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Karachi, June 06, 2016 (PPI-OT): Budget FY17 – Lacks ‘Rumble in the Jungle’
The fourth PML(N) budget retains its resolve of macroeconomic stability and growth tilt by stimulating laggard sectors like Agriculture (potentially lower fertilizer and pesticides prices) and export related sectors like Textile (zero rated) while also promoting a documented tax base. Picking up from last year, AKD Securities Limited is encouraged by the 21% higher Federal PSDP allocation (94% utilization in FY16E) which provides an increasing pivot towards infrastructure activities. That said, economic growth targets seem ambitious where a FY17B GDP growth target of 5.7% (FY16E: 4.7% despite an ailing agriculture sector) can be challenging (AKD estimate of FY17B GDP growth: 4.9%).
While stock market related taxation regime has been immaterially tweaked (measures largely aimed at non-filers), corporate related tax measures on: 1) Insurance (heightened incidence of taxation), 2) extension of the super tax regime for another year while widely expected includes a new provision which proposes to exclude Brought forward depreciation and business losses and 3) removal of tax exemption on inter-corporate dividends for companies availing group taxation relief can together materially impact business sentiments, in AKD Securities Limited’s view. In this backdrop, budgetary implications on the market should be neutral to negative where all eyes should now be focused towards the upcoming MSCI-EM reclassification announcement on Jun 14’16.
Macroeconomic Outlook: Economic targets seem to be ambitious where a FY17F GDP growth target of 5.7% can be challenging (AKD estimate of FY17F GDP growth: 4.9%) while a fiscal deficit target of 3.8% (FY16E: 4.3%) necessitates aggressive tax collection efforts. With external repayments starting next year, reliance on domestic sources for funding the deficit is likely to further exacerbate (nearly 82% of deficit financing in FY17B).
Picking up from last year, 21%YoY higher Federal PSDP allocation provides an increasing pivot towards infrastructure activities and energy sector development, both of key importance to propel economic growth going forward. However, on-going fiscal consolidation efforts can consequently give rise to concerns regarding necessary allocation for CPEC projects planned for completion by FY18B.
Implications – Major Taxation Developments: Proposed reduction in urea prices by ~PkR390/bag is a key positive enabling manufacturers to clear sizable inventory stockpiles (assuming negligible impact on net retention prices). Textiles should also benefit where recent budgetary measures (inclusion in the zero-rated tax scheme, ERF rates reduced by 50bps to 3.0%), in addition to availability of gas and exemption from load-shedding are likely to improve the operating environment.
On the flip side, sectors such as: 1) Food producers (removal from zero rating regime), 2) Cements (increase in FED on locally produced cement to a fixed rate of PkR50/bag), 3) removal of tax exemption on inter-corporate dividends for companies availing group taxation relief (e.g. ENGRO and DAWH) and 4) proposed taxation of investment income (dividend and capital gains) of Insurance companies at the corporate tax rate (31%) should together heighten the incidence of taxation and materially impact business sentiments, in AKD Securities Limited’s view.
Investment Perspective: With budgetary implications on the market expected to be neutral to negative in nature, AKD Securities Limited encourages investors to continue realigning portfolios towards Cements and Allied (robust offtake), Fertilizers and Textiles (positive budgetary implications) and Power (relatively attractive dividend yields). That said, with an election year soon approaching, sector allocations towards Banks offering growth themes (CPEC, diversified income base) and decent dividend yields along with Autos (introduction of new models) and the oil space (indirect benefit from a revival in Agri based sectors) providing diversification benefits should not be overlooked.