January 8, 2014

Initiation Pakistan Research

Please refer to the last page for Analyst Certification and other important disclosures.

Tariq Glass Industries Ltd. (TGL) has managed to become a leader in the float glass market

within six months of inaugurating its new 181ktpa plant. The company previously operated

only in the container glass and tableware segment. Despite predatory pricing by Ghani Glass

(GHGL) to limit TGLs market penetration, TGL, helped by its superior quality, has

successfully captured ~50% of float glass market share. The current market standing is now

apparently well accepted and respected by these two players and resultantly both increased

float glass prices by 24% in Nov-13. The current increase has merely recouped cuts post

TGL's COD and inflationary impact of price freeze during the preceding two years is yet to be

passed on. Recent price increase coupled with volumetric growth from an expanding

product portfolio is likely to bring about strong earnings growth for TGL. We expect FY14

and FY15 EPS to clock in at PKR7.95 and PKR10.80, up 50% and 36% YoY. TGL is currently

trading at a cheap FY14/FY15 PER of 3.7x/2.7x. Our Dec-14 PT of PKR67/sh offers a stellar

upside potential of 127%. BUY!

Better quality allowed market penetration: Industry sources establish that Tariq Float has

generally been accepted by market participants as being of better quality than GHGLs float

glass. This has allowed TGL to aggressively expand its market share post-expansion.

End of predatory pricing to benefit TGL: Owing to the high market penetration accomplished

by TGL in a very short time span, GHGL ended the price war and apparently accepted TGL's

market share. Resultantly, both companies collectively increased prices by 24% in Nov-13.

This, coupled with a recent 7% increase in tableware prices, shall allow strong margin

expansion during 2HFY14. We expect TGL's gross margins to rise to 22.7% in 4QFY13 from

14.9% in 1Q, which would still be 6pp lower than pre-predatory pricing gross margins of GHGL.

Expanding product portfolio and focus on exports to improve utilization: TGL recently started

producing colored-float glass and is also planning on commencing production of CVD coated

reflective glass and mirror glass. In addition to this, TGL is also focusing on exporting its surplus

production to India and Middle East. We expect that TGL shall achieve capacity utilization of

75% in the float segment by 4QFY14 and have assumed the same as peak utilization level.

TGL Financial Highlights

FY11A FY12A FY13A FY14E FY15E FY16E

EPS 2.07 4.22 5.30 7.95 10.80 11.79

DPS (PKR) 1.00 - - - 5.00 6.00

BV/share 23.8 29.3 36.4 44.4 55.2 62.0

PER (x) 14.3 7.0 5.6 3.7 2.7 2.5

Dividend Yield 3% 0% 0% 0% 17% 20%

PBR (x) 1.2 1.01 0.81 0.67 0.54 0.48

EV/EBITDA 4.8 4.8 10.5 3.4 2.2 1.8

ROA 8% 9% 7% 8% 11% 12%

ROE 13% 16% 16% 20% 22% 20%

EBITDA growth 4% 51% -17% 196% 33% 4%

Net Profit growth 1% 104% 26% 50% 36% 9%

Source: Elixir Research

Household Goods TGL: A potential two-bagger

TGL PA BUY Price Target: PKR67/Share

Closing Price: PKR29.6/Share

Key Data

12m Price Range (PKR) 29.6 17.0

Market Cap (PKR mn) 2,049.9

Outstanding Shares (mn) 69.3

Avg. Daily Volume mn (6m) 0.4

1Yr Relative Performance

Source: Elixir Research

Syed Nasir RizviAC

snarizvi@elixirsec.com (+92-21) 3569 4679

60

80

100

120

140

160

180

Jan

-13

Mar

-13

May

-13

Jul-

13

Sep

-13

Nov

-13

Jan

-14

(%) TGL KSE-100 INDEX

Initiation TGL

2 Elixir Securities January 8, 2014

Initiate with BUY

TGL is currently trading at a cheap FY14/15 PER of 3.7/2.7x. We have valued TGL using FCFE

and have used cost of equity of 17% with a terminal growth rate of 3%. Our Dec-14 Price

Target of PKR67/sh offers stellar potential upside of 127%. Strong gains expected from

volumetric growth coupled with end of predatory pricing make TGL a compelling investment

opportunity. BUY!!

TGL Valuation

PKR Mn

FY15E FY16E FY17E FY18E FY19E FY20E

Assumptions: Risk Free Rate 10.0%

Risk Premium 7.0% Cost of Equity 17.0% Terminal Growth 3.0%

FCFE

9 336 491 663 732 963

Discount Factor

0.5 1.5 2.5 3.5 4.5 5.5

Discounted FCFE

8 266 331 383 361 406

PV of FCFE 1,755 PV of Term. Value 2,987 Cash Balance 193 Dec-14 Equity Value 4,936 No. of Shares (Mn) 73* Dec-14 Price Target 67 Source: Elixir Research

* Adjusted for potential dilution

Tariq Glass is engaged in the production of glass products

Tariq Glass Industries Ltd. is engaged in the production and sale of glass products including

glass containers, tableware and float glass with annual combined production capacity of

~280ktons per annum. Its production facility is situated in the outskirts of Lahore. The

company markets its products under the Toyo Nasic, Omroc, Nova and Tariq Float

brand names.

TGL recently commissioned its float glass plant

In 2010, TGL decided to enter the float glass market by investing in a 550tpd

(181ktons/annum) float glass plant. Total capital expenditure for this project amounted to

PKR3.5bn and was financed by a combination of debt and equity. The company issued 46.2mn

right shares for this purpose in FY11. The plant was commissioned during 4QFY13 and the

company is marketing its float glass under the Tariq Float brand name.

GHGL is the primary competitor in the float glass market

According to industry sources, annual demand for float glass in Pakistan is estimated to be

around 250ktons per annum. Prior to TGLs entry into the float glass market, there was a

shortage of locally produced float glass. Ghani Glass Ltd. (GHGL) was the primary producer and

market leader with surplus demand being fulfilled by imported products. GHGL enjoyed

healthy margins on the product due to lack of competition coupled with high prices of

imported glass. Owing to flourishing demand, GHGL expanded its production facility from

Initiation TGL

3 Elixir Securities January 8, 2014

~110ktons to ~293ktons in FY12. This, combined with TGLs recent entry into the market, has

now a created a slight oversupply of float glass in the country.

Predatory pricing reduced margins

Despite cost pressures, GHGL had not increased prices of float glass since FY12 in anticipation

of TGLs entry into the market. In fact, after TGLs float glass plant came online in 4QFY13,

GHGL employed a predatory pricing strategy to limit TGLs market penetration and further

reduced its ex-factory prices from ~PKR45/kg to ~PKR34/kg. TGL, being a new entrant and

price taker, had to price its product at the reduced rate in order to gain access to the market.

Lower prices combined with higher depreciation and finance costs resulted in lower margins

and earnings for TGL. TGL posted gross margin of 13.9% between 4QFY13-1QFY14, down 5.7pp

relative to 19.6% during the same period last year (when the float glass plant had not been

commissioned).

0

50

100

150

200

250

300

350

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

Float Capacity Float ProductionKTonsKTons

GHGL Float glass capacity and production trend

Source: Company Accounts, Elixir Research

30.5%

28.7% 28.6% 28.8%

22.9% 22.5%

15%

17%

19%

21%

23%

25%

27%

29%

31%

33%

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

GHGL Gross Margins

GHGL enjoyed healthy margins prior to FY12

Source: Company Accounts, Elixir Research

29,595

34,591

42,641 44,254

39,404

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

Average Ex. Factory Float Glass PricesPKR/ton

GHGL reduced float glass prices in 4QFY13

Source: Company Accounts, Elixir Research

10.2%9.0%

19.3%17.6%

20.47%

15.1% 14.9%

0%

5%

10%

15%

20%

25%

FY0

8

FY0

9

FY1

0

FY1

1

FY1

2

FY1

3

1Q

FY1

4

TGL Gross Margins

TGLs realized gross margins plunged after float glass expansion

Source: Company Accounts, Elixir Research

Initiation TGL

4 Elixir Securities January 8, 2014

Better quality allowed market penetration

Company and industry sources establish that Tariq Float has generally been accepted by

market participants as being of better quality than GHGLs float glass. Some sources also

indicate that TGLs product is comparable, if not better, than the much higher priced imported

glass, which is priced around PKR85/kg. This, coupled with rigorous marketing efforts, has

allowed TGL to aggressively expand its market presence after commencing production.

Company sources indicate that TGL has already captured ~50% of the float glass market from

GHGL and imported products and has successfully solidified its position as a key player in the

industry.

Price war has ended now

Owing to the high market penetration accomplished by TGL in a very short time span, GHGL

has apparently acknowledged TGLs strong position in the float glass market and ended the

price war. The two companies collectively increased prices by 24% to PKR42/kg in Nov-13. The

current price increase has merely recouped cuts post TGL's COD and inflationary impact of

price freeze during the preceding two years is yet to be passed on.

Expanding product portfolio and focus on exports to allow volumetric growth

After successful penetration in the float glass market, TGL has started producing and selling

colored-float glass during 2QFY14 which is a higher value product and is priced at ~PKR60/ton.

The company is also planning on commencing production of CVD (Chemical Vapor Deposition)

coated reflective glass and mirror glass which are higher-priced variants of float glass.

Successful marketing of these products shall allow TGL to gain an even higher share of the

market in Pakistan. In addition to this, the company is also focusing on exporting its surplus

production to neighboring regions such as India and the Middle East. We expect TGL to

achieve optimum capacity utilization of 75% in the float segment by 4QFY14 and

conservatively assume that capacity utilization shall continue at the same level post-FY14.

Note that float glass plants can technically achieve 80% utilization levels.

Tableware prices have also been increased

TGL holds a strong reputation in its tableware business and produces a wide variety of

products including glass cups, mugs, goblets and ashtrays. The company operates at close to

optimum capacity in this segment (FY13 utilization: 71%) and has little room for volumetric

growth. Margins on these products had remained relatively stable during the last three years

hovering between 18-20%. However, increased costs during FY13 were not entirely passed on

by the company resulting in lower margins (9MFY13: 16%). TGL has recently increased

tableware prices by 7% in Dec-13 to pass on the increased costs during the year.

Expect strong earnings ramp-up in the remaining part of FY14

Increase in both float glass and tableware prices coupled with volumetric growth on the back

of an expanding product portfolio shall allow strong earnings growth for TGL in the remaining

part of the current fiscal year. We expect EPS to clock in at PKR1.18, PKR2.69 and PKR3.14

during 2Q, 3Q and 4QFY13, up 1.1x, 1.8x and 5% YoY. This shall take FY14 EPS to PKR7.95, up

50% YoY. In addition to this, we believe that gross margins shall come in at 16.1%, 21.4% and

22.7% during the three quarters. Margins shall post strong recovery in the second half of FY14

due to better gas availability post-winter and realization of the full impact of the price

increase.

Initiation TGL

5 Elixir Securities January 8, 2014

Growth to continue post-FY14

We expect FY15 EPS to clock in at PKR10.8, up 36% YoY, on the back of better margins and

capacity utilization relative to FY14 average due to full year impact of higher prices new glass

variants. In addition to this, bottom-line shall also be supported by debt repayments and lower

finance costs in FY15. Subsequent to FY15 we expect earnings growth to materialize and post a

modest 5-year CAGR of 7% between FY16-FY20.

15.1%

19.1%

22.2% 22.0% 22.0% 21.9%

10%

12%

14%

16%

18%

20%

22%

24%

FY1

3A

FY1

4E

FY1

5E

FY1

6E

FY1

7E

FY1

8E

TGL Gross Margins

Expect better margins in the near future

Source: Company Accounts, Elixir Research

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100

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200

250

300

FY1

3A

FY1

4E

FY1

5E

FY1

6E

FY1

7E

FY1

8E

TGL Capacity TGL ProductionKTonsKTons

Capacity utilization to improve in FY14 and FY15 In FY14

Source: Company Accounts, Elixir Research

17.5%

14.8%

16.5%

12.8%

14.9%16.1%

21.4%22.7%

10%

12%

14%

16%

18%

20%

22%

24%

1Q

FY1

3A

2Q

FY1

3A

3Q

FY1

3A

4Q

FY1

3A

1Q

FY1

4A

2Q

FY1

4E

3Q

FY1

4E

4Q

FY1

4E

TGL Gross Margin

Gross margins shall also improve

Source: Company Accounts, Elixir Research

0.79 0.57

0.97

2.98

0.94 1.18

2.69

3.14

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1Q

FY1

3A

2Q

FY1

3A

3Q

FY1

3A

4Q

FY1

3A

1Q

FY1

4A

2Q

FY1

4E

3Q

FY1

4E

4Q

FY1

4E

PKR/share

Expect better earnings in the upcoming quarters

Source: Company Accounts, Elixir Research *Tax reversal realized during 4QFY13

Initiation TGL

6 Elixir Securities January 8, 2014

PT adjusted for dilution from share issue

TGL currently owes USD2mn to Qinhuangdao Yaohua Glass Machine Manufacture Co. Ltd. for

supply of equipment for its float glass plant. The company has an option to issue 4.2mn fully

paid ordinary shares to the supplier against these dues. It has already taken shareholder

approval in this regard and is awaiting regulatory approvals. We believe that TGL shall manage

to issue the shares by the end of 2014 and have accordingly adjusted our PT for this potential

dilution.

Initiation TGL

7 Elixir Securities January 8, 2014

Financials

Income Statement

PKRmn FY10A FY11A FY12A FY13A FY14E FY15E FY16E FY17E FY18E

Net Sales 2,071 2,602 3,411 3,889 7,329 8,539 9,021 9,529 10,066

COGS 1,672 2,145 2,713 3,302 5,928 6,642 7,036 7,437 7,863

Gross Profit 399 457 698 587 1,400 1,897 1,985 2,092 2,203

Operating costs 46 91 145 128 41 94 116 140 166

EBITDA 354 366 554 459 1,359 1,803 1,869 1,952 2,037

EBIT 247 251 434 250 903 1,328 1,375 1,439 1,502

Finance Cost 45 42 41 94 205 166 107 99 65

Net Profit Reported 188 210 423 153 688 1,151 1,257 1,327 1,424

EPS (PKR) 2.05 2.07 4.22 5.30 7.95 10.80 11.79 12.45 13.36

DPS (PKR) 0.58 1.00 - - - 5.00 6.00 6.25 6.75

Source: Elixir Research

Balance Sheet

PKRmn FY10A FY11A FY12A FY13A FY14E FY15E FY16E FY17E FY18E

Shareholders Funds 618 1,647 2,033 2,524 3,075 3,823 4,294 4,740 5,233

Long Term Loans 315 218 859 2,061 1,755 1,459 1,164 869 574

Current Liabilities 431 478 939 1,776 2,010 1,718 1,577 1,538 1,602

Capital & Liabilities 1,365 2,342 3,831 6,361 6,840 7,001 7,035 7,147 7,408

Net Fixed Assets 910 1,389 2,814 4,537 4,465 4,398 4,320 4,231 4,129

Current Assets 455 953 1,017 1,824 2,375 2,603 2,715 2,916 3,279

Total Assets 1,365 2,342 3,831 6,361 6,840 7,001 7,035 7,147 7,408

Source: Elixir Research

Cash Flow Statement

PKRmn FY10A FY11A FY12A FY13A FY14E FY15E FY16E FY17E FY18E

Net Income 142 144 293 367 551 748 817 863 926

Depreciation 106 115 119 209 457 475 494 514 534

Capex 201 590 1,525 1,878 400 408 416 424 433

Work. Cap. Changes 76 42 36 (909) (413) (111) (63) (66) (69)

FCFF 185 680 (811) (2,056) 332 812 901 951 1,000

Net Debt Repayments 133 181 (775) (1,853) 195 695 495 395 295

FCFE 22 472 (62) (264) 4 9 336 491 663

Dividends 17 23 69 0 0 0 347 416 433

Net Cash Flows 5 449 (132) (264) 4 9 (10) 75 230

Source: Elixir Research

Initiation TGL

8 Elixir Securities January 8, 2014

Financial Ratios

FY10A FY11A FY12A FY13A FY14E FY15E FY16E FY17E FY18E

EPS 2.05 2.07 4.22 5.30 7.95 10.80 11.79 12.45 13.36

DPS 0.58 1.00 - - - 5.00 6.00 6.25 6.75

BVPS 8.9 23.8 29.3 36.4 44.4 55.2 62.0 68.4 75.5

PER 14.5 14.3 7.0 5.6 3.7 2.7 2.5 2.4 2.2

EV/EBITDA 6.8 4.8 4.8 10.5 3.4 2.2 1.8 1.5 1.2

P/BV 3.3 1.2 1.0 0.8 0.7 0.5 0.5 0.4 0.4

Div Yield 2% 3% 0% 0% 0% 17% 20% 21% 23%

ROCE 15% 11% 12% 9% 10% 13% 14% 15% 16%

ROA 11% 8% 9% 7% 8% 11% 12% 12% 13%

ROE 25% 13% 16% 16% 20% 22% 20% 19% 19%

Gearing 0.55 (0.17) 0.31 1.09 0.83 0.48 0.32 0.19 0.07

Turnover Growth 47% 26% 31% 14% 88% 17% 6% 6% 6%

EBITDA Growth 212% 4% 51% -17% 196% 33% 4% 4% 4%

Net Profit Growth NM 1% 104% 26% 50% 36% 9% 6% 7%

Source: Elixir Research

Initiation TGL

9 Elixir Securities January 8, 2014

Chief Executive Officer

Junaid Iqbal (92-21) 3569 4617 jiqbal@elixirsec.com

Pakistan Research Team Institutional Equities Retail Equities

Azfer Naseem, CFA

Head of Research (92-21) 3569 4716 anaseem@elixirsec.com

Sateesh Balani (92-21) 3569 4679 sbalani@elixirsec.com

Faisal Bilwani

Head of Equities - FII (92-21) 3569 3919 fbilwani@elixirsec.com

M. Sibtain Mustafa

Head of Equities - LII (92-21) 3569 3911 smustafa@elixirsec.com

Muhammad Ali Taufiq

Head of Equity Strategy Retail (92-21) 3569 3922 alitaufiq@elixirsec.com

Sikandar Rahim (92-21) 3569 3914 srahim@elixirsec.com

Ujala Adnan (92-21) 35694622 Uadnan@elixirsec.com

Jawwad Aboobakar (92-21) 3565 3182 jawwad@elixirsec.com

Kamran Kaludi (92-21) 3569 3920 kkaludi@elixirsec.com

Mubashir Anis Silat (92-21) 3569 4622 manis@elixirsec.com

Muhammad Raza Rawjani (92-21) 3569 3911 rrawjani@elixirsec.com

Adil Abid (92-21) 3569 4666 aabid@elixirsec.com

Syed Nasir Rizvi (92-21) 3569 4622 snarizvi@elixirsec.com

HNW & Family Offices

Harris Ahmed Batla (92-21) 3569 4706 habatla@elixirsec.com

Khurram Malik (92-21) 3569 4602 kmalik@elixirsec.com

Ibad-ur-Rehman (92-21) 3569 4622 irehman@elixirsec.com

Lahore Office Tahir Maqbool (92-42) 3577 2643 tmaqbool@elixirsec.com

Islamabad Office Asim Ghafoor Qureshi (92-51) 227 2341 aghafoor@elixirsec.com

Syed Tahseen (92-21) 3569 4622 tjaved@elixirsec.com

Faisalabad Office Syed Baqar Hassan (92-41) 254 1001-4 sbhassan@elixirsec.com

Initiation TGL

10 Elixir Securities January 8, 2014

Analyst Certification

The Elixir Research Team certifies that (1) the views expressed in this report accurately reflect their personal views about all of the subject companies/securities and (2) no part of their compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Disclaimer The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.

Research Dissemination Policy

Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.

Company Specific Disclosures Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.

Other Important Disclosures Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

Copyright 2014, Elixir Securities Pakistan (Pvt.) Ltd. All rights reserved. This report or any portion hereof may not be reproduced, distributed, published or sent to a third party without prior consent of Elixir Securities Pakistan (Pvt.) Ltd.