The Budget FY13 has no major surprises for the capital markets as the newly amended capital gain tax ordinance is now part of Finance Bill, which will bring some certainty to the investors related to tax issues, analysts said. "We maintain our positive stance on Pakistan bourse that is trading at FY13 estimated PE of 6.5x and dividend yield of 8 percent", Muhammad Sohial, leading analyst in his detailed research report on "Sector Impact of Budget FY13", said.
"In the short run the dwindling Pak Rupee and meltdown in global stocks may affect local market also", he added.
He discussed the budgetary measures and their impact on the following sectors:
Stock Market: Budgetary measures:
--- Finance Amendment Ordinance 2012 is now a part of Finance Bill
--- 2012 which also includes the rules for computation of Capital gain tax (CGT). Thus the relief for stock market investors will now be approved by the parliament.
--- As a result of this no source of income will be asked for investment made for at least 45 days till June 30, 2012 or for at least 120 days till June 30, 2014, provided statement of investment is filed along with return and wealth statement.
--- Turnover tax reduced from 1 percent to 0.5 percent.
--- For investment in IPO, individuals will now get tax credit up to 20 percent of taxable income or Rs 1 million, which ever is less. Previously, individuals were entitled to get a tax credit of 15 percent or Rs 0.5 million which ever is less. Also the holding period to get a tax rebate has been reduced to 2 years from 3 years.
--- No reduction made in corporate tax rate of 35 percent.
--- In line with the expectations, the government ignored the demand of minimum dividend payment by the listed companies.
--- Similarly, the new budget also maintain 10 percent tax on dividend setting aside the KSE proposal
--- To curb speculation and holding real estate for trading purpose, the government will charge 10 percent and 5 percent tax on gain on property if sold within one year and two years of its acquisition, respectively. However, there will be no CGT on sales after 2 years. This may divert some funds from property business towards shares trading.
Impact: 'Neutral to Positive'All in all the Budget FY13 has no major surprises for the capital markets. The newly amended gain tax ordinance is now part of Finance Bill, which will bring some certainty to the investors related to tax issues. Contrary to fear, banks tax rate has not been increased which bodes well for local banking sector. On the other hand, bad times for Fertiliser will continue as cash-starved government in order to rationalise energy prices has imposed more tax on gas. Though we maintain our positive stance on Pakistan bourse that is trading at FY13 estimated PE of 6.5x and dividend yield of 8 percent. In the short run the dwindling Pak Rupee and meltdown in global stocks may affect local market also.
Banks: Budgetary Measures
--- Contrary to media reports tax on T-bill remain at 35 percent in line with standard corporate tax unlike market expectation of 40 percent.
--- Dividends received on investments in money market and income funds are now charged at 25 percent instead of 10 percent in 2012. This tax will progressively be increase to 35 percent in 2013.
--- Exemption limit of WHT on cash withdrawals (currently charged at 0.2 percent) increased from 25,000 to 50,000.
--- Reliance on bank and non bank borrowing will keep interest rate high with no major growth expected in private sector credit
Impact: 'Neutral'Increase in tax on dividends on investment in funds has no major impact on banks as 2012 average earnings will be revised down by less than 1%. However, few banks like ABL and UBL which have higher exposure in funds their earnings will be affected by 2-4%, if they hold funds for short period. On the other hand, the said measure will be slightly negative for those Macs which are subsidiaries of banks. Moreover, increase in cash withdrawal limit will slightly improve deposit base. "We believe banks will continue to benefit from higher interest rates and lower provisioning," he said.
Cement: Budgetary Measures
--- Increase in PSDP, which is also spent on infrastructure development, to Rs 873 billion, up 20 percent from last year.
--- FED on cement price reduced by Rs 100 per ton (Rs 5 per bag) to Rs 400 per ton (Rs 20 per bag).
--- Reduction in turnover tax from 1 percent to 0.5 percent for cement firms having tax losses.
--- Custom duty on rubber scrap reduced from 20 percent to 10 percent.
--- Increase in gas cess by Rs 87 per mmbtu on captive power plants which will increase cost of power generation.
Impact: 'Neutral to Positive'Government higher allocation in an election year on development spending may generate local demand for cement. This will boost domestic demand for cement in FY13 which is already up 9 percent during 10MFY12. Moreover, reduction in FED (if not passed on to consumers) low custom duty on rubber scrap and lesser turnover tax will improve cement firms profitability. Assuming these benefits are not passed on to the consumers then DGKC and Lucky Cement annualised earnings would increase by 8-10 percent. However, increase in gas cess has slight negative implication for cement plants.
Fertilizer: Budgetary Measures
--- To generate additional revenue, GoP has imposed an additional gas cess of Rs 100 per MMBTU on feed gas while Rs 87 per MMBTU on fuel gas.
--- Government also allocated subsidy of Rs 26 billion on fertiliser. Last year, the government is estimated to provide Rs 45 billion on fertiliser.
Impact: 'Negative' Increase of Rs 87-100 per MMBTU of gas cess will increase cost of production for FFC and FFBL by approximately Rs 165 per bag, Rs 130 per bag for Engro and Rs 30 per bag for Fatima. Given the oversupply scenario, it would further affect their earnings as fertiliser producers will find it difficult to fully pass on the impact in light of low priced imported urea. Assuming, they cannot pass on the gas tax impact then 2012 earning of FFC, FFBL, ENGRO and Fatima will be effected by 6-8 percent that is Rs 1.4, Rs 0.3, Rs 1.5 and Rs 0.1 per share, respectively. Similarly, subsidy allocation of Rs 26 billion also implies urea import to continue in spite of mounting inventories which could not only affect local manufactures sales but also their pricing power.
Auto Assemblers: Budgetary Measures
--- No change has been made in the CKD import duty structure
--- Similarly no change has been made in the duty structure of used and new cars
--- To encourage import of hybrid electric vehicles (HEV) at affordable prices the rate of duty on HEV and their batteries has be reduced by 25 percent.
--- Advance tax on purchase of 1300cc to 1600cc locally assembled cars is revised upward from Rs 16,875 to Rs 25,000.
Impact: 'Neutral'No major relaxation for used cars will provide sigh of relief to local assemblers like Pak Suzuki and Indus Motors. On hybrid vehicle there will be no major impact on local car assemblers.
Insurance: Budgetary Measures
--- FED of 16 percent on live stock insurance is abolished.
--- CGT on shares has been reduced from 15 percent to 12 percent (if holding is less than 6-months), while from 9 percent to 8.5 percent (if holding more than 6-months but less than 1-year).
--- Increased tax credit on life insurance from 15 percent (or Rs 0.5 million which ever is less) to 20 percent (or Rs 1 million which ever is less). Further holding period for tax rebate is also reduced from 3 to 2 years.
Impact: 'Positive'For listed insurance sector, reduction in FED on live stock insurance and CGT on shares bodes well for their future profitability. Moreover, increase in tax rebate will support life insurance penetration in Pakistan which is already very low.
Textile: Budgetary measures
--- Reduction of 1 percent turnover tax to 0.5 percent for companies with tax losses.
--- To encourage normal tax regime and phasing out of Presumptive
--- Tax Regime (PTR) in three years, lower tax rates are being offered to commercial importers, exporters and suppliers.
--- Increase in gas cess by Rs 87 per MMBTU on captive power plants will increase cost of production.
Impact: 'Neutral' Reduction in turnover tax and decrease in export duties will improve textile manufacturers' earnings. On the flip side, increase in gas cess will be slightly negative. "However, the above measures have no major impact on NML, the only company we cover in textile sector", he said.
E&P: Budgetary measures
--- The govt announced customary dividends estimates from state owned E&P and royalty targets on oil and gas for FY13. The government is expecting to receive dividend of Rs 8 and Rs 10 per share from OGDC and PPL, respectively.
--- The government has announced a target from privatisation proceeds of Rs 74 billion, which implies the government intention of conducting PPL's secondary public offering in FY13.
Impact: 'Neutral'The budget remained a non-event for the exploration sector.
Furthermore, it is expected OGDC and PPL to announce a dividend of Rs 10 and Rs 16 per share in FY13. "The recent reduction in the international oil prices may cause the sector to underperform in the short-run", he said.
OMCs and Refinery: Budgetary measures
--- The government announced PL target of Rs 120 billion as against FY12 collection estimate of Rs 69 billion.
--- The government announced its total dividend expectation from PSO for FY13, rendering into cash payout of Rs 13 per share.
--- The government announced a gas development surcharge of Rs 300 and Rs 200 per MMBTU on CNG for north and south zone.
--- Abolishment of FED on lubricating and base oil. FED on base oil is currently stands at Rs 7.15 per liter.
Impact: 'Neutral to Positive' for OMCs & Ref Increase in taxes on CNG would reduce petrol/CNG price differential, hence boding well for petrol sales. While abolishment of FED on lube oil could provide traction to local lubricating sales going forward.
For refineries, abolishment of Rs 7.15 per liter FED on base oil bodes well for NRL, the only lube refinery of Pakistan. "We estimate an annualised earning impact of Rs 10-12 per share on NRL, assuming the impact is not passed on". However lube prices and margins will continue to be a function of international oil prices.
IPPs: Budgetary measures
--- The government has announced total electricity subsidy target of Rs 185 billion against revised allocation of Rs 464 billion in the outgoing year. The amount includes Rs 120 billion for inter-disco tariff differential against last year revised allocation of Rs 417 billion.
Impact: 'Neutral' Given existing tariff differential of 20-25 percent in electricity tariff and cost and political compulsion in the election year playing a road block to further reduce tariff-cost gap, we estimate the electricity subsidy to overshoot the initial allocation. As such the budget turned out to be a non-event for the IPPs. However recent fall in crude and furnace oil price can be a blessing in disguise if this trend of oil continues in FY13 also.
Telecom: Budgetary measures
--- 20 percent increase in the government employee salaries.
--- The government also announced its total dividend expectation from
--- PTCL for FY13, rendering into cash payout of Rs 2 per share.
--- The government announced the revenue from 3G licenses of Rs 79 billion in FY13.
--- No change in FED for telecom sector
Impact: 'Neutral to Negative' Increase in salaries will negatively impact profitability of PTCL as salary expenses contribute around 17 percent of total cost. The increase could dilute PTCL earning by Rs 0.3-0.35 per share but, we have already partially priced in the effect in our financial models. Expected revenue of Rs 79 billion from 3G licenses seems to be an arbitrary number and final revenue will be decided when consultant will be hired.
Chemicals: Budgetary Measures
--- No change in import duty on PTA imports in line with the estimate, though few investors were expecting increase in protection.
--- Reduction of 1 percent turnover tax to 0.5 percent.
Impact: 'Neutral' on Lotte PTA Given low PTA to Px margin scenario, reduction in turnover tax would reduce company's tax liability in future if company post a tax loss. However, at present the budget is a non-event for Lotte PTA.
Pharma/FMCG: Budgetary measures
--- Abolishment of FED on skin care products.
--- Customs duty on 88 pharmaceutical raw materials and other inputs reduced from 10 percent to 5 percent.
--- Reduction in maximum sales tax to 16 percent.
--- Tax credit on dairy investment or for extension of the existing manufacturing facility.
--- Elimination of FED on live stock insurance.
--- Reduction of sales tax on tea from 16 percent to 5 percent.
Impact: 'Positive' for pharma/FMCG Encompassing the populous measures that aim to provide relief to common masses ahead of general election, the Federal Budget FY13 bodes well for the Pharmaceutical as well as consumer related firms. These measures are expected to induce sales and improve margins thereby further improving profitability of pharma companies like Glaxo, Abbott, Searle, etc along with FMCGs like Unilever Pakistan, Colgate, Engro Foods etc.
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