Budget FY 16. June 2015

Transcription

1 Budget FY 16 June 2015

2 Economic Targets- From Stabilization to Growth GDP growth target for FY16 set at 5.5%. The last time GDP growth was at this level was in FY07. Long term sustainable GDP growth is targeted at 7.0% by FY18. Tax revenue budgeted to increase by 17% in FY16. Fiscal deficit for FY16 is targeted at 4.3% compared to 5.0% in FY15. GoP is also targeting PKR1.5tn expenditure under the National Development program (Federal plus Provincial) for FY16, with PKR700bn earmarked as the Federal PSDP. After the lowest inflation in last 11 years in FY15, the govt targets inflation to be 6% in FY16. Subsidies budgeted to decline by 43% in FY16. Key Indicator FY15 (P) FY16 % Change GDP Growth 4.2% 5.5% 30% Fiscal Deficit 5.0% 4.3% -14% Inflation 4.6% 6.0% 30% Federal PSDP (PKR-Bn) % Gross Revenue (PKR-Bn) 3,952 4,313 9% Tax to GDP 10.6% 11.1% 5% Investment to GDP 13.5% 16.5% 22% Subsidies % Tax Revenue 2,910 3,418 17% Sectors (PKR-Bn) - PSDP FY16 Power and Water 142 Dasu Hydro Power Project 52 Land of Diamer Bhasha Project 21 Nelum Jhelum 11 Tarbella IV 11 Guddu 5 NHA 160 Karachi-Lahore Motorway 21 Multan Sukhar Section 61 Sukhar Hydrabad 11 Bus Transit Karachi 16 Railways 41 PM Youth Program 20 TDP's 100 China Pakistan Economic Corridor 48 Education 21 Total PSDP 700 Source: Ministry of Finance *Provisional based on 11MFY15 figures 2

3 FY16 Budget Snapshot Budget Revenue Fy15 Fy16 PKR Billion Year to June Budget Revised +/- %GDP Budget %GDP Tax Revenues 3,129 2,910-7% 10.63% 3, % FBR Revenues 2,810 2,605-7% 9.51% 3, % Direct Taxes 1,180 1,109-6% 4.05% 1, % Indirect Taxes 1,630 1,496-8% 5.46% 1, % Other Taxes % 1.11% % Non-Tax Revenue 816 1,042 28% 3.81% % Dividends % 0.30% % PTA/(Surplus & 3G Licences) % 0.22% % SBP Profits % 1.46% % Markup (Provinces/PSEs) % 0.28% % Defense receipts % 0.75% % Oil/Gas Revenues % 0.35% % Foreign Grants % 0.16% % Other non-tax % 0.28% % Gross Revenue Receipts 3,946 3,952 0% 14.43% 4, % Less: Provincial Transfers (1,720) (1,575) -8% -5.75% (1,849) -6.03% Net Revenue Receipts 2,225 2,378 7% 8.68% 2, % Budget Expense & Deficit Fy15 Fy16 PKR Billion Year to June Budget Revised +/- %GDP Budget %GDP Current Expenditure 3,130 3,185 2% 11.63% 3, % Interest Payement 1,325 1,270-4% 4.64% 1, % Defense % 2.63% % Subsidies % 0.89% % Salary and Pension (Gov. Employees) % 1.95% % Others % 1.53% % PSDP Federal (Net) % 1.98% % Gross PSDP 1,175 1,188 1% 4.34% 1, % Less: Provincial Share % 2.36% % Other Development Expenditure % 0.48% % Net Lending % 0.16% % Total Expenditure 3,936 3,902-1% 14.25% 4, % Federal Fiscal Deficit (1,711) (1,524) -11% -5.57% (1,625) -5.30% Provincial Cash Surplus % 0.52% % Consolidated Fiscal Deficit (1,422) (1,383) -3% -5.05% (1,328) -4.33% Budget Financing Breakup Fy15 Fy16 PKR Billion Year to June Budget Revised +/- %GDP Budget %GDP Financing of Fiscal deficit (1,422) (1,383) -3% -5.0% (1,328) -4.3% External Loans % 1.2% % External Grants % 0.1% % Domestic bank borrowing % 1.5% % Domestic non-bank borrowing % 2.2% % Privatization % 0.1% % Source: Next Research 3

4 Key budgetary measures Income Tax Relief Measures Corporate tax rate reduced by 1% to 32% for FY16. Tax exemption for power transmission projects for a period of 10 years, provided that the project is set up by FY18. Limit for individual investor s is being enhanced to PKR 1.5 mn for investment in newly listed stocks. Tax credit for enlistment on stock exchange has been increased to 20% from 15% Reduction in WHT On Token and Transfer of Vehicles. Limit of capital for small company has been enhanced to 50 mn form 25 mn Salaried individual taxpayers earning from Rs 400,000 to Rs 500,000 are chargeable at a reduced tax rate of 2% from 5% earlier. Non-Salaried individual taxpayers earning taxable income enhanced from Rs 400,000 to Rs 500,000 are chargeable at a reduced tax rate of 7% from 10% earlier. Income Revenue Measures Increase in CGT on securities by 2.5% held for less than 1 year to 15% and 1-2 year is 12.5% durations and 7.5% for a holding duration of between 2-4 years Tax on dividend income enhanced by 2.5% for both filers (12.5%) and non-filers (17.5%). For Mutual Funds the existing rate of 10% shall continue. Tax rate of 35% for all sources of income to Banking companies. Threshold of deduction of WHT on electricity consumption be reduced from Rs 100,000 to Rs. 75,000. It is proposed that a 10% WHT be imposed on renting out machinery, scientific or industrial equipment Taxation for Not Distributing Dividend: It is proposed that in the case of a listed company other than a bank or a modaraba, which does not distribute cash dividends within 6 month of CY 15 or distributes dividends to such an extent that its reserves, after such distribution, are in excess of 100% of its paid up capital, the excess amount may be taxed at the rate of 10%. It is proposed to levy a one-time super tax on everyone earning income above Rs. 500 million in FY15 at a rate of 4% of income for banking companies and 3% of income for all others. 4

5 Capital markets- a slew of negatives Key negatives A one-time super-tax on anyone earning income above PKR 500 million in FY15 at a rate of 4% of income for banking companies and 3% of income for all others. Rationalizing Tax Rate of 35% for dividend income and capital gains for banks. Increase in CGT on securities by 2.5% for stocks held for less than 12 months to 15%, between months from 10% to 12.5%, and introduced a 7.5% capital gains tax for holding duration between 2-4 years Increase in tax on dividends by 2.5% for both filers ( to 12.5%) and non-filers ( to 17.5%). It is proposed that in the case of a listed company other than a bank, which does not distribute cash dividends within 6 month of Tax Year 2015 distributes dividends to such an extent that its reserves, after such distribution, are in excess of 100% of its paid up capital, the excess amount may be taxed at the rate of 10%. This is not applicable to companies where the government has more than 50% of the shareholding. 5% tax on bonus shares not repealed. Impact Banks will be the worst impacted sector, where the twin impacts of removing favorable tax rate on dividends and capital gains, and a one-time increase in corporate tax rate by 4% will lead to a 8%-11% annualized reduction in earnings. All other sectors (barring E&P s) will also see a decline in earnings from the one-time super tax applicable on tax year. For companies with Jun year-ends, upcoming 4Q earnings will be significantly impacted, as the super tax has been imposed on tax year For banks with equity market portfolios, to minimize CGT incidence at 35%, they may mark-to-market or trim their equity portfolios in the month of June-15. This can create significant selling pressure in the market. Taxation of undistributed profits seems problematic to implement, as it is a retrospective tax. However, if this goes through, companies like PSO, DGKC, and NML will see a significant impact. We expect the market to react negatively to the budget, particularly on the news of increase in the super-tax. 5

6 OMC'S INSUR. TEXTILE CEMENT Proposed tax on excess reserves Taxation for Not Distributing Dividend: It is proposed that in the case of a listed company other than a bank or a modaraba, which does not distribute cash dividends within 6 month of CY 15 or distributes dividends to such an extent that its reserves, after such distribution, are in excess of 100% of its paid up capital, the excess amount may be taxed at the rate of 10%. This is not applicable on companies where the govt. has more than 50% shareholding. Reserves include revenue reserves and other surpluses, but exclude capital reserves, share premium reserves, and those required to be created under any laws or regulations. The table seeks to calculate the per share impact from this measure. However, we have used total reserves, without excluding capital reserve and share premium reserve, so the actual impact is likely to be less Furthermore, we believe the retrospective nature of this proposal is likely to see it being challenged in courts, and its passing remains a low probability. Sector Company Paid up Reserves Excess Per share Paid up Reserves Excess Per share 10% tax Sector Company 10% tax PKR mn PKR mn Reserves Impact PKR mn PKR mn Reserves Impact HUBC 11,571 16,771 5, ACPL 1,145 7,284 6, KAPCO 8,809 18,286 9, CHCC 1,766 5,756 3, NPL 3,541 8,006 4, KOHC 1,545 8,931 7, NCPL 3,673 3, FCCL 13,798 2,378 (11,421) n.a n.a LPL 3,798 8,505 4, PIOC 2,271 3,799 1, PKGP 3,721 10,586 6, DGKC 4,381 54,918 50,537 5, ENGRO 5,238 27,927 22,689 2, LUCK 3,234 52,951 49,717 4, FFC 12,722 14,566 1, MLCF 5,277 6,477 1, EFERT 13,309 25,237 11,928 1, Bestway 5,794 26,189 20,395 2, Fatima 21,000 18,184 (2,816) (282) (0.13) NCL 2,002 6,748 4, PSO 2,717 80,895 78,178 7, KTML 2,455 4,497 2, APL ,397 10,568 1, NML 3,516 67,243 63,727 6, HASCOL 906 2,126 1, AICL 3,500 11,356 7, SHELL 1,070 4,152 3, EFUG 1,600 11,911 10,311 1, FERTILIZER POWER 6

7 Cement Custom duty on coal import has been increased to 5% from previous 1%, which will increase the cost of coal by US$3.0/ton (Coal Price assumed at US$60/ton). This will erode earnings of companies by 1.9%-2.4%; however, we expect it to be passed on, as it would only require a PKR 3/bag increase. Super-tax of 3% to reduce EPS by 3-4% for FY15; however, as the full year impact will come in the 4QFY15 results, upcoming results will be considerably depressed. Higher PSDP provision up by 29% to 700 bn in FY16 from 542 bn in FY15. Domestic cement expected to remain strong. Highest allocation is to Dasu dam, which will benefit Fauji Cement the most. An import duty of 20% on ordinary Portland cement has been imposed. This reduces the threat of cheaper imports from Iran. Reduction in mark up rate of export refinance scheme from 6% to 4.5% to provide marginal benefit to some leveraged companies. Minimum tax on builders and property reseller suspended for the period of 3 years. Exemption of sales tax on bricks and crushed stones for next 3 years. Custom Duty reduced to 10% on import of construction machinery in used condition. FED on white cement has been exempted, positive for MLCF. 5 year tax holiday on the set-up of an industrial unit in KPK between 1 st July 2015 to 30 th June We understand this would apply to Cherat s new 1.3mn ton plant, which is expected to come online by Dec-16. This would be a significant fillip to the stock price. PSDP Breakup (PKR-Bn) Source: Ministry of Finance 7 FY16 Power and Water 142 Dasu Hydro Power Project 52 Land of Diamer Bhasha Project 21 Nelum Jhelum 11 Tarbella IV 11 Guddu 5 NHA 160 Karachi-Lahore Motorway 21 Multan Sukhar Section 61 Sukhar Hydrabad 11 Bus Transit Karachi 16 Railways 41 PM Youth Program 20 TDP's 100 China Pakistan Economic Corridor 48 Education 21 Total PSDP 700

8 Banking Banks earnings will be negatively impacted by two proposals; 1) the uniform tax rate of 35% for all sources of income, and 2) super tax of 4% if income imposed for tax year Previously, capital gains tax on equities was 12.5% for holdings of more than one year and dividend income was taxed at 10%. Impact of uniform 35% tax reduces EPS by 1%-5% across our banking universe, with ABL being impacted the most. BAHL and HMB would be least impacted by this measure, as they have very little dividend income, and capital gains from equities. Furthermore, the one-time super-tax will reduce CY15 EPS by an additional 5-6% across our banking universe. Coming on the back of the narrowing of the interest rate corridor in the May-15 monetary policy (which had an earnings impact of 7%-18% across our banking universe), these measures paint a very bleak picture for sector profitability in the quarters We expect banks to remain under pressure in the weak ahead, as earnings outlook has dimmed considerably due to continued regulatory pressures. 8

9 Oil and Gas For E&P s, the budget was a relative non-event. The reduction in corporate tax rate by 1% to 32% for FY16 and the super-tax of 3% are not applicable on E&Ps, as they operate under the Fifth Schedule, and these tax measures have come under the First Schedule. No impact on OGDC and PPL from tax on excess reserves, as Government has more than 50% stake. We would recommend buying E&P stocks on weakness, as they remain relatively insulated from the adverse tax measures put through in this budget. For the OMC sector, the 3% super tax will reduce FY15 earnings by approx % for PSO and APL. However, the full impact will be taken in 4QFY15 results. One advantage for OMC s is that FY15 results have been significantly curtailed by inventory losses, so quantum of super tax will also be reduced. Allocation to National Highway Authority from PSDP is PKR160 billion (23% of FY16 PSDP) for construction of roads and highways and PKR 48 billion to China Pakistan Economic Corridor (CPEC). The govt. also plans to re-lay the Lahore-Islamabad Motorway. This will be beneficial for APL since it has more than 90% of market share in Asphalt (which is used for making roads and highways). Potential increase in motor fuel demand due to the set up of the transportation network under CPEC will also benefit the OMCs. Significant reduction in energy sector subsidy to PKR118 bn compared to the revised target of PKR221 bn allocated last year indicates that the govt. will continue to take steps to reduce the electricity subsidy. 9

10 Others Textile Reduction in finance cost of textile companies mainly due to reduction in mark up rate of export refinance scheme from 6% to 4.5% and LTFF from 7.5% to 6%. Expected to improve NCL earnings by PKR 0.56/share, and NML by PKR 0.42/share. Super-tax to reduce FY15 earnings by 3.5%. Custom duty on textile machinery import to remain at 0% Sales tax have been increased from 2% to 3% on non-value added exports, whereas other textile export duty will remain unchanged. Pre-budget expectation was that it may increase to 5%, so this may come as a relief. Minimum wage rate has been increased to PKR13,000/month from previous PKR12,000/month as it will increase the fixed cost base of the companies hence its negative for textile. Dairy Removing zero rating of dairy products other than baby formula milk, and transferring into exemption status. Milk and Cream, yogurt, flavored milk, butter, whey, desi ghee, and cheese will now have sales tax of 10%, from being exempt previously. EFOODS and Nestle would need to increase product prices to maintain margins. Reduced import duty by 5% to 20% on Skimmed Milk from non-saarc countries. Should benefit EFOODS as it primarily imports from non- SAARC countries. Autos Super-tax to reduce FY15 EPS by 2.9%-3.3% for our auto universe. Transfer of ownership or registration fee has been reduced, which is applicable on secondhand vehicles, this will be marginally negative for auto manufacturers. Banks being encouraged to lend to pvt. Sector will provide further impetus to auto financing. 10

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