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AKD Quotidian about — A relatively focused Budget!

Karachi, June 13, 2013 (PPI-OT): Considering limited preparation time, the PML-N government’s FY14 Budget, delivered by Finance Minister Ishaq Oar comes across as focused on pushing through energy reforms (circular debt stock to be eliminated in 60 days) and reviving the privatization program with a view to curbing the fiscal deficit to 6.3% of GDP vs. 8.8% in FY13.

According to AKD Securities also laudable is the decision to continue with the previous government’s targeted support program, a welcome sign that the PML-N government is not looking to rescind previous positive steps. That said, much remains contingent on execution capability (revenue collection targets appear ambitious) as well as on the materialization of foreign assistance.

AKD Securities sees a generally positive impact from the market’s perspective due to lppt reduction in the corporate income tax rate (ex-Banks) and continued exemption from OMCs and Refineries from 1%turnover tax. Specifically, the high PSDP allocation spells positives for Cements while the Oil and Gas and Electricity sectors should continue momentum on resolution to circular debt. AKD Securities revised end-Dec’13 Index target is 23,300 points.

The Economy: With provisional FY13 GDP growth logging in at 3.6%, the FY14 Budget envisages achievable GDP growth of 4.4%. The total budgetary outlay for FY14 is PkR3,985bn, up 15%YoY, underpinned by an ambitious FBR tax collection target of PkR2,475bn (+23%Y0Y) leading to a fiscal deficit target of 6.3% of GDP.

While revenue collection (tax + non-tax) is highly contingent on execution capability and dependence on external sources (mci. privatization proceeds) will remain strong, key positives include planned 40%YoY reduction in tariff differential subsidies and high PSDP allocation of PkR1,155bn given the myriad backward linkages of the construction industry.

The Market: No change to the CGT regime is a key positive. Although turnover tax increase to 1% will hurt specific sectors, reduction in corporate income tax rate (ex-banks) to 34%, which is proposed to be gradually reduced to 30% is a key positive in the broader context where the AKD Universe (ex-banks and EandP) should see EPS estimate upgrades of 1%- 2% across FY14F/FY15E Other noteworthy measures include mandating dividend income for companies as final tax and withdrawal of tax exemption on specie dividends (e.g. bonus issues).

In AKD Securities views, initial market movement will track sector-specific developments with attention to soon turn to the Jun 2113 MPS, IMF-Pakistan talks at month-end and the upcoming energy reform plan. AKD Securities expects foreign investors to remain engaged with the Pakistan Market with relatively undemanding valuations (FY14F PIE: 7.Bx) underpinning AKD Securities revised end-Decf13 Index target of 23,300 points although AKD Securities cautions that the market could witness near-term volatility as divergent sector themes come into play.

Sectors: A mixed bag – AKD Securities sees clear positives for Cements (big PSDP allocation) while OMCsl Refineries may see a relief rally due to exemption from higher turnover tax (no change in the specific clause of the Income Tax Ordinance related to oil and gas exemptions).

OMCs, Refiners and Gas TandD companies will continue to be subject to 0.5% turnover tax. Sectors that appear largely unaffected include Index heavyweights EandP and Banks as are Telecoms, Textiles and Electricity. AKD Securities sees negatives at the margin for Fertilizers (high urea import subsidy) and Autos (higher taxes on new registrations).

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