few existing shareholders of HPL at PKR per share that is at a 25% premium over the floor price of PKR per share. This clearly portrays the level of confidence that investors have on HPL s growth trajectory. HPL Flagship Site - Sharah-e-Faisal, Karachi 5

7 SECTION II OMC SECTOR DYNAMICS 6

8 7 Domestic Oil Marketing Industry Overview There are thirteen Oil Marketing Companies ( OMC ) operating in Pakistan including foreign and domestic players. That said, close to 90% of the market is dominated by four oil marketing companies with state-owned PSO having the largest market share at 63%. Among these thirteen OMCs there are two relatively new companies, namely Total Parco Pakistan Limited and Hascol Petroleum Limited that have emerged as active players and are rapidly gaining further market share. Following are the current market shares of all OMCs operating in Pakistan: Company Market No. of Retail Market Listing Status Share (%) Outlets Price* Pakistan State Oil Listed 3,760 PKR 345 Shell Pakistan Ltd 9.90 Listed 798 PKR 210 Attock Petroleum Ltd Listed 362 PKR 508 Chevron Pakistan Ltd Branch Office Total-Parco Pakistan Ltd Non Listed Hascol Petroleum Ltd Under Listing 210 N / A Byco Petroleum Ltd Listed 219 PKR 9 Bakri Trading Co. Pakistan (Pvt.) Ltd Pvt. Limited 47 - Askari Oil Services (Pvt.) Ltd Pvt. Limited Overseas Oil Trading Co. (Pvt.) Ltd Pvt. Limited Zoom Petroleum (Pvt.) Ltd Pvt. Limited 12 - Admore Gas (Pvt.) Ltd Pvt. Limited Pearl Parco (Pvt.) Ltd Pvt. Limited (Non OMC) 0 - (Source: OCAC Oil Report Oct- 2013) *Price quoted as at January 16, 2014 Oil marketing companies have three primary drivers of earnings which include product inventory and resulting inventory Net Realizable Value ( NRV ) adjustments, marketing margins and overall sales volumes. While marketing margins are regulated and NRV adjustments on inventory are a function of international oil prices, OMC strategy to increase core earnings focuses on increasing volume and expanding market share. While OMC volumes have increased at tepid 5-year CAGR of 1.6%, earnings have posted a volatile trend with a CAGR of 2.3%. Earnings volatility is largely due to: 1) NRV adjustments on inventory due to changes in crude oil and refined product prices, 2) PKR depreciation with SBP rebuffing FX cover for oil marketing companies since 2009, 3) higher financial charges due to working capital requirements to finance circular debt and buildup in receivables and 4) interest income/expense on delayed payments due to circular debt. Pakistan's oil & gas landscape is divided between up, mid and downstream sectors within the regulatory ambit of the Ministry of Petroleum and Natural Resources. Pakistan's oil marketing and distribution

9 however is undergoing a deregulation phase within the backdrop of increasing volume demand and higher reliance on imported products. Consumption of petroleum products has increased at a 1% CAGR over the last 10 years, led by expanding rural incomes and per-capita incomes. This is despite cannibalization with the trend in shift to Compressed Natural Gas ( CNG ) as a transport fuel up till FY12, which has reversed of late with a severe shortage of natural gas in the country. Pakistan's oil demand is expected to rise by approximately 7% during the current fiscal year ( ) ending June 30, 2014 on year-on-year basis. The demand would touch 21 million tons against 19 to 20 million tons, on the back of closure of CNG stations and resolution of circular debt problem. Over the last few years, POL products demand rose by an average 3%to4% per year, but if the country's growth rate managed to remain between 5% - 6% during this year along with the closure of CNG stations in Punjab then the subsequent increase in demand of petroleum products is likely increase rapidly. The country is a huge oil guzzler as more than 80% of the total demand is either imported in the form of Crude or Refined products. The product slate is dominated by 9 million tons of Fuel Oil (including 4.5 million tons produced locally) followed by High Speed Diesel with total consumption of 7.5 million tons (including 4 million tons of imported products). With the shortage of CNG in the market the Motor Gasoline (Petrol) market has almost doubled from 1.2 million tons to 2 million tons. With domestic refining capacity at 13.15mn tons per annum, Pakistan produces approximately 9.5mn tons while annual consumption is close to 20mn tons per year. The deficit is primarily for fuel oil, high speed diesel and more recently motor gasoline. At present there are 6 major oil refineries operating in the country: UNIT: M. Tons Oil Refineries Capacity Production Pak Arab Refinery Limited ("PARCO") 4,500,000 3,216,416 National Refinery Limited ("NRL") 2,710,500 1,834,845 Attock Refinery Limited ("ARL") 1,916,500 1,710,000 Byco Petroleum Pakistan Limited ("BPPL") 1,740, ,332 Byco Oil Pakistan Limited ("BOPL") Under Commissioning 5,800,000 - Pakistan Refinery Limited ("PRL") 2,298, ,272 Regulatory Landscape for OMCs: Over the last decade, oil marketing and distribution has been semi-regulated with marketing margins set by the Government of Pakistan ( GoP ) while price setting at the forecourt retail level has moved back and forth from regulatory ambit. In 2000 the market for residual fuel oil and industrial products mainly used for power generation was completely de-regulated which was followed by GoP s reforms across key areas of the economy. While marketing margins remain regulated, OMCs in Pakistan focus on 8

10 increasing core earnings by volumetric growth that eventually boasts their respective market share and profitability. In order to stimulate foreign investment, marketing margins for OMCs were revised from an initial 0.51%-2.17% to 3% for all regulated products. Margins were further enhanced to 3.5% in July 2002 and Pakistan's 2nd largest volume generating product HSD (accounts for 35% of total petroleum products consumption today) was de-regulated at the principal stage in view of the domestic production deficit. OMCs were allowed to import HSD and set the retail level price of the product with prices uniform across the country through a system known as Inland Freight Equalization Margin (IFEM) evenly spreading the distribution and transport costs of the products across the country onto end retail prices. During 2002 to 2008, petroleum product pricing included ex-refinery prices based on import parity, with dealer and distributor margins and taxes taking prices to the ex-depot level. Prices were independently regulated by the Oil and Gas Regulatory Authority ( OGRA ). Post 2008, within the backdrop of firmly high oil prices, the GoP reinstated the reform process to further deregulate the sector. Marketing margins were changed from a percentage to an absolute basis in 2010 leading to a reduction in product distribution margins by 20%-25% across the regulated product range. In 2011, the GoP revised upwards margins on premium motor gasoline and HSD by 32% and 30%, respectively, to improve core profitability of downstream marketing within the backdrop of circular debt exposure and PkR depreciation. Imports of premium motor gasoline were deregulated at the principal stage i.e. allowing OMCs to set the ex-refinery and ex-depot price based on actual product imports excluding gallop tenders while the GoP continued to monitor HSD prices at the ex-refinery level for refiners. In 2012, the GoP for the first time deregulated HSD prices at the ex-refinery level bringing them in-line with actual OMC import prices as set by Pakistan State Oil Company Limited (state owned and is the largest oil marketing company in Pakistan). Currently, margins on HSD and MS are being considered for an upward revision by the GoP given inflationary pressures amid repeated requests by the industry. 9

11 SECTION III HASCOL PETROLEUM LIMITED 10

12 Hascol Petroleum Limited HPL was incorporated in 2001 under the Companies Ordinance, 1984 primarily to take advantage of the petroleum sector deregulation and undertake a program for owning, leasing and renting oil storage facilities as well as importing petroleum products for its own account. In February 2005 HPL was granted a full marketing license by the Government of Pakistan and since then, HPL has been engaged in developing a retail network and storage facilities under the Hascol brand and by 31st December 2013 the Company had commissioned approximately 210 retail outlets across Pakistan and this number is expected to reach 291 by the end of The Directors and sponsors of the company have decades of multinational companies experience in Oil Trading, Retail Management, Marketing & Supply Chain Management. HPL management team comprises of well experienced staff from each segment of the oil industry who have worked in local and multinational oil companies for many years and have ability to do things right. Pattern of shareholding of HPL as at 31st December 2013 is as follows: 11 Serial Name of Shareholder Shares % 1 Mr. Mumtaz Hasan Khan - Chairman & CEO 34,387, Fossil Energy (Private) Limited 12,175, Marshal Gas (Private) Limited 8,500, Other Shareholders 10,536, Total Shares 65,600, As at December 31, 2013 HPL s investment in its fixed assets amounted to PKR 2,315 million while the Company operates through 210 retail fuel stations wide-spread across Pakistan. Further to this, HPL has constructed and commissioned a state of the art storage installation at Shikarpur while another purpose built installation is currently being constructed at Machike. HPL s product mix includes petroleum products such as Motor Spirits ( MS ), Furnace Oil ( HSFO ), High Speed Diesel ( HSD ), Jet A-1, Liquid Petroleum Gas ( LPG ), Super Kerosene Oil ( SKO ) and Lubricants. The Company is currently offering Petrol, Diesel under the Company s own brand name as Tiger Super and Rocket Diesel and lubricants under the brand name of FUCHS.

13 The Code of Corporate Governance applicable to listed companies is fully in place at the Company and the following Management Committees and Board Committees actively function towards the sustainability and growth of HPL: Product Line: HPL s product mix includes petroleum products such as Motor Spirits ( MS ), Furnace Oil ( HSFO ), High Speed Diesel ( HSD ), Jet A-1, Liquid Petroleum Gas ( LPG ), Super Kerosene Oil ( SKO ) and Lubricants. The success of an OMC is dependent on how well its supply chain has been established. The presence of storage facility at each discharge point of Pak Arab Pipe Line Company System is a necessity. HPL has very successfully developed supply depots, either through its own sources or through third party arrangements. Supply chain is a lifeline of any industry throughout the world. It plays an essential role in ensuring that the right products are available at the right places at all times; specially, in the country like Pakistan where the gap between supply and demand is continuously widening. Storage Facilities: HPL has developed state-of-the-art storage facilities at strategic locations that fully cover its retail network. Out of the 5 functional facilities, the Shikarpur storage facility is fully owned and operated by HPL while Machike storage facility would be the second facility to be owned by HPL. 12

14 The existing storage facilities currently operating under the banner of HPL including the under construction Machike Facility are as follows: Unit in MT Serial Facility Ownership Capacity 1 Port Qasim Long-term agreement - VTT Port Qasim (Pvt.) Ltd. 32,400 2 Kemari Long-term agreement - Al-Raheem Trading 12,150 3 Kemari Import Terminal Long Term Lease Agreement with Al-Abbas Group 15,000 4 Shikarpur HPL Owned 6,500 5 Machike HPL Owned (Under Construction) 6,500 6 Amangarh Long-term lease agreement - an option to buy 1,500 In order to further enhance its capacity the Company is in the process of acquiring a land at Mehmood Kot, Punjab adjacent to Pak-Arab Refinery Limited. This will facilitate the Company to cover its supply in the Southern Punjab envelope. 13

15 Efficient Logistics Network: HPL s logistics network provides the Company with an efficient value chain that drives the Logistics department is the backbone of an oil marketing and distribution company. Hascol Petroleum Limited does not compromise on quality and quantity of petroleum products. HPL is maintaining its logistics policy wherein we ensure the deliveries of safe and sound condition to the valued customers. Tank Lorries registered with HPL are duly calibrated by weights & measures, and designed as per rules required by 'OGRA' and 'Ministry of Petroleum and Natural Resources'. HPL has got 19 registered contractors maintaining a fleet of 1,300 Tank Lorries for Black Oil and 350 Tank Lorries for White Oil. HPL all the tank lorries are registered in HPL state of the art ERP system JD Edwards to control the logistics data and product movement and time log, as well. The cartage contractors have to provide the tank lorries as per demand of HPL Cartage Agreements. IT Infrastructure: In 2013 HPL successfully implemented JD Edwards ERP software which is an integrated system comprising of the following six modules: Financial Procure to Pay Order to Cash Inventory Management Transportation Advance Pricing Now all Hascol Installations, depots and warehouses are connected with the Hascol Head Office in Karachi enabling Hascol real time information for business controls efficient customer service and structured MIS of management decisions. 14

16 All of HPL regional offices, Installations & depots are connected online for the Video Conferencing with HPL management at Head office. Hascol has built its own state-of-the-art data center for the centralized and safe storage of Company's valuable data with inside and outside firewalls to ensure data security and safety. Retail Outlets: HPL has a large network of retail outlets in all corners of the country. With over 210 retail outlets in all four provinces of the country HPL has invested more than PKR 2 billion in their expansion venture through dealers and its own investment. Attached to the retail outlets HPL is also operating a network of convenient store with a brand name "Hasmart". HPL have 42 Hasmart, 40 Tyre - Care and 15 Express Wash nationwide to cater the needs of its customers. Automax LPG (Liquefied Petroleum Gas) is an economical, safe and environment friendly alternate to CNG, Petrol and Diesel. HPL is the first oil marketing company to develop LPG auto station and started dispensing LPG through its Flagship retail outlet at Sharah-e-Faisal with a brand name AUTOMAX. At present 15 AUTOMAX stations are in various stages of approval with the Government of Pakistan. 15

17 The detail of current retail outlets with respect to location is as follows: Province Retail Outlets % Sindh % Baluchistan % Punjab % Khyber Pakhtun Khua % Azad Jamu & Kashmir % Total % FUCHS HPL s Lubricants: HPL has a sole strategic agreement with FUCHS international to manufactures/import, distribute and sell FUCHS branded lubricating oils and greases in Pakistan. A company that combines tradition with progress is best poised to meet the challenges of the future. HPL is the only local company with International Lubricant Brand.i.e. FUCHS Germany that gives a great strength to HPL's lubricants product line. In addition to its strong sales through 210 retail outlets, HPL also operates in high street market, commercial and industrial sector. It is also the market leader for supplies to Pakistan Army with sales well over PKR 1 billion (2.5 million liters). HPL has the proprietary product rights to cater for lubricant for Pakistan Army's indigenous tank, Al-Khalid. 16

18 Historical Financials of HPL ( ): (PKR in millions) Description Fixed Assets 2,286 1, Current Assets 6,707 2,595 1,136 Equity (Including Revaluation Surplus) 1,444 1, Current Liabilities 7,630 3,067 1,686 Sales (in Thousand Liters) 619, , ,910 Sales 57,441 29,775 19,584 Gross Margin 1, Operating Profit / (Loss) Finance Cost Profit Before Tax Profit After Tax Earnings per Share Break-up Value per share (with Revaluation) Break-up Value per share (w/o Revaluation) Current Ratio 0.88:1 0.85:1 0.67:1 *Financial Year January to December 17

19 Key Agreements: 1. Currently HPL has fuel supply arrangements with all refineries in Pakistan. 2. HPL has hospitality agreement with PSO for the storage and handling of products at, Machike, Chakpirana and Sihala. 3. HPL is engaged in a sole strategic agreement with FUCHS International for the manufacture, import distribution and sale of their products in Pakistan. 4. HPL is in contract with OOPL as it blending partner for lubricants in Pakistan. 5. HPL is in contract with Sui Sothern Gas Company ( SSGC ) for the supply of LPG. 6. HPL is in contract with Marshal Gas (Pvt.) Limited for the supply of LPG. 7. HPL has signed a Technical Services Agreement ( TSA ) with an International Operator, to start aircraft refueling services in Karachi. Principal Purpose of the IPO: The principal purpose of the Issue is to inject additional equity into the Company mainly for utilization in the completion of Machike Storage Facility in Punjab and for setting up new retail outlets all across Pakistan. As per the Company s plans, out of the total equity raised via issuance of 25 million shares at PKR 20/- per share: PKR 200mn will be utilized for capital expenditure on the completion of Machike Storage Facility which includes purchase of pipelines, gensets, pumps, electrical equipment etc. PKR 100mn will be utilized for the setting up and commissioning of new / under construction retail fuel stations The remaining proceeds will be utilized for working capital requirements of the Company Future Prospects: Pakistan economy is in a growth mode and energy is a very essential ingredient, more trucks will move across the country for trade and there will be more cars and motorcycles on the road. The expected growth rate of the of the economy is between 3% to 4% and the in efficiency of state owned OMC will create a space for new market entrant with thin cost structure, efficient supply chain management and good corporate governance. HPL has doubled its sales volume and profitability on year to year basis. During the last three years this growth has resulted in a market share from 1% to 2.4% up to October 2013 (Source OCAC Report), from 2014 and onwards within 2 years the company has a target to achieve a volumes of 1,000,000 MT with a market share of 5%. 18

20 This growth will be achieved by HPL backed by the following strategic steps: Completion of Machike Storage Facility Development of a Storage Facility at Mehmood Kot Depots at Sahiwal and Shershah Increase in retail outlets from 210 to 291 by the end of 2016 Development of Aircraft Refueling Station (JET-A1) at Karachi Airport. After PSO, HPL is the only OMC that has a TSA with an International Operator to sell Jet A-1 to airlines Development of a Lubricants and Grease Plant by end of

21 SECTION IV PROFILE OF DIRECTORS 20

22 Profile of Directors Mr. Mumtaz Hasan Khan Chairman & C.E.O Mr. Mumtaz Hasan Khan has over 50 year of experience within the oil industry. He started his career with Burmah Shell Oil Storage and Distribution Company in May In January 1976 Mr.Mumtaz resigned from the post of International Sales Manager to join Pakistan Services Limited as Managing Director. Pakistan Services Limited was the owning company of four Intercontinental Hotel (now known as Pearl Continental Hotel) in Pakistan at that time. In 1980 Mr. Mumtaz left Pakistan Services Limited and moved to London. He established Hascombe Limited, which started trading in Crude Oil and Petroleum Products. Hascombe bought petroleum product from Middle Eastern sources and sold to international trading companies like Shell and Elf. Hascombe was also a major supplier of petroleum products to Pakistan during 1991 till In 2005 Hascol was granted an oil marketing license by the government of Pakistan in Pakistan. Hascol has established a network of 200 Petrol Pumps all across Pakistan including Azad Jamu and Kashmir. Mr. Mumtaz Hasan Khan is currently also serving as Chairman of Sigma Motors (Sole distributor of Land Rover vehicles in Pakistan).He is a Trustee of the Foundation of Museum of Modern Art (FOMMA) located in Karachi and the member of the Expert Energy Group which prepared Pakistan s first Integrated Energy Plan in

23 Dr. Akhtar Hasan Khan Director Dr Akhtar Hasan Khan is a former civil servant. He retired as Secretary Planning for the Government of Pakistan. Dr. Akhtar holds a Masters in Public Administration from the University of Harvard and a PHD in economics from the TUFFs University in USA. Dr. Akhtar served as Secretary Education, Additional Secretary Finance, Additional Secretary Commerce and additional secretary ministry of production. Dr. Akhtar has served on the board of public organization such as Pakistan International Airline, National Development Finance Corporation, Pakistan Automobile Corporation and Chairman of the Pakistan Ghee Corporation. Dr Akhtar is the author of several publications; his recent book was called the impact of privatization in Pakistan. He is a Director of Sigma Motors Limited. Mr. Najmus Saquib Hameed Director Mr. Najmus Saquib Hameed is the honorary Vice Chairman and C.E.O of Layton Rahmatullah Benevolent Trust (LRBT). LRBT is one of the largest charitable organizations in Pakistan providing free eye care to over 2 million patients through a network of 17 hospitals annually. He has over 47 year of experience in Senior Management position with multinational organization such as Unilever and Pakistan Tobacco where he retired as Chairman of the Company. Mr. Najmus Saquib holds a Master in International Relations and was a gold medalist at Institute of Business Administration (IBA). He has served as Chairman of the Cigarette Manufacturers Association and past Chairman Board of Governor at the Indus Valley School of Art and Architecture, Karachi. Mr. Najmus Saquib Hameed is currently serving on the board of NIB Bank Limited and Sigma Motors Limited. Mr. Farooq Rahmatullah Director Mr. Rahmatullah is law graduate from the University of Peshawar. He joined Burmah Shell and Oil Distribution Company in Mr. Rahmatullah worked in various capacities with the organization i.e. Chemical, Human Resource, Marketing, Supply, Distribution and Retail. In 1994 Mr. Rahmatullah was transferred to Shell International London as Manager Business Strategy Division. He looked after various portfolios covering 140 countries. In 1998 he was transferred back to Pakistan as Head of Operations Shell Pakistan. Mr. Rahmatullah was also looking after Middle East and South Asia (MESA).In 2001 he was appointed managing director Shell Pakistan Limited a post he retired from in June Mr. Rahmatullah is credited with being the founding member of PAPCO (Pak Arab Pipeline Company limited). He has also served as the Director General of Civil Aviation Authority, Chairman of the Oil and Gas Development Authority, Chairman of LEADs. Since 2005 he has been chairman of the Pakistan Refinery Limited. He is currently serving on the Board of Director of Faysal Bank Limited, Society of Sustainable Development, and Resource Development Committee for the Agha Khan Hospital. He is also the Group Founding Member of the Pakistan Human Development Fund and a member of National Commission of Government Reform and Member of the Pakistan stone Development Company. He is the Chairman of Pakistan Refinery Limited and Non-Executive Director of Faysal Bank Limited. 22

24 Mr. Liaquat Ali Director Mr. Liaquat Ali is a Chartered Accountant by profession and a fellow member of the Institute of Charted Accountantsof Pakistan (ICAP). He has over 18 years of experience in leasing and investment banking field and has completed numerous transactions including restructuring of companies, merger and Acquisition. Mr. Liaquat Ali is a member of one of the leading Chartered Accountant firm Avais Hyder Liaquat Nauman Chartered Accountants (AHLN). AHLN is a member of RSM international which is the 7 th largest network of accounting and consulting firms in the world [1]. AHLN has offices in Lahore, Karachi, Peshawar, Faislabad, Islamabad, Quetta and Kabul (Afghanistan). He is also a member of the benevolent fund committee of ICAP. Mr. Sohail Hasan Director Mr. Sohail is a Chartered Accountant and a member of the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Pakistan. He was a partner in a leading accounting firm A.F.Ferguson & Co for over 35 years and has also served as its senior partner. He has served as the member of the Provisional Financial Commission Punjab and is currently a member of the Corporate Law Review Commission of Pakistan. He is a Non-Executive Director of Habib Metropolitan Bank Limited. Mr. Saleem Butt Chief Operating Officer& Executive Director Mr. Saleem Butt has achieved a diversified 22 year career in Finance, Corporate Affairs, Supply Chain, Sales, Management, Human Resource, I.T and ERP implementation. Mr. Butt started to work as a Chartered Accountant for a firm which is now a part of Price Waterhouse Coopers. He then worked with various Shell Group of companies in Pakistan and overseas for 14 years. He was then offered a position with Emaar Pakistan a subsidiary of Emaar PJSC, U.A.E as Chief Operating Officer (COO). Mr. Butt is a Chartered Accountant and holds a Bachelor Degree in Commerce from the University of Karachi. He received his fellowship from the Institute of Chartered Accountants of Pakistan in He also serves as non-executive director on the boards of Pakistan Refinery Limited, TRG Pakistan Limited and Sigma Motors Limited. 23

25 SECTION V INVESTMENT RATIONALE 24

26 Investment Rationale Growth Story: HPL has taken a time span of approximately 8 years to turn itself into a fully developed OMC. The sponsors of the Company have mostly invested the capital from their own resources and have now made the company capable running as a profitable and sustainable entity which can clearly be seen through the financial highlights of the Company. The construction of back-end (storages) and front-end (retail outlets) facilities has been a game changer for HPL as the functionality of these facilities have brought the Company s sales volumes at an optimum level and further volumes can be generated as well. In addition to this, the local and the international brands such as FUCHS AG attached to the Company now carries significant business value and today HPL is known for its quality products and services. The below given table shows average throughput of OMCs in liters for the period from July to September 2013 which clearly depicts the growth potential that HPL has in order to increase its market share backed by an efficient and strategically placed storage network: Internationally Renowned Lubricant Provider: The Company has a strategic agreement with Fuchs Lubricants, one of the largest global manufacturers of lubricants based out of Fuchs Petrolub AG with its headquarters in Mannheim, Germany. This agreement allows HPL to manufacture, import, distribute and sell branded lubricating oils and greases in Pakistan. Share Premium: A pool of strategic investors have recently purchased 3,875,000 Ordinary Shares of HPL (5.91% of the existing total paid-up capital) from existing shareholders of HPL at PKR per share that is at a 25% premium over the floor price of PKR per share. This clearly portrays the level of confidence that investors have on HPL s growth trajectory. 25

27 Fuel Supply Arrangements: HPL has established fuel supply arrangements, with all domestic refineries including Pak-Arab Refinery, Attock Refinery, Pakistan Refinery Limited, Byco Petroleum Pakistan Limited and National Refinery. Apart from the fuel supply arrangements, HPL has developed a wellmanaged supply chain structure through which its products are transferred to all parts of the country. The Company has also entered into the import market and has imported 3 cargos of Fuel Oil and Motor Gasoline during the current year. The Company has also set up a fully integrated import supply chain at both Kemari and Port Qasim. Shield Against Circular Debt: HPL has carried a very defensive commercial sales strategy during the past 3 years due to the rising issue of circular debt pertaining to the Oil & Gas and Power sectors of Pakistan. As an antidote to this risk, HPL has always secured its receivables from commercial sales to IPPs and other debt burdened institutions through irrevocable financial instruments. As a result of these prudent measures HPL has remained unharmed by the risk of circular debt and the resultant liquidity crunch faced by most OMCs. Strategically Placed Storage Facilities: The Company, under agreements with other OMCs, uses 5 different storage facilities that are strategically located in different oil supply hubs of the country. Apart from this, HPL has recently commissioned its own storage Facility in Shikarpur, Sindh which is currently being fully utilized by the Company while HPL will also commission another storage facility at Machike in Punjab this year. The operational support of these purpose built state-of-the-art storage facilities will provide significant volumetric growth in the sales of High Speed Diesel & Motor Spirit. With the shortage of CNG in the country during the last 3 years the country-wide volume of Motor Gasoline has doubled. HPL has hired a storage facility at Kemari on long-term basis to manage the imported products and imported its first cargo in December The import facilities for fuel oil, motor gasoline and High Speed Diesel have placed the Company strategically in a very strong position for the security of its supplies. Sponsor Profile & Management Prowess: The main sponsor of HPL, Mr. Mumtaz Hasan Khan, has an experience of over 50 years in the Oil industry and has been associated with reputable brand names such as Burmah Shell. Over the years HPL has gathered a team of well experienced team of individuals who have significant expertise in the oil industry. The Company has a strong emphasis on recruiting and retaining the best professionals who play the pivotal role in this business model. The Management has a cumulative experience of 175 years pertaining to the Oil Marketing industry. Recent Growth Track-Record: From 2010 onwards the Company has roughly doubled its sales volumes at year on year basis. This growth has resulted in an increase of market share from 1.00% to 2.50% up to October (Source: OCAC Oil Report) 26 Year Sales of HPL 2010 PKR 9,202,000, PKR 19,583,000, PKR 29,775,000, PKR 57,441,000,000

28 The current network of the Company has the capacity to further enhance the sales volumes after completion of the Machike Storage Facility based in Punjab. Growing Retail Network: The Company has a wide-spread network of 210 retail outlets across Pakistan through which POL products are sold. The company plans to add 50 more retail outlets by the end of this year, moreover the Company plans to add 91 fuel stations by the end of 2016 which would further boast HPL s sales of HSD and MS. The province-wise break-up of HPL s 210 operational retail outlets is as follows: Avg. Monthly Motor Fuels Province No. of Sites Sale / Site Quantity (Liters) Punjab ,619,392 92, Sindh ,574, , Khyber Pakhtun Khua 26 4,833,402 15, Baluchistan 07 3,596,000 42, Azad Jammu Kashmir ,000 12, ,537, ,537 Attractive Floor Price: The floor price of PKR per share represents an attractive discount of 64.70% on CY13 P/E Multiple of HPL i.e times versus the P/E Multiple of KSE-100 Index i.e times (Source: Bloomberg). Moreover, we have also undertaken relative valuation based on comparison of HPL with leading oil marketing companies of the country. For relative valuation we have considered Attock Petroleum Limited, Pakistan State Oil & Shell Pakistan Limited. The following table highlights the financial highlights and trading multiples of the above mentioned OMCs in comparison with HPL: Indicators PSO SHELL APL HPL Retail Outlets 3, Sales (PKR in 000') 1,294,503, ,316, ,181,800 57,441,365 PAT/ (LAT) (PKR in 000') 12,557,945 (2,082,531) 3,906, ,407 Shares (No. of shares) 246,987,217 85,609,886 69,120,000 65,600,000 EPS (PKR per share) (24.33) Market Price (As at 31-Dec-13) * Shareholder's Equity (PKR in 000') 61,887,604 6,175,590 14,043,457 1,443,695 Book Value (PKR per share) P/ E Ratio 6.55 N/A P/ B Ratio Financial Data Reporting Date 30-Jun Dec Jun Dec-13 * Book Building - Floor Price 27

29 The floor price of PKR per share represents an attractive discount of 56.49% based on CY13 P/E Multiple of HPL of 3.35 times versus the Average P/E Multiple of the above mentioned OMCs of 7.70 times. Based on the above given peer comparison, HPL has an estimated value of PKR when viewed in line with the average P/E of 7.70x for PSO & APL. Furthermore, when comparing the CY13 P/B Multiple of HPL of 0.91 times with the Average P/B Multiple of the above mentioned OMCs of 2.14 times, the P/B Multiple presents a discount of 57.48%. Based on the average P/B of 2.14x for the above mentioned OMCs the projected value of HPL is estimated to be PKR Multiples Average HPL s Projected HPL (CY13) Multiple Price P/E 7.70x EPS PKR 5.97 PKR P/B 2.14x BVPS PKR PKR

30 SECTION VI MANAGEMENT PROJECTIONS & VALUATIONS 29

31 Management Projections HASCOL PETROLEUM LIMITED PROJECTED BALANCE SHEETS Balance Sheets Amount in PKR ' (A) 2014 (E) 2015 (E) 2016 (E) 2017 (E) 2018 (E) Non Current Assets Property, plant and equipment 2,308,238 2,587,971 2,922,970 3,193,316 3,119,369 3,026,241 Intangible assets 7,054 5,643 4,515 3,612 2,889 2,311 Long term deposits 32,372 25,898 20,718 16,574 13,260 10,608 Long term investment Deferred taxation - net 354, , , , , ,323 2,702,155 2,938,554 3,235,340 3,471,927 3,368,099 3,248,484 Current Assets Stock-in-trade 3,177,692 3,578,063 4,674,853 5,846,939 6,001,056 8,298,955 Trade debts 2,088,097 2,736,166 3,739,883 4,872,449 5,648,053 7,054,112 Loans and advances 464, , , , , ,535 Trade deposits and short term prepayments 40,585 44,644 49,108 58,929 70,715 84,858 Sales tax receivable Other receivables 35,674 41,025 47,179 54,256 62,394 71,753 Bank balances 864,680 1,264,161 1,131,186 1,540,853 2,818,562 3,398,769 6,671,429 8,105,473 10,061,552 12,771,802 14,979,239 19,267,982 TOTAL ASSETS 9,373,584 11,044,027 13,296,892 16,243,729 18,347,339 22,516,466 Non Current Liabilities Liability against assets subject to Finance Lease 73,685-20,520 18,399 16,813 4,508 Deferred Liability - Gratuity 50,174 57,700 66,355 76,308 87, ,918 Long Term Loan - Summit Bank (150) Long Term Loan - PAIR (100) 58,333 25, Long Term Loan FWBL - (200) 163,636 90,909 (0) Long Term Loan - PAIR (150) - 139,286 85,714 42, Long Term Deposits 90,872 99, , , , , , , , , , ,776 Current Liabilities Current Portion of Liabilities Against Assets Subject to Finance Lease 46,987 31, Finance Under Mark-up Arrangements 493, , ,044 96,631 67,641 47,349 PAIR - (100) 41, HBL - (70) 70, PAIR - (350) - 145, , , , ,000 Commercial Paper (75) 75, Commercial Paper (150) - 150, , , , ,000 Trade & Other Payables 6,368,590 7,126,809 8,595,955 10,457,467 11,363,365 14,088,308 Accrued Interest 16,569 18,226 20,048 22,053 24,259 26,685 Sales Tax Payable Provision for Taxation 381, , , , , ,977 Total Current Liabilities 7,493,188 8,077,035 9,504,988 11,280,166 12,117,761 14,856,318 TOTAL LIABILITIES 7,929,889 8,489,889 9,787,532 11,538,681 12,355,374 15,108,094 NET ASSETS 1,443,695 2,554,138 3,509,360 4,705,048 5,991,964 7,408,372 Shareholders' Equity Share Capital 656, , , , , ,000 Further issue at Rs 10/ share (25m shares) - 250,000 Share premium - Old 3,300 3,300 3,300 3,300 3,300 3,300 Share premium of Rs 10/ share (25 m shares) - 250, , , , ,000 Accumulated profits 426,019 1,038,712 1,996,185 3,194,123 4,483,290 5,901,949 Surplus on revaluation on fixed assets 358, , , , , ,123 1,443,695 2,554,138 3,509,360 4,705,048 5,991,964 7,408,372 30

32 HASCOL PETROLEUM LIMITED PROJECTED PROFIT & LOSS ACCOUNTS Profit & Loss Accounts Amount in PKR '000 Description 2014 (E) 2015 (E) 2016 (E) 2017 (E) 2018 (E) Sales - Gross 76,823,122 97,504, ,562, ,846, ,455,929 Sales - Net of Sales Tax 66,597,535 84,525, ,781, ,696, ,296,298 Cost of Sales (65,032,134) (82,566,407) (100,446,724) (109,148,115) (128,555,807) Gross Profit 1,565,401 1,959,341 2,334,814 2,547,946 2,740,492 Selling & Distribution Expenses (621,784) (639,705) (705,548) (763,697) (797,313) Administrative Expenses (229,706) (249,201) (275,858) (306,121) (340,398) Operating Profit 713,910 1,070,435 1,353,407 1,478,128 1,602,781 Finance Cost (106,795) (101,692) (125,652) (154,395) (132,036) Other Income 94, , , , ,481 Profit Before Taxation 701,747 1,070,499 1,335,377 1,438,525 1,594,226 Taxation 89, , , , ,568 Profit After Taxation 612, ,473 1,197,939 1,289,167 1,418,659 EPS GP Margin 2.35% 2.32% 2.27% 2.28% 2.09% NP Margin 0.80% 0.98% 1.01% 1.00% 0.94% Current Ratio Breakup Value with Revlauation Breakup Value w/o Revlauation

33 Valuation Snapshot Weighted Average Cost of Capital Risk Free Rate 11.50% 5 - Year PIB Rate M arket Risk Premium 6.00% Standard Convention by Consensus Analyst Beta 1.07 Average OM C Beta (PSO & SHELL) Cost of Equity 17.92% Ke = Rf + (Rm-Rf)Beta Terminal Growth Rate 2.00% Sustainable Growth Rate Tax Rate 35.00% Corporate Tax Rate Cost of Debt 13.50% 1 - Year KIBOR % Debt to Equity 21.67% Debt to Equity Ratio WACC 15.94% Weighted Average Cost of Capital Free Cash Flow (Amount in PKR '000) FY14F FY15F FY16F FY17F FY18F Terminal Yr. Profit After Tax 612, ,473 1,197,939 1,289,167 1,418,659 Add: Depreciation 106,913 96, , , ,529 Working Capital Changes (276,344) (619,909) (439,070) (23,829) (983,594) Add: Interest Expense (Net of Tax) 69,416 66,099 81, ,357 85,823 Less: Capital Expenditure (386,646) (431,751) (399,670) (74,402) (44,402) Free Cash Flow 126,033 68, ,195 1,439, , ,296 NPV of Free Cash Flow 108,751 51, , , ,119 Terminal Value Terminal Growth Rate 2.00% Terminal WACC 15.94% Estimated Terminal Free Cash Flow (PKR) 626,296 Terminal Value (FY2018) (PKR) 4,493,335 Terminal Value (Current) (PKR) 2,145,032 DCF Valuation NPV of Forecasts (PKR) 1,615,652 NPV of Terminal Value (PKR) 2,145,032 Enterprise Value / Cashflow Generated 3,760,684 Less: Net Debt (Net Cash as at December 31, 2013) (157,642) Equity Value (PKR) 3,603,042 No of Shares 90,600,000 Per Share Equity Value (PKR)