Post on 05-Apr-2018
transcript
7/31/2019 Budget Review FY13
1/23
Fiscal Policy at a Cross Road!
A landmark 5th Federal Budget by the incumbent Government is thematically designed for
election year politics focusing on providing broader relief while leaving structural issues
unanswered. This could potentially pose risk 6-12 months down where mitigation includes
Pakistan's return to the fold of the IMF and sharp pull back in international hard and soft
commodity prices. While budgeted measures include further streamlining within the current
collection ambit, additional steps need to be taken in terms of revenue enhancing measures.
For projections to be realistic, power sector reforms remain critical and require refocusing
on rationalizing power sector tariffs and leakages from public sector enterprises at a brisk
clip representing the core of fiscal imbalances. From the market's vantage, inclusion of
Capital Gain Tax reforms in the Finance Bill 2012 and broader sector wide neutral to benign
impacts should provide for post budget upside. We retain our Dec'12 end Index target of16,000 but sustainable gains would require balancing of inflationary pressures (continued
recourse to SBP financing) and risk mitigation on Pakistan's external account. .
Economy Outlook: While the fiscal deficit in FY12 remained high at 7.4% of GDP (inclusive of
1.9% of GDP debt consolidation) and real GDP growth logged in at 3.7%YoY vs. the target of
4.2%YoY, positives included below target inflation of 11%, tax revenue collection (up 22%YoY) and
buoyance in remittances. In our view Pakistan has and still needs structural and fiscal reforms that
address external and chronic fiscal imbalances. With election year politics striking, a balance
between growth objectives and fiscal consolidation appears challenging. We expect fiscal deficit
to exceed 6% of GDP in FY13 vs. FY13B estimate of 4.7% of GDP with risks of continuing
monetization of subsidies and uncertain outlook for external financing. On the revenue side the
GoP's main focus for tax revenue enhancement is through improved tax administration and
compliance while current expenditures remain entrenched.
Market Implications: Inclusion of CGT reforms introduced via Presidential Ordinance and included
in the Finance Bill 2012 will likely provide for renewed upside ahead of vetting by the Parliament.
Sector impacts are largely neutral to benign in our view. Market implications include imposition of
0.01% CVT on purchase value of shares introduced through the Finance (Amendment) Ordinance
2012 and entrusting NCCPL to collect advance tax from members in respect of margin financing.
Imposition of CGT on immovable property and increase in tax rate for banks investments in money
market and income funds can potentially provide for increasing stock market investments.
Sector Impacts: Budget contains positives for cements in the shape of lower FED and incentivizesthe use of alternative lower cost energy while for autos reduction in custom duties is a positive.
Upstream exploration receives the benefit of one-time tax charge @40% against inconsistency
between PCA's and Statute. For Banks, a minor negative in terms of higher taxation on dividends
from income and money market funds but considering expectations of harsher treatment, we believe
the sector could post a relief rally. Insurance receives benefit of revision in CGT rates while life
insurance premiums for tax credit have been enhanced. Chemicals face negative implications on
enhancement of Gas Infrastructure Development Cess ahead of temporary weakening in pricing
power. .
Federal Budget 2013June 2012
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AKD Securities LimitedMember Karachi Stock Exchange
Priced on June 01, 2012
KSE-100 Index
13,876.97
FYTD Chg. 11.1%
KSE Market Cap
PkR3,552bn (US$37,787mn)
FYTD KSE-100 High/Low
14,617.97 / 10,842.26
FYTD Avg. Daily Traded Value
PkR4,054.91mn(US$45.323mn)
KSE-30 Index / KMI-30 Index
12,056.44 / 24,202.81
FYTD Chg. 4.1% / 15.6%
As % of Total Cap. 18% / 13%
AKD Universe
75% of KSE-100 Market Cap.
AKD Universe Valuation Summary
2011A 2012F 2013F
PER (x) 7.8 6.9 6.1
P/BVS (x) 1.7 1.5 1.3
DY (%) 6.7 7.6 9.3
ROE (%) 22.1 21.7 22.2
ROA (%) 4.0 4.1 4.3
KSE-100 Index vs. Volume
0
100
200
300
400
500
600
700
Jun-11 Aug-11 Dec-11 Mar-12 May-12
(Index)
10,500
11,000
11,500
12,000
12,500
13,000
13,500
14,000
14,500
15,000
(mn)
Volume (LHS) KSE-100 Index
7/31/2019 Budget Review FY13
2/23
Budget Review 2012-13
02
AKD Securities Limited
June 2012
Contents
The KSE outperforms in lower Global Risk Tolerance! ........................................................................04
Self-centered Pakistan.........................................................................................................................06
Corporate Earnings are topping estimates...........................................................................................06
Budgetary Implications.........................................................................................................................07
Budget Implications on Sectors ......................................................................................................08-09
Economy
Election Year Budget............................................................................................................................10
RISKS...................................................................................................................................................10
Budget Snapshot..................................................................................................................................11EXPENDITURE....................................................................................................................................12
REVENUE: FBR trying to achieve double digit Tax to GDP.................................................................13
Non Tax Revenue Measures................................................................................................................14
Deficit & Financing: Elusive fiscal deficit target of 4.7% of GDP .........................................................14
Total external financing ........................................................................................................................16
Medium Term budgetary Targets..........................................................................................................16
Sector Implications
Cements...............................................................................................................................................17
Banks ...................................................................................................................................................17
Oil & Gas..............................................................................................................................................18
Autos ....................................................................................................................................................18
Insurance..............................................................................................................................................19
Fixed Line Telecom ..............................................................................................................................19
Fertilizer................................................................................................................................................20
Textiles .................................................................................................................................................20
Chemicals.............................................................................................................................................20
Annexure - Salient features of the FY13 Budget ............................................................................21-22
AKD Research Team
Analyst Tel no. E-mail Coverage
Naveed Vakil +92 111 253 111 (692) naveed.vakil@akdsecurities.net E&P, Oil Marketing
Raza Jafri, CFA +92 111 253 111 (637) raza.jafri@akdsecurities.net Pakistan Economy & Commercial Banks
Usman Zahid +92 111 253 111 (693) usman.zahid@akdsecurities.net Cement & Power
Ayub Ansari +92 111 253 111 (693) ayub.ansari@akdsecurities.net Fertilizer, Chemical & Telecom
Anum Dhedhi +92 111 253 111 (637) anum.dhedhi@akdsecurities.net Pakistan Economy & Commercial Banks
M. Naeem Javid +92 111 253 111 (693) naeem.javid@akdsecurities.net Textiles, Fertilizer
Qasim Anwar +92 111 253 111 (680) qasim.anwar@akdsecurities.net Technical Analysis
Hassan Quadri +92 111 253 111 (639) hassan.quadri@akdsecurities.net Research Production
Azher Ali Quli +92 111 253 111 (639) azher.quli@akdsecurities.net Research Production
Nasir Khan +92 111 253 111 (639) nasir.khan@akdsecurities.net Research ProductionTariq Mehmood +92 111 253 111 (643) tariq.mehmood@akdsecurities.net Library Operations
7/31/2019 Budget Review FY13
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AKD Securities Limited
June 2012
KSE-100 Index - Timeline
10,000
10,500
11,000
11,500
12,000
12,500
13,000
13,500
14,000
14,500
15,000
Jan-11 Mar-11 May-11 Aug-11 Oct-11 Dec-11
Punjab
Governor
assassinated
MENA
crisis
escalates
Raymond
Davis issue
affects Pak-
US ties
PML-N parts
ways with
PPP in Punjab
MTS
launched
Additional
revenue
measuresannounced
after IMF
talks
Securities
Lending
an d
Borrowing
Product
launched
US says Pakistan
not doing
enough to
combat
militancy
US forces kill
Osama BinLaden in
Abbottabad
Moodys gives
assurance on
Pakistans
sovereign debt
FY12 Budget
announced
MQM parts
ways from
coalitionSelloff inline
with global
equities
DR reducedby 50bps
Deteriora
ting law &
order in
Kh i
CP I
tumbles
due to
rebasing
Global recession
concerns + US pressure
on Pakistan
US announces
Operation Twist
on global
recession fears
DR cut
by
150bps
to 12%
FS V
benefit
enhanced
Circular debt
exposure
converted to
Go P
securities
Pak-IMF
Article IV
talks
FBR to examine
source of
investment in
capital mkts
NATO attacks
and memo
scandle
US freezes
CS F
US freezes
US$700mn
aid to
Pakistan
Consensus made onwhich rule should
be amended to
dilute the impact of
CGT on share
transaction
Gop agrees to SE
demands for
relaxation in CGT
Regime
Nt
C
s
s
d
S&P
Paki
rati
stab
Presi
CGT r
7/31/2019 Budget Review FY13
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The KSE outperforms in lower Global Risk Tolerance!
In our report titled "U.S. Monetary Policy and Implications at Home" (dated 28th January,
2012), we highlighted improving levels of global risk tolerance underpinning the best 1Q
rally in global equities since 1998 where the KSE-100's 21% return was the highest since
1QCY06. Post 1QCY12, increasing risk aversion (see graph below), with sentiment
undermined by the European debt crisis and slowing Asian growth, has led CYTD MSCI
World and MSCI EM returns negative. The KSE-100 has declined by 5% from its CYTD
peak but remains up 22%CYTD buttressed by 1) above-line corporate earnings, 2) return
of individual and market maker classes post CGT reforms with liquidity re-rating valuations
and 3) continuing FII flows - the first set of inflows even as U.S. Treasury yields are at
record lows. Our proxy for risk tolerance since 2009 (from where asset class discrimination
has had little meaning) shows Pakistan outperforming regional equities in times of broader
risk-off investment. In periods of sharp contraction between U.S. Treasury yields and the
Federal Funds Rate, Pakistan has on average outperformed the MSCI EM and MSCI World
by 7%, underscoring Pakistan's weak correlation in broader sell-offs as well as undemanding
valuations.
During periods of low risk tolerance, VIX (a measure of implied volatility - fear gauge)
increases while the spread between benchmark 10yr U.S. Treasury and Federal Funds
rate contracts. Two rounds of asset purchases by the U.S. Federal Reserve led to declining
levels in VIX and increasing U.S. Treasury yields which underscored a broader rally in risk
assets. During 1QCY12, decline in risk aversion was underpinned by the U.S. Economy
moving past trough with manufacturing at the heart of the recovery while housing showed
signs of stabilizing within the backdrop of the U.S. Federal Reserve extending the maturity
profile of its securities portfolio (see chart on the right for US$400bn in maturity extensions)
in efforts to lower longer term interest rates. European Governments negotiated a second
bailout for Greece while Asian economies moved to unconventional monetary stimulus
with balance sheet expansion by the BoJ (Bank of Japan) while the PBOC (Peoples Bank
of China) moved to ease lender reserve requirements. However, recent shift in the European
political landscape with risks to scale-back in austerity measures and fallout contagion
have lowered global risk tolerance - 10yr U.S. Treasury yields have declined to record lows
with the Feds maturity extension program coined "Operation Twist" scheduled to expire
in Jun'12. Pakistan Market's returns since 2009, in periods of risk-off investment on average
Budget Review 2012-13
04
AKD Securities Limited
June 2012
Source: Bloomberg & AKD Research
Proxy for Risk Tolerance
-
10.0
20.0
30.0
40.0
50.0
60.0
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
0.25
0.75
1.25
1.75
2.25
2.75
3.25
3.75
4.25
VIX Index (LHS)
US 10 Yr. Treasury (minus) Fed Rate
-40%
-20%
0%
20%
40%
60%80%
100%
120%
140%
160%
180%
Jan-09
Apr-09
Aug-09
Dec-09
Mar-10
Jul-10
Nov-10
Feb-11
Jun-11
Oct-11
Jan-12
May-12
MXEF Index
MXWO Index
KSE100 Index
Relative Performance
U.S. 10yr Treasury Yield - Federal Funds Rate vs. VIX
Pakistan outperforms in times
of broader risk-off investment
Total Assets of U.S. Federal Reserve
Source: Federal Reserve
500
1,000
1,500
2,000
2,500
3,000
3,500
Aug-07
Mar-08
Oct-08
May-09
Dec-09
Jul-10
Feb-11
Sep-11
Apr-12
USDbn
Maturity Extension - Operation Twist
Source: Federal Reserve
(350)
(300)
(250)
(200)
(150)
(100)
(50)
-
50
100
Up to 3
years
Over 6
years to8 years
Over 8
years to10 years
Over 10
years to20 years
Over 20
years to30 years
USDbn
7/31/2019 Budget Review FY13
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show 7% outperformance vs. the MSCI EM and MSCI World Indices. In our view, this
vindicates Pakistan's low correlation in broader global sell-offs. Markets will likely look tothe FOMC meeting scheduled for later this month for cues on the Federal Reserve's
response where balance sheet expansion will likely be weighed for political support ahead
of U.S. Presidential Elections as well as anchoring inflationary expectations while maturity
extension programs will likely be limited with capacity at the shorter end of the yield curve.
Taking monthly returns since 1991 over an annual time series, Pakistan's correlation to
MSCI EM and MSCI World has gradually increased off a low base but at 0.4 (linear trend)
it remains weak enough, in our view, to retain outperformance potential even within thebackdrop of a global sell-off in risk assets. Pakistan has posted volatile correlation over
our time series, in contrast to a sustained correlation between MSCI World and MSCI EM
at 0.78 on monthly returns since 1991. Pakistan's historically volatile yet relatively low
correlation underscores corporate earnings drivers in confluence with domestic demand
as well as oft volatile political landscape and external account stress. Despite these
negatives, Pakistan has posted the 7th best US$ adjusted return over the last decade!
While we have highlighted Pakistan's low correlation, we remain cognizant of Pakistan'sexposure to global commodity prices where 55% of KSE-100 market capitalization is
commodity based. Taking monthly returns over an annual time series between MSCI World
Budget Review 2012-13
05
AKD Securities Limited
June 2012
Source: Bloomberg & AKD Research
KSE Correlation
(0.60)
(0.40)
(0.20)
-
0.20
0.40
0.60
0.80
1.00
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
MSCIEM-SPGS MSCIEM-TRJ
MSCIWO-SPGS MSCIWO-TRJ
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
MXEF Index MXWO Index
Linear (MXEF Index) Linear (MXWO Index)
2012
MSCI Correlation with TRJ-CRB/S&P GSCI
Source: Bloomberg & AKD Research
10Yrs US Dollar adjusted return CAGR
INDONESIA
INDIA
CHINA
THAILAND
PHILIPPINES
POLAND
Pakistan
MSCIEM
BRAZIL
LUXEMBOURG
AUSTRIA
S.KOREA
HONGKONG
MEXICO
MALAYSIA
CANADA
AUSTRALIA
NORWAY
DENMARK
MSCIASIAPACIFIC
MSCIASIA
NEWZ
EALAND
TAIWAN
BELGIUM
IRELAND
SWEDEN
NASDAQ
MSCIWORLD
SWITZERLAND
HUNGARY
GERMANY
MSCIEUROPE
UNITEDKINGDOM
SPAIN
JAPAN-TOKYO
JAPAN-NIKKEI225
FRANCE
FINLAND
S&P500
DOWJ
ONESIND.AVG.HOLLAND
GREECE
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Pakistan's historically volatile
yet relatively low correlationunderscores corporate
earnings drivers in confluence
with domestic demand as well
as oft volatile political
landscape and external account
stress
7/31/2019 Budget Review FY13
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and MSCI EM, correlations to commodity indices (S&P GSCI and TRJ-CRB) show returns
in increasing lockstep with correlation on average logging in at 0.8 since 2009, underminingtraditional asset class discrimination in our view. Downside risks to commodity prices will
likely have implications for the commodity-based market cap at the KSE. A sharp pull back
in commodities poses downside risks for Oils, Fertilizers and Textiles - cotton is already
at multi-year lows (barring composites). Within this backdrop, while we retain selective
conviction within the commodity-backed market cap, we flag Commercial Banks as potential
outperformers over FY13 (see our section on commercial banks).
Self-centered Pakistan: Recent Capital Gain Tax Reforms announced via Presidential
Order and now included in the Finance Bill 2012 will likely serve to extend the Pakistan
market disconnect. Tracing back to the Finance Minister's announcement of the same in
Jan12, daily market volumes have risen to an average of 245mn shares while traded value
has improved to US$66mn - levels last seen in CY09. FII participation has held up with
an inflow of US$90.7mn within the same time frame (since Jan 2112) while individual and
market maker asset classes have returned (inflow of US$53.6mn) improving liquidity, and
consequently the KSE has seen a re-rating of valuations and a compression in the discount
to regional peer group.
Corporate Earnings are topping estimates: With the recent Capital Gain Tax Reform
shoring up market liquidity, price discovery has tracked a stellar trend in corporate earnings,which are consistently topping consensus estimates. Over the last 4 sequential quarters,
earnings have topped ours as well as consensus estimates by 1%-6%. Following a 7%
bottomline expansion in 2QFY12, earnings growth for 3QFY12 clocked in flat (dragged
lower by Fertilizer Sector earnings) but beat ours as well as consensus expectations by
5%. Oil and Gas and autos topped forecast by 33% and 10%, respectively, while banks
remained in-line with a marginal 3% deviation. Going forward for 4QFY12, we expect
coverage cluster earnings to decline by 4% led by oil and gas (lower oil prices) and
commercial banks (impact of revision in floor rate of savings deposits) whereas cements
and fertilizers will likely outperform on improving fundamentals and a lower base effect.
That said, over the next 12 months, we retain conviction with commercial banks and flag
the sector an outperformer where the sector trades at below floor level valuations despitemarked improvement in asset quality metrics, expected uptick in lending yields and
continuing focus on risk free investments.
Budget Review 2012-13
06
AKD Securities Limited
June 2012
Source: Bloomberg & AKD Research
KSE PE Discount to Region
-40%
-20%
0%
20%
40%
60%
80%
Jan-06
Jul-06
Jan-07
Aug-07
Feb-08
Sep-08
Mar-09
Sep-09
Apr-10
Oct-10
May-11
Nov-11
Jun-12
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12TD
-
100
200
300
400
500
600Avg. Traded Value (US$mn)
Avg. Daily Volume (mn, LHS)
KSE - Volume and Value Traded
We flag Commercial Banks as
potential outperformers over
FY13
Discount/Premium to Floor Valuations
Source: AKD Research
-30%
15%
134%
-21%
2% 8%
53%
-57%
101%
-94%
-18%
-51%
-150%
-100%
-50%
0%
50%
100%
150%
Autos
Fertilizer
Chemicals
Banks
Cement
Electricity
Engineering
Telecom
FMCGs
Multiutilities
OilandGas
Textiles
7/31/2019 Budget Review FY13
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Budgetary Implications: Recent budgetary measures in line with election year politics
should provide the market reason to rejoice where sector related developments have
panned out Neutral to benign in our view, contrary to negative expectations.
Expansionary/populist nature of the Federal Budget 2012-13 and resultant growth in reserve
money led by NDA expansion should provide for market upside to our end-Dec'12 Index
target of 16,000 but sustainable gains will require balancing of inflationary pressures and
risk mitigation on Pakistan's external account (increase in NFA) which includes an inevitable
return to an IMF program. Budgetary measures include a repeat of prior year targeted
foreign flows and remain ambitious where our Economist Anum Dhedhi estimates a 28%YoYrise in NDA in the event of non-materialization of foreign inflows which could provide upside
risks to inflation.
Budget Review 2012-13
07
AKD Securities Limited
June 2012
Source: AKD Research
KSE Tracks Reserve Money
121
1,121
2,121
3,121
4,121
5,121
6,121
7,121
8,121
Oct-92
May-94
Dec-95
Jul-97
Feb-99
Sep-00
Apr-02
Nov-03
Jun-05
Jan-07
Aug-08
Mar-10
Oct-11
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Reserve Money (PKRbn)
KSE-100 Index (RHS)
Money Supply (PkRbn)
Source: AKD Research
QoQ Profitability Growth
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1
QCY10
2
QCY10
3
QCY10
4
QCY10
1
QCY11
2
QCY11
3
QCY11
4
QCY11
1
QCY12
YoY Growth
Deviation from AKD Est.
QoQ Growth
QoQ Sectoral Profitability 2QCY12
112%
-10%
0% 9
%
-15%
-11%
12%
-6%
-2%
67%
-4%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
Fertilizers
Banks
Telecom
FMCG*
Chemicals
O
il&Gas
C
ements
Power
Autos
Textile
Total
Sustainable gains will require
balancing of inflationary
pressures and risk mitigation
on Pakistan's external account
(increase in NFA)
Over the last 4 sequential
quarters, earnings have topped
ours as well as consensus
estimates by 1%-6%
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7/31/2019 Budget Review FY13
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Budget Review 2012-13
10
Election Year Budget
Fiscal rules operate at the crossroads of politics and economics. Slippages in implementing
IMF prescribed fiscal reforms, particularly implementation of RGST, elimination of electricity
subsidies and resolution of circular debt, in our view inter alia are the key reasons for a
sustained high deficit. While the government in FY12 managed to achieve below targeted
inflation of 11% and on track tax revenue collection, up 22%YoY in FY12, fiscal deficit
remained at 7.8% of GDP (inclusive of 1.9% of GDP debt consolidation). A confluence of
unfavorable factors included a global environment with non-materialization of expected
foreign flows (3G license/Etisalat payment/CSF and lower logistical support receipts from
the US). Going forward, total budgetary outlay has been set at PkR3.2trn for FY13 (up
15.8%YoY) with current expenditure at a rigid 82% of total outlay. Gross revenue target
is set at PkR2.5trn, up 24%YoY, resulting in a budgetary gap of PkR1.2trn (4.7% of GDP- inclusive of provincial surplus of PkR80bn). Heading upto election year, budget expenditure
risks overshooting with fiscal deficit likely to exceed 6% of GDP. Budgetary measures
include broader relief while heightened tax collection targets will likely fall on the shoulders
of improved administrative and collection measures.
RISKS: As with prior years, expenditure overshooting is a key risk with increasing subsidies
and realization of development expenditure with election year politics. Acknowledged risks
to the Budget remain on the back of 1) weak external financing, which can lead to a spiraling
twin deficit, 2) matching upside and downside risk to oil prices and impact on oil import bill,
3) spillover effect from global slowdown (particularly the Eurozone) and 4) increasing share
of budgetary borrowing from domestic sources leading to crowding out of private sector
credit growth and inflationary central bank borrowing.
AKD Securities Limited
June 2012
Real GDP Growth (%) 4.30
Agri Growth (%) 4.10
Manufacturing Growth (%) 4.00
Services Growth (%) 4.60
Average CPI Inflation (%) 9.50
Total Tax Revenue as (%) of GDP 11.10
Total Expenditure as (%) of GDP 19.00
Current Expenditure as (%) of GDP 14.50
Development Expenditure as (%) of GDP 4.40
Fiscal Balance as (%) of GDP -4.70Revenue Balance as (%) of GDP -0.30
Total Public Debt as (%) of GDP 56.50
Total Investment as (%) of GDP 13.1
National Savings as (%) of GDP 11.2
Total Exports (US$bn) 25.26
Total Imports (US$bn) 45.69
CA Balance (US$bn) 4.77
Remittances (US$bn) 14.09
Major Export Targets
Food Group (US$bn) 5.2
Textiles (US$bn) 13.2
Manufacturings (US$bn) 5.2
Major Import Targets
Food Group (US$bn) 3.6
Petroleum (US$bn) 15.3
Fertilizer Agriculture & Chemical 3.6
Machinery 4.3
Budget Estimates
Source: Annual Plan & Budget Brief
Source: AKD Research
Key Points
1.) Fiscal deficit
2.) PSDP outlay
3.) Tax collection
Target
4.7% of GDP or PkR1.2tr inclusive
of provincial surplus
Target of PkR873bn with federal
component at PkR360bn
Tax collection target up 24%YoY to
PkR2.5tr.
Comment
Fiscal deficit target is conservative
given the continuing subsidy burden
We expect utilization inline till general
elections
Target dependent upon continued
streamlining of administration and
collections
Source: MoF & AKD Research
Fiscal Deficit and GDP Growth(%) Revenue and Expenditure
0
5
10
15
20
25
30
FY92
FY94
FY96
FY98
FY00
FY02
FY04
FY06
FY08
FY10
FY12
Total Expenditure Total Revenue
Fiscal Deficit
0
1
23
4
5
6
7
8
9
10
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
Fiscal deficit as a % of GDP Real GDP grwoth
7/31/2019 Budget Review FY13
11/23
Source: AKD Research & MoF
Expenditures (PkRbn) FY10R FY11R FY12R FY13B FY13AKD
Defence 378 445 510 545 545
Subsidies 229 396 512 209 220
Debt Service (Foreign) 71 74 72 80 85
Debt Repayment (Foreign) 148 127 137 216 281
Debt Service (Domestic) 596 654 772 846 870
Total Debt Servicing 815 855 981 1,142 1,236
Public Order & Safety 37 59 62 70 70
Economic Affairs 81 80 72 54 65
Education Affairs 32 40 45 48 50
Health Affairs 7 7 7 8 8
Others 439 414 443 537 550.00
Total Current Expenditure 2,017 2,296 2,632 2,612 2,744Development Exp (PSDP & Others) 405 382 478 591 600
TOTAL EXPENDITURE 2,422 2,678 3,110 3,203 3,344
As percentage of Total Expenditure
Defence 18% 21% 24% 26% 26%
Subsidies 11% 19% 25% 10% 11%
Total Debt Servicing 39% 41% 47% 55% 59%
Public Order & Safety 2% 3% 3% 3% 3%
Economic Affairs 4% 4% 2% 3% 3%
Education Affairs 2% 2% 2% 2% 2%
Health Affairs 0% 0% 0% 0% 0%
Others 21% 20% 21% 26% 26%
Total Current Expenditure 63% 72% 82% 81.5% 86%
Development Exp (PSDP & Others) 19% 18% 23% 28% 29%
Expenditures
AKD Securities Limited
June 2012
Budget SnapshotRevenues (PkRbn) FY1
Indirect Taxes 9
Direct Taxes 5
Total Tax Revenue 1,4
Income from Property & Enterprise 1
Civil Admin & Other Receipts 3
Misc. Revenue Sources 1
Total Non-Tax Revenue 5
Gross Revenue Receipts 2,0
(Less: Provincial Share) 6
Net Revenue Receipts 1,3
Net Capital Receipts 2
External Receipts 5
Estimated provincial surplus 2Privatization Proceeds
Bank Borrowing
TOTAL RESOURCES 2,5
As percentage of Total Revenues
Indirect Taxes 3
Direct Taxes 2
Total Tax Revenue 5
Income from Property & Enterprise
Civil Admin & Other Receipts 1
Misc. Revenue Sources
Total Non-Tax Revenue 2
Gross Revenue Receipts 7
(Less: Provincial Share) 2
Net Revenue Receipts 5
Net Capital Receipts 1
External Receipts 2
Estimated provincial surplus 1
Privatization Proceeds
Bank Borrowing
TOTAL RESOURCES 10
Revenues
7/31/2019 Budget Review FY13
12/23
Budget Review 2012-13
EXPENDITURE
Expenditures on face value show marginal YoY growth; however in view of election yearpolitics, there are concrete risks to overshooting. Total Federal outlay has been earmarked
at PkR3.2tn versus a revised PkR3.11tn last year, up a marginal 3%YoY. Last year, budgeted
expenditures were overshot by 16% or PkR343bn underpinned by Power Sector and
Fertilizer subsidies. Current expenditures are projected at PkR2.61tn down a tepid 1%YoY.
However, this includes a sharp reduction in subsidies at 59%YoY to PkR209bn which we
believe is extremely optimistic. Debt servicing inclusive of repayments, are projected to
increase by 16%YoY and account for 36% of total expenditures. Defense expenditures
logged in line with previous year trends up 7%YoY and at 26% of total expenditures.
Considering election year, we believe the tradition of balancing expenditure subsidies with
PSDP is unlikely. For FY13, the Federal Budget targets Federal development expenditure
at PkR591bn (PSDP PkR360bn) up 24%YoY from a revised PkR478bn last year wherewe expect targets to be inline till the run up in general elections. Inclusive of provincial
allocations, PSDP is targeted at PkR873bn (3.7% of GDP) up 19%YoY versus a revised
PkR743bn last year.
We view targets as conservative particularly in relation to containing subsidies particularly
as PSDP cuts may prove difficult specifically till the run up in general elections. This will
include allocations to complete ongoing projects and schemes (96% allocation) with the
power sector allocation earmarked at PkR185bn. Expenditure side slippages have become
recurring with sharp deviations in subsidies led by power where revised estimates for FY12
place the subsidy bill at PkR512bn against PkR166bn budgeted with tariff differential
subsidies exceeding the target by PkR383bn (inclusive of KESC). We expect this is where
chronic challenges will likely remain where based on our estimates taking only fuel oil
generation; we expect power sector tariff under-recovery in excess of 34% (including the
recent 16% hike) against consumer tariffs for 700-1000 units (as a proxy). .
Even with downside risks to oil prices we believe the GoP will be required to rationalize
power sector tariffs at a brisk pace. Our sensitivity shows for international crude oil pricesat US$90/bbl fuel oil generation costs over an annual basis would exceed consumer tariffs
by PkR165bn. This compares to a total tariff differential allocation of PkR170bn inclusive
12
AKD Securities Limited
June 2012
Current Expenditure Budgetversus Actual/PSDP Utilization
Source: Economic Survey Source: MoF, PES & AKD Research
Entrenched Current Expenditures
FY13F Current Expenditures
Source: Economic Survey
0
5
10
15
20
25
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Current Exp as % of GDP Dev Exp as % of GDP
Defence
21%
Others
21%
Subsidies
8%Debt Servicing
43%
Health Affairs
0%
Public Order &Safety
3%
EconomicAffairs
2%
EducationAffairs
2%
-21.1%
-30.3%
0.5%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
FY10 FY11 FY12
7/31/2019 Budget Review FY13
13/23
of KESC allocations and life line consumer subsidies. The overall subsidy package of
PkR209bn includes increasing allocations for FFBL at PkR3.4bn and USC for the sale of
sugar at PkR6bn.
REVENUE: FBR trying to achieve double digit Tax to GDP
Pakistan's tax to GDP (FBR) at 9.3% is one of the lowest in the region. The GoP is targeting
domestic internal revenue generation in FY13 of nearly Pk2.5trn, up 24% YoY to bring tax
to GDP to double digits at 11.1%. While no new tax is imposed, achieving a 25%YoY
increase in Direct tax and 23%YoY increase in Indirect tax is ambitious with our projected
nominal GDP growth target of 15.2%. While this is achievable, it will require continued
focus on improving administrative and collection measures. Of particular note is the
imposition of 1% withholding tax on disributors/dealers, which would help in enhancing
documentation in the economy and curb hoarding practices going forward. In our view,
going by the recent track record of the government, growth in tax collection will gather
pace on the back of 1) efforts to increase tax payer documentation and strengthening
electronic payment, 2) improved tax administration and risk based audit, 3) simplifying the
taxation system by focusing on Income tax and Sales Tax, 4) close watch on Afghan transit
trade and recovering arrears and 5) natural course of PkR/US$ depreciation. .
Budget Review 2012-13
13
AKD Securities Limited
June 2012
Source: PES, Energy Year Book & AKD Research
Fuel Oil Generation cost Power Sector Subsidy Sensitivity
Total and Tax Revenue as % of GDP
Source: AKD Research
5
7
9
11
13
15
17
19
FY92
FY95
FY98
FY01
FY04
FY07
FY10
FY13
Rev as % of GDP Tax to GDP
0%
10%
20%
30%
40%
50%
60%
70%
80 90 95 100 110
-
50
100
150
200
250
300
350
Power Sector Under RecoverySubsidy Burden PkRbn
5.00
7.00
9.00
11.00
13.00
15.00
17.00
19.00
21.00
23.00
FY08 FY09 FY10 FY11 FY1210%
15%
20%
25%
30%
35%
40%
Fuel Oil Generation Cost
Consumer Rates 700 - 1000 Units
Under Recovery (RHS)
Source: Budget Doucments & AKD Research
Breakup of FED Breakup of Customs DutyTax Collections
Source: SBP
Natural Gas
Cement
Others
OtherServices
Cigarettes &Tobacco
ImportedGoods
BeverageConcentrate
POLProducts
POL
Products
Edible
Oil
Others
Iron & steelElectric
machinery
Vehicles
Machinery &Mechanical
appliance
-
40.0
80.0
120.0
160.0
200.0
Jul-11
Au
g-11
Se
p-11
Oct-11
No
v-11
De
c-11
Ja
n-12
Fe
b-12
Ma
r-12
(PkRbn)
7/31/2019 Budget Review FY13
14/23
Out of the total tax collection, 57% is through indirect taxation (PkR1,572bn) where sales
tax growth is targeted in line with FY12 and is estimated to increase 26%YoY to PkR1.07trnin FY13. Total indirect collection against FED and Customs/Regulatory Duty is projected
at PkR372bn, up a marginal 5%YoY. This is despite the abolishment of FED on 12 items,
reduction in FED on Cement by PkR100/ton and custom duties on stationery items being
abolished and reduced on pharmaceutical raw material. Petroleum levy is targeted at
PKR120bn, up 74%YoY against the revised FY12 estimate, which in our view is realistic
provided oil prices do not rebound sharply. That said, we expect FY13 target of Income
tax collection (96% of Direct tax) at PkR914bn to be an uphill task.
Non Tax Revenue Measures
The government has budgeted non tax revenue target of PkR730.3bn during FY13 up
43%YoY from a revised estimate of PkR561bn in FY12. On the Non Tax revenue front,
receipts from civil administration and other functions (being 48% of total Non Tax Revenue)
are earmarked at PkR354.2bn in FY13, up 42%YoY. The primary contributor towards the
national kitty remain profits from SBP which are estimated at PkR200bn. SBP profitability
has historically been directly linked with the overall interest rate level in the economy and
Central Bank lending to the private and public sector. We expect this to be a realistic target
where further upside can come from any increase in interest rates. In addition revenue of
PkR150bn is expected under the Defense head which include the logistical support receipts
provided from coalition forces. However this carries risk with the recent uneasy relationship
between the U.S and Pakistan. Partial financing will be done through income from property
and enterprise of PkR179bn, up 91%YoY. This growth will largely be underpinned by
auction of 3G licenses expected to generate PkR79bn which failed to materialize over the
past two years. The miscellaneous receipts target of PkR197bn remains inline with our
projected growth of 16%YoY. Notable drivers include a 28%YoY increase in Gas Development
Surcharge while PkR30bn from Gas Infrastructure Development Cess is conservative (AKD
Research Estimates GIDC at PkR60bn. Royalty collections are forecasted to remain flat
at PkR58bn. Dividend income is forecasted to increased by 10%YoY to PkR64.6bn led by
higher dividend expectations from Pakistan Petroleum Limited (PPL). .
Deficit & Financing: Elusive fiscal deficit target of 4.7% of GDP
With Expenditure to GDP aimed at 18.9% and tax to GDP of 10.1% in FY13, the onus of
financing falls on domestic and external financing. The GoP has historically used development
Budget Review 2012-13
14
AKD Securities Limited
June 2012
Source: SBP & Budget Documents
SBP profits Non Tax Revenue
8%
9%
10%
11%
12%
13%
14%
15%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
0
50
100
150
200
250
SBP Profits (RHS) Discount Rate ( LHS)
PTA profits(3G auction)
Dividends
SBP ProfitDefense Receipts
Gas Dev.Surcharge
Oil/GasRoyalty
Interest
Others
We expect FY13 target of
Income tax collection (96% of
Direct tax) at PkR914bn to be
an uphill task
This growth will largely be
underpinned by auction of 3G
licenses expected to generate
PkR79bn which failed to
materialize over the past two
years
2011-12 2012-13
(PkRmn) Revised Budget Est.
FINANCIAL INSTITUTIONS 405.9 408.7
National Investment Trust 27 27
National Bank of Pakistan 33 33
Allied Bank of Pakistan 48 48
United Bank Limited 25 28
Habib Bank Limited 65 65
PaK Oman Investment Co, 108 108
Pak Brunei Investment Co, 50 50
Pak China Investment Co, 25 25
Pak Iran Joint Investment Co. 25 25
NON-FINANCIAL INST. 61,543.96 67,842.76
PPL 6,358 9,339
MARI 60 65
PSO 385 450
PARCO 2,400 3,000
SNGPL 174 500
SSGCL 1,115 1,200
GHPL 13,000 13,500
OGDCL 25,000 26,000
PTCL 6,500 6,500
Others 3,276 3,644
Total 58,674 64,607
Dividend Estimates
Source: Budget Brief
7/31/2019 Budget Review FY13
15/23
expenditure as a counter balance; however, considering election year, outlays are likely
to remain in line with projections particularly in the run up to general elections. We expecttotal expenditure outlays to overshoot by approximately PkR200bn. The GoP estimate for
FY13 fiscal deficit of PkR1.1trn (4.7% of GDP), in our view, is optimistic and will likely
exceed 6% of GDP. The budget plans to finance this shortfall by PkR135bn from Net
External Financing and PkR971bn from Domestic Sources (Bank and Non Bank borrowing).
In our view, FY13 budget has unrealistically estimated external financing to the tune of
PkR386.9bn, up 71%YoY from the revised FY12 estimate of PkR226.1bn. While only 54%
of budgeted foreign flows materialized during the current fiscal year, we conservatively
expect PkR265bn to materialize in FY13.
Out of the total Capital Receipts long term debt (Floating and Permanent) and NSS have
been highlighted as the two main funding sources with an aggregate target of PkR477bn
in FY13. Coupled with expected recourse to central bank borrowing we believe this could
provide for upside pressure on money market yields.
While Pakistan has positive real interest rates, increasing government borrowing for
budgetary support and uncertain materialization of foreign inflows (leading to a weak
PkR/US$) remain the key risks to interest rate outlook. Should external financing fall below
target and expenditure overshoot by by our estimates in FY13, we estimate deficit
monetization will increase average CPI inflation to 12.5%YoY from budgeted 9.5%YoY and
above our base case estimate of 11%. That said, pressure on fiscal deficit may be contained
with vigilance on inflation and focus on curbing the leakage from PSEs and refocus on
power sector tariff rationalization.
Budget Review 2012-13
15
AKD Securities Limited
June 2012
Source: SBP & AKD Research
Insufficient external flows shift reliance on Domestic Sources
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY08 FY09 FY10 FY11 FY12 JUL-MAR
External as % of financing Domestic as % of financing
While Pakistan has positive
real interest rates, increasing
government borrowing for
budgetary support and
uncertain materialization of
foreign inflows (leading to a
weak PkR/US$) remain the key
risks to interest rate outlook
Source: SBP & AKD Research
Domestic Financing NDA/NFA vs. CPI
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
FY08 FY09 FY10 FY11 FY12 JUL-
MARNon Banks Banks
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Jul-0
9
Oct-0
9
Jan-10
Apr-1
0
Jul-1
0
Oct-1
0
Jan-11
Apr-1
1
Jul-1
1
Oct-1
1
Jan-12
Apr-1
20%
2%
4%
6%
8%
10%
12%
14%
16%
18%
NDA/NFA CPI YoY
7/31/2019 Budget Review FY13
16/23
Total External Financing
The government has estimated external loans of PkR274.8bn, up 34%YoY against the
revised FY12 estimate. These include project loans of PkR140.3bn, down 15.3%YoY and
program loans (budgetary support) of PkR41.4bn, up 9.2x. At the same time, GoP expects
a challenging PkR46.5bn from Euro Bonds which we view as unlikely considering increasing
strains in global financial markets.
The budget estimates External Grants of PkR112bn for FY13, up 11.6%YoY from a revised
FY12 target of PkR45bn. Out of this, PkR74.4bn is estimated from Privatization Proceeds
including the SPO of PPL, OGDCL exchangeable bond offering and small ticket items
including Heavy Electrical Complex and NPCC.
Medium Term Budgetary TargetsReal GDP growth has been targeted at 4.3% higher than the 3% average from FY08-FY12.
However in view of continuing infrastructure bottlenecks and chronic energy shortages we
expect real GDP growth to contain at 4.3% only.
The 10MFY12 current account deficit has surged to 1.7% of GDP, due to expanding trade
imbalance and decline in foreign official and private capital inflows. Despite non-materialization
of foreign inflows and US$1.2bn repayment to the IMF, the external sector has been
sustained by surging remittances. This has been possible due to introduction of innovative
schemes like the Pakistan Remittance Initiative (PRI) to enhance the flow of remittances
with the SBP as the processing agent. The initiative envisions Pakistan as a remittance
hub to process all transactions backed by incentive to maximise remittances. The GoPexpect remmittance growth to clock in at 13%YoY for FY13.
For FY13, Pakistan continues to face challenges on the external front with IMF repayments
of US$2.78bn at the forefront. That said, the sell-off in global commodities will dissuade
risks and provide some respite. As for oil, the main import driver, we expect the import bill
to contract by ~US$1.2bn for every US$10/bbl fall in crude price. Furthermore, external
account risk mitigates also include a return to the fold of an IMF program. .
We have provided our sensitivity analysis of Oil (Arab light) price and Oil import bill.
Investment is targeted to improve from the current level of 12.5% of GDP to 13.1% in FY13,
while addressing energy shortages the GoP has committed to utilize the increase in Gas
Infrastructure Development Cess for the construction of Iran-Pakistan (IP) and Turkmenistan-
Afghanistan-Pakistan-India (TAPI) pipelines to overcome the energy shortages.
Budget Review 2012-13
16
AKD Securities Limited
June 2012
External Financing
Source: Economic Survey
Project Loans
36%
Programme Loans
11%
Euro Bonds and
others
24%
External grants
29%
GDP Growth (%)
Source: Economic Survey
Sectoral GDP Growth Trend (%)
Source: AKD Research
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
F Y09 F Y10 F Y11 F Y12 F Y13 F Y14
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
FY09 FY10 FY11 FY12 FY13 FY14
Agri Manufacturing Services
Source: AKD Research
Arab light (US$/bbl) 75 100 125
Import bill (US$ bn) 10.18 13.20 16.23
Pakistan oil import bill sensitivity to International Oil
7/31/2019 Budget Review FY13
17/23
1M 3M 6M 12M
Absolute (%) 1.4 44.6 91.6 75.0
Rel. Index (%) 2.2 37.4 71.5 61.9
Relative Performance
Budget Review 2012-13
17
AKD Securities Limited
June 2012
Dividend income arising from money market/income funds to be taxed at 25% in FY13
and at 35% in FY14, up from 10% at present. More affected banks, in our view, are
ABL, MEBL and HMB. From a macro perspective, this may lead to shift towards
alternative investment avenues including the stock market.
0.2% WHT now deductable on cash withdrawals of PkR50k/day, up from PkR25k/day
previously.
Budgetary impacts are slightly negative at the margin. However, considering that the
much feared increase in corporate tax rate/ tax on T-bills did not materialize, we believe
Banks are in for a sustained bull run across 2HCY12.
Despite higher regulatory risk, our optimism is based on 1) robust balance sheet
growth - deposits up QoQ in 1QCY12, bucking seasonal trend, 2) sustained focus on
risk-free investments and resultant decline in provisions, 3) Likelihood of a reversal
in the interest rate cycle - spreads to sustain at >7% and 4) capital strength amidst
zero risk weight of GoP securities leading to higher payouts. Risks to materialization
of foreign flows (e.g. Eurobonds) as well as selected domestic proceeds (e.g.
privatization) should lead to higher than budgeted bank borrowing which buttresses
our bull case. Our top picks are BAFL and UBL.
1M 3M 6M 12M
Absolute (%) -3.2 7.7 25.1 8.4
Rel. Index (%) -2.3 0.5 5.0 -4.8
Relative Performance
Banks Budget Implications - Neutral to Negative
Performance Chart
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
May-11 Aug-11 Nov-11 Feb-12 May-12
KSE-100 Index Banks
FED on cements has been reduced by PkR100 per ton which though positive, is lower
than initial market expectations. The reduction, nevertheless, provides manufacturers
with space to cut prices by PkR5 per bag.
Customs duty on scrap of rubber / shredded tyres has been reduced to 10% from
previous 20%. While positive owing to implementation of Tyre Derived Fuel (TDF)
technology by players such as LUCK, DGKC et al, the impact on cost savings from
TDF remains a bit of an unknown.
PSDP target for FY13 has been set at PkR873bn (Provinces: PkR513bn; Federal:
PkR360bn) compared to PkR730bn in FY12 - up 19.6%YoY which should help continue
the dispatch growth momentum from last year.
The Finance Bill provides for exporters to move towards the normal tax regime (NTR)
from current final tax regime (FTR), should they decide to avail it. Clause 41AA provides
an option to opt for the NTR instead of the FTR, however, stipulates that minimum
tax liability under NTR should not be less than 50% of the realized proceeds at the
time of exports. Given, however, that even the biggest cement exporter (LUCK) is
currently paying a tax (turnover) that translates to just 4.2% (9MFY12 current tax), it
would be ill-advised to enter into NTR and therefore, we deem it unlikely that any
manufacturer will opt for it.
Cements Budget Implications - Positive
Performance Chart
-20%
0%
20%
40%
60%
80%
100%
May-11 Aug-11 Nov-11 Feb-12 May-12
KSE-100 Index Cements
7/31/2019 Budget Review FY13
18/23
Budget Review 2012-13
18
AKD Securities Limited
June 2012
For the tax year 2012 and onwards, the GoP has provided a one time tax regime for
upstream Oil & Gas companies at 40% of profits and gains, net of royalty, subject to
withdrawal of all pending appeals etc and clearance of outstanding tax liability up to
tax year 2011. This is against long standing disputes created over inconsistency
between the Schedule to the Mining Act 1948 and Petroleum Concession Agreements.
E&P companies discharge tax obligations as per respective PCA's at the higher of
55% on profits and gains or 50% of profits and gains before deducting royalty. The
FBR's contention includes the Mining Act providing a floor and ceiling at 55% and
50% before royalty while PCA's are framed for profit and gains only. .
Budget remains largely silent for gas distribution however GDS collection is expected
to improve by 29%YoY to PkR30bn. This underscores improving gas production as
well as downward sticky consumer gas tariffs particularly in 2HFY12 as international
prices come off.
Removal of FED on lubricants ranging from 10% of retail price to PkR7.5/litre on baseoil is positive to improve overall consumption levels as well as for Lube Oil producers
such as NRL which may retain the benefit
1M 3M 6M 12M
Absolute (%) -2.6 -2.1 4.9 0.4
Rel. Index (%) -1.8 -9.3 -15.2 -12.7
Relative Performance
Oil & Gas Budget Implications - Positive
Performance Chart
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
May-11 Aug-11 Nov-11 Feb-12 May-12
KSE-100 Index Oil & Gas
Status quo as far as import duty on CBUs is concerned which is a big relief for the
OEM sector.
Custom duty on imported CKD units reduced to 30% from 35% previously which will
reduce the manufacturing costs for car as well as tractor manufacturers. Negative for
auto parts manufacturers (Thal Engineering and Agri Autos).
Advance tax on 1300cc-1600cc vehicles has been raised by PkR8,125/unit to PkR25k.
We view this as slight negative for INDU but positive for PSMC given its dominance
in the economical category (below 1300cc).
Auto sector has gained 30%CYTD and has outperformed the broader market by 8%
in the said period. However, there has been a recent sell-off in the sector due to fear
of reduction in CBU imort duties in budget FY13. With status quo on import duties
maintained, we believe autos are ripe for a relief rally.
1M 3M 6M 12M
Absolute (%) -1.6 12.4 31.5 6.4
Rel. Index (%) -0.8 5.1 11.4 -6.7
Relative Performance
Autos Budget Implications - Neutral to Positive
Performance Chart
KSE-100 Index Automobile and Parts
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
May-11 Aug-11 Nov-11 Feb-12 May-12
A non-event for the Electricity (Power) sector where the government announced no
tangible steps for curbing or even controlling circular debt.
Total subsidy for tariff differential has been projected at PkR185.3bn compared to
revised figure of PkR464.2bn for FY12, indicating further round of tariff hikes. That
said, we remain skeptic of subsidy targets being met, given revision in FY12 targets
from initial allocation of PkR147.3bn. Electricity tariffs and loadshedding will likely be
one of the focal points of all political parties in the election year expect subsidy
targets to be revised upwards again!
1M 3M 6M 12M
Absolute (%) 3.6 3.8 12.4 8.7
Rel. Index (%) 4.4 -3.4 -7.6 -4.4
Relative PerformanceElectricityBudget Implications - Neutral
Performance Chart
-15%-10%
-5%
0%
5%
10%
15%
20%
25%
May-11 Aug-11 Nov-11 Feb-12 May-12
KSE-100 Index Power
7/31/2019 Budget Review FY13
19/23
Budget Review 2012-13
19
AKD Securities Limited
June 2012
For tax credit purposes, limit of investment in securities and insurance as proportion
of taxable income increased from 15% to 20% and from PkR500k to PkR1mn, whichever
is lower.
Required retention period of shares is also being reduced to 2yrs from 3yrs. The
purpose of these budgetary measures is to encourage retail investment in insurance
schemes, where insurance penetration is extremely low (premiums as % of GDP are
less than 1% with non-life penetration at 0.5% compared with emerging markets
average of 1.3%).
At the same time, FED on livestock insurance has been eliminated which should prove
to be uplifting at the margin.
We see FY13 Budgetary proposals as Neutral to slightly Positive for the Insurance
sector. Potential increase in funds flow to the equity market (as Banks shift away from
money market funds) may be positive for overall stock price recovery, which should
bode well for listed Insurance companies given their hefty reliance on investment
income. At current levels, we retain our preference for AICL.
1M 3M 6M 12M
Absolute (%) 5.3 1.7 27.0 11.6
Rel. Index (%) 6.1 -5.5 6.9 -1.5
Relative Performance
Insurance Budget Implications - Neutral to Slightly Positive
Performance Chart
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
May-11 Aug-11 Nov-11 Feb-12 May-12
KSE-100 Index Insurance
A 100% tax credit for corporate dairy projects for upto five years, given that the
investment is fully equity funded. The move will stimulate development of dairy farming
in the country, and may result in new corporate players in the field. We flag FFC as
a potential beneficiary, as the company seeks to diversify its business operations, in-
line with peer ENGRO.
GST on tea has been reduced to 5% from 16% previously, which is essentially catered
to tackle tea smuggling and will be beneficial for ULEVER.
1M 3M 6M 12M
Absolute (%) 3.3 20.7 49.1 45.2
Rel. Index (%) 4.1 13.5 29.0 32.0
Relative PerformanceFood ProducersBudget Implications - Positive
Performance Chart
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
May-11 Aug-11 Nov-11 Feb-12 May-12
KSE-100 Index Food Producers
GoP has announced a 20% hike in government employee salaries which is negative
for the service oriented telecom sector.
The GoP has maintained its FY12 dividend target for PTC at PkR6.5bn (DPS PkR2.05)
and the FY13 target has also been kept at PkR6.5bn. We believe that PTC is likely
to announce a dividend this month, which is likely to keep the stock in limelight in the
near term. Recall, GoP has 62% shareholding in PTC.
GST on telecom services has been kept unchanged at 19.5%.
The already ambitious 3G auction target has been increased by PkR4bn to PkR79bn.
The budget appears Neutral on the telecom sector, however, an interim dividend
announcement by PTC is likely to excite in the near term. Furthermore, any tangible
development on ICH will likely lead to a sector re-rating.
1M 3M 6M 12M
Absolute (%) 15.8 30.1 45.6 -14.5
Rel. Index (%) 16.6 22.8 25.5 -27.7
Relative Performance
Fixed Line Telecom Budget Implications - Neutral
Performance Chart
-50%
-40%
-30%
-20%
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0%
10%
20%
30%
May-11 Aug-11 Nov-11 Feb-12 May-12
KSE-100 Index Fixed Line Telecommunication
7/31/2019 Budget Review FY13
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Budget Review 2012-13
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AKD Securities Limited
June 2012
No news in itself is bad news as far as LOTPTA is concerned as the budget was silent
on PTA import duty implying status quo (import duty at 3%).
Higher gas prices (GIDC) will increase costs for both EPCL and LOTPTA.
1M 3M 6M 12M
Absolute (%) 7.2 5.4 20.0 -2.5
Rel. Index (%) 8.0 -1.9 -0.1 -15.7
Relative Performance
Chemicals Budget Implications - Negative
The much feared Gas Infrastructure Development Cess (GIDC) has been increased.
Resultantly, GIDC on feed stock and fuel stock has been enhanced by PkR103/mmbtu
and PkR87/mmbtu respectively which would collectively raise urea production costs
by PkR138/bag.
Urea import subsidy has been set at PkR26bn, which is lower than FY12s revised
number of PkR45bn. Assuming the current landed cost of US$525/ton and retail price
of PKR1600/bag (PkR1379/bag ex-GST), the GoP can import upto 1.2mn tons of urea
in FY13, which will be sufficient to cover up the production loss from Sui supplied
plants, and keep the industry well supplied.
Despite the election year and recent slide in soft commodity prices (cotton in particular),
the government has not announced any targeted relief measures for the agriculture
sector (e.g. increase in wheat support prices), which is likely to keep farmer economics
weak over the near term.
Budget FY13 is broadly negative for the sector given the hike in gas prices and threat
of further urea imports. Urea pricing power is likely to remain depressed owing to the
supply glut as well as threat of further imports which is likely to accrue in less than
full pass-through of GIDC impact. On the flipside, Jun12 urea sales may pick up
significantly ahead of an expected price hike in Jul12. We highlight FATIMA as the
key beneficiary as GIDC is not applied on locked in feedstock rate for new plants.
.
1M 3M 6M 12M
Absolute (%) -3.5 -7.5 -0.6 0.9
Rel. Index (%) -2.7 -14.7 -20.7 -12.3
Relative Performance
Fertilizer Budget Implications - Negative
Performance Chart
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
May-11 Aug-11 Nov-11 Feb-12 May-12
KSE-100 Index Fertilizers
In FY13 budget, PkR5.068bn is allocated for export development fund, up by modest
PkR50mn compared with revised estimate of FY12, which is unlikely to make any
material impact on textile exports.
Gas Infrastructure Development Cess (GIDC) on captive power producers is increased
from PkR13/mmbtu to PKR100/mmbtu (17.1% surge in natural gas cost), further
increasing cost of production of textile manufacturers which have captive power facility
fueled by natural gas.
Exporters (including textile exporters) are provided an option to opt out of Final Tax
Regime (FTR) provided their tax liability does not fall below 50% of tax liability computed
under FTR. The difficulties related to documentation may refrain most of the exportersto opt out of FTR.
Among textile sector, we retain our liking for NML where recent dip in price should be
taken as an attractive entry point.
1M 3M 6M 12M
Absolute (%) 2.3 13.9 26.8 -1.8
Rel. Index (%) 3.1 6.6 6.8 -15.0
Relative Performance
Textiles Budget Implications - Neutral to Negative
Performance Chart
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
May-11 Aug-11 Nov-11 Feb-12 May-12
KSE-100 Index Textile
7/31/2019 Budget Review FY13
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Budget Review 2012-13
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Annexure
Salient features of the FY13 Budget are as follows:
Taxation slabs for individuals and AOPs to be reduced to 5 from earlier 17. Further,
taxable income for salaried individuals and AOPs to be increased to PkR400k p.a from
previous PkR350k p.a. Moreover, AOPs will also be taxed at progressive rates rather
than previous flat rate of 25%.
CGT related changes approved by Finance Ordinance, 2012 will now gain statutory
status through Finance Bill 2012.
Expenditure made on BMR will be get tax credit of 20% and shall be adjustable upto 5
years.
Stock exchanges will not collect WHT on carry over trades. NCCPL will collect WHT
@10% on margin financing in share business.
Investment in IPOs and insurance premium will obtain a tax credit; higher of 20% (15%
in FY12) of taxable income or PkR1mn (PkR0.5mn in FY12). Moreover, retention period
has also been reduced from 3 years to 1 year.
Property sold before 2 years of possession will be subject to CGT ranging from 5% to
10%.
Dividend and profit from intra group debt is to be exempted from WHT for the companies
entitled to group taxation.
Tax arbitrage opportunity for banks has been purged by imposing 25% tax in FY13 and
35% in FY14 on dividend received from money market funds and income funds.
Retailers having revenue up to PkR5mn will be subject reduced tax rate of 0.5% from
earlier 1%.
E&P companies have been provided with option to pay tax@40% of profits and net of
royalty gains from FY12 onwards provided these companies withdraw pending appeals
and payment of tax liability up to FY11 by Jun 30'12.
Exporters, importers and suppliers are provided an option to exit Final Tax Regime (FTR)and enter Normal Tax Regime (NTR).
Manufacturers will act as withholding agents to collect 1% tax from traders and distributors
which will be adjustable against tax liability of those traders/distributors.
Expansions in PPE made before Jul 1'11 through 100% fresh equity will get tax credit
for 5 years from commencement of commercial production.
Initial depreciation on building will be reduced to 25% from earlier 50%.
Tax exemption granted on venture companies and private equity is to be extended for
10 years period.
FED on cements will be reduced by PkR100/ton.
AKD Securities Limited
June 2012
7/31/2019 Budget Review FY13
22/23
Budget Review 2012-13
22
Import duty on rugged tryres to be reduced to 10% from 20%.
Additional GIDC is to be imposed on fertilizer sector by PkR103/mmbtu on fuelstock and
on PkR87/mmbtu.
GST has been rationalized at 16% for goods.
Sales tax on steel sector enhanced from PkR6/Kwh to PkR8/Kwh.
Minimum price for new brands is floored to 95% of most popular price category brands.
Limit of taxable cash withdrawals (subject to 0.2%WHT) has been on enhanced to 50k
pd from previous 25k pd.
100% tax credit will be provided against tax payable to industrial undertakings includingdairy farming.
15 items, including lub oils, have been exempted from FED.
FED on 88 pharmaceutical raw materials has been reduced.
AKD Securities Limited
June 2012
7/31/2019 Budget Review FY13
23/23
AKD SECURITIES LIMITEDMember: Karachi Stock Exchange
PAKISTAN
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