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FY17 Budget Review
Federal Budget FY17
A Logical Budget (mostly)
Research Entity Number – REP-085
www.jamapunji.pk
June 2016
FY17 Budget Review
Executive Summary
Given (i) poor export performance (-13%YoY in 10MFY16), (ii) decline in Agriculture sector (-0.2%YoY in FY16P on 28%YoY lower cotton
production) and (iii) need to sustain Manufacturing growth, the FY17 Budget appropriately attempts to boost all three. There are clear
positives for Textiles, Agriculture and the broader manufacturing sector through incentives for expansions/BMRs. Push to inculcate a tax
culture by penalizing non-filers may also lead to medium-term benefits.
On the flipside, after Banks saw higher taxation measures post windfall profits in CY14 (shift into PIBs), the FY17 Budget turns its attention
to the Construction sector with higher taxes/duties imposed for Cements & Allied industries. In our view, this is not a reflection of need to
cool down the sector but an attempt to piggyback on segments experiencing super-normal growth.
We find the FY17 Budget to be logical in its motivations. We also flag that headline targets (GDP growth: 5.7%, CPI: 6.0%, tax collection:
PkR3.95tn) do not appear overly ambitious at first glance; targets may still be missed but not by much and GDP growth should cross the
5% mark for the first time since FY08. Within this backdrop however, we find sharply higher tax incidence for Insurance sector as slightly
incongruous with the overall well-thought out theme to the Budget. Removal of exemptions on inter-corporate dividends is also a
potential negative.
For the PSX, changes to market structure through tweaks in CGT regime should have a marginal impact; we believe the GoP has been
cognizant of upcoming MSCI Review in refraining from drastic changes.
Sectors with a positive impact include: Textiles, Agri-linked themes (Fertilizers, Tractors) and Information Technology.
Sectors with a negative impact include: Insurance, Food and Construction-linked themes (Cements, Steel, Glass).
Within off-radar names, we find positives for PAEL, GTYR, SRVI, TREET, SYS, NETSOL, LOTCHEM and the Sui companies. However, there could
be some negative impact for HUMNL, EPCL and ASTL.
FY17 Budget Review
Market
Budget Steps Impact Comments
CGT regime changed Negative CGT now applicable up to 60m vs. up to 48m earlier. Rates for tax filers kept between 7.5%-15%
and raised to 11%-18% for non-filers. This may have a slightly negative impact.
Enhanced WHT on
dividends for non-filersNegative
No change for tax filers but for non-filers: (i) WHT on dividends increased by 2.5ppt to 20% and
(ii) WHT on dividends from mutual funds raised 5ppt to 15%. WHT stays unchanged at
12.5%/10% for filers. This will have a negative, albeit largely negligible impact.
16% FED removed but
0.01%WHT doubled
Neutral to
Negative
FED removal addresses double taxation anomaly as brokers are already subject to provincial
taxes. In addition, transactional tax (on both purchases and sales) has been doubled to 0.02%.
This should be passed through with minor impact on volumes.
Tax credit on listing
extended to 2yrsPositive
19 companies have opted for listing since 2013. This, taken together with tax incentives for
expansions financed by new equity issuances should encourage fresh listings.
Our view
We see FY17 Budgetary measures as tweaks that should not have a material bearing on investors particularly as CGT rates have been kept
unchanged for tax return filers. However, we caution that frequent changes to market structure are not entirely positive in the context of
Pakistan’s aspirations to be upgraded to EM status. While we like incentives to encourage new listings, we also venture that the market could
have cheered the removal of tax on bonus issuances but this did not come to pass.
FY17 Budget Review
Economy
Resources (PkRbn) FY16P FY17B YoY
Tax Revenue 3,420 3,956 16%
Non-Tax Revenue 913 959 5%
Gross Revenue Receipts 4,333 4,916 13%
(Less: Provincial Share) 1,852 2,136 15%
Net Revenue 2,481 2,780 12%
Net Capital Receipts 589 454 -23%
External Receipts 860 819 -5%
Estimated Provincial Surplus 337 339 1%
Bank Borrowing 199 453 128%
Total Resources 4,479 4,895 9%
Privatization Proceeds 14 50 268%
Expenditure (PkRbn) FY16P FY17B YoY
Defence 776 860 11%
Total Debt Servicing 1,633 1,804 10%
Others - Social Protection, Housing,
Environment etc941 917 -3%
Current Expenditure 3,600 3,844 7%
Development Expenditure 879 1,051 20%
Total Expenditure 4,479 4,895 9%
Subsidies 197 141 -28%
Source: Ministry of Finance, IMS Research
Resources: Push to raise tax revenue
Tax revenue collection is set to be up 18% in FY16. Target for FY17F
seems achievable given the additional tax measures for FY17F and
push to increase tax base. Low petroleum product prices and lower-
than-expected widening of tax base could keep growth in check.
Non-tax revenue is projected to increase by 5%YoY. Challenges could
emanate if (i) 3G auction fails to materialize, (ii) interest rates remain
low (drag to SBP profits), and (iii) oil prices fail to recover, leading to
low payouts from POL and OGDC.
Extension of crowding out effect with GoP expected to raise
borrowings from banks by 1.3x.
Expenditure: Contained growth, led by PSDP
Total expenditure is projected to rise by 9%YoY (20% of GDP), led by
robust growth in development spending.
Resultantly, fiscal deficit is expected to be reduced from 4.3% in FY16 to
3.8% in FY17F, the lowest in 10years.
FY17 Budget Review
Sectors Outlook
SectorsBudget
ImpactKey Measures Analyst Comments
Autos Neutral
Used car import policy unchanged at 3 years, while
imposing (i) 3% (expected 2%) adjustable WHT on
auto financing from non-filers, (ii) 3% super tax, and
(iii) reduced markup on loans from ZTBL.
3% WHT is negative for auto financing, however, impact to
be limited given its adjustable nature. 3% super tax to have
4% negative EPS impact for Autos. Reduced rates for agri-
credit to potentially benefit tractor sales.
BanksNeutral to
Negative
4% Super Tax extended for another year. 16% FED on
banking services removed. To avail tax credit, equity
requirement has been reduced from 100% to 70%; this
could aid loan growth.
Super Tax will take 2QCY16 tax rate to 50% and full-year
CY16F tax rate to c.40%. This could trim CY16F EPS
estimates by ~5% although impact on TPs will be minor
due to non-recurring nature. FED removal to have neutral
impact.
Cements Negative
FED changed from 5% (PkR0.4/kg) to PkR1/kg and CD
on clinker raised from 2% to 5%. Total PSDP
earmarked at PkR1.675tn.
FED change will necessitate c.PkR30/bag price increase. Full
pass-through may be difficult, which could lead to margin
erosion. High PSDP is a plus but not a surprise.
ConsumerNeutral to
Negative
Withdrawal of zero-rated status on milk & fat milk, (ii)
raised RD from 25% to 45% on powdered milk and (iii)
CD concessions extended on machinery import for
dairy, livestock & poultry from 5% to 2%. Tax on
mineral water to be charged on retail price.
EFOODS/NESTLE to draw negative impact from withdrawal
of zero-rated status and RD on milk powder owing to hefty
imports. NESTLE may face additional earnings attrition on
change in mineral water bottles tax regime.
FY17 Budget Review
Sectors Outlook
SectorsBudget
ImpactKey Measures Analyst Comments
Fertilizer Positive
GST on urea reduced to 5%. Subsidies also announced
on Urea and DAP to take their prices to PkR1,400/bag
and PkR2,500/bag respectively. Duty on imported urea
raised by 1% to 3%.
Budget is pro-farmer. Cheaper local fertilizer prices at retail
level should help improve offtake, especially for Urea.
Insurance NegativeUniform corporate tax rate to apply (31%). 4%/1%rate
on premiums for non-life/life exceeding PkR2mn pa.
Imposition of uniform corporate tax rate is deeply negative
due to large proportion of investment income (current ETRs
are 10%-15%).
Oil & Gas Neutral
Super tax of 3% imposed while PkR25bn allocated for
gas infrastructure development. No other notable
measure for this sector.
The super tax trims EPS estimates by 3-4% for companies
across the Oil & Gas chain. Gas infrastructure development
could keep Sui companies in limelight.
Power Neutral
GoP has allocated PkR118bn (-31%YoY) and PkR130bn
(+16%YoY) as subsidy and PSDP respectively while
imposing super tax of 3% on profits.
Development expenditure to spur uplift in generation with
subsidy reduction to rationalize tariffs. 1% reduced
corporate tax rate would have a 3% EPS impact on KAPCO’s
bottom-line.
FY17 Budget Review
Miscellaneous Sectors
SectorsBudget
ImpactKey Measures Analyst Comments
Textile Positive
Pending refunds to be expedited, ERF reduced by
50bps to 3%, export-oriented sectors again zero-rated,
duty free machinery import retained.
Meaningful positives for the sector which should widen
margins and allow some improvement in exports.
Chemicals Neutral
CD on Ethylene increased by 1%; on hard coking coal
increased by 1%. Only positive change is 1ppt increase
in PTA import duty to 5%.
Companies that may be negatively impacted include EPCL
(low pricing power)and ICI (may pass on increase in CD on
coal partially on Soda Ash). Positive for LOTCHEM.
Misc. Mixed
Steel: (i) Enhanced fixed rate for steel melters/re-rollers;
Durables: Reduction in CD on Thermostats of
Deepfreezers; Razors: Duty removed on carbon steel
strips; Tyres: 30% RD on bead wires removed; Media:
Foreign content to be taxed; IT: Tax exemption on
exports extended by 3yrs.
Positives for IT sector (SYS, NETSOL), PAEL, TREET, GTYR,
SRVI
Negatives for Steel sector and HUMNL
FY17 Budget Review
Pakistan Economy
FY17 Budget Review
A Logical Budget (mostly)
Headline targets
GDP growth target for FY17 is 5.7%.; we see GDP growth crossing the
5% mark in FY17 for the first time since FY08.
Although 6% CPI target broadly appears realistic, there are challenges
to the sub-4% fiscal deficit target given risks to revenue targets.
The big picture
Considering need to push manufacturing, improve exports and revive
agriculture, the FY17 Budget appropriately has incentives for Textiles
(21% weight in LSM; 59% share in exports) and Agriculture.
Broader manufacturing sector also incentivized by tax breaks on
expansions/BMRs. However, measures taken to rein in Construction
industry which has delivered strong performance over last few years.
Higher taxation for Insurance sector also stands out as an anomaly.
There is a clear emphasis on encouraging tax filing with non-filers to
face punitive measures.
Analyst Comments
Macro targets finally appear achievable. We believe the FY17 Budget has
rightly attempted to address weak points in the economy . Higher
taxation for construction sector attempts to piggyback on super-normal
profits while higher tax for Insurance is jarring as the overall Budget
introduces logical measures. Provided disincentives for non tax-filers are
able to give rise to a “tax culture”, major long-term benefits can accrue.
Services sector driving GDP growth
GDP growth at 8yr high; can accelerate
Key Metrics (%) FY15 FY16P FY17B
GDP growth 4.0 4.7 5.7
- Agriculture 2.9 (0.2) 3.5
- Manufacturing 3.2 5.0 7.7
- Services 5.0 5.7 5.7
CPI (YoY) 4.8 3.5 6.0
FBR Tax-to-GDP 9.5 10.5 10.8
Non-Tax-to GDP 4.0 3.3 3.1
Current Expense-to-GDP 16.3 15.9 14.9
Total Expense - to-GDP 20.4 20.2 19.8
Fiscal deficit-to-GDP 5.0 4.3 3.8
0.0%
2.0%
4.0%
6.0%
8.0%
FY09
FY10
FY11
FY12
FY13
FY14
FY1
5
FY16
FY17F
FY18F
FY19F
GDP Growth
FY17 Budget Review
Internal Resources
Tax revenue targeted at PkR3,956bn (+16%YoY); Direct Taxes
(PkR1,558bn; +18%YoY) and Indirect Taxes (PkR2,063bn; +16%YoY).
GIDC and PL targets are PkR145bn and PkR150bn.
Non-tax revenue budgeted at PkR959bn (+5%YoY). Major heads
include: (i) 3G auction – PkR75bn, (ii) SBP profits – PkR280bn and PSE
dividends – PkR85bn.
57% of gross revenue receipts i.e. PkR2,880bn to be transferred to
provinces as per the NFC Award.
External Resources
External resources eyed at PkR819bn (-5%YoY) with privatization
proceeds targeted at PkR50bn. Of note are US$1bn earmarked for
Eurobonds and US$750mn for Sukuks. There is also an amount of
US$2bn to arrive from commercial banks (this could be Chinese loans
for CPEC projects).
Tax revenue on the rise despite challenges
Resources (FY17) breakup
Revenue: Recent track record gives confidence
Analyst Comments
Considering revised tax target was met in FY16P and there is push for
filing returns, tax collection should remain buoyant. However, there are
challenges to the non-tax target if interest rates remain low (which will
affect SBP profits), 3G proceeds do not materialize and PSE dividends fall
short. On the external side, we are sanguine on bond flotation and tie
sizeable borrowing from foreign commercial banks with CPEC financing.
63%10%
8%
18%
1%
Net revenue receipts
Net capital receipts
Est. provincial surplus
Ext. resources
Privatization
300
1,300
2,300
3,300
4,300
5,300
FY11 FY12 FY13 FY14 FY15 FY16 FY17F
PkRbn
FBR Tax revenue Non-tax revenue
FY17 Budget Review
Current Expenditure
Current expenditure budgeted at PkR3,844bn (+7%YoY); total debt
servicing is projected at PkR1,804bn (+10%YoY) while allocation for
military expenses is PkR860bn (+11%YoY). Together these two will
account for 55% of total budgetary outlay, same as last 5yr average.
PkR141bn have been allocated for subsidies lower by 28%YoY; this will
primarily entail lower power sector subsidies. No subsidy has been
allocated for fertilizer imports.
Developmental
• Federal PSDP allocation is PkR800bn (+21%YoY); including provinces,
total PSDP is PkR1,675bn (+20%YoY).
• Highlights at federal level include: (i) PkR41bn for Railways, (ii)
PkR130bn for WAPDA, (iii) PkR188bn for the highway authority and
PkR25bn for gas infrastructure development.
Debt servicing to lead growth in current expenditure
Development expenditure to be up by 20%YoY
Expenditures: Policy continuity
Analyst Comments
Proposed 7%YoY increase in current expenditure appears realistic in the
context of 5yr CAGR of 9% and 3%YoY growth in FY16P. Emphasis
remains on PSDP (+11%YoY) which accounts for c. 33% of total outlay.
At the micro level, lack of fertilizer import subsidy is positive for local
fertilizer manufacturers while PkR25bn allocation for laying down gas
infrastructure is positive for the Sui companies.
40%
7%25%
18%
1% 11%Debt financing
Pension
Defence
Grants
Subsidies
Others
0
500
1,000
1,500
FY12 FY13 FY14 FY15 FY16 FY17
PkRbn
Federal PSDP Others
FY17 Budget Review
Pakistan Market
FY17 Budget Review
Pakistan is a high payout market
Market Structure I: Limited impact from CGT changes
Previous
< 12m 15.0%
12m-24m 12.5%
24m-48m 7.5%
> 48m 0.0%
New Filer Non-Filer
< 12m 15.0% 18.0%
12m-24m 12.5% 16.0%
24m-60m 7.5% 11.0%
> 60m 0.0% 0.0%
0.0%
15.0%
30.0%
45.0%
60.0%
FY13A FY14A FY15A FY16F FY17F FY18F FY19F
IMS Universe Payout (%)
Tweaks to CGT regime Change in CGT regime: CGT now applicable up to 60m vs. up to
48m earlier. Rates for tax filers kept between 7.5%-15% and raised to
11%-18% for non-filers.
Analyst Comments
Enhancing CGT period by 1yrs to 5yrs should not have any impact. No
change to CGT rates for filers is a positive; however, higher rates for
non-filers could affect volumes at the margin.
Increase in taxes for non-filers: (i) WHT on dividends increased by
2.5ppt to 20% and (ii) WHT on dividends from mutual funds raised
5ppt to 15%. WHT stays unchanged at 12.5%/10% for tax filers.
Analyst Comments
Similar to changes to the CGT regime, higher WHT on dividends for
non-filers is unlikely to impact the market and there is no impact on
companies paying dividends.
FY17 Budget Review
Traded value much below peak levels…
…but volumes have risen
Market Structure II: FED removal balances higher WHT
-
100
200
300
400
500
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16TD
Market Vol (Shrs mn)
-
100
200
300
400
500
600
700
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16TD
Market Val (US$mn)
16% FED removed: This is inline with PSX proposal as double
taxation (provincial taxes also imposed) took tax incidence to 31%.
Analyst Comments
FED removal addresses double taxation anomaly as brokers are already
subject to provincial taxes. This is the only PSX proposal that appears to
have been approved without amendment.
WHT doubled: Transactional tax (on both purchases and sales) has
been doubled to 0.02%
Analyst Comments
This can have a slight negative impact; in case of pass-through, volumes
may be impacted at the margin, if not passed through brokers’ revenue
could be affected.
FY17 Budget Review
Trend of bonus issuances
Market Structure III: Listings encouraged but bonus tax retained
83
63 62
4945
65
2218
4
2008 2009 2010 2011 2012 2013 2014 2015 2016
Bonus
10
4
6
4 43
6
8
2
0
2
4
6
8
10
12
2008
2009
2010
2011
2012
2013
2014
2015
2016td
No of New Listing
Trend of new listings Tax credit on listing extended to 2yrs: Not extended to 5yrs as PSX
requested. However, this is still a positive
Analyst Comments
In itself, this should have a minor impact. Taken together with incentives
to expand by issuing new shares however, it could accelerate new
listings. This is a positive for the market.
Tax on bonus issuances retained: Tax on stock dividends has been
kept at 5%, despite sound rationale from the PSX to remove the same.
Analyst Comments
The market would likely have cheered the removal of tax on bonuses;
since it was introduced, there has been a clear drop in stock issuances
(particularly from Banks). We see removal as a “when not if” scenario.
FY17 Budget Review
Sectors Outlook
FY17 Budget Review
Autos
Key measures
At the time of leasing of a motor vehicle to a non-filer, advance tax shall be collected at
the rate of 3% of the value of the motor vehicle by banks, leasing companies, DFIs etc.
Incentives and duty reductions outlined in the Automotive Policy 2016-2021 are proposed
to be implemented through Budget FY17.
(i) Super tax kept at 3% for 2016. (ii) Regulatory duty withdrawn on bead wire for tyres
manufacturers (10% previously) (iii) 1% reduction in duty of LPG buses (previously 2%)
Reduction in interest rates for BoP, ZTBL, NBP and Punjab Co for agricultural credit by 2%
Sales tax exemption on spare parts, including vehicles for site use i.e. single or double
cabin pick-ups, dumper trucks, imported for Thar Coal Field.
Analyst Comments
Reduction in CD in AIDP-II is largely priced in,
with imposition of 3% Adv. Tax on car
financing for non-filers to have limited impact
on demand. Withdrawal of RD on bead wire of
tyres to benefit GTYR/SRVI through trimming
in input costs while tractor demand should
pick pace on 2% reduction in agri-credit loan
financing rates. Positive for MTL, AGTL. Super
tax to impact ~4-5% on autos.
Budget Impact: Neutral IMS Stance: Marketweight
*Bloomberg Estimates N = Neutral, B = Buy & S = Sell
In US$mn Free In PkR -52W TP Upside PE (x) PB (x) DY (%)
Autos Price Mkt Cap 12m Td. Val Float (%) High Low PkR (%) Stance 16F 17F 16F 17F 16F 17F
INDU* 929.96 698.6 0.22 20% 1,309.2 910.0 - - - 6.6 7.4 2.6 2.3 9% 8%
HCAR* 307.10 419.1 0.87 20% 307.1 215.3 - - - 9.0 8.1 5.8 4.3 3% 3%
PSMC* 415.03 326.4 0.44 26% 525.9 374.3 - - - 7.5 7.4 5.8 4.3 3% 3%
AGTL* 447.40 247.8 0.06 6% 556.5 378.1 - - - 12.4 10.8 4.0 3.8 11% 11%
MTL* 612.77 259.4 0.12 40% 703.0 463.1 - - - 13.5 11.3 5.7 5.2 7% 7%
GHNL 161.89 69.6 0.95 30% 210.8 88.3 147.0 (9.2) S 11.6 11.4 4.4 4.2 3% 3%
Sector 8.4 8.3 3.9 3.3 6% 6%
FY17 Budget Review
Banks
Key measures
Extension of super tax regime into FY17, with Banks liable to pay 4% of their trailing four
quarters pre-tax earnings in 2QCY16. This could take ETR for 2QCY16 to c. 50%.
Enhanced agriculture credit target by 17%YoY to PkR700bn in FY17, with GoP sharing half
the credit risk. Reduction of markup rates on agricultural loans by 2%, applicable on NBP
and BOP which could hurt NIMs for these banks if GoP does not bear burden.
For tax credit, equity requirement to finance expansions has been reduced from 100% to
70% with deadline extended to Jun’19. This should aid loan growth in the medium term.
Adjustable 3% WHT imposed on auto leasing at time at lease, which could impact auto
financing at the margin.
Analyst Comments
Super tax would lead to a 6.5-7.0% hit on base
case earnings, thereby dragging TPs by 2% on
average. However, we revise our EPS estimates
for CY16F by -4.5% on average, backed by
higher capital gains assumption. We remain
UW on Banks but flag that attractive D/Ys for
the Big-5 can prevent pressure on share prices.
Budget Impact: Neutral to Negative IMS Stance: Underweight
In US$mn Free In PkR -52W TP Upside PE (x) PB (x) DY (%)
Banks Price Mkt Cap 12m Td. Val Float (%) High Low PkR (%) Stance 16F 17F 16F 17F 16F 17F
MCB 216.37 2,301.5 0.80 40% 281.67 190.2 197.0 (9.0) S 10.3 10.1 1.6 1.6 7% 7%
NBP 53.98 1,097.5 0.45 24% 61.31 51.15 61.3 13.6 B 5.9 5.7 0.6 0.6 14% 14%
UBL 172.36 2,016.5 1.71 40% 186 143.69 193.0 12.0 B 8.4 7.9 1.4 1.4 8% 8%
HBL 178.95 2,508.6 1.62 45% 235.53 170.79 201.0 12.9 B 8.0 7.2 1.4 1.3 8% 8%
BAFL 24.75 376.0 0.25 45% 29.93 23.88 26.1 5.5 N 5.7 5.7 0.7 0.7 4% 4%
ABL 84.31 922.6 0.14 15% 106.01 83.25 108.3 28.5 B 6.2 6.2 1.0 1.0 9% 9%
Sector 7.8 7.4 1.2 1.1 8% 8%
N = Neutral, B = Buy & S = Sell
FY17 Budget Review
Cement
Key measures
Increase in FED to PkR1/kg from 5% of MRP (est. PkR0.40-0.42/kg).
Federal PSDP has been allocated at PkR800bn from FY16’s allocated amount of PkR661bn.
Total developmental expenditure target: PkR1.65tn.
Period for tax credits on BMR has been increased by 3yrs till June’19.
Greenfield projects’ tax exemption is extended by 2yrs till June’19.
Increase in custom duty on clinker imports to 11% from 2%.
Negative implication of 3% super tax on FY16’s profits by about 4%.
Corporate tax rate reduced to 31%.
Analyst Comments
Increase in duty remains a key negative for the
sector, which could potentially decrease our
earning estimates by 11%-18%. That said,
given strong demand and FCCL’s recent
incident, companies located in the North are
likely to pass on the impact of increased FED.
We have conservatively incorporated half of
the impact of increased FED in our estimates.
Budget Impact: Negative IMS Stance: Marketweight
Mkt Cap 12m Td. Val Free In PkR -52W TP Upside PE (x) PB (x) DY (%)
Cements Price (US$mn) Float (%) High Low PkR (%) Stance 16F 17F 16F 17F 16F 17F
DGKC 181.07 758.1 4.24 55% 184.02 125.76 182.3 0.7 N 9.5 8.9 1.2 1.1 4% 4%
MLCF 97.97 494.1 2.24 45% 99.93 64.36 100.0 2.1 N 11.2 9.5 2.4 2.1 3% 4%
CHCC 115.58 195.1 0.67 65% 116.64 77.45 128.0 10.8 N 14.6 9.7 2.3 2.0 2% 3%
PIOC 108.78 236.1 0.72 55% 108.78 77.03 107.7 (1.0) N 10.9 9.7 2.7 2.3 6% 6%
Sectors 9.7 8.7 1.7 1.6 5% 6%
N = Neutral, B = Buy & S = Sell
FY17 Budget Review
Chemicals
Key measures
Only positive change for the PSX is the 1% increase in duty on PTA from 4% to 5% (duty
on Paraxylene – its input – is unchanged). Lotte Chemical (LOTCHEM) is the only producer
in Pakistan. We estimate annualized EPS impact of PkR0.15/sh for LOTCHEM. This is
however negative for Polyester producers – notably ICI and Ibrahim Fiber.
CD on Ethylene increased from 2% to 3%. This is an input for Engro Polymer, which
producers PVC and caustic soda. Given low pricing power, EPCL will likely absorb this cost
increase.
CD on solid caustic soda (produced by Engro Polymer and Sitara Chemicals) has been
reduced from 20% to 5%. This may limit price increases. Cautic soda market is presently
undergoing high competition.
Analyst Comments
Overall, mixed duty changes for listed
Chemical companies in Pakistan. PTA duty is
an exception (benefits LOTCHEM). This is
negative for ICI’s Polyester business which uses
PTA as an input. Engro Polymer will bear both
reduced CD on a product and higher duty on
raw material.
Budget Impact: Neutral IMS Stance: Marketweight
Mkt Cap 12m Td. Val Free In PkR -52W TP Upside PE (x) PB (x) DY (%)
Chemicals Price (US$mn) Float (%) High Low PkR (%) Stance 16F 17F 16F 17F 16F 17F
ICI* 449.27 396.5 0.12 15% 559.79 403.8 - - - 24.4 19.5 3.7 3.3 2% 3%
EPCL* 9.48 60.1 0.08 17% 13.01 8.77 - - - (6.2) (9.7) 1.1 1.2 0% 0%
LOTCHEM* 6.86 99.3 0.28 25% 9.17 5.05 - - - (9.4) (13.9) 1.0 1.0 0% 0%
*Bloomberg Estimates N = Neutral, B = Buy & S = Sell
FY17 Budget Review
Consumer
Key measures
Milk and Fat filled milk have been removed from zero-rated status. Additionally powdered
milk will be charged RD at the rate of 25% in addition to previous 20% CD.
Enhanced FED on cigarettes (PkR0.23/cigarette for lower and PkR0.55/ cigarette on higher
tier cigarette.
Reduction in CD on dairy machinery imports to 2% (previously: 5%) on: milking machines,
milk UHT plant, milk chillers, tabular heat exchangers and dairy, livestock, poultry sheds.
1% increase in FED on aerated beverages to 11.5% likely to be passed on to the end
consumer without compromising GMs.
17% sales tax on mineral water previously taxed on value of supply will now be charged
on retail price.
(1) Removal of RD from Carbon Steel Strips used by Razor blade manufacturers (previously
17.5%) (2) Reduction in CD on cool chain machinery from 5% to 3%.
Analyst Comments
UHT milk sector will no longer be able to claim
tax refunds given removal from zero-rating,
resulting in +PkR6-7/ltr in milk prices
(EFOODS, NESTLE) and expanding price
differential b/w loose milk. RD on powdered
milk may draw GM attrition for EFOODS,
NESTLE on Tarang and MilkPak. Lower CD on
machinery to benefit EFOODS on expansion
for milk powder plant. Sales tax on mineral
water to negatively impact NESTLE while ASC
& FFBL to potentially benefit from reduction in
cold storage machinery. Positives for TREET
too.
Budget Impact: Neutral to Negative IMS Stance: Underweight
Mkt Cap 12m Td. Val Free In PkR -52W Upside PE (x) PB (x) DY (%)
Consumer Price (US$mn) Float (%) High Low TP (%) Stance 16F 17F 16F 17F 16F 17F
EFOODS* 166.60 1,220.5 2.02 15% 175.24 119.46 - - - 30.7 24.9 6.7 5.6 0% 2%
Consumer 14A 15A 14A 15A 14A 15A
NESTLE 7,513.60 3,256.4 0.027 10% 10725.1 6400 - - - 43.0 38.9 27.0 27.0 2% 3%
NATF 293.47 290.6 0.035 45% 384.93 283.75 - - - 42.9 30.6 13.8 11.0 3% 7%
TREET 53.51 70.5 0.493 35% 81.15 45.85 - - - 34.2 70.2 2.8 1.4 1% 1%
*Bloomberg Estimates N = Neutral, B = Buy & S = Sell
FY17 Budget Review
Fertilizer
Key measures
Government plans to provide relief of PkR36bn and PkR10bn on Urea and DAP in FY17.
Relief will be provided in shape of reduction in sales tax to 5% (lower prices by
PkR180/bag) from 17%, and remaining from subsidy & some margin attrition.
New Urea/DAP prices are set at PkR1400 and PkR2500 per bag, which should trigger
demand throughout CY16/17.
Proposal to abolish tax exemptions on dividends from group companies to hit earnings
within the sector, if approved in the NA.
Increase in duty on urea imports by 1% to 3%.
Implication of super tax at 3% in CY16 to diminish earnings by 5.0-5.5%.
Analyst Comments
Demand should increase given relief provided
in shape of reduced fertilizer prices. Besides
improvement in demand, we anticipate
companies to take hit of PkR35-50/bag in the
course of price reduction to PkR1400/bag. That
said, we revise up our Urea demand
assumption for the industry by 10-11% to
5.3/5.9mn tons for CY16/17F. Major
beneficiaries will be EFERT and FFC.
Budget Impact: Positive IMS Stance: Marketweight
N = Neutral, B = Buy & S = Sell; * Under review
Mkt Cap 12m Td. Val Free In PkR -52W Upside PE (x) PB (x) DY (%)
Fertilizer Price (US$mn) Float (%) High Low TP (%) Stance 16F 17F 16F 17F 16F 17F
FFC 117.00 1,422.5 1.57 55% 158.87 104.78 109.7 (6.2) N 12.9 11.7 5.5 5.0 7% 7%
FFBL 54.30 484.7 2.00 35% 66.11 46.19 61.8 13.8 B 15.2 9.8 4.1 3.5 5% 6%
EFERT 68.91 876.5 1.93 25% 99.19 68.40 84.5 22.6 B 7.7 7.1 2.1 2.1 9% 12%
Fertilizer 10.1 8.4 2.8 2.6 7% 8%
FY17 Budget Review
Insurance
Key measures
Imposition of uniform corporate tax rate on all sources of income to 31% across-the-
board vs. as low as 10% for some income heads earlier. This will significantly drive up
effective tax rate of investment income-dependent Insurance companies and is both a
major negative and a major surprise given deep under penetration of the sector.
Advance tax on premium of 4% on general insurance and 1% on Life insurance exceeding
PkR0.2million per annum, applicable on non-filers.
Super tax of 3%, applicable on trailing four quarter earnings. Similar to Banks, this will
have an outsize impact on upcoming 2QCY16 results.
Analyst Comments
FY17 Budget is deeply negative for the
Insurance sector. We downgrade our stance on
AICL to Neutral, with revised TP of PkR55 (vs.
PkR67 previously), backed by a 13% decline in
earnings estimates in the medium term on
account of flat tax rate on all domestic sources
of income.
Budget Impact: Negative IMS Stance: Marketweight
Mkt Cap 12m Td. Val Free In PkR -52W TP Upside PE (x) PB (x) DY (%)
Insurance Price (US$mn) Float (%) High Low PkR (%) Stance 16F 17F 16F 17F 16F 17F
AICL 53.72 179.7 0.69 70% 61.1 45.4 55.0 2.4% N 8.00 7.29 1.11 1.03 6% 7%
Insurance 14A 15A 14A 15A 14A 15A
IGIIL* 211.00 247.4 0.16 33% 263.2 204.9 - - - 31.46 20.02 2.24 2.11 1% 3%
EFUG* 123.00 235.1 0.05 60% 143.4 107.0 - - - 13.45 6.10 1.88 1.55 4% 5%
JGICL* 116.00 173.9 0.01 25% 128.0 77.0 - - - 16.87 13.46 3.36 3.08 3% 4%
JLICL* 519.00 357.7 0.02 20% 536.0 400.0 - - - 27.49 23.08 11.85 9.57 2% 3%
*Bloomberg Estimates N = Neutral, B = Buy & S = Sell
FY17 Budget Review
Oil & Gas
Key measures
Super tax of 3% imposed on earnings of FY16. We estimate FY16 earnings to trim 3-4%
across the Oil & Gas sectors; but, immaterial impact on valuations.
Post FY16 Budget, the revision of new corporate tax rate for following year led to higher
effective tax rate for PSO in FY15 results (super-tax notwithstanding). This was due to
adjustment in deferred taxes based on new future corporate tax rate (was being booked
on 35%). As per channel checks, this is not likely to recur in FY16 results.
Dividend expectations as per Budget documents for PSO, OGDC and PPL are PkR6.7bn,
PkR35.0bn, and PkR0.6bn, which translates into per share dividends of about PkR4.50,
PkR9.50, and PkR8.50 respectively.
Analyst Comments
Neutral for Oil & Gas. Potential changes
expected before the Budget – like reduced
turnover tax – were missing. The dividend
expected from OGDC and PSO seems on the
higher side to us, while that of PPL is
achievable. Reduction in power subsidy to
PkR118bn will be challenging unless oil prices
remain below US$50/bbl.
Budget Impact: Neutral IMS Stance: Marketweight
Mkt Cap 12m Td. Val Free In PkR -52W* PE (x) PB (x) DY (%)
Oil & Gas Price (US$mn) Float (%) High Low TP Upside Stance 16F 17F 16F 17F 16F 17F
OGDC* 143.40 5,894.2 2.33 15% 195.87 95.58 - - - 10.6 8.1 1.3 1.2 3% 4%
PPL* 156.26 2,944.4 1.76 24% 174.39 101.08 - - - 12.1 9.0 1.5 1.3 4% 5%
POL* 357.05 807.2 1.70 46% 413.28 189.67 - - - 12.0 8.7 2.6 2.4 8% 9%
Sector 11.1 8.4 1.4 1.3 4% 5%
OMCs 16F 17F 16F 17F 16F 17F
PSO 382.70 993.7 2.03 47% 404.09 287 485.0 26.7 B 12.1 7.9 1.1 0.9 2% 3%
APL 434.30 344.3 0.09 25% 591.43 405 633.0 45.8 B 10.8 8.0 2.6 2.4 8% 11%
Sector 11.8 8.0 1.3 1.1 4% 5%
*Bloomberg Estimates N = Neutral, B = Buy & S = Sell
FY17 Budget Review
Power
Key measures
Allocation for subsidy to WAPDA & PEPCO has been slashed by 31% to PKR 118bn against
PKR 171bn (0.6% of GDP) in FY16 in line with IMF program and phasing out of tariff
differential subsidy.
Total allocation of PKR 161.7bn for the energy sector under PSDP, up by 6%YoY from PKR
153.2bn in FY16. Out of this allocation PKR130bn has been earmarked for the power wing
and PKR31.7bn under the water wing with 10,000MW to be added to the national grid by
Dec 2018.
Taxation changes : (i) Super tax is to be charged at the rate of 3%, (ii) 1% reduction in
corporate tax rate .
Analyst Comments
Reduction in tariff differential subsidies would
reduce inefficiencies and ease liquidity crises in
the power sector. Increased PSDP allocation to
spur generation uplift of big ticket projects (to
come online by 2018). Reduction in corporate
tax rate and imposition of super tax would
result in negative ~3% impact on KAPCO’s
bottom line.
Budget Impact: Neutral IMS Stance: Marketweight
Mkt Cap 12m Td. Val Free In PkR -52W TP Upside PE (x) PB (x) DY (%)
Power Price (US$mn) Float (%) High Low PkR (%) Stance 16F 17F 16F 17F 16F 17F
HUBC 118.44 1,309.8 0.83 65% 118.44 93.49 115.10 (2.8) N 11.0 9.4 3.8 3.7 8% 9%
KAPCO* 87.83 738.9 0.41 50% 98.17 75.16 - - - 9.3 8.4 4.0 4.0 11% 12%
NPL* 51.06 172.8 0.10 45% 60.8 48.19 - - - 5.4 5.4 1.4 1.3 12% 13%
NCPL* 50.25 176.4 0.11 49% 62 49.14 - - - 6.0 5.8 2.3 2.2 15% 16%
LPL* 22.05 80.0 0.09 40% 34.71 21.18 - - - 6.2 5.3 0.6 0.6 14% 16%
PKGP* 24.16 85.9 0.08 45% 32.93 22.34 - - - 4.6 4.6 0.6 0.6 19% 19%
KEL* 7.99 2,108.7 1.20 10% 8.85 6.74 - - - 6.2 5.6 20.3 16.0 1% 4%
Sector 7.4 6.6 4.2 4.0 6% 8%
*Bloomberg Estimates N = Neutral, B = Buy & S = Sell
FY17 Budget Review
Textile
Key measures
Textile sector is one of the five sectors brought under the zero-rated tax regime, effective
from July 1st, 2016. The zero-rating will be available on purchase of raw material,
intermediate goods and energy i.e. electricity, gas, furnace oil, and coal.
All approved pending sales tax refunds till Apr 30th, 2016 will be paid by Aug 31st, 2016,
which will improve liquidity of the sector.
The Export Refinance Facility (ERF) rate has been reduced from 3.5% to 3.0%. Meanwhile,
exception of custom duty on machinery imports by textile sector and concessionary duties
on imported man-made fibers have been extended.
The existing scheme on Duty Drawback of Local Taxes and Levies (DLTL) is extended for
FY17. This will be based on FOB values of their enhanced exports (if up yoy10% at least) at
the following rates: Garments 4%, Made-ups 2%, and Processed fabric 1%.
Minimum wage of labor has been increased from PkR13,000 to PkR14,000 per year.
Analyst Comments
Broadly, these measures should help textile
companies in improving export
competitiveness, technical upgradation, and
ultimately improve margins and volumes.
Value-added sector will benefit more than
spinners. The super tax of 3% will trim NML’s
FY16 EPS by 3.4% and our new estimate is
PkR13.48 for FY16.
Budget Impact: Positive IMS Stance: Overweight
Mkt Cap 12m Td. Val Free In PkR -52W TP Upside PE (x) PB (x) DY (%)
Textile Price (US$mn) Float (%) High Low PkR (%) Stance 16F 17F 16F 17F 16F 17F
NML 120.82 406.0 1.18 50% 122.05 86.83 145.7 20.6 B 9.0 7.3 0.54 0.52 4% 5%
Textile 14A 15A 14A 15A 14A 15A
NCL* 38.40 88.2 0.28 50% 42.38 32.05 - - - 12.1 11.5 1.1 0.9 2% 3%
GATM* 43.52 95.0 0.13 35% 45.45 29.68 - - - 8.1 16.4 1.5 1.4 2% 3%
KTML* 79.91 215.6 0.16 75% 80.01 52.17 - - - 19.3 10.8 3.7 2.8 0% 4%
*Bloomberg Estimates N = Neutral, B = Buy & S = Sell
FY17 Budget Review
Miscellaneous Sectors
Key measures
Consumer Durables: Massive reduction in CD on Thermostats of Deep freezers from 20% to 3%, stands positive for Pak Electron,
though deep freezer accounts for a small chunk of their appliances segment. Positive
Pharmaceuticals: Any expenditure in respect of sales promotion, advertisement and publicity above 5% of turnover shall not be
treated as admissible business expenditure. This could result in potential cutbacks on promotion expenditure although we deem it
largely a non-event as most pharmaceuticals remain within the 5% limit. Neutral
CD on various raw materials used in various drugs (on iron in folic acid, anti-malarial and anti-allergy drugs and raw material for
chronic constipation and urinary tract infections) have been reduced from 5% to 3%. This could potentially expand GMs for listed
pharmaceutical companies namely ABBOTT, GLAXO, SEARLE and HINOON. Positive
Media: Payment for foreign produced commercials for advertisement on any television channel or any other media shall deduct tax
at the rate of 20% from the gross amount paid. This would prove negative for HUMNL which pays heavily for foreign content
viewership. Negative
1.5%WHT (previously 1%) proposed to be levied on payments of electronic and print media for advertisement services on the value
of services will likely be passed on to the end consumers. Negative
Steel: Enhancement of fixed rate basis of electricity on steel sector, ship breakers and steel melters should have a nominal impact.
Negative
IT services: Tax exemption on exports of IT services extended by 3yrs till June’19 and tax-free repatriation up till 80% of receipts.
Positive for SYS
Budget Impact: Mixed
FY17 Budget Review
IMS Universe
EPS (PkR) EPS (Growth) PER (x) PBV (x) DY (%) DPS (PkR) ROE (%)
Price TP (PkR) Upside (%) Recomm. 16F 17F 16F 17F 16F 17F 16F 17F 16F 17F FY16F FY17F FY16F FY17F
OMCs
PSO 382.7 485.0 26.7% BUY 31.5 48.1 23% 53% 12.1 7.9 1.1 0.9 2.4% 3.1% 9.0 12.0 9% 12%
APL 434.3 633.0 45.8% BUY 40.2 54.4 1% 35% 10.8 8.0 2.6 2.4 8.3% 11.1% 36.0 48.0 24% 30%
Sector 18% 44% 12.2 8.5 1.4 1.2 3.8% 4.9% 12% 15%
Cement
DGKC 181.1 182.3 0.7% Neutral 19.1 20.5 9% 7% 9.5 8.9 1.2 1.1 3.9% 3.9% 7.0 7.0 12% 12%
MLCF 98.0 100.0 2.1% Neutral 8.8 10.3 34% 17% 11.2 9.5 2.4 2.1 3.1% 4.1% 3.0 4.0 22% 22%
CHCC 115.6 128.0 10.7% Neutral 8.3 11.9 16% 50% 14.0 9.7 2.3 2.0 2.2% 3.5% 2.5 4.0 16% 20%
PIOC 108.8 107.7 -1.0% Neutral 10.0 11.3 -9% 12% 10.9 9.7 2.7 2.3 5.5% 6.0% 6.0 6.5 25% 24%
Sector 21% 12% 9.7 8.7 1.7 1.6 5.2% 5.8% 18% 18%
Power
HUBC 118.4 115.1 -2.8% Neutral 10.7 12.6 14% 17% 11.0 9.4 3.8 3.7 8.4% 9.3% 10.0 11.0 35% 39%
Sector 12% 12% 7.6 6.7 2.3 1.9 5.3% 5.8% 30% 28%
Autos
GHNL 161.9 147.0 -9.2% SELL 13.9 14.2 23% 2% 11.6 11.4 4.4 4.2 3.1% 3.1% 5.0 5.0 35% 28%
Sector 23% 2% 11.6 11.4 4.4 4.2 3.1% 3.1% 35% 28%
Banks
ABL 84.3 108.3 28.5% BUY 13.6 13.7 1% 1% 6.2 6.2 1.0 1.0 8.6% 8.6% 7.3 7.3 16% 16%
MCB 216.4 197.0 -9.0% SELL 20.9 21.4 -7% 2% 10.3 10.1 1.6 1.6 7.4% 7.4% 16.0 16.0 16% 16%
NBP 54.0 61.3 13.6% BUY 9.1 9.5 -3% 4% 5.9 5.7 0.6 0.6 13.9% 13.9% 7.5 7.5 11% 11%
HBL 179.0 201.0 12.3% BUY 22.3 24.9 -7% 12% 8.0 7.2 1.4 1.3 7.8% 8.4% 14.0 15.0 16.9% 17.8%
UBL 172.4 193.0 12.0% BUY 20.6 21.7 -4% 5% 8.4 7.9 1.4 1.4 7.5% 7.5% 13.0 13.0 17% 18%
BAFL 24.8 26.1 5.5% Neutral 4.3 4.3 -9% 0% 5.7 5.7 0.7 0.7 4.0% 4.0% 1.0 1.0 12% 12%
Sector -5% 6% 7.8 7.4 1.2 1.1 8.3% 8.5% 15% 15%
Fertilizer
FFC 117.0 109.7 -6.2% Neutral 9.1 10.0 -31% 11% 12.9 11.7 5.5 5.0 6.7% 6.8% 7.9 8.0 43% 43%
EFERT 68.9 84.5 22.6% BUY 8.9 9.6 -21% 8% 7.7 7.1 2.1 2.1 9.4% 12.3% 6.5 8.5 27% 29%
FFBL 54.3 61.8 13.8% BUY 3.6 5.5 -18% 54% 15.2 9.8 4.1 3.5 4.6% 6.4% 2.5 3.5 27% 36%
Sector -21% 20% 10.1 8.4 2.8 2.6 7.2% 8.7% 28% 31%
Textile
NML 120.8 145.7 20.6% BUY 13.5 16.5 19% 22% 9.0 7.3 0.5 0.5 4.6% 5.5% 5.6 6.6 6% 7%
Insurance
AICL 53.7 55.0 2.4% Neutral 6.7 7.4 -8% 10% 8.0 7.3 1.2 1.1 5.6% 6.5% 3.0 3.5 14% 15%
IMS Universe -9.3% 16.8% 9.1 7.8 1.5 1.4 5.7% 6.4% 17% 18%
FY17 Budget Review
Chief Executive Officer Extension E-mail
Shehzad Moosani 603 [email protected]
IMS Sales Team Designation Extension E-mail
Noor Hameed Executive Director Broking 201 [email protected]
Gohar Rasool Head of international Sales 601 [email protected]
Mohammad Waqar Head of Investment Advisory 203 [email protected]
Burhan Moosa Senior Equity Dealer 207 [email protected]
IMS Research Team Designation Extension E-mail Coverage
Raza Jafri, CFA Director Research 301 [email protected] Strategy
Muhammad Saad Ali, CFA Head of Research 205 [email protected] Oil & Gas, Chemicals
Abdul Ghani Fatani Investment Analyst 305 [email protected] Economy, Banks & Insurance
Yusra Beg Investment Analyst 306 [email protected] IPPs, Autos, Consumer & Pharma
Abdul Samad Khanani Investment Analyst 303 [email protected] Fertilizer & Cements
Tanveer Ahmad Investment Analyst 102 [email protected] Textile & Consumer
Abdul Wadood Manager Research 302 [email protected] Database
Ubair Usman Assistant Database 302 [email protected] Database
Muhammad Rehan Library Incharge 302 [email protected] Database
Contact Us
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IMS Team
FY17 Budget Review
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Disclaimer
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We, IMS Research Team, certify that the views expressed in the report reflect our personal views about the subject securities. We
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recommendations on in this report.
Ratings Guide* Total Return
Buy More than 15%
Neutral Between 0% - 15%
Sell Below 0%
*Based on 12 month horizon unless stated otherwise in the report. Total Return is sum of any Upside/Downside
(percentage difference between the Target Price and Market Price) and Dividend Yield.