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 ceo@imsecurities.com.pk

IMS Sales Team Designation Extension E-mail

Noor Hameed Executive Director Broking 201 noor.hameed@imsecurities.com.pk

Gohar Rasool Head of international Sales 601 gohar.rasool@imsecurities.com.pk

Mohammad Waqar Head of Investment Advisory 203 mohammad.waqar@imsecurities.com.pk

Burhan Moosa Senior Equity Dealer 207 burhan.moosa@imsecurities.com.pk

IMS Research Team Designation Extension E-mail Coverage

Raza Jafri, CFA Director Research 301 raza.jafri@imsecurities.com.pk Strategy

Muhammad Saad Ali, CFA Head of Research 205 saad.ali@imsecurities.com.pk Oil & Gas, Chemicals

Abdul Ghani Fatani Investment Analyst 305 abdul.ghani@imsecurities.com.pk Economy, Banks & Insurance

Yusra Beg Investment Analyst 306 yusra.beg@imsecurities.com.pk IPPs, Autos, Consumer & Pharma

Abdul Samad Khanani Investment Analyst 303 abdul.samad@imsecurities.com.pk Fertilizer & Cements

Tanveer Ahmad Investment Analyst 102 tanveer.ahmad@imsecurities.com.pk Textile & Consumer

Abdul Wadood Manager Research 302 abdul.wadood@imsecurities.com.pk Database

Ubair Usman Assistant Database 302 ubair.usman@imsecurities.com.pk Database

Muhammad Rehan Library Incharge 302 muhammad.rehan@imsecurities.com.pk Database

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FY17 Budget Review

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Disclaimer

Research Entity Number – REP-085

We, IMS Research Team, certify that the views expressed in the report reflect our personal views about the subject securities. We

also certify that no part of our compensation was, is, or will be, directly or indirectly, related to the specific recommendations

made in this report. We further certify that we do not have any beneficial holding of the specific securities that we have

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.