LAHORE - The Budget FY13 has no major surprises for the capital markets. Financial experts said that 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 fertilizer will continue as cash-starved government in order to rationalise energy prices has imposed more tax on gas. In the short run the dwindling Pak Rupee and meltdown in global stocks may affect local market also, says a report released by Topline Investment Securities.
Increase in PSDP, which is also spent on infrastructure development, to Rs873b, up 20 per cent from last year. FED on cement price reduced by Rs100 per ton (Rs5 per bag) to Rs400 per ton (Rs20 per bag), while reduction in turnover tax from 1 per cent to 0.5 per cent for cement firms having tax losses. Custom duty on rubber scrap reduced from 20 per cent to 10 per cent. Increase in gas cess by Rs87 per mmbtu on captive power plants which will increase cost of power generation.
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 per cent 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 per cent. However, increase in gas cess has slight negative implication for cement plants.
Increase of Rs87-100 per MMBTU of gas cess will increase cost of production for FFC and FFBL by approx.Rs165 per bag, Rs130 per bag for Engro and Rs30 per bag for Fatima. Given the oversupply scenario, it would further affect their earnings as fertilizer 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 per cent that is Rs1.4, Rs0.3, Rs1.5 and Rs0.1 per share, respectively. Similarly, subsidy allocation of Rs26b also implies urea import to continue in spite of mounting inventories which could not only affect local manufactures sales but also their pricing power.
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 per cent. Advance tax on purchase of 1300cc to 1600cc locally assembled cars is revised upward from Rs16,875 to Rs25,000.
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.
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.
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 budget remained a non-event for the exploration sector. Furthermore, it is expected OGDC and PPL to announce a dividend of Rs10 and Rs16 per share in FY13. 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 Rs7.15 per litre FED on base oil bodes well for NRL, the only lube refinery of Pakistan. We estimate an annualised earning impact of Rs10-12 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. The govt has announced total electricity subsidy target of Rs185b against revised allocation of Rs464b in the outgoing year. The amount includes Rs120b for inter-disco tariff differential against last year revised allocation of Rs417b.
Given existing tariff differential of 20-25 per cent in electricity tariff and cost and political compulsion in the election year playing a road block to further reduce tariff-cost gap, it is estimated 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.
Increase in salaries will negatively impact profitability of PTCL as salary expenses contribute around 17 per cent of total cost. Expected revenue of Rs79b from 3G licences seems to be an arbitrary number and final revenue will be decided when consultant will be hired. 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
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.