PICIC Growth Fund - Analysis of Financial Statements Financial Year 2002 - Financial Year 2008
PICIC Growth Fund is one of the largest closed-ended scheme in Pakistan. The principal business of the Fund is to invest in listed equity securities with an objective to generate capital.
The fund aims to be the top performer of the Mutual Fund Industry through wealth maximisation of the certificate holders by investing in the best available opportunities with emphasis on growth, while considering the risk parameters and applicable rules and at the same time to provide the investors lucrative investment opportunities through an investment mix of blue chip shares, which offer healthy dividends and growth opportunities.
Its certificates are listed on all the three stock exchanges of Pakistan. The Fund managed by PICIC Asset Management Company Limited, which is the investment adviser. Central Depository Company of Pakistan Limited is the trustee of the Fund. JCR-VIS Credit Rating Company Limited has assessed the performance ranking of PICIC Growth Fund at 'MFR-2 Star' for the two-year period ended June 30, 2007.
Its majority customers, rather shareholders are individuals. PICIC Asset Management Company, which is the wholly owned subsidiary of the bank, holds a major portion of the units of the mutual fund, followed by financial institutions (including PICIC), NIUT, investment companies and insurance companies. Modarabas, mutual funds, and joint stock companies have smallholdings.
FINANCIAL PERFORMANCE Q1'09 (SEPTEMBER ENDED 2008)
During the first quarter of FY09 KSE-100 index fell from 12,289 to 9,179 points, a decline of 25.31% as compared to a decline of 3.05% during the corresponding period of last year. Market capitalisation fell by 24.62% compared to an increase of 1.33% last year. Furthermore, during the period, the rupee devalued almost 14% against the US dollar.
As the current account deficit widened further, the government has to increase its borrowings from State Bank to above Rs 170 billion. As the government followed tight monetary policy accompanied by increased fiscal spending, the private sector liquidity was affected, bringing down the economic growth.
In these depressing conditions, PGF registered a total loss of Rs 1,720 million and an unrealised loss of Rs 1,720 million, as compared to a total loss of Rs 68 million in the corresponding period. Realised capital gain showed improvement as it stood at nil as compared to the loss of Rs 187 million in the corresponding period.
The dividend income reduced from Rs 156 million to Rs 41 million in Q1'09. Total expenditures for the period stood at Rs 47 million compared to Rs 77 million, which stood improved control measures from the company. The main focus was seen in the management fees section and the securities transaction costs section.
The net loss for the period was Rs 1,768 million, as the tax provision was nil in accordance with the clause 99 of Part I of the Second Schedule of the Income Tax Ordinance, 2001 and Regulation 72 of NBFC & NE Regulations, 2007. The net loss for Q1'08 comparatively was Rs 145 million. The loss per certificate for Q1'09 was Rs 6.24 as compared to Rs 0.51 for the corresponding period.
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INCOME STATEMENT Q1'09 Q1'08
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Income:
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Capital gain on Sale of Investments -net -187,397
Unrealised appreciation/(Diminution) -1,779,691 -66,978
Dividend 41,132 156,871
Profit on bank deposits 18,129 29,535
Total Income -1,720,430 -67,969
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Expenditure:
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Management Fee 41,878 57,157
Fee to Trustee 1,391 1,789
Fee to S.E.C.P. 2,094 2,858
Securities transaction costs 429 13,607
Other Expenses 1,405 1,689
47,197 77,100
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Profit Before Taxation -1,767,627 -145,069
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Taxation - Prior years
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Profit After Taxation -1,767,627 -145,069
Basic Earning per Certificate (Rupees) -6.24 -0.51
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FINANCIAL PERFORMANCE FY02-FY08
During the year 2008, the KSE-100 index plummeted throughout the year, showing a downfall of 10.77%, from 13,772 to 12,289. This decline came as a sharp contrast after the growth of 37.87% observed during FY07. Market capitalisation fell by 6.02% from Rs 4.019 trillion to Rs 3.777 trillion in FY08, as compared to an increase of 43.48% during FY07.
This decline all over was a result of the volatile political scenario of the country, coupled with macroeconomic developments, which impacted the market fundamentals across the board as the key factors for the required rate of return rose sharply during the year, hence pulling the market prices downward.
The market movements portrayed a perfect picture of the socio-politico developments inside the country, which included the unrest in tribal region, Presidential election, judicial activism, emergency, assassination of Benazir Bhutto, elections, global financial crunch and domestic energy crisis and the government borrowing from SBP eventually took their toll on the macro economy, and the rupee lost 15% of its value.
In response, the SBP tightened the monetary policy and the stock market discounted all these developments and readjusted itself in a sharp manner, resulting in a decline of 36% in less than three months. During the year under review, the KSE-100 Index reached a high of 15,676 and a low of 11,162.
Average daily volume stood at 242 million shares as compared to 212 million shares in FY07. Higher volumes were primarily due to increased foreign-based activity and enhanced market volatility due to the unstable political situation prevailing in the country. The total Index Points Movement (IPM) during the period under review was 4,514 points as compared to 4,267 points in FY07.
The average daily volatility stood at 0.44% against 0.59% in FY07. Lower volatility is purely reflective of the higher base effect as at the beginning of the period. Performances of the sectors, which contribute almost 73% of the market capitalization, are banking (12.13% outperformance), oil and gas exploration (31.24% outperformance) and fertiliser (57.95% outperformance).
The top-3 outperforming sectors versus the KSE-100 Index during this period were textile spinning (296.85% outperformance), leather and tanneries (142.22% outperformance) and investment banks/cos./securities (103.93% outperformance). The top-3 under-performing sectors were textile weaving (18.72% under-performance), tobacco (10.04% under-performance), and technology and communication (5.11% under-performance).
The economy of the country, in FY08, posted a real GDP growth of 5.8%, as compared to 7% in FY07. Slowdown in growth is mainly attributed to the rupee weakness arising from fiscal anomalies and the tight monetary policy. Year 2007-08 was a politically volatile year as per the reasons discussed above, with their consequences on all aspects of economy of the country.
The attempt by the government to protect local consumers from the rising global crude oil prices through borrowing from SBP led to an abnormal expansion in budget deficit (almost 9% of GDP). However, this attempt proved futile as the global crude oil prices kept their march upwards and all the government policies to keep the impact away from the public failed.
Finally the government was forced to reverse this policy. In response to the government borrowing, the SBP accelerated monetary tightening to control surging inflation. As a result the development budget remained unutilized and the budgeted subsidy skyrocketed. Therefore, inflation management choked the growth impetus for the year. Due to the rising global crude oil prices external indicators continued to worsen.
The country's trade deficit widened to US $21 billion in FY08 compared to US $14 billion in FY07. Although the remittances' flow financed the trade deficit partially, the current account deficit rose to US $13bn (7% of GDP) compared to US $7.4 billion last year (5% of GDP). Even the raise in FDI of USD 3.94 billion could not ward off the pressure from the foreign exchange reserves, which fell to USD 11 billion from an all time high of USD 16 billion.
Falling reserves took their toll on the rupee, which depreciated by 15% during the year. Under these depressing circumstances circulating around our country, economy and its impact on KSE, the fund was able to out-perform the benchmark KSE-100 index by 3.05% during the year under review. The KSE-100 Index declined by 10.77% while on dividend adjusted non-frozen net asset value and total net asset value basis the fund decreased by 7.72% and 4.68% respectively.
This has been a highly impressive turnaround for the fund from the situation it was facing during the time period last year six months ie from January to June 2007, when the fund under-performed the KSE-100 index by 18%. This was the result of the policy of the new management, which took over on July 01, 2007, to reorganise and restructure the fund to maximise portfolio returns over the long-term in a manner that is consistent with the investment objectives of the Fund.
During FY08, the investment decisions were based purely on fundamentals and entry and exit strategy was driven strictly in accordance with the market opportunities and conditions. During the year under review total loss stood at Rs 291 million as compared to income of Rs 2,127 million in FY07. Realized capital gain during the year stood at Rs 184 million as compared to realized capital gain of Rs 882 million in previous year.
The dividend income during the year stood at Rs 466 million as compared to Rs 598 million in the corresponding year. Total expenditure during the year stood at Rs 308 million as compared to Rs 338 million during the corresponding year. Tax provision for the current year amounted to nil due to tax exemption under Clause 99 of the Second Schedule of the Income Tax Ordinance, 2001 and Regulation 72 of NBFC & NE Regulations, 2007.
The net loss for the year stood at Rs 599 million as compared to profit of Rs 1,789 million reported in FY07. This transforms into a loss per certificate of Rs 2.11 for the year 2008 as compared to income of Rs 6.31 in the corresponding year. The net assets decreased from Rs 13,489 million on June 30, 2007 to Rs 11,284 million on June 30, 2008 and accordingly the net asset value per certificate decreased from Rs 47.58 per certificate on June 30, 2007 to Rs 39.80 per certificate on June 30, 2008.
DIVIDEND
The Board of Directors of PICIC Asset Management Company Limited has declared a final cash dividend of 10% (ie Re. 1.00 per certificate) of PICIC Growth Fund for FY08. Together with the interim cash dividend of 15% (ie Rs 1.50 per certificate) the total dividend for FY08 amounts to 25% (ie Rs 2.50 per certificate) resulting in total cash payout of Rs 709 million.
This again was lower than the dividend paid in FY07 that was of 62.5% (ie Rs 6.25 per certificate) resulting in a total payout of Rs 1772 million. The operating performance of the fund improved from 2002 to a peak in 2006. After that in 2007, the profile witnessed a decline, which went even below in 2008. The dividend income of the fund has increased consistently over the years.
The fund has diversified investments with some of them being in active sectors of the economy. There has been witnessed a robust growth in the market capitalisation of the economy due to strong macroeconomic performance as well as financial sector reforms. These have increased the global investors' confidence.
Aggressive foreign interest in the domestic capital markets particularly in the banking sector (owing to the acceleration in the mergers and acquisition activity) has allowed the market to remain buoyant throughout the years. The capital gains were higher in 2006 as it included the impact of gain from NRL privatisation of Rs 323 million.
The capital gains in 2007 were about 3 times less than those in 2006. Due to lower capital gains, the total income of the fund was also recorded at a lower level in 2007 than in 2006. In 2008, the capital witnessed further decline as the entire economy and KSE-100 market index suffered a downfall. Hence the fund showed an overall loss at the end of the year. The capital gain to total income ratio showed a peak in 2006, declining after that.
This was because the total income in 2005 was the lowest of all the years in the period concerned and there was experienced a negative unrealized appreciation on investment. As the capital gains declined in 2007 and 2008, the ratio also nose-dived. Capital gains comprised only 41.49% of the total income in 2007 as compared to 117% in 2006. In 2008, the fund faced an unrealized diminution on its investments at a massive scale of Rs 1,009 million.
The low capital gains, coupled with an overall loss, took the capital gains/total income ratio into a negative value. The dividend income to total income also showed a consistently rising trend except a little dip in 2005 owing to robust growth in the capital markets. Since the total income was relatively less in 2007 as against 2006, the ratio witnessed a slight increase over 2006 in 2007.
The dividend income comprised 28.12% of total income in 2007 while it constituted 14.35% in 2006. In 2008, the dividend income fell from last year by Rs 465,982 as compared to Rs 598,242 of last year. Yet the overall loss bade the dividend income to total income ratio fell to a miserly -160%. The returns from investment of the company peaked in 2003 and 2006. In other years, they were relatively lower and went to negative values in 2008.
The profit after tax in 2006 was the highest among all the years in the period under review. This was due to higher total income due to capital gains from the privatization of NRL. The return on assets in 2003 was 17.42%. The fund's asset base was smallest in 2003 of all the years, while the profit remained high due to lower expenses. In 2006, the ratio again increased to 25.45% due to a more than double increase in profit.
The total asset base continued to increase while the profit saw a decline in 2007. Hence, the ratio was lower at 12.61%. This was almost a decline to half. The return to equity ratio depicted a trend similar to the return to assets ratio of the fund due to same reasons as mentioned above. The equity of the fund continued to rise as investors gained confidence in the market and as more foreign investors were attracted to the capital stocks.
The ratio was at a level of 13.26% in 2007 as against 27.23% in 2006. In 2008, there was a decline in assets due to loss in fair value of investments and deposits held by the company, which lowered the net value of assets as compared to 2007. Still, the company managed to cut down its liabilities, mainly in the management fees department and payables against purchase of investment.
Yet the ROA and ROE ratios are both in negative values due to the overall loss faced by the company. The PAT to total income paralleled the other two ratios due to the same reasons. It was recorded at 81% in 2007 and 89% in 2006. The surge in the ratio in 2008 is merely caused by the overall losses incurred by the company and does not indicate profits of any kind.
The debt management profile of the company showed a fluctuating trend, with attaining a peak in 2006. Overall, the ratios have remained low indicating that the fund has managed its liabilities quite effectively. It also reinforces the fact that the fund is largely equity-based. The debt to asset ratio indicated a peak in 2006 at 7% since the liabilities of the fund were the highest in 2006.
The major portion of the fund's payables comprises of the fee to investment advisor. This portion showed a major increase in 2006. In 2007, the ratio was at 5%. Though the fee to SECP increased in 2007, however, the total assets recorded a far greater increase over the period 2006-07.
Hence, the ratio was lower than in 2006. In 2008, the company managed to cut down its liabilities largely, especially in fees against management and payables against purchase if investments, causing the ratio to go down to 1%, in spite of lower assets as compared to last year. The debt to equity ratio peaked in 2006 for the same reason.
It was 7% in 2006. In 2007 it declined to 5% due to an increase in the unappropriated profit and surplus on revaluation of available for sale securities. In 2008 it fell to 1%due to the same reasons discussed above. The capital adequacy of the fund shows the fund as equity based fund. Paid-up capital as a portion of equity has been different in different years.
Also the equity as a portion of total assets has been hovering from 99% to 95% because the fund is equity based. The major portion of the equity goes to the unappropriated profit of the fund, followed by paid-up capital, confirming the fund's objective of growth by retaining a major portion back. The assets are allocated with the greatest part going to investments, and then bank balances.
In terms of sectoral performance of 2008, there were other sectors of asset distribution as well, but the magnitude of those sectors is very low as compared to the major two sectors. The highest contributing sector was fertilizer, with a share of 57.95%.
The most outperforming sector was textile spinning, with a share of 296.85%. The division of assets and liabilities is shown as below. The market value of the fund has shown mixed trends. Generally, the market value of the fund has remained high throughout. The net assets of the fund have shown a rising trend over the years, most of them being financed by capital through investments in equity.
The capital base of the fund has increased slightly for the last 6 years and so did the premium on issue of certificate. What increased was the unappropriated profit and surplus on revaluation of available for sale securities. In 2008, the net assets fell due to the loss faced in fair value of investments. This was reflected in a loss in the unappropriated profits of the company. The closing NAV has increased sharply after 2002 after which it hovered between 52 and 47.
This shows that the fund is able to handle the volatility in the market and hence is able to maintain its NAV at a consistent value. Even in 2008, we see that though the closing NAV decreased, reflecting the low performance of the market, opening NAV increased The number of share certificates in 2008 remained same as in 2007 but the net assets recorded a lower value that made the NAV stand out at 39.8 in 2008 as against 47 in 2007. The earnings per certificate also maintained a similar value throughout the period under review.
It showed a slight dip in 2005 due to lower profitability. It increased in 2006 due to a more than double increase in profits. However, the ratio slightly declined in 2007 as lower capital gains stimulated lower profits. Consequently, in 2008 the ratio again fell due to low markets and volatile situation of our country, from Rs 6.31 to Rs -2.11.
The dividend per share has shown an erratic trend and so have the dividend yield and dividend payout. The dip in both the ratios is attributed to the low DPS in 2005. However, both have shot up again in 2007 on the account of a handsome DPS. In 2008 the DPS fell from RS.4.25 to Rs 2.5. this resulted in a decline in dividend yield but the payout remained to be high on account of lower unappropriated profits.
FUTURE OUTLOOK
Amid the current economic distress in the country, the stock market is expected to remain bearish unless some major plans are implemented for its growth. The current macroeconomic environment is definitely challenging for the government as well as the industry since the macro decisions bear significant impact on the micro economy.
However, the fund's restructuring will bring operational efficiencies and reduce the operating cost of the fund. Taking this into consideration, the profitability and operating results of the fund are expected to improve. The fund does not seem to face any problems with regard to its capital adequacy that is sufficient to maintain to long-term growth. It can also be said for the debt profile of the fund.
However, a fact to be noted is that the fund being a growth fund does not have any investments in government securities that provide a more certain return. Also, the fund could be developed to capture the potential in the energy, agriculture and IT sectors, being hopeful for their positive results, through better policies and implementation.
With an elected parliament the expectation is justified that the country will achieve its true economic potential. The stock market is the barometer of the economy and is expected to respond positively towards the adoption of growth oriented economic policies. Overall, the risk investors may feel after such a low year may be reduced due to a diversified portfolio of the fund.
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PICIC Growth Fund - Financials
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STATEMENT OF ASSETS & LIABILITIES 2002 2003 2004 2005 2006 2007 2008
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Net Assets:
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Investment in HFT 2,126,396 1,090,922 2,643,087 2,234,380 7,685,039 7,768,015 5,916,081
Investment in AFS - 3,073,783 4,066,101 6,038,966 3,869,359 4,520,672 4,545,273
Other Assets 370,086 250,367 236,585 994,546 1,175,817 1,904,529 932,365
Total Assets 2,496,482 4,415,072 6,945,773 9,267,892 12,730,215 14,193,216 11,393,719
Liabilities -14,213 -30,130 -135,856 -220,843 -831,262 -704,283 -109,291
Net Assets: 2,482,269 4,384,942 6,809,917 9,047,049 11,898,953 13,488,933 11,284,428
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Financed By:
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Capital 840,000 840,000 1,260,000 1,575,000 2,835,000 2,835,000 2,835,000
Premium on issue of certificate - - 630,000 630,000 2,992,500 2,992,500 2,992,500
Unappropriated profit 1,642,269 2,192,814 2,575,471 2,524,738 3,622,469 4,561,137 2,332,031
Surplus on revaluation of AFS Investment - 1,352,128 2,344,446 4,317,311 2,448,984 3,100,296 3,124,897
Total Certificate Holder's Funds 2,482,269 4,384,942 6,809,917 9,047,049 11,898,953 13,488,933 11,284,428
Net Asset Value per Certificate (Rupees) 29.55 52.2 54.05 57.44 41.97 47.58 39.80
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INCOME STATEMENT 2002 2003 2004 2005 2006 2007 2008
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Income:
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Capital gain on Sale of Investments -net 42,185 196,541 533,508 547,331 4,232,009 882,486 184,399
Unrealised appreciation/(Diminution) - 338,517 56,976 -118,677 -1,193,622 498,733 -1,009,969
Dividend 189,990 303,732 358,726 466,403 519,612 598,242 465,982
Other Income 18,176 11,088 4,462 9,139 63,726 147,779 68,340
Total Income 250,351 849,878 953,672 904,196 3,621,725 2,127,240 -291,248
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Expenditure:
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Management Fee 51,045 78,883 136,198 158,929 210,407 245,018 249,134
Auditors' Remuneration 57 127 262 358 533 624 554
Other Expenses 1,248 1,923 14,555 39,642 167,402 82,430 58,045
52,350 80,933 151,015 198,929 378,342 328,072 307,733
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Profit Before Taxation 198,001 768,945 802,657 705,267 3,243,383 1,789,168 -598,981
Taxation - Prior years - - - - 3,652 - -
Profit After Taxation 198,001 768,945 802,657 705,267 3,239,731 1,789,168 -598,981
Basic Earning per Certificate (Rupees) 2.36 8.05 5.1 3.56 15.28 6.31 -2.11
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Ratios
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Operating Performance 2002 2003 2004 2005 2006 2007 2008
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Dividend Income 189990 303732 358726 466403 519612 598242 465982
Capital Gain 42185 196541 533508 547331 4232009 882486 184399
Capital Gain/Total Income 16.85% 23.13% 55.94% 60.53% 116.85% 41.49% -63.31%
Dividend Income/Total Income 75.89% 35.74% 37.62% 51.58% 14.35% 28.12% -159.99%
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Profitability Ratios 2002 2003 2004 2005 2006 2007 2008
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Return on Assets 7.93% 17.42% 11.56% 7.61% 25.45% 12.61% -5.26%
Return on Equity 7.98% 17.54% 11.79% 7.80% 27.23% 13.26% -5.31%
PAT/Total Income 79.09% 90.48% 84.16% 78.00% 89.45% 84.11% 205.66%
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Debt Management Ratios 2002 2003 2004 2005 2006 2007 2008
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Debt/Assets Ratio 0.01 0.01 0.02 0.02 0.07 0.05 0.01
Debt/Equity 0.01 0.01 0.02 0.02 0.07 0.05 0.01
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Capital Adequacy 2002 2003 2004 2005 2006 2007 2008
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Paid-up Capital / Total Equity 0.34 0.19 0.19 0.17 0.24 0.21 0.25
Equity/Total Assets 0.99 0.99 0.98 0.98 0.93 0.95 0.99
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Dividend Ratios 2002 2003 2004 2005 2006 2007 2008
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Dividend Per share 2.60 3.50 4.50 3.50 1.00 4.25 4.25
Dividend Yield 0.09 0.07 0.08 0.06 0.02 0.09 0.11
Dividend Payout 13.30 13.41 22.02 21.83 7.83 26.42 51.67
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Market Value Ratios 2002 2003 2004 2005 2006 2007 2008
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Net Assets 2482269 4384942 6809917 9047049 11898953 13488933 11284428
Certificates issued (in '000s) 84000 84000 126000 157500 283500 283500 283500
Opening NAV 12.48 29.55 52.20 54.05 57.44 41.97 47.58
Closing NAV 29.55 52.20 54.05 57.44 41.97 47.58 39.80
Earnings Per Certificate 2.36 8.05 5.10 3.56 15.28 6.31 -2.11
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process.
[The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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