Budget FY17 - Reforms set to persist_ recovery in agri to lift 06-06-2016

KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi This report has been prepared by KASB Securities Ltd. and is provided for information purposes only. Under no circumstances it is to be used or considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be relied upon as such. From time to time KASB Securities Ltd. and any of its officers or directors may, to the extent permitted by law, have a position, or otherwise be interested in any transaction, in any securities directly or indirectly subject of this report. This report is provided solely for the information of professional advisers who are expected to make their own investment decisions without undue reliance on this report and the company accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. In particular, the report takes no accounts of the investment objectives, financial situation and particular need of individuals, who should seek further advice before making any investment. This report may not be reproduced, distributed or published by any recipient for any purpose. The views expressed in this document are those of the KASB Securities & Economic Research Department and do not necessarily reflect those of KASB or its directors. KASB, as a full‐service firm, has or may have business relationships, including investment‐banking relationships, with the companies in this report.Refer to the last page of this report for additional disclosures.

Mohammad Fawad Khan, CFA Strategist [email protected] Sarah Mazher Economist [email protected] Syeda Humaira Akhtar Research Analyst [email protected] Aijaz Siddique Research Analyst [email protected] Asad Ali Research Analyst [email protected]

Event Strategy| Pakistan 06 June 2016 Pakistan Strategy

Budget FY17: Reforms set to persist; recovery in agri to lift

FY17 Budget: focus on reforms and macro stability Government unveiled Budget 2016-17 on 03-June, envisaging total outlay of PRs4.4tn (+10% YoY). The last budget under the ongoing IMF program retains the dual focus of maintaining momentum on fiscal reforms (fiscal deficit target of 3.8% vs 4.3%) while targeting to leverage the gains on macro stability to lift economic growth (5.7% target vs 4.7% in FY16) towards medium-term target (7%).

Five key themes emerging from the budget 2016-17 #1: Favorable measures to lift growth momentum: While focus on agriculture, exports and pick-up in development spending targets (up 20% to PRs1.6trn) are noteworthy, GDP target may face challenges from energy shortages (supply additions are back loaded) and lower development spending. We see limited bearing on inflation outlook. Targets for development outlay are energy (23%), road transportation (24%), rail infrastructure (5%).

#2: Incentives for exporters to address concerns on external account post IMF program: A 13% drop in export in FY16 has paved the way for meeting exporters’ demand of major relief in input tax procedure for major sectors, incentives for refinancing cost and investment. Near- term drag on exports, however, is expected to remain, given global environment and overvalued exchange rate.

#3-Fiscal consolidation: The government is counting on new tax measures (PRs200bn) and limited expenditure growth to reduce fiscal deficit to an 11-year low. Key risks include slippage on current expenditure and potential shortfall in non-tax revenue stream. Tax revenue target of 16% seems realistic and may lift tax-to-GDP to 12.9% on its way to medium-term target of 13.9%. Deficit target is likely to be in the limelight post-completion of IMF program in Aug-16.

#4-Stepping up efforts on documentation: The government has persisted on its drive to increase the cost of non-compliance tax by building on the measures announced last year. Though commendable, efficacy of such measures is expected to remain low.

#5-Encouraging backdrop for corporate earnings: Beyond the impact of Super Tax (4-5%), we contend FY17 Budget has laid down an encouraging policy backdrop for the corporate earnings growth. We believe future measures effectively remove potential areas of earnings downside and may lead to earnings surprises ahead.

No major negative surprise warrants positive market reaction We expect the budget to draw a positive reaction from the market despite disappointment on government not considering many of the proposals of Pakistan Stock Exchange. With no major negative surprise in the budget and positive backdrop for corporate earnings, we believe market valuation (CY16E P/E of 9.4x and D/Y of 5.9%) have further room for growth as MSCI classification theme gains more traction (decision due on 14th June).

Winners: Cement, Fertilizer, Textile & Power Losers: Steel, Insurance, and Consumer Non-event: E&Ps, Banks, Autos, Refineries, Chemical Top picks: POL, PPL, ENGRO, LUCK, DGKC, ICI, UBL, HUBC, EFERT and INDU

Table 1: Federal Budget Snapshot (PRsbn) FY16R FY17B

Total revenue 4,333 4,916 Tax revenue 3,420 3,956 % of GDP 11.6% 11.8% Non-tax revenue 913 960 % of GDP 3.1% 3.2% Provinces share 1,852 2,136 % of GDP 6.3% 6.4% Net fed. Revenue 2,481 2,780 % of GDP 8.4% 8.3% FBR revenue 3,104 3,621 % of GDP 10.5% 10.8% Federal outlay 4,096 4,395 % of GDP 13.8% 13.1% Current Exp 3,282 3,400 % of GDP 11.1% 10.1% Development Exp 814 995 % of GDP 2.8% 3.0% Federal deficit (1,615) (1,615) % of GDP -5.5% -4.8% Provincial surplus 337 339 Total deficit (1,278) (1,276) % of GDP -4.3% -3.8% Source: MoF

Pakistan Strategy – June 2016

Budget FY17: Reforms set to persist; recovery in agri to lift growth Budget 2016-17 envisages total outlay of PRs4.89tn (+9% YoY). The last budget under the ongoing IMF program retains the dual focus of maintaining momentum on fiscal reforms (fiscal deficit target of 3.8% vs 4.3%) while leveraging the gains on macro stability to lift economic growth (5.7% target vs 4.7% in FY16) towards medium-term target.

We believe the latest federal budget presented to the Parliament reflects the government’s intent to address the weak links in the current macro backdrop. However, implementation of growth-centric reforms and fiscal consolidation both need firm attention throughout the year. We highlight fiscal consolidation targets might be viewed skeptically as the IMF program ends in Aug-16. Five key themes of the budget are as follows: (1) propel growth momentum amid price stability via recovery in agriculture sector and increase in PSDP, (2) fortify external stability by giving boost to export sector, (3) fiscal consolidation, (4) increased efforts for documentation of the economy, and (5) encouraging backdrop of corporate earnings.

#1: Favorable measures to propel growth momentum We believe the reforms should facilitate the rising GDP growth momentum, and expect growth to exceed 5% in FY17E, however, largely depict more of the same.

Pro-agri measures: Following the big Kissan package announced last year by the Prime Minister, we believe the government’s resolve to boost farmer income via several pro-agriculture sector measures announced in federal budget (refer Table 4 for measures in detail) is a positive step towards improved prospects for both (1) crop yields, and (2) industrial demand dynamics. Not only should it help agriculture sector to churn out positive growth in FY17 vs -0.2% in FY16, but LSM sector performance should also receive a boost on the back of higher rural demand for consumer durables, autos, cement, steel, construction etc.

Development spending: Another important driver is the increase in public sector development program (PSDP) by 20% to PRs1.675tn. Major heads are transport with allocation of PRs229bn, which include 8 projects under China Pakistan Economic Corridor (CPEC), and power sector (PRs130bn).

We are more cautious and less optimistic of the govt.’s stated GDP growth target of 5.7% for FY17. Factors that curb our enthusiasm for high demand, high growth story are as follows: (1) budget documents reveal the government’s intention to heavily rely on borrowing from banks in FY17 (35% of deficit financing), which could curtail the nascent growth in credit supply to private sector, (2) our view on significant gains in electricity supply goes beyond FY17 once

Chart 1: Major source of deficit financing is expected to be banks in FY17

-0.5

0.0

0.5

1.0

1.5

2.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

B

Bank borrowing* Non-bankExternal

Source: MoF

Table 2: Pakistan Macro Targets

FY16P FY17T FY17E-KASB

GDP growth 4.7% 5.7% 5.0-5.25% Agriculture growth -0.2% 3.5% - Industrial growth 6.8% 7.7% - Services growth 5.7% 5.7% - CPI inflation (YoY) 2.8% 6.0% 4.70%

Source: MoF, KASB estimates

Table 3: Medium-Term Economic Estimates

FY16 (Budgeted)

FY16 (Revised) FY17 (Budget) FY18E FY19E

Real GDP Growth 5.5% 4.7% 5.7% 6.2% 7.0% Inflation 6.0% 3.5% 6.0% 6.0% 6.0% Total Revenue 15.1% 15.9% 16.0% 15.9% 16.1% Tax Revenue 12.0% 12.6% 12.9% 13.4% 13.9% Total Expenditure 19.4% 20.2% 19.8% 19.4% 19.6% Current 14.9% 15.9% 14.9% 14.6% 14.6% Development 4.5% 4.3% 4.7% 4.8% 5.0% Fiscal Balance -4.3% -4.3% -3.8% -3.5% -3.5% Total Public Debt 62.0% 64.8% 61.4% 57.8% 54.3%

GDP at market prices 30,672

29,598 33,509 37,944 43,215

Source: Budget Brief


CPEC projects come online, which puts a cap on the productive capacity, hindering growth. The government reportedly expects to add 5,304MW of electricity in FY17, and cumulative 10,000MW by Mar-18. We also highlight risk of potential inflationary pressures due to the potentially high demand, low supply scenario in the near-term, with additional demand boost due to increase in minimum wage, and pensions announced by the government.

Impact on inflation: We expect limited inflationary impact from the budgetary proposals. Prices of cigarettes are likely to increase by an average of 10-15%, with a CPI impact of 25bp. However, due to price increase announced in two phases (June and December), the impact on full year average CPI estimate would be watered down. Additionally, removal of concession on powder milk, whey powder/yoghurt, beverages and possibly milk as well as marble, steel, and FED increase in cement would impact food and construction/house rent indices; though we believe the impact should not be material.

Table 4: Addressing key areas of growth

Pro-Agricultural sector Further reduction in price of urea to PRs1400/bag from Jul-16 via subsidy and reduction in GST to 5% from 17% Further reduction in price of DAP to PRs2500/bag from Jul-16 via higher subsidy Agriculture credit is being increased by another PRs100bn to PRs700bn Reduction in mark up rates of ZTBL, NBP, Bank of Punjab and Punjab Cooperative by 2%. Sharing risk of non-payment of credit by small farmers by guaranteeing up to 50% of the financing Off-peak rate of PRs8.85/unit for agriculture tube wells is being reduced to PRs5.35/unit Duty on import of machinery for the dairy, livestock and poultry sectors reduced to 2% from 5% Concession of customs duty for fish farming Tax relief on cool chain machinery used for food processing Exemption of sales tax on pesticides GST exemption to Silos for grain storage

Pro-Exporter measures Zero rating restored on 5 exports-oriented sectors; 3% tax on inputs removed, 5% on locally finished goods maintained.

The above sectors include textile, leather, sports goods, surgical goods and carpets. 50bp cut in exporters financing rate (to 3%) eff. July 1st PRs6bn allocation to bring Trade policy into operation Drawback of Local Taxes scheme to continue Technology Upgradation Fund for (1) SMEs to encourage investment in non-traditional exports and (2) textile sector Duty free import of textile machinery, concessionary duty on man-made fiber not produced locally, to continue All the pending GST refunds approved till 30th April will be paid by 31st August 2016 Other pro-industry measures Duty reduced to 2% from 5% on 2000 items, mostly plant and machinery import Tax credit on employment generation by new industrial undertaking increased to 2% from 1% Tax credit for making over 90% sales to registered persons increased to 3% from 2.5% 20% tax credit on investment for BMR via 100% new equity financing for 5yrs extended to Jun-19

100% tax credit on new industry & expansion through equity threshold reduced to 70% from 100% & extended to Jun-19

Period of exemption on investment in green-field industrial undertakings extended to Jun-19 30% RD on import of Bead Wire used in tyres manufacture abolished CD on cement clinker, and semi-printed paper etc. increased to protect local industry Privatization target of PRs50bn

Source: Budget Documents, KASB research


#2: Incentives to improve export potential; limited near-term boost Notwithstanding the global economy slowdown including demand slowdown in China, we believe pro-textile measures (including further reduction in export refinance rate and GST refunds) as well as zero-rating restoration for all five export-oriented sectors should help ease cash flows, finance working capital needs, and improve export potential. Some focus on facilitation of non-traditional exports through setting up of technology upgradation fund is welcome, though implementation and taking the plan efficiently forward is required to make structural improvement and increase the country’s export competitiveness. Near-term drag on exports, however, is expected to remain, given global environment and overvalued exchange rate.

#3: Fiscal consolidation The government’s resolve to reduce fiscal deficit to 11-yr low of 3.8% of GDP in FY17 from 4.3% of GDP, is a formidable task in our view, given hefty development spending allocations, ambitious target of 39% reduction in power subsidies, and potential shortfall in non-tax revenue stream.

Tax target more realistic: FBR’s tax revenue target of PRs3.6tn (16.7% YoY growth) seems realistic vs above-20% YoY growth targets set in last few years. Key taxation measures include withdrawal of exemptions and concessions (PRs120bn impact) and increase in advance tax on non-filers in different areas.

Non-tax revenues are also expected to grow by 5% YoY to PRs960bn (+5% YoY) despite remaining flat in FY16. We highlight uncertainty under few heads including (1) PRs170bn (US$1.5bn) under coalition support fund vs only US$0.9bn received FY16 to date – where the Finance Minister hinted at a new arrangement being worked upon with US government, and (2) PRs75bn from 3G/4G license auction.

In order to meet the fiscal deficit target of 3.8% of GDP, current expenditures are targeted to grow by only 4% vs 22% growth projected for development outlay. The govt. also expects provinces to turn in a surplus of PRs339bn (1% of GDP), despite a hefty provincial PSDP target (up 19% to PRs875bn).

Chart 2: Curtailing twin deficits as % of GDP will likely be a challenge

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Fiscal deficit/GDP Current account deficit/GDP Source: Economic Survey, Budget in Brief FY16

Chart 3: Debt/GDP to be brought <60% in next 2-yrs from 64.8% in FY16

48%50%52%54%56%58%60%62%64%66%

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

B

FY18

B

FY19

B

Source: Economic Survey, Budget in Brief FY16


Table 5: Key budgetary targets

(PRsbn) FY16R FY17B YoY Comments Total Revenue (1+2) 4,333 4,916 13% Mainly via withdrawal of tax exemptions and concessions (PRs120bn impact) and FED hikes

% of GDP 14.6% 14.7% (1)Tax Revenue 3,420 3,956 16% FBR collection target is PRs3,621bn, implying a realistic 16.7% YoY growth Direct tax 1,324 1,558 18% Extension in Super tax, Higher tax rate on non-filers, tax on property gross income, builders & developers etc. Indirect tax 1,780 2,063 16% Withdrawal of concessions & exemptions, FED hike on cement, cigarettes and GST on steel, POL products etc.

Other taxes 316 335 6% GIDC target unchanged (PRs145bn), Petroleum levy collection target (up 11% to PRs150bn), in line with expected growth in fuel sales

(2) Non tax revenue 913 960 5% Downside risk from planned PTA profits of PRs75bn (3G/4G auction) & Coalition support fund (US$1.5bn) Transfer to prov. 1,852 2,136 15% Higher revenue transfer based on NFC Award Total Expenditure (1+2) 4,096 4,395 7% PSDP allocation increased while current expenditure to grow by meager 4% (Risk of upside in current exp)

% of GDP 13.8% 13.1%

(1) Current Exp 3,282 3,400 4% Realignment by reducing subsidy by 39% to pay for 3% higher debt servicing (PRs1.36trn) & defence spend (+11%)

General services 2,559 2,707 6% 7.7% higher minimum wage, for civil servants, hike in minimum pension Subsidies 197 141 -28% Mainly through reduction of power sector subsidy by 39% to PRs 118bn Defence 776 860 11% A normalized 10-11% increase is expected unless there is further uptick in security operations (2) Development 814 995 22% Likely to face the axe in case of slippages in current expenditure targets

Federal PSDP 661 800 21% Allocation for National Highway (PRs188bn), power sector (PRs130bn), new gas development fund (PRs25bn) to supply gas to remote areas

Provincial PSDP 732 875 19% Pressure of surplus balance could lead to cuts Other 128 157 23% BISP up 13% to PRs115bn, while PRs6bn allocated under trade policy incentives Provincial surplus 337 339 1% Based on higher revenue transfers, we await provincial budgets announcement to comment further Consolidated deficit -1,278 -1,276 0% Highly dependent on effective implementation of subsidy elimination & revenue targets

% of GDP -4.3% -3.8% Source: MoF, KASB

R= Revised; B=Budgeted

Chart 4: Planned rise in Tax/GDP from 12.6% to 12.9% in FY17E

52.0%

54.0%

56.0%

58.0%

60.0%

62.0%

64.0%

66.0%

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

B

FY17

B

Source: MoF, Budget in Brief FY16

Chart 5: PSDP breakup (PRsbn)*

Transport , 229

IDPs, 100

Power, 157 32

Gas , 25HEC, 21

National Health, 35

Others, 201

*Federal Portion only

Source: Budget in Brief FY16


Financing of the deficit: The budgeted PRs50bn under privatization proceeds indicate renewed commitment towards the strategic sale of state-owned enterprises, which hit a snag in FY16. Plans to finance the deficit point towards much greater reliance on domestic financing (where share of bank borrowing is projected to increase to 35% from 16% of the total deficit) compared to much lower 18% share of external financing vs 36% in FY16. This is mainly due to a jump in external loan repayments in FY17 to PRs585bn (US$5.5bn) from PRs395bn (US$3.8bn) in FY16. However, the plan to tap the global capital market remains on the table, whereby the government has targeted PRs106bn (US$1bn) Eurobond issue coupled with Rs79bn (US$750mn) Sukuk bond. The government also expects US$2bn loan from a consortium of commercial banks. The total public debt/GDP is projected to be reduced to 61.4% in FY17 vs 64.8% in FY16E, where external debt/GDP has gradually been declining of late (at 23.6% in Mar-16 from 24.1% in FY14).

#4-Government persists on documentation drive As part of its drive to broaden tax net, the government has persisted on its drive to increase the cost of not paying the taxes by building on the measures for increased documentation announced last year. Following points are noteworthy;

• Not only has the government increased the distinction for tax-filers and non-tax filers, the scope of the scheme has been further broadened, to include capital markets (mutual fund investment, capital gains, and dividend income), insurance, autos and other sectors. As per media reports, the government has covered 30 new areas in the budget where the distinction due to higher withholding tax has been introduced.

• Despite opposition from the traders and retailers, the government has persisted on

imposition of 0.6% Withholding Tax on banking transaction exceeding PRs50,000 for non-filers. The introduction of this measure last year resulted in disintermediation for banks at a limited scale. The government has shown flexibility by introducing an amnesty scheme which failed to produce the desired results as only 10,000 new tax filers availed the benefits under the scheme. We expect the traders, wholesalers and retailers, the three segments which feel the pain of higher tax due to heavy reliance on banking channels, to return to negotiating table on this issue.

Chart 8: Planned rise in Tax/GDP from 12.6% to 12.9% in FY17E, &16.1% in FY19E

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

RFY

17B

FY18

BFY

19B

Source: MoF

Chart 6: Banks are expected to finance PRs458bn (35% of total) in FY17

-500

0

500

1000

1500

2000

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

R

FY17

B

External Bank borrowing Non-bank Privatization Source: MoF, Budget in Brief FY16

Chart 7: Realistic growth build-in for direct taxes collection (PRsbn)

0%

10%20%

30%40%

50%

60%

FY11

FY12

FY13

FY14

FY15

FY16

R

FY17

B

Direct tax Indirect tax

Source: Budget in Brief FY16


• Three main segments of economy-agriculture, services, and real estate largely remains outside the tax ambit .The introduction of fixed area-based tax on real estate builders and developers is likely to be passed on to buyers and may not capture the income of the entities involved in the activities.

#5-Corporate earnings: encouraging backdrop for medium-term growth We eye limited near-term impact on corporate earnings from announced budget measures. The extension in Super Tax for one more year will likely chip off earnings by 4-5% for CY16/FY16. We project corporate earnings to decline 2% in CY16 and grow by 10% in CY17. Beyond the impact of Super Tax, we contend FY17 Budget has laid down an encouraging policy backdrop for the corporate earnings growth over the medium-term. Key elements in the policy that particularly interest us are (1) a much-needed policy focus on agriculture, and export, (2) a number of incentives for investment, and (3) continuation of heavy development spending program. We believe future measures effectively remove potential areas of earnings downside and set the stage for potential earnings surprises ahead, in our view. Overall measures contained in the Budget reinforce our positive outlook on cement (infrastructure & investment focus), select fertilizer (pro agri), autos (pro-agri), and IPPs (energy subsidy). Budget is largely a non-event for E&P and Oil & Gas stocks (except for drag on earnings from Super Tax) and banks (no major surprise). Sectors where the budget measures may have negative impact on margins or bottom-line are Steel, Insurance and consumer. .

Market reaction: Budget increases our liking Despite disappointment on not seeing many of proposals of Pakistan Stock Exchange in the FY17 budget, we believe a pro-agriculture and pro-export budget is likely to draw a positive reaction from the market. A 3% performance of the market in one-week ahead of the budget reflects market anticipation on the potential budgetary measures. With no major negative surprise in the budget and largely positive outlook for corporate earnings growth, we believe market valuation (CY16E P/E of 9.4x and D/Y of 5.9%) have further room for expansion. That said, with budget out of way, we believe market focus will entirely shift to upcoming MSCI decision on potential reclassification of Pakistan from MSCI Frontier Market to MSCI Emerging Market. The decision, due on 14th June, may complement the market excitement on the budget and lead to sustained period of heightened activity.

Chart 9: KASB Universe Corporate Earning Growth (%) – 2005 - 2016E

‐20.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2016

Source: KASB Research

Chart 10: Sectors Growth (CY15E –CY16E)

-30%-20%-10%

0%10%20%30%40%50%60%

Chem

ical

Con

sum

ers

Cem

ent

KSE-

100

Pow

er

Auto

s

Text

iles

Ferti

lizer

Bank

s

Telec

om

Oil a

nd G

as

2016 2017



Direct measures for the market Changes in Capital Gains Tax- The government has continued to tinker with the capital gain tax structure in the Budget-FY17. However, unlike last year, the changes are not drastic and should be easily acceptable to market participants, in our view. Many of the pre-budget proposals given by the Pakistan Stock Exchange have failed to find any favor in this budget. We don’t expect any major disappointment among investors as expectations were not running high on potential materialization of proposal. Meanwhile, higher tax rate on dividend income has not materialized. Key measures from the market perspective are enumerated below.

The government has made two major changes in CGT and dividend tax regimes. Firstly, the exemption from tax on capital gains arising from securities with holding period of more than 48-mths has been withdrawn and a flat tax rate for holding period beyond 48-mths has been introduced at 7.5%. Secondly, distinctions for filers and non-filers have been introduced for both CGT and tax on dividend. Following table details the new tax regime.

Table 6: Capital Gains Tax on Disposal of Securities (%)

*Holding Period FY11 FY12 FY13 FY14 FY15 FY16 FY17 Filers 10.0% 10.0% 10.0% 10.0% 12.5% 15.0% 15.0% <6 Months Non-Filers 18% Filers 7.5% 8.0% 8.0% 8.0% 12.5% 15.0% 15.0% 6 Months - 1 Year Non-Filers 18% Filers - - - - 10.0% 12.5% 12.5% 1 Year - 2 Years Non-Filers 16% Filers - - - - - 7.5% 7.5% 2 Years - 4 Years Non-Filers 11% Filers - - - - - - 7.5% > 4 Years Non-Filers 11%

Source: Finance Bill

Super Tax extended: The government has extended the applicability of Super Tax for one more year as hinted by the Finance Minister well ahead of Budget announcement. Just to recall, the amount collected in Super Tax, levied at 3/4% of non-banking and banking companies, will be used for the rehabilitation of Internally Displaced Persons (IDPs) due to ongoing security operation. The Super Tax will drag corporate earnings by 4-5%. The scope of Super Tax encompasses all sectors, including E&Ps, IPPs and Textile. Importantly, the

Chart 11 : KASB Universe Corporate Earning Growth (%) – 2005 - 2016E

Jan‐05

Jan‐06

Jan‐07

Jan‐08

Jan‐09

Jan‐10

Jan‐11

Jan‐12

Jan‐13

Jan‐14

Jan‐15

Jan‐16

6

8

10

12

Price


Chart 12 : KSE100 Index Performance

‐100 200 300 400 500 600 700 800 900

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Jan‐13

Mar‐13

May‐13

Jun‐13

Aug‐13

Oct‐13

Dec

‐13

Feb‐14

Apr‐14

Jun‐14

Aug‐14

Oct‐14

Dec

‐14

Feb‐15

Apr‐15

Jun‐15

Aug‐15

Oct‐15

Dec

‐15

Feb‐16

Apr‐16

Jun‐16

Vol (shrsmn) (rhs) KSE100 Index



new tax will be applicable on tax year 2016, which suggests the required adjustment has to be made in Jun-16 earnings.

Uniform tax for insurance sector: From market perspective, the changes in the tax treatment of capital gains and dividend income can have implications for liquidity flows from banks, a significant player in the stock market. The changes (fully explained below) have reduced relative attractiveness of equity asset class for banks. This is particularly important for banks’ investment in IPPs, in which returns are primarily contingent on dividend distribution. Interestingly, dividend income on IPPs is taxed at 7.5% vs 10% for other sources. It remains to be seen if the increase in CGT to 35% across various holding period will be applicable on past capital gains.

Tax incentives for enlistment: The government has ignored the long-standing demand of bourses of creating a permanent tax differential for listed and unlisted companies in order to attract more listing and deepening of equity market. However, demand for extension in period for tax credit has been met with 20% tax credit now available for two years (earlier: one year)

Withholding tax on dividend increased for non-filers: Withholding tax on dividend distribution is proposed at 20% (earlier 17.5%) for non-filer. Meanwhile, the government has introduced separate slabs for capital gain tax on non-filers (see above). We believe the measure is likely to produce initial jitters among investors however the increase in tax is unlikely to detract investors from stock market.

Revision in corporate tax rate to 31%: The revision is part of scheduled reduction in corporate tax rate to 30% by 2018 and as such, built in our estimates.

FED removed on stock trading; withholding tax increased: The government has streamlined taxation on stock trading and has provided exception from Federal Excise Duty as the provincial government has already imposed 14% sales tax on such financial services. The measure provides clarity on the double taxation though there will be no impact on the transaction cost as only sales tax has been built into share trading cost. In a related development, the withholding taxes on share trading has been increased to 0.02% from 0.01% levied on value of share trading .This will have a nominal impact on share trading cost.

Three key areas of criticism

1. An apparent focus on conventional areas for tax collection while untapped areas (real estate, services and agriculture) are still outside the tax ambit despite few measures announced in the budget.

2. Some of the tax measures for real estate and services sectors announced in the budget may fan friction between provinces and the federal government, as provinces claim authority in these areas under 18th Amendment.

3. Political noise on allocation of development spending in different provinces.


Table 7: KASB Universe– Summary

Price Price Rec EPS (PRs) EPS Gth (%) PE (x) PBV (x) DY (%) ROE (%)

SYM Objective 3-Jun-16 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E KASB Universe* (1.9) 9.8 9.4 8.6 1.5 1.4 5.9% 6.5% 18.3% 17.6% OGDC 144 143.4 Buy 14.36 15.61 -29.23 8.72 9.99 9.19 1.28 1.19 3.8% 4.5% 13% 13% PPL 195 156.26 Buy 12.94 16.72 -27.67 29.16 12.07 9.35 1.49 1.37 3.8% 5.1% 13% 15% POL 360 357.05 Buy 33.29 37.58 -6.91 12.89 10.73 9.50 2.74 2.63 9.0% 10.1% 25% 28% MARI 1046 963.64 Buy 48.03 86.12 -6.27 79.29 20.06 11.19 4.14 3.06 0.4% 0.4% 23% 31% NRL 265 381.13 Buy 34.81 35.45 27.57 1.84 10.95 10.75 0.99 0.92 1.3% 1.3% 9% 9% PSO 438 382.7 U/R 34.26 49.52 34.20 44.54 11.17 7.73 1.07 0.94 1.0% 2.7% 10% 13% APL 467 434.3 Buy 36.20 45.20 -8.64 24.86 12.00 9.61 2.64 2.50 8.1% 8.2% 22% 27% DGKC 215.0 181.07 Buy 20.56 21.77 18.00 6.00 8.81 8.32 1.15 1.04 3.3% 3.3% 13% 13% KOHC 303.3 266.19 Buy 30.25 33.01 40.71 9.14 8.80 8.06 2.92 2.35 4.1% 4.5% 38% 32% LUCK 621.0 619.49 Buy 55.01 61.72 29.66 12.19 11.26 10.04 2.37 1.93 1.8% 1.9% 23% 21% MLCF 105.7 97.97 Buy 9.21 10.79 40.60 17.18 10.64 9.08 2.44 2.06 3.1% 4.1% 25% 25% PIOC 124.3 108.78 Buy 11.13 13.55 4.00 23.00 9.80 8.00 2.58 2.19 6.0% 7.4% 30% 30% CHCC 110.0 115.58 Buy 8.39 11.15 15.04 32.85 13.78 10.37 2.27 1.99 3.5% 4.3% 17% 20% FFC 96 117 U/P 9.60 10.55 -27.18 9.96 12.19 11.09 5.67 5.71 8.5% 9.4% 46% 51% FFBL 53 54.3 Neutral 3.49 3.52 -19.67 0.65 15.55 15.45 3.89 3.88 6.9% 6.9% 24% 25% EFERT 97 68.91 Buy 10.24 9.79 -9.30 -4.42 6.73 7.04 1.84 1.67 8.7% 8.7% 29% 25% ENGRO 363.5 343 Buy 34.49 36.00 31.06 4.38 9.94 9.53 2.02 1.67 6.6% 7.0% 23% 19% FATIMA 41.3 31.6 Buy 4.11 4.76 -6.66 15.71 7.68 6.64 1.36 1.21 6.3% 7.1% 19% 19% INDU 1140 929.96 Buy 135.90 135.52 17.25 -0.27 6.84 6.86 2.62 2.31 9.4% 9.5% 41% 36% PSMC 225 415.03 U-R 36.45 29.17 -20.72 -19.99 11.39 14.23 1.47 1.36 1.7% 1.7% 13% 10% NPL 47 51.06 U-Perf. 7.76 7.80 -11.77 0.48 6.58 6.54 1.40 1.29 8.8% 8.8% 22% 21% NCPL 42 50.25 U/P 6.37 6.84 -24.35 7.43 7.89 7.35 1.23 1.15 12.9% 10.9% 16% 16% HUBC 108 118.44 Buy 10.96 13.42 28.70 22.49 10.81 8.82 4.26 3.89 8.4% 9.7% 40% 46% KAPCO 81 87.83 Neutral 11.34 12.49 9.25 10.15 7.75 7.03 2.70 2.62 11.4% 12.5% 35% 38% EFOODS 142 166.6 Neutral 5.98 8.24 35.84 37.93 27.88 20.21 7.97 6.14 1.2% 1.2% 32% 34% ICI 590 449.27 Buy 37.55 45.20 52.35 20.38 11.96 9.94 2.74 2.33 3.1% 3.7% 25% 25% ABL 118 84.31 Buy 14.08 15.35 6.61 9.01 5.99 5.49 1.03 0.96 8.3% 9.5% 18% 18% NBP 48.75 53.98 U/P 6.30 6.86 -17.02 8.77 8.56 7.87 0.66 0.66 9.3% 9.3% 8% 8% MCB 210.86 216.37 Neutral 22.19 24.86 -0.86 12.06 9.75 8.70 1.60 1.52 6.9% 7.4% 17% 18% HBL 195 178.95 U/P 21.87 22.25 -8.64 1.73 8.18 8.04 1.37 1.30 7.8% 7.8% 17% 17% BAFL 28.66 24.75 Neutral 3.79 3.54 -19.97 -6.42 6.53 6.98 0.78 0.75 7.7% 7.2% 12% 11% UBL 207 172.36 Buy 20.41 23.00 -6.05 12.69 8.44 7.49 1.38 1.28 8.1% 9.0% 16% 18% PAEL 106 63.62 Buy 8.07 9.03 22.87 11.88 7.89 7.05 1.81 1.52 1.3% 3.8% 26% 23% CPPL 370 342.97 Buy 31.22 36.42 42 17 9.99 8.57 2.94 2.37 2.8% 3.3% 36% 31% MUGHAL 90 71.61 Buy 8.03 9.55 39.96 18.93 8.92 7.50 1.98 1.65 2.8% 3.3% 25% 24% NML U-R 120.82 U-R 26.97 29.23 3.78 8.37 4.48 4.13 0.62 0.58 3.3% 3.3% 14% 14% PTC U-R 15.95 U-R 1.30 1.30 -11.67 0.00 12.24 12.24 0.65 0.65 0.0% 0.0% 5% 5% *Price Objectives have been determined based on DCF methods for standalone companies, and SOTP method for holding companies except banks (Justified P/BV) and Oil Marketing Companies (Blend of P/E and DCF) Source: KASB Research


Cements: Pro-growth measures Budget Impact: Positive Losers: None, Winners: All PSDP allocation up 20% The government has jacked up its FY17 target for development spending by 20% to PRs1.675trn (Federal component: PRs800bn, up 21% YoY against revised FY16 target of PRs661bn) as progress on many projects under CPEC accelerates. We believe, the higher PSDP, largely dominated by infrastructure and construction projects will set the stage for yet another year of strong double-digit growth in cement off-take amid stable demand, pricing and investment outlook in the sector. However, fiscal pressure, given a lower deficit target of 3.8%, might keep the actual disbursements in check.

FED increased from 5% on MRP to PRs50/bag FED calculation mechanism for levying tax on cement has been changed from 5% of the retail price (PRs25-27/bag) to a fixed rate of PRs50/bag. We believe cement companies will be able to comfortably pass-on the impact of higher FED to end consumers (net impact on prices of 5-6%) and hence will not hurt cement industry profitability.

Custom duty on coal has been reduced; raised for clinker The custom duty on import of coal has been reduced to 5% reversing the 1% increase in the duty (as levied in the mini-budget). This reduction in import duty will lead to coal import being categorized under the revised slab of 3% (as 2% and 5% slabs merged to one slab of 3%). Our crude estimates show a muted impact of 0.2-0.6% in primary margins for the industry. Moreover, the duty on import of clinker has been raised from 2% to 11%; which will not have any material impact for the industry, in our view, given minimal clinker imports.

3% Super tax Super tax of 3%, levied in FY15 as a one-time tax, has now been extended and will be levied for FY16 as well; however, the only change this time will be the exclusion of depreciation and carry forward tax losses for the purpose of tax calculation.

Inter-corporate dividends will now be subject to taxes The benefit of group taxation relief is proposed to be restricted to percentage of holding whereby the subsidiary will now be able to surrender its assessed losses to the parent company only up to the percentage of its holding in the company. The exemption from inter-corporate dividend taxation for companies exercising group relief will also be withdrawn. We believe LUCK and DGKC will face the brunt of the same amongst KASB cement universe.

Incentives for capital investment The government has announced several measures to promote capital investments, including: (1) extension in BMR tax credit facility from FY16 to FY19, (2) the condition of100% fresh equity for claiming tax credit on expansion of existing plant has been reduced to at least 70% equity, while the timeline for the same has also been extended from FY16 to FY19, and (3) exemption on investment in green-field industrial undertakings has also been extended up to FY19.

Other measures In some other pro-infrastructure development measures, government has enhanced the limit of mark-up on house building and export refinancing rate has been reduced to 3% from 3.5% earlier, which will provide boost to private infrastructure activity, in our view. On a rather negative side, a separate tax regime for Developers of plots and Builders of residential, commercial and other buildings has been proposed, whereby tax will be charged on the basis of geography and size of plot.


Fertilizers – A number of incentives to improve off-take in FY17 Budget Impact: Positive Losers: None, Winner: Engro, Efert, FFC, FFBL, Fatima and AGL

Budgetary proposals for the upcoming fiscal year are designed to provide respite to the farmer through lower input costs and higher liquidity. Reduction in the prices of fertilizers and pesticides through reduction in GST and enhanced availability of credit would positively affect demand for fertilizers in FY17, in our view. We expect the volumetric growth to lead to a substantial reduction in current inventory levels of urea and improve earnings of the manufacturers. As per our calculations, fertilizers will have to reduce prices by PRs50/bag, which will negatively affect their margins on urea and DAP. However, once the GST and subsidy is effective, the improvement in off-take will positively affect the profitability of the players due to reduction in inventory levels. On the basis of relatively better margins on concessionary gas, we are selective in our liking for EFERT, FATIMA and ENGRO.

Reduction in GST + subsidy disbursement to lead to reduction in urea and DAP prices

The govt. has announced reduction in urea prices from current prevailing levels to PRs1400/bag for the farmers. We believe the manufacturers will bear PRs50/bag reduction in urea prices from ex-factory prices of PRs1750/bag. The remaining differential between urea prices of PRs1740/bag (incl. dealer margin) and the targeted PRs1400/bag would be achieved through GST reduction of 12% and subsidy of ~PRs13.2bn. As per our calculations, (1) the reduction in GST would reduce farmer prices to PRs1566/bag, which translates into federal govt. burden of PRs14bn on 4mn tons off-take, and (2) subsidy of PRs13bn would reduce farmer prices further to PRs1400/bag. The retention prices of manufacturers are expected to decline by PRs35/bag. Improved demand would reduce domestic inventory, which was hovering around ~1.45mn tons at the end of May-16. However, considering the fact that the GST and subsidy are effective from 1’Jul-16, we might observe a further increase in inventory levels in Jun-16 before they start decreasing.

In case of DAP, a subsidy of ~PRs10bn has been allocated. This will lead to decline in prices of PRs250/bag on offtake of 2mn tons in FY17. However, manufacturers will also curtail prices by PRs50/bag. We believe the subsidy and price cut would bring farmer prices to ~PRs2500-2700/bag which would be positive for importers (including Efert) and FFBL due to the strong demand and differential in landed cost and domestic prices.

Other concessions to boost outlook further

We believe additional measures such as elimination of GST on pesticides, subsidy on electricity used by tube wells and higher credit availability serve as an icing on the cake for the farmers. These measures would further improve farming conditions.

Super-tax to negatively impact earnings in CY16

We believe imposition of super tax of 3% would negatively impact the earnings of the manufacturers in CY16. Since profitability has been affected by high inventory levels in the last couple of quarters and is expected to be weak in 2Q16 as well on account of the same, we believe the impact of super tax would not be as strong as in CY15. After assuming a low off-take for Jun-16, our calculations suggest an EPS impact of PRs0.45/0.20/0.35/0.15 for FFC/FFBL/Efert/Fatima.


Textile – No-tax no refund a major relief Budget Impact: Positive Losers: None, Winners: All textile exporters Extension of relief measures: Extension of relief measures announced in the last budget like reduced Export Refinance Rates, continuation of duty drawback at various rates on textile products, and exemption of CD on import of machinery bode well for textile sector. Long-standing demand met: The government has yielded a major, long-standing demand of textile and other export-oriented sectors and levied no-tax, no-refund policy (zero rating of textile exports). The measure will allow textile companies to pay no GST at the time of import or local sourcing of raw material and energy fuels hence, relieving the sector from the hassle of going through the GST refund process. Local sales of textile goods will continue to be taxed at 5%. Stuck-up claims to be cleared: Furthermore, the government has promised to refund stuck-up GST claims by Aug-16. The total stuck-up claims of textile industry are quoted at PRs49bn (total refund claims of PRs110bn). Direct benefit to earnings: The simplification of tax process on raw material and energy consumption will result in direct relief on balance sheet (reduced working capital, hence low borrowing) and profit (reduced financial charges). Nishat Mills and Nishat Chunian Ltd carry PRs1.2bn and PRs0.7bn as refund claims from the government as of Jun-15. For the two companies, the zero-rating could bring PRs0.18/sh and PRs0.17/sh relief on earnings. Zero rating is open to misuse: Contrary to pre-budget expectation, the government has not reduced the levy on gas (Gas Infrastructure Development Cess) or promised any major benefit in the form of rebate on foreign exchange on early surrender of export proceeds. The zero-rating regime is susceptible to misuse as seen in the past. It remains to be seen what safeguard measures the tax authorities will enforce to avoid misuse.

OMCs: Non-event Budget Impact: Neutral Losers: None, Winners: APL Power subsidy reduction can solve issues, albeit timeline is uncertain

Budget 2016-17 does not carry any specific major impacting the downstream sector. As details on fiscal account suggest, expectation regarding any settlement of stuck-up receivables have once again failed to materialize. Government plans to reduce power sector subsidy by another 39% in this year, with major change coming from subsidy reduction for Karachi Electric Consumers.

Duty slabs increased for petrol and diesel: The changes in the duty slabs will impact the ex-refinery prices of diesel, petrol and furnace oil. Custom duty on diesel has been increased to 11% from 10% while CD on petrol will see 1% increase to 3%. Custom duty on furnace oil is likely to reduce to 3% from 5%. The changes in duty slabs will not impact the margins of OMCs. We do not see any reason for the government to lift Deemed Duty on diesel for refineries.

LNG imports likely to ramp-up: Completion of power projects by Dec-16 may see increase in LNG imports by PSO to 60 cargos (4.5mn ton per annum) from current 48 cargos (3.9mn ton), up 25% which may benefit PSO.

Government has increased allocation for transportation infrastructure, including projects for China Pakistan Economic Corridor, to PRs188bn in Budget2016-17. Among the listed companies, Attock Petroleum Ltd (APL) may benefit from increased bitumen demand which is used in road construction.


Power – Focus remains on new capacity Budget Impact: Neutral Losers: None, Winners: None Emphasis on boosting investments in new plants

We view the FY17 budget to be neutral for the power sector. The addition of power generation capacity continues to remain the major focus for the government with: (1) 16% higher PSDP allocation of PRs130bn as compared to PRs112bn last year for energy sector, (2) reduced subsidy burden (down 39% YoY), and (3) planned addition of 10,000MW electricity to the national grid by Mar-18. Moreover, beyond that Dasu, Diamer-Bhasha, Karachi Civil Nuclear Energy and many other projects are in the pipeline including coal-based power projects under CPEC. Reduced subsidy burden and focus on increasing transmission and distribution network coupled with addition of electricity generation capacity bode well for the sector. However, the government has stopped short of announcing any framework for reducing the existing stock of circular debt. The imposition of super tax will also be applicable on IPPs, in our view.

Banks – Barred from any specific measures Budget Impact: Neutral Winners: None; Losers: None Unlike last year, this year’s budget has proved to be largely neutral for the banking sector as no major specific measure has been announced. The imposition of 4% super tax on bank’s earnings will likely chip off bank’s earnings by 6.1% in CY16. The government’s drive to broaden the tax net via increasing cost of non-compliance in the form of withholding tax on banking transaction or cash withdrawal may impact bank’s asset growth, and deposit mix. However, the impact of the same was quite limited last year. The FY17 budget is unlikely to have any major bearing on energy and food prices and should be termed as non-inflationary. The macro backdrop for the banks continues to improve as the government now targets higher GDP growth. Government’s focus on agriculture and promoting investment bodes well for banking sector advances and may provide a much-needed avenue for placement of assets over the medium-term. The government targets to raise PRs453bn funds from banks for deficit financing target which may account for up to ~43% of likely asset growth in FY17; hence, the need to grow advances to place expected asset addition remains.

E&Ps –Super Tax drag continue even in low earnings year Budget Impact: Neutral Losers: NA, Winner NA The details in the relevant section of the proposed Act suggest that the Super Tax will also be applicable on E&Ps. We estimate negative earnings impact for OGDC, PPL, POL and Mari of 4-5% for FY16E.

Power sector reform remains important for providing certainty on cash flow outlook of both OGDC and PPL. The projected reduction in power subsidy by 33% is significant and if materialized can provide further relief to E&P companies from circular debt. We maintain our overweight stance on E&Ps sector with Buy rating on all four E&P companies.


Autos – Largely a non-event Budget Impact: Neutral Losers: None, Winner: None As expected the long term auto policy recommendations have been incorporated in the FY17 budget. The implementation of the auto policy is positive in terms of reduced CKD duty and favorable environment for new entrants. We highlight that absence of any proposal on relaxation in used cars’ import policy comes in as a relief, whereby used cars imports continue to be on the rise, growing by 65% YoY to 41,507units in 10MFY16. We believe extension of the pro-agri measures are likely to have positive spillover on auto industry sales driven by potentially higher rural demand.

Advance tax on non-filers at the time of auto-financing

We believe the proposal of 3% advance tax to be collected by the financial institutions at the time of financing/leasing of the vehicle could be slightly negative for financing-backed sales (approx. 35%-40% of total industry sales). The auto sales through consumer financing have seen significant increase in the past 2-years (reportedly from 10-20%) on the back of low interest rates and new auto-financing products introduced by banks. However, several pro-agriculture income measures suggest demand from rural areas should gain traction in FY17.

Non-event for tractors The budget is largely a non-event for tractor industry, with no change in GST or CBU duties. Recall tractor sales have jumped 37% YoY in 10MFY15, post reduction in GST from 17% to 10% in previous budget.

Good news for tyre manufacturers Removal of 10% regulatory duty on import of bead wire, used should be positive for tyre manufacturers (GTYR).

Chemicals – Lower custom duty to benefit margin Budget Impact: Neutral Losers: None, Winners: ICI Lower custom duty on coal and MEG The reduction in the Custom duty slabs is expected to reduce the CD on thermal coal to 3% from 6% last year. Duty on PTA, a major feedstock for polyester, will also be reduced to 3% from 4% previously. Post commissioning of two additional coal boilers at the start of FY17, coal has become one of the major sources of fuel for ICI. Therefore the earnings impact for ICI will be fairly modest and should provide some relief to its ailing PSF segment, in our view.

Consumers – adverse taxation changes Budget Impact: Negative Losers: Nestle, Efoods, Nurpur and Shakargunj, Winners: None

Removal of zero-rating would make dairy firms unable to claim refunds on GST paid on inputs (except on infant use products). Perhaps in anticipation of this measure, dairy producers had already passed on the impact to final consumers by increasing prices before the budget by PRs5/ltr. However, we believe the firms have not yet accounted for the impact of imposition of regulatory duty on powdered milk. Thus, the prices of brands such as Everyday and Tarang may be increase post budget. Any strategy by major players such as Efoods and Nestle will be undertaken after understanding the implications of higher prices on volumetric growth of the brands. Overall, we expect either margins or volume to be negatively affected by these measures.

Chart 13: Advances for auto-financing (PRs bn) have doubled in the past 3 years.

-

20

40

60

80

100

120

Sept-

12De

c-12

Mar-1

3Ju

ne-1

3Se

pt-13

Dec-1

3Ma

r-14

June

-145

Sept-

14De

c-14

Mar-1

5Ju

ne-1

5Se

pt-15

Dec-1

5Ma

r-16

Source: MoF


FED raised on cigarettes and beverages further

The govt. has proposed to increase FED on cigarettes and carbonated water (beverages) further. For carbonated water FED has been proposed to be increased to 11.5% from the prevailing 10.5%. On cigarettes the new rates will be as follows: for prices greater than PRs3,435/1,000 cigarettes, the revised rate is PRs3,705/1000 cigarettes and for prices greater than PRs1,534/1000 cigarettes, the revised rate is PRs1,649/1000 cigarettes.

Relief on CD on machinery

The govt. has proposed reduction in CD on cool chain machinery from 5% to 3%. The measure will be positive for companies engaged in meat processing such as Al-Shaheer Corporation and FFBL. Furthermore, it has also been proposed to reduce CD on machinery used in dairy, livestock, fish farming and poultry sectors from 5% to 2% which is good for investments in these sectors. CD has also been proposed to be removed on fish and shrimp feed. Steels Melters– Size of GST increase to decide the EPS drag Budget Impact: Negative Losers: All, Winners: None We see the FY17 budget to have negative impact on the steel sector, where positives emanating from higher PSDP allocation and lower custom duty (CD) on billets will be offset by the negative impact from higher CD on scrap and higher GST.

PSDP allocated at PRs1.675bn, up 20%YoY: We highlight that the handsome PSDP allocation (PRs1.675bn up 20%) including heavy infrastructure and development projects coupled with CPEC, will continue to provide major impetus for steel demand growth going forward.

Customs duty on billets & scrap: As per the FY17 budget, the government has merged CD slabs of 2% and 5% into one slab of 3%. The development will increase the CD on imported scrap to 3% from 2% earlier, which will increase cost of producing billets by PRs300-350/ton for steel melters. However, the development will reduce the CD on imported billets and Hot-rolled coil to 3% from 6% previously, resulting in PRs1000-1100/ton savings for flat rolled players (International steel Ltd and Aisha steel) and long rolled steel re-rollers (Mughal & Dost steel) directly importing billets rather than producing internally.

Enhanced fixed rate basis GST: The government has hinted to enhance the fixed rate basis sales tax for steel-melters and re-rollers. Long-rolled steel producers currently pay a fixed rate basis sales tax of PRs9 for each unit of electricity consumed. Although the increase in the rate is yet not clear we highlight a potential impact of PRs800-850/ton for long-rolled steel producers for each PRs1/unit increase in GST.

Insurance– axe falls on capital gains and dividend income Budget Impact: Negative Winners: None; Losers: all

The increase in tax rate for dividend income and capital gains will likely hurt earnings of both life and general insurance companies. Based on dividend income and capital gains booked in 2015, we estimate the impact of 10%-15% for Adamjee, New Jubilee Insurance and New Jubilee Life insurance. The government has announced a number of areas for tax credit for life/health insurance. Similarly, the finance minister has announced to start health insurance policy for poor and lower income with target of PRs9bn premium in 2016-17. Both the measures will have positive impact on industry growth.


Analyst Certification I, Mohammad Fawad Khan,CFA hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Fundamental equity opinion key Investment rating Total return expectation (within 12-month period of date of initial rating) Buy ≥ 20% Neutral ≥ 0% Underperform N/A Other Important Disclosures KASB Securities Research personnel (including the analyst(s) responsible for this report) receive compensation based upon, among other factors, the overall profitability of KASB Securities, including profits derived from investment banking revenues.

From time to time research analysts conduct site visits of covered companies. KASB Securities policies prohibit research analysts from accepting payment or reimbursement for travel expenses from the company for such visits. Investors should contact their KASB Securities representative if they have questions concerning this report.

This report may contain forward looking statements which are often but not always identified by the use of words such as “anticipate”, “believe”, “estimate”, “intend”, “plan”, “expect”, “forecast”, “predict” and “project” and statements that an event or result “may”, “will”, “can”, “should”, “could” or “might” occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Investments in general involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk.

This report may contain a short-term trading idea or recommendation, which highlights a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company. Short-term trading ideas and recommendations are different from and do not affect a stock's fundamental equity rating, which reflects both a longer term total return expectation and attractiveness for investment relative to other stocks within its Coverage Cluster. Short-term trading ideas and recommendations may be more or less positive than a stock's fundamental equity rating.

KASB Securities is aware that the implementation of the ideas expressed in this report may depend upon an investor's ability to "short" securities or other financial instruments and that such action may be limited by regulations prohibiting or restricting "shortselling". Investors are urged to seek advice regarding the applicability of such regulations prior to executing any short idea contained in this report.

Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned in this report. Investors in such securities and instruments effectively assume currency risk.

KASB Securities and Economics Research Mohammad Fawad Khan, CFA Pakistan Macro, Strategy & Banks +92 21 111 222 000 ext 330 [email protected]

Sarah Mazher Pakistan Macro & Autos +92 21 111 222 000 [email protected]

Syeda Humaira Akhtar Cements & E&P +92 21 111 222 000 ext 332 [email protected]

Aijaz Siddique Fertilizer, Consumers & Textile +92 21 111 222 000 ext 337 [email protected]

Asad Ali Chemical, Steel & Power +92 21 111 222 000 ext 331 [email protected]

Ahmed Hanif Technical +92 21 111 222 000 ext 383 [email protected]

M. Noman Mughal Library +92 21 111 222 000 ext 339 [email protected]

Shabana Iqbal Research Support +92 21 111 222 000 ext 339 [email protected]


KASB Securities may have issued and may in the future issue trading ideas or recommendations that are inconsistent with, and reach different conclusions from, the information presented in this report. Such ideas or recommendations reflect the different time frames, assumptions, views and analytical methods of the persons who prepared them, and KASB Securities is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this report.

This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of any securities. Neither KASB Securities, nor any of its analysts have any authority whatsoever to make any representation or warranty on behalf of the issuer(s). KASB Research Policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior to the publication of a research report containing such rating, recommendation or investment thesis.

In the event that the recipient received this report pursuant to a contract between the recipient and KASB Securities for the provision of research services for a separate fee, and in connection therewith KASB Securities may be deemed to be acting as an investment adviser, such status relates, if at all, solely to the person with whom KASB Securities has contracted directly and does not extend beyond the delivery of this report (unless otherwise agreed specifically in writing by KASB Securities). KASB Securities is and continues to act solely as a broker-dealer in connection with the execution of any transactions, including transactions in any securities mentioned in this report.

Budget FY17 - Reforms set to persist_ recovery in agri to lift 06-06-2016

Documents

Transcript of Budget FY17 - Reforms set to persist_ recovery in agri to lift 06-06-2016