The Federal Budget FY12 had few surprises in store with regards to taxation, while it continued to emphasise on policies to lure long-term investments. The finance minister in his speech expressed ‘optimism’ on the possibility of revival after three consecutive years of financial woes. The impact of budgetary measures on different sectors is noteworthy.
POWER
The government has set the power subsidy target of Rs147.3 billion for FY12. Out of this, Rs122.7 billion is allocated to WAPDA and the remaining Rs24.5 billion would be used to subsidise generation and distribution costs of KESC. Compared to the revised target of Rs343.1 billion, the current allocation is significantly lower, suggesting another round of power tariff hikes are likely in the offing.
In case of investment in power infrastructure, the transcript of the budget speech indicates that the government has allocated Rs32.5 billion for power generation, transmission, distribution and conservation. But with no detailed assessment of the situation presented regarding the mechanism of circular debt resolution, the budget remained a non event for IPPs.
FERTILISER
The sector went largely ignored in the budget with no direct measures being announced. However, some indirect measures which could affect the sector are notable such as the reduction in GST by one percent which will be benefit farmers who have seen consistent increases in fertiliser prices since the start of the year. At the same time, fertiliser manufacturers are placated as the purchase cost of gas would be lowered due to this reduction.
To encourage the introduction of the corporate sector at the local bourse, the government has increased the tax credit facility from five to fifteen percent. Engro Corporation, with a vision of going public with its
fertiliser, food and energy arms, could be the major beneficiary of such a facility. With no major announcement directly affecting the fertiliser sector, we remain bullish on it due to compelling valuations and defensive natures of the stocks (especially FFC and FFBL) said Bilal Qamar at JS.
OIL & GAS
In FY12 federal budget, the government has indicated it will receive dividend income of Rs25 billion and Rs8.4 billion from OGDC and PPL, respectively. However, analysts believe that the target is slightly conservative as OGDC and PPL are expected to contribute Rs32 billion (Rs10 per share) and Rs17.9 billion (Rs18 per share) to the government’s coffers. Furthermore, from oil and gas marketing companies, the government has estimated dividend inflows
of Rs385 million, Rs660 million and Rs600 million from PSO, SNGP and SSGC, respectively.
For FY11, the revised dividend target from PSO stands at Rs385 million, whereas the two gas marketing companies are jointly estimated to contribute Rs701.3 million. It is believed that the budget will have negligible effect on the oil and gas chain.
TELECOM
Similar to last year’s 50 percent hike in government employee salaries; the government has decided to raise it by 15 percent in FY12. This is likely to bode ill for PTCL whose gross margins have already witnessed a large decline in the past year due to this factor.
It is not immediately clear whether the reduction in the GST would apply on the telecom sector as well. However, it is generally understood that the telecom services will continue to be charged at the
19.5 percent GST applicable before the budget. For the second year running, the government has allocated itself substantial revenue from the auction of 3G licenses.
Whether it is successful in conducting such an auction and achieving the target to Rs75 billion remains questionable.
Overall the budget was impartial to the Textile and Chemical sector. The minimum wage rate was anticipated to be revised upwards along with an uptick in the Export Finance Scheme (EFT) which did not materialise. However, zero-rating facility remains intact for the textile sector along with duty cut rate on PTA at three percent which is in line with pre budget expectation.
TEXTILE
On the local textile sales front, a reduced rate of six to four percent in GST was charged on yarn to dyed fabrics previously. However in the budget announced, a standard rate of five percent has been imposed across the board. But this will not have any significant impact on the sector’s profitability.
The measure of 100 percent tax rebate on BMR or industrial undertaking financed is not limited to any one sector. However, the textile sector is one of the prime beneficiaries as majority of small and medium BMRs are financed through equity within this sector. Furthermore, due to supply constraints locally and internationally, farmers were able to fetch extraordinary prices which will motivate them to harvest cotton again this season. The government has also benchmarked textile exports at $15.5 billion for FY12 in comparison to an estimate of $14.8 billion for FY11.
CEMENT
The budget may be good news for savvy investors such as a gradual removal of federal excise duty on cements. The Cement sector seems to be the biggest beneficiary with 12 percent increase coming in public spending proposed in FY12. Moreover, federal excise duty (FED) on a cement bag has been proposed to be reduced to Rs500/bag from Rs700/bag and has been further proposed to be slashed in a matter of three years. The top picks would be Fauji Cement (FCCL; target price Rs 8 per share) which is bringing in a new line and should become one of the best players in northern zone, while DG Khan Cement (DGKC) and Lucky Cement (LUCK; target price Rs 100.7 per share) will use their economies of scale especially in the northern zone where 80 percent of the country’s capacity is consumed.
Status quo remains in major sectors
