PPI Original Text (PPI-OT) – Morning Call about FY13 Budget Review – Arif Habib Limited

Karachi, June 04, 2012 (PPI-OT): Incentive but Expensive!

After failing to achieve ambitious targets of FY12, the government has yet again strategized an expansionary budget, with an outlay of PKR 3,203bn.

According to Arif Habib Limited, special emphasis is given to development expenditure by allocating a 19% YoY higher amount of PKR 783bn. On the revenue front, government has targeted an ambitious tax collection target of PKR 2504bn for FY13, projecting a growth of 24% YoY. Arif Habib Limited fears that achieving such a high revenue target would be difficult as the government has announced numerous tax concessions in the budget. The government is targeting fiscal deficit of PKR 1,105bn for FY13, for which reliance will once again be on the internal sources.

Bridging the growing deficit
In FY12, approximately 84% of the fiscal deficit was financed by domestic sources amounting to PKR 1,165bn. Government borrowed PKR 939bn from the banking sector and the remainder from the non banking sector. Budget FY13 foresees an augmented fiscal deficit for which the government needs an additional financing from all available resources. Major proportion of the deficit is estimated to be financed through internal sources. Total domestic financing is projected to be PKR 971bn in FY13 while external financing is estimated at PKR 135bn

The following are the major budgetary measures undertaken in FY13:

• Minimum taxable income increased to PKR 400,000 and tax slabs have been reduced to 5 from 17.

• FED reduced on cement from PKR 500/tons to PKR 400/tons.

• Minimum turnover tax has been reduced to 0.5% from 1%.

• Tax on commercial importers has been reduced to 3% and on commercial exporters to 0.5% if they opts out of PTR.

• Intra group loans would be exempted from withholding tax.

• WHT on cash withdrawal limit enhanced to PKR 50,000 and above from PKR 25,000.

• Tax on dividend received by banks from money and income funds to be gradually increased in 2 years (2013: 25%, 2014: 35%).

• Manufacturers to act as withholding agents, deducting 1% tax against sales to traders and distributors.

• Capital gain on disposal of immovable property within 1 Year set at 10% and after 1 year but before 2 year at 5%

Capital Market to continue positive trend
Impact of Budget FY13 on the capital market would be positive. Measures like inclusion of CGT ordinance in the finance bill 2012, reduction in turnover tax, abolishment/reduction in FED rate, increase in tax rebate on investment in IPO and reduction in custom duty on pharmaceutical raw material all bode well for the sectors of the capital market. However, increase in cess by 52.3% will have a negative connotation for the fertilizer sector. Arif Habib Limited’s Dec-12 index target is 15,900 suggesting a potential upside of 14.6%. The market is currently trading at P/E of 6.8x and offering dividend yield of 6.5%. Arif Habib Limited has Overweight stance on Cement, IPPs, Auto, E and P sectors. Arif Habib Limited’s top picks are LUCK, FCCL, ACPL POL, OGDC, PTC, NBP, BAFL, HUBC, KAPCO, NCPL and APL.

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