Morning Call about – Pre-Budget FY14; what to expect? – Arif Habib Limited

Karachi, June 11, 2013 (PPI-OT): ‘Under commitment-over deliver’ the new setup’s strategy Though investors eye this budget to be a macho one to have a single-bullet hit to all the ailing issues facing the economy, from lingering energy power crises to debt repayment and support to industries, Arif Habib Limited believes, stakeholders should think realistically given the time constraint the newly setup had, between power transition and to finalize budget proposals where mainly macro issues are to be handled with much needed delicacy.

According to Arif Habib Limited be it an investor-friendly or painstaking-for- masses, one should look through the reforms that needed to be put in place for a long-term sustained economic growth. Arif Habib Limited expects this budget to be largely a non- event for capital market, in a direct manner.

Key macro theme of the Budget FY14
However, Arif Habib Limited expects few changes in the taxation measures to beef up gov’t finances, significant decline in subsidies, recharged privatization process, one- time funding solution for circular debt and a change in the overall deficit financing, a balance through local and foreign funding, would be the key highlights of budget.

Revenues to be realistic, excessive Expenditures cut to support deficit
When it comes to numbers, initial impression suggests an outlay of PKR 3.2trn, almost same as last year. Tax Revenue on the other hand, is estimated around PKR 2,475bn vis-à-vis PKR 2,381bn targeted last year( revised down to PKR 2,050bn later), thereby hinting at the fact that first a serious overhaul at the taxation side needs to be kicked in alongside increased taxpayers instead of just earmarking big numbers.

At the same time, while total fiscal deficit is expected to be around PKR 1.4-1.5tr or 5.5%-6.0% of GDP, the financing modes for the deficit, unlike earlier, would be balancing between local and foreign components.

This is expected to include, substantial privatization proceeds (EandPs, Banks), Eurobond (USD 500mn), implementation of 3G auction (USD 800mn-1,000mn), USD 400mn out of PTC’s pending funds with Etisalat and funding from IFIs (IMF is expected to have agreed in principle for another funding facility).

Lower subsidies, expected around ~PKR80-100bn in FY14 budget, against actual to-date over PKR 350bn, would hint towards substantially higher power/gas tariff (positive for Power, OMCs). Other measures may include 30% cut in non-developmental expenditures while a 10% increase in gov’t employees’ salaries (20% last year) and 15% for pensioners may reduce austerity measures’ intended purpose to certain extent.

Massive development budget of PKR 1,155bn (Federal at PKR 540bn, Provincial PKR 615bn), though encouraging, should be underscored with maximum utilization through more basic projects to support growth instead of the iconic ones.

Market outlook and recommendation
Arif Habib Limited believes the macro-level corrections, if defined in budget FY14 and later implemented in true spirit, will ensure sustainability in the economy albeit with short-term repercussions like high inflation (due to power subsidy cut, issuance of PKR 500bn T-bills).

Specific announcement on privatization and funding through external sources should provide impetus to capital market (market still trades at deep discount on key multiples to peers with 7.4x PE at 2014E earnings and 6.7% dividend yield).

On the other hand, though tax measures, as proposed by FBR such as imposition of import duty on 284 items (coal, chemicals), higher FED (cements), 0.5% increase in export tax (textiles), 1% increase in sales tax (especially on dairy products, food sector) and few other taxes should not have very significant impacts on sectors, and should be seen from a pass-on perspective, higher turnover tax would be negative for Autos, OMCs.

Arif Habib Limited prefers energy chain (IPPs, OMCs, EandPs) provided resolution on circular debt being top-priority while privatization-sensitive sectors (EandP, Banks) should be tracked for gains once specifics are provided in the budget FY14.

Leave a Reply