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Pakistan Strategy: Where is the Market P/E really at?

• Various P/E levels are floating in the market, from as low as 8.5x to Bloomberg consensus of 9.0x. Based on 85 constituents of the KSE-100 Index, we estimate forward P/E is at 9.6x, higher than Bloomberg consensus due to inclusion of pharmaceutical & consumer companies which trade at higher multiples. We estimate that at its CYTD peak, the KSE-100 was trading as high as 12x.

• Knowing the true P/E can help determine the levels this market can potentially trough out at. The 10yr average P/E is 9.3x and we are close to these levels now. On election date in May’13, market P/E stood near 8.0x; this could be taken as a floor but we believe improved security since then, much lower interest rates and higher earnings growth (FY18F: 18%YoY) justify higher valuation multiples.

• Can the market break lower? It can, but this entails giving up majority of the valuation rerating in the last 4+ yrs and would represent deeply oversold territory, in our view. New retail investors are already eyeing entry while our conversations with foreign fund managers show increased desire for bottom fishing. We think a cherry picking stance can be adopted and positions can begin to be gradually built.