Expect major positives like incorporation of the recently-promulgated Finance Amendment Ordinance 2012 into the Finance Bill 2012, the new fiscal document is believed to have brought no major surprises for the country’s capital market.
The presidential ordinance, which includes the rules for computation of the much-debated Capital Gain Tax (CGT) and is considered to be a turning point for the volume-starved equity market, is going to get a Parliamentary nod with the passage of the new budget.
“All in all the Budget FY13 has no major surprises for the capital markets,” said the analysts at Topline Research. The budgetary measures, the observers view, would have an impact ranging from neutral to positive on the listed sectors including banks, cement, fertilizer, auto assemblers, insurance, textile, exploration and production, oil manufacturing companies and refineries, Independent Power Producers, telecommunication, chemicals, pharmaceuticals and Fast Moving Consumer Goods.
Generally, the fresh budget for local bourses envisages that: No source of investors’ income would be asked for the funding 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 Initial Public Offering (IPO), individuals would 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 Rs0.5mn 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.
As expected the government ignored the demand of minimum dividend payment by the listed firms. Similarly, the new budget also maintains 10 percent tax on dividend setting aside the Karachi Stock Exchange’s (KSE) proposal.
To curb speculation and holding real estate for trading purpose, the government would charge 10 percent and five percent tax on gain on property if sold within one year and two years of its acquisition, respectively. However, there would be no CGT on sales after two years. This may divert some funds from property business towards shares trading.
The analysts maintain a positive stance on the bourse which is trading at FY13 estimated PE of 6.5x and dividend yield of 8 percent. In the short run, however, the dwindling Pak rupee and meltdown in global stocks may affect local market also, warned they. A sector-wise breakup of budgetary measures and impact is as follows:
Banks
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 would progressively be increase to 35 percent in 2013.
– Exemption limit of WHT on cash withdrawals (currently charged at 0.2 percent) increased from 25k to 50k.
– Reliance on bank and non bank borrowing would 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 would be revised down by less than one percent.
However, few banks like ABL and UBL, which have higher exposure in funds their profits would be affected by 2 to 4 percent, if they hold funds for short period. On the other hand, the said measure would be slightly negative for those AMCs which are subsidiaries of banks. Moreover, increase in cash withdrawal limit would slightly improve deposit base. “Banks would continue to benefit from higher interest rates and lower provisioning,” the analysts said.
Cement
Measures
– Increase in PSDP, which is also spent on infrastructure development, to Rs873bn, up 20 percent from last year.
– FED on cement price reduced by Rs100 per ton (Rs5 per bag) to Rs400 per ton (Rs20 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 Rs87 per mmbtu on captive power plants which would increase cost of power generation.
Impact
Neutral to Positive
The government higher allocation in an election year on development spending may generate local demand for cement. This would 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 would imo 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 Rs87 per MMBTU on captive power plants would increase cost of production
Impact
Neutral
Reduction in turnover tax and decrease in export duties would improve textile manufacturers’ earnings. On the flip side, increase in gas cess would be slightly negative.
E&P
Measures
– The government 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 Rs8 and Rs10 per share from OGDC and PPL, respectively.
– The government has announced a target from privatization proceeds of Rs74bn, which implies the government’s intention of conducting PPL’s secondary public offering in FY13.
Impact
Neutral
The budget remained a non-event for the exploration sector. Furthermore, we expect OGDC and PPL to announce a dividend of Rs10 and Rs16 per share in FY13.
OMCs and Refinery
Measures
– The government announced PL target of Rs120bn as against FY12 collection estimate of Rs69bn.
– The government announced its total dividend expectation from PSO for FY13, rendering into cash payout of Rs13 per share.
– The government announced a gas development surcharge of Rs300 and Rs200 per MMBTU on CNG for north and south zone.
– Abolishment of FED on lubricating and base oil. FED on base oil is currently stand at Rs7.15 per liter.
Impact
Neutral to Positive
Increase in taxes on CNG would reduce petrol/CNG price differential, hence boding well for petrol sales. Abolishment of FED on lube oil could provide traction to local lubricating sales going forward. For refineries, abolishment of Rs7.15 per liter FED on base oil bodes well for NRL, the only lube refinery of Pakistan. We estimate an annualized earning impact of Rs10-12 per share on NRL, assuming the impact is not passed on. However lube prices and margins would continue to be a function of international oil prices.
IPPs
Measures
– The government has announced total electricity subsidy target of Rs185bn against revised allocation of Rs464bn in the outgoing year. The amount includes Rs120bn for inter-disco tariff differential against last year revised allocation of Rs417bn.
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
Measures
– 20 percent increase in Government employee salaries.
– The Government also announced its total dividend expectation from PTCL for FY13, rendering into cash payout of Rs2 per share
– The Government announced the revenue from 3G licenses of Rs79bn in FY13.
– No change in FED for telecom sector
Impact
Neutral to Negative
Increase in salaries would negatively impact profitability of PTCL as salary expenses contribute around 17 percent of total cost. The increase could dilute PTCL earning by Rs0.3-0.35 per share but, we have already partially priced in the effect in our financial models. Expected revenue of Rs79bn from 3G licenses seems to be an arbitrary number and final revenue would be decided when consultant would be hired.
