budget review fy13

7/31/2019 Budget Review FY13

1/23

Fiscal Policy at a Cross Road!

A landmark 5th Federal Budget by the incumbent Government is thematically designed for

election year politics focusing on providing broader relief while leaving structural issues

unanswered. This could potentially pose risk 6-12 months down where mitigation includes

Pakistan's return to the fold of the IMF and sharp pull back in international hard and soft

commodity prices. While budgeted measures include further streamlining within the current

collection ambit, additional steps need to be taken in terms of revenue enhancing measures.

For projections to be realistic, power sector reforms remain critical and require refocusing

on rationalizing power sector tariffs and leakages from public sector enterprises at a brisk

clip representing the core of fiscal imbalances. From the market's vantage, inclusion of

Capital Gain Tax reforms in the Finance Bill 2012 and broader sector wide neutral to benign

impacts should provide for post budget upside. We retain our Dec'12 end Index target of16,000 but sustainable gains would require balancing of inflationary pressures (continued

recourse to SBP financing) and risk mitigation on Pakistan's external account. .

Economy Outlook: While the fiscal deficit in FY12 remained high at 7.4% of GDP (inclusive of

1.9% of GDP debt consolidation) and real GDP growth logged in at 3.7%YoY vs. the target of

4.2%YoY, positives included below target inflation of 11%, tax revenue collection (up 22%YoY) and

buoyance in remittances. In our view Pakistan has and still needs structural and fiscal reforms that

address external and chronic fiscal imbalances. With election year politics striking, a balance

between growth objectives and fiscal consolidation appears challenging. We expect fiscal deficit

to exceed 6% of GDP in FY13 vs. FY13B estimate of 4.7% of GDP with risks of continuing

monetization of subsidies and uncertain outlook for external financing. On the revenue side the

GoP's main focus for tax revenue enhancement is through improved tax administration and

compliance while current expenditures remain entrenched.

Market Implications: Inclusion of CGT reforms introduced via Presidential Ordinance and included

in the Finance Bill 2012 will likely provide for renewed upside ahead of vetting by the Parliament.

Sector impacts are largely neutral to benign in our view. Market implications include imposition of

0.01% CVT on purchase value of shares introduced through the Finance (Amendment) Ordinance

2012 and entrusting NCCPL to collect advance tax from members in respect of margin financing.

Imposition of CGT on immovable property and increase in tax rate for banks investments in money

market and income funds can potentially provide for increasing stock market investments.

Sector Impacts: Budget contains positives for cements in the shape of lower FED and incentivizesthe use of alternative lower cost energy while for autos reduction in custom duties is a positive.

Upstream exploration receives the benefit of one-time tax charge @40% against inconsistency

between PCA's and Statute. For Banks, a minor negative in terms of higher taxation on dividends

from income and money market funds but considering expectations of harsher treatment, we believe

the sector could post a relief rally. Insurance receives benefit of revision in CGT rates while life

insurance premiums for tax credit have been enhanced. Chemicals face negative implications on

enhancement of Gas Infrastructure Development Cess ahead of temporary weakening in pricing

power. .

Federal Budget 2013June 2012

Researchwww.akdsecurities.net

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(AKDS), firstcall.com

and Reuters Knowledge

UAN: 111-253-111

Copyright2012 AKD Securities Limited. All rights reserved. The information provided on this document is not intended for distribution to, or use by, any person or

entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject AKD Securities or its affiliates to a ny

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Securities or its affiliates to buy or sell any securities or provide any investment advice or service. AKD Securities does not warrant the accuracy of the information provided

herein.

Important disclosures, including investment banking relationships and analyst certification at end of this report. AKD Securities does and seeks to do businesswith companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivityof the report. Investors should consider this report as only a single factor in making their investment decision.

AKD Securities LimitedMember Karachi Stock Exchange

Priced on June 01, 2012

KSE-100 Index

13,876.97

FYTD Chg. 11.1%

KSE Market Cap

PkR3,552bn (US$37,787mn)

FYTD KSE-100 High/Low

14,617.97 / 10,842.26

FYTD Avg. Daily Traded Value

PkR4,054.91mn(US$45.323mn)

KSE-30 Index / KMI-30 Index

12,056.44 / 24,202.81

FYTD Chg. 4.1% / 15.6%

As % of Total Cap. 18% / 13%

AKD Universe

75% of KSE-100 Market Cap.

AKD Universe Valuation Summary

2011A 2012F 2013F

PER (x) 7.8 6.9 6.1

P/BVS (x) 1.7 1.5 1.3

DY (%) 6.7 7.6 9.3

ROE (%) 22.1 21.7 22.2

ROA (%) 4.0 4.1 4.3

KSE-100 Index vs. Volume

0

100

200

300

400

500

600

700

Jun-11 Aug-11 Dec-11 Mar-12 May-12

(Index)

10,500

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

15,000

(mn)

Volume (LHS) KSE-100 Index


2/23

Budget Review 2012-13

02

AKD Securities Limited

June 2012

Contents

The KSE outperforms in lower Global Risk Tolerance! ........................................................................04

Self-centered Pakistan.........................................................................................................................06

Corporate Earnings are topping estimates...........................................................................................06

Budgetary Implications.........................................................................................................................07

Budget Implications on Sectors ......................................................................................................08-09

Economy

Election Year Budget............................................................................................................................10

RISKS...................................................................................................................................................10

Budget Snapshot..................................................................................................................................11EXPENDITURE....................................................................................................................................12

REVENUE: FBR trying to achieve double digit Tax to GDP.................................................................13

Non Tax Revenue Measures................................................................................................................14

Deficit & Financing: Elusive fiscal deficit target of 4.7% of GDP .........................................................14

Total external financing ........................................................................................................................16

Medium Term budgetary Targets..........................................................................................................16

Sector Implications

Cements...............................................................................................................................................17

Banks ...................................................................................................................................................17

Oil & Gas..............................................................................................................................................18

Autos ....................................................................................................................................................18

Insurance..............................................................................................................................................19

Fixed Line Telecom ..............................................................................................................................19

Fertilizer................................................................................................................................................20

Textiles .................................................................................................................................................20

Chemicals.............................................................................................................................................20

Annexure - Salient features of the FY13 Budget ............................................................................21-22

AKD Research Team

Analyst Tel no. E-mail Coverage

Naveed Vakil +92 111 253 111 (692) [email protected] E&P, Oil Marketing

Raza Jafri, CFA +92 111 253 111 (637) [email protected] Pakistan Economy & Commercial Banks

Usman Zahid +92 111 253 111 (693) [email protected] Cement & Power

Ayub Ansari +92 111 253 111 (693) [email protected] Fertilizer, Chemical & Telecom

Anum Dhedhi +92 111 253 111 (637) [email protected] Pakistan Economy & Commercial Banks

M. Naeem Javid +92 111 253 111 (693) [email protected] Textiles, Fertilizer

Qasim Anwar +92 111 253 111 (680) [email protected] Technical Analysis

Hassan Quadri +92 111 253 111 (639) [email protected] Research Production

Azher Ali Quli +92 111 253 111 (639) [email protected] Research Production

Nasir Khan +92 111 253 111 (639) [email protected] Research ProductionTariq Mehmood +92 111 253 111 (643) [email protected] Library Operations


3/23


June 2012

KSE-100 Index - Timeline

10,000

10,500

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

15,000

Jan-11 Mar-11 May-11 Aug-11 Oct-11 Dec-11

Punjab

Governor

assassinated

MENA

crisis

escalates

Raymond

Davis issue

affects Pak-

US ties

PML-N parts

ways with

PPP in Punjab

MTS

launched

Additional

revenue

measuresannounced

after IMF

talks

Securities

Lending

an d

Borrowing

Product

launched

US says Pakistan

not doing

enough to

combat

militancy

US forces kill

Osama BinLaden in

Abbottabad

Moodys gives

assurance on

Pakistans

sovereign debt

FY12 Budget

announced

MQM parts

ways from

coalitionSelloff inline

with global

equities

DR reducedby 50bps

Deteriora

ting law &

order in

Kh i

CP I

tumbles

due to

rebasing

Global recession

concerns + US pressure

on Pakistan

US announces

Operation Twist

on global

recession fears

DR cut

by

150bps

to 12%

FS V

benefit

enhanced

Circular debt

exposure

converted to

Go P

securities

Pak-IMF

Article IV

talks

FBR to examine

source of

investment in

capital mkts

NATO attacks

and memo

scandle

US freezes

CS F

US freezes

US$700mn

aid to

Pakistan

Consensus made onwhich rule should

be amended to

dilute the impact of

CGT on share

transaction

Gop agrees to SE

demands for

relaxation in CGT

Regime

Nt

C

s

s

d

S&P

Paki

rati

stab

Presi

CGT r


4/23

The KSE outperforms in lower Global Risk Tolerance!

In our report titled "U.S. Monetary Policy and Implications at Home" (dated 28th January,

2012), we highlighted improving levels of global risk tolerance underpinning the best 1Q

rally in global equities since 1998 where the KSE-100's 21% return was the highest since

1QCY06. Post 1QCY12, increasing risk aversion (see graph below), with sentiment

undermined by the European debt crisis and slowing Asian growth, has led CYTD MSCI

World and MSCI EM returns negative. The KSE-100 has declined by 5% from its CYTD

peak but remains up 22%CYTD buttressed by 1) above-line corporate earnings, 2) return

of individual and market maker classes post CGT reforms with liquidity re-rating valuations

and 3) continuing FII flows - the first set of inflows even as U.S. Treasury yields are at

record lows. Our proxy for risk tolerance since 2009 (from where asset class discrimination

has had little meaning) shows Pakistan outperforming regional equities in times of broader

risk-off investment. In periods of sharp contraction between U.S. Treasury yields and the

Federal Funds Rate, Pakistan has on average outperformed the MSCI EM and MSCI World

by 7%, underscoring Pakistan's weak correlation in broader sell-offs as well as undemanding

valuations.

During periods of low risk tolerance, VIX (a measure of implied volatility - fear gauge)

increases while the spread between benchmark 10yr U.S. Treasury and Federal Funds

rate contracts. Two rounds of asset purchases by the U.S. Federal Reserve led to declining

levels in VIX and increasing U.S. Treasury yields which underscored a broader rally in risk

assets. During 1QCY12, decline in risk aversion was underpinned by the U.S. Economy

moving past trough with manufacturing at the heart of the recovery while housing showed

signs of stabilizing within the backdrop of the U.S. Federal Reserve extending the maturity

profile of its securities portfolio (see chart on the right for US$400bn in maturity extensions)

in efforts to lower longer term interest rates. European Governments negotiated a second

bailout for Greece while Asian economies moved to unconventional monetary stimulus

with balance sheet expansion by the BoJ (Bank of Japan) while the PBOC (Peoples Bank

of China) moved to ease lender reserve requirements. However, recent shift in the European

political landscape with risks to scale-back in austerity measures and fallout contagion

have lowered global risk tolerance - 10yr U.S. Treasury yields have declined to record lows

with the Feds maturity extension program coined "Operation Twist" scheduled to expire

in Jun'12. Pakistan Market's returns since 2009, in periods of risk-off investment on average


04


June 2012

Source: Bloomberg & AKD Research

Proxy for Risk Tolerance

-

10.0

20.0

30.0

40.0

50.0

60.0

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

0.25

0.75

1.25

1.75

2.25

2.75

3.25

3.75

4.25

VIX Index (LHS)

US 10 Yr. Treasury (minus) Fed Rate

-40%

-20%

0%

20%

40%

60%80%

100%

120%

140%

160%

180%

Jan-09

Apr-09

Aug-09

Dec-09

Mar-10

Jul-10

Nov-10

Feb-11

Jun-11

Oct-11

Jan-12

May-12

MXEF Index

MXWO Index

KSE100 Index

Relative Performance

U.S. 10yr Treasury Yield - Federal Funds Rate vs. VIX

Pakistan outperforms in times

of broader risk-off investment

Total Assets of U.S. Federal Reserve

Source: Federal Reserve

500

1,000

1,500

2,000

2,500

3,000

3,500

Aug-07

Mar-08

Oct-08

May-09

Dec-09

Jul-10

Feb-11

Sep-11

Apr-12

USDbn

Maturity Extension - Operation Twist

Source: Federal Reserve

(350)

(300)

(250)

(200)

(150)

(100)

(50)

-

50

100

Up to 3

years

Over 6

years to8 years

Over 8

years to10 years

Over 10

years to20 years

Over 20

years to30 years

USDbn


5/23

show 7% outperformance vs. the MSCI EM and MSCI World Indices. In our view, this

vindicates Pakistan's low correlation in broader global sell-offs. Markets will likely look tothe FOMC meeting scheduled for later this month for cues on the Federal Reserve's

response where balance sheet expansion will likely be weighed for political support ahead

of U.S. Presidential Elections as well as anchoring inflationary expectations while maturity

extension programs will likely be limited with capacity at the shorter end of the yield curve.

Taking monthly returns since 1991 over an annual time series, Pakistan's correlation to

MSCI EM and MSCI World has gradually increased off a low base but at 0.4 (linear trend)

it remains weak enough, in our view, to retain outperformance potential even within thebackdrop of a global sell-off in risk assets. Pakistan has posted volatile correlation over

our time series, in contrast to a sustained correlation between MSCI World and MSCI EM

at 0.78 on monthly returns since 1991. Pakistan's historically volatile yet relatively low

correlation underscores corporate earnings drivers in confluence with domestic demand

as well as oft volatile political landscape and external account stress. Despite these

negatives, Pakistan has posted the 7th best US$ adjusted return over the last decade!

While we have highlighted Pakistan's low correlation, we remain cognizant of Pakistan'sexposure to global commodity prices where 55% of KSE-100 market capitalization is

commodity based. Taking monthly returns over an annual time series between MSCI World


05


June 2012


KSE Correlation

(0.60)

(0.40)

(0.20)

-

0.20

0.40

0.60

0.80

1.00

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

MSCIEM-SPGS MSCIEM-TRJ

MSCIWO-SPGS MSCIWO-TRJ

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

MXEF Index MXWO Index

Linear (MXEF Index) Linear (MXWO Index)

2012

MSCI Correlation with TRJ-CRB/S&P GSCI


10Yrs US Dollar adjusted return CAGR

INDONESIA

INDIA

CHINA

THAILAND

PHILIPPINES

POLAND

Pakistan

MSCIEM

BRAZIL

LUXEMBOURG

AUSTRIA

S.KOREA

HONGKONG

MEXICO

MALAYSIA

CANADA

AUSTRALIA

NORWAY

DENMARK

MSCIASIAPACIFIC

MSCIASIA

NEWZ

EALAND

TAIWAN

BELGIUM

IRELAND

SWEDEN

NASDAQ

MSCIWORLD

SWITZERLAND

HUNGARY

GERMANY

MSCIEUROPE

UNITEDKINGDOM

SPAIN

JAPAN-TOKYO

JAPAN-NIKKEI225

FRANCE

FINLAND

S&P500

DOWJ

ONESIND.AVG.HOLLAND

GREECE

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Pakistan's historically volatile

yet relatively low correlationunderscores corporate

earnings drivers in confluence

with domestic demand as well

as oft volatile political

landscape and external account

stress


6/23

and MSCI EM, correlations to commodity indices (S&P GSCI and TRJ-CRB) show returns

in increasing lockstep with correlation on average logging in at 0.8 since 2009, underminingtraditional asset class discrimination in our view. Downside risks to commodity prices will

likely have implications for the commodity-based market cap at the KSE. A sharp pull back

in commodities poses downside risks for Oils, Fertilizers and Textiles - cotton is already

at multi-year lows (barring composites). Within this backdrop, while we retain selective

conviction within the commodity-backed market cap, we flag Commercial Banks as potential

outperformers over FY13 (see our section on commercial banks).

Self-centered Pakistan: Recent Capital Gain Tax Reforms announced via Presidential

Order and now included in the Finance Bill 2012 will likely serve to extend the Pakistan

market disconnect. Tracing back to the Finance Minister's announcement of the same in

Jan12, daily market volumes have risen to an average of 245mn shares while traded value

has improved to US$66mn - levels last seen in CY09. FII participation has held up with

an inflow of US$90.7mn within the same time frame (since Jan 2112) while individual and

market maker asset classes have returned (inflow of US$53.6mn) improving liquidity, and

consequently the KSE has seen a re-rating of valuations and a compression in the discount

to regional peer group.

Corporate Earnings are topping estimates: With the recent Capital Gain Tax Reform

shoring up market liquidity, price discovery has tracked a stellar trend in corporate earnings,which are consistently topping consensus estimates. Over the last 4 sequential quarters,

earnings have topped ours as well as consensus estimates by 1%-6%. Following a 7%

bottomline expansion in 2QFY12, earnings growth for 3QFY12 clocked in flat (dragged

lower by Fertilizer Sector earnings) but beat ours as well as consensus expectations by

5%. Oil and Gas and autos topped forecast by 33% and 10%, respectively, while banks

remained in-line with a marginal 3% deviation. Going forward for 4QFY12, we expect

coverage cluster earnings to decline by 4% led by oil and gas (lower oil prices) and

commercial banks (impact of revision in floor rate of savings deposits) whereas cements

and fertilizers will likely outperform on improving fundamentals and a lower base effect.

That said, over the next 12 months, we retain conviction with commercial banks and flag

the sector an outperformer where the sector trades at below floor level valuations despitemarked improvement in asset quality metrics, expected uptick in lending yields and

continuing focus on risk free investments.


06


June 2012


KSE PE Discount to Region

-40%

-20%

0%

20%

40%

60%

80%

Jan-06

Jul-06

Jan-07

Aug-07

Feb-08

Sep-08

Mar-09

Sep-09

Apr-10

Oct-10

May-11

Nov-11

Jun-12

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

CY05

CY06

CY07

CY08

CY09

CY10

CY11

CY12TD

-

100

200

300

400

500

600Avg. Traded Value (US$mn)

Avg. Daily Volume (mn, LHS)

KSE - Volume and Value Traded

We flag Commercial Banks as

potential outperformers over

FY13

Discount/Premium to Floor Valuations

Source: AKD Research

-30%

15%

134%

-21%

2% 8%

53%

-57%

101%

-94%

-18%

-51%

-150%

-100%

-50%

0%

50%

100%

150%

Autos

Fertilizer

Chemicals

Banks

Cement

Electricity

Engineering

Telecom

FMCGs

Multiutilities

OilandGas

Textiles


7/23

Budgetary Implications: Recent budgetary measures in line with election year politics

should provide the market reason to rejoice where sector related developments have

panned out Neutral to benign in our view, contrary to negative expectations.

Expansionary/populist nature of the Federal Budget 2012-13 and resultant growth in reserve

money led by NDA expansion should provide for market upside to our end-Dec'12 Index

target of 16,000 but sustainable gains will require balancing of inflationary pressures and

risk mitigation on Pakistan's external account (increase in NFA) which includes an inevitable

return to an IMF program. Budgetary measures include a repeat of prior year targeted

foreign flows and remain ambitious where our Economist Anum Dhedhi estimates a 28%YoYrise in NDA in the event of non-materialization of foreign inflows which could provide upside

risks to inflation.


07


June 2012


KSE Tracks Reserve Money

121

1,121

2,121

3,121

4,121

5,121

6,121

7,121

8,121

Oct-92

May-94

Dec-95

Jul-97

Feb-99

Sep-00

Apr-02

Nov-03

Jun-05

Jan-07

Aug-08

Mar-10

Oct-11

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Reserve Money (PKRbn)

KSE-100 Index (RHS)

Money Supply (PkRbn)


QoQ Profitability Growth

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1

QCY10

2

QCY10

3

QCY10

4

QCY10

1

QCY11

2

QCY11

3

QCY11

4

QCY11

1

QCY12

YoY Growth

Deviation from AKD Est.

QoQ Growth

QoQ Sectoral Profitability 2QCY12

112%

-10%

0% 9

%

-15%

-11%

12%

-6%

-2%

67%

-4%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Fertilizers

Banks

Telecom

FMCG*

Chemicals

O

il&Gas

C

ements

Power

Autos

Textile

Total

Sustainable gains will require

balancing of inflationary

pressures and risk mitigation

on Pakistan's external account

(increase in NFA)

Over the last 4 sequential

quarters, earnings have topped

ours as well as consensus

estimates by 1%-6%


8/23


9/23


10/23


10

Election Year Budget

Fiscal rules operate at the crossroads of politics and economics. Slippages in implementing

IMF prescribed fiscal reforms, particularly implementation of RGST, elimination of electricity

subsidies and resolution of circular debt, in our view inter alia are the key reasons for a

sustained high deficit. While the government in FY12 managed to achieve below targeted

inflation of 11% and on track tax revenue collection, up 22%YoY in FY12, fiscal deficit

remained at 7.8% of GDP (inclusive of 1.9% of GDP debt consolidation). A confluence of

unfavorable factors included a global environment with non-materialization of expected

foreign flows (3G license/Etisalat payment/CSF and lower logistical support receipts from

the US). Going forward, total budgetary outlay has been set at PkR3.2trn for FY13 (up

15.8%YoY) with current expenditure at a rigid 82% of total outlay. Gross revenue target

is set at PkR2.5trn, up 24%YoY, resulting in a budgetary gap of PkR1.2trn (4.7% of GDP- inclusive of provincial surplus of PkR80bn). Heading upto election year, budget expenditure

risks overshooting with fiscal deficit likely to exceed 6% of GDP. Budgetary measures

include broader relief while heightened tax collection targets will likely fall on the shoulders

of improved administrative and collection measures.

RISKS: As with prior years, expenditure overshooting is a key risk with increasing subsidies

and realization of development expenditure with election year politics. Acknowledged risks

to the Budget remain on the back of 1) weak external financing, which can lead to a spiraling

twin deficit, 2) matching upside and downside risk to oil prices and impact on oil import bill,

3) spillover effect from global slowdown (particularly the Eurozone) and 4) increasing share

of budgetary borrowing from domestic sources leading to crowding out of private sector

credit growth and inflationary central bank borrowing.


June 2012

Real GDP Growth (%) 4.30

Agri Growth (%) 4.10

Manufacturing Growth (%) 4.00

Services Growth (%) 4.60

Average CPI Inflation (%) 9.50

Total Tax Revenue as (%) of GDP 11.10

Total Expenditure as (%) of GDP 19.00

Current Expenditure as (%) of GDP 14.50

Development Expenditure as (%) of GDP 4.40

Fiscal Balance as (%) of GDP -4.70Revenue Balance as (%) of GDP -0.30

Total Public Debt as (%) of GDP 56.50

Total Investment as (%) of GDP 13.1

National Savings as (%) of GDP 11.2

Total Exports (US$bn) 25.26

Total Imports (US$bn) 45.69

CA Balance (US$bn) 4.77

Remittances (US$bn) 14.09

Major Export Targets

Food Group (US$bn) 5.2

Textiles (US$bn) 13.2

Manufacturings (US$bn) 5.2

Major Import Targets

Food Group (US$bn) 3.6

Petroleum (US$bn) 15.3

Fertilizer Agriculture & Chemical 3.6

Machinery 4.3

Budget Estimates

Source: Annual Plan & Budget Brief


Key Points

1.) Fiscal deficit

2.) PSDP outlay

3.) Tax collection

Target

4.7% of GDP or PkR1.2tr inclusive

of provincial surplus

Target of PkR873bn with federal

component at PkR360bn

Tax collection target up 24%YoY to

PkR2.5tr.

Comment

Fiscal deficit target is conservative

given the continuing subsidy burden

We expect utilization inline till general

elections

Target dependent upon continued

streamlining of administration and

collections

Source: MoF & AKD Research

Fiscal Deficit and GDP Growth(%) Revenue and Expenditure

0

5

10

15

20

25

30

FY92

FY94

FY96

FY98

FY00

FY02

FY04

FY06

FY08

FY10

FY12

Total Expenditure Total Revenue

Fiscal Deficit

0

1

23

4

5

6

7

8

9

10

FY93

FY95

FY97

FY99

FY01

FY03

FY05

FY07

FY09

FY11

FY13

Fiscal deficit as a % of GDP Real GDP grwoth


11/23

Source: AKD Research & MoF

Expenditures (PkRbn) FY10R FY11R FY12R FY13B FY13AKD

Defence 378 445 510 545 545

Subsidies 229 396 512 209 220

Debt Service (Foreign) 71 74 72 80 85

Debt Repayment (Foreign) 148 127 137 216 281

Debt Service (Domestic) 596 654 772 846 870

Total Debt Servicing 815 855 981 1,142 1,236

Public Order & Safety 37 59 62 70 70

Economic Affairs 81 80 72 54 65

Education Affairs 32 40 45 48 50

Health Affairs 7 7 7 8 8

Others 439 414 443 537 550.00

Total Current Expenditure 2,017 2,296 2,632 2,612 2,744Development Exp (PSDP & Others) 405 382 478 591 600

TOTAL EXPENDITURE 2,422 2,678 3,110 3,203 3,344

As percentage of Total Expenditure

Defence 18% 21% 24% 26% 26%

Subsidies 11% 19% 25% 10% 11%

Total Debt Servicing 39% 41% 47% 55% 59%

Public Order & Safety 2% 3% 3% 3% 3%

Economic Affairs 4% 4% 2% 3% 3%

Education Affairs 2% 2% 2% 2% 2%

Health Affairs 0% 0% 0% 0% 0%

Others 21% 20% 21% 26% 26%

Total Current Expenditure 63% 72% 82% 81.5% 86%

Development Exp (PSDP & Others) 19% 18% 23% 28% 29%

Expenditures


June 2012

Budget SnapshotRevenues (PkRbn) FY1

Indirect Taxes 9

Direct Taxes 5

Total Tax Revenue 1,4

Income from Property & Enterprise 1

Civil Admin & Other Receipts 3

Misc. Revenue Sources 1

Total Non-Tax Revenue 5

Gross Revenue Receipts 2,0

(Less: Provincial Share) 6

Net Revenue Receipts 1,3

Net Capital Receipts 2

External Receipts 5

Estimated provincial surplus 2Privatization Proceeds

Bank Borrowing

TOTAL RESOURCES 2,5

As percentage of Total Revenues

Indirect Taxes 3

Direct Taxes 2

Total Tax Revenue 5

Income from Property & Enterprise

Civil Admin & Other Receipts 1

Misc. Revenue Sources

Total Non-Tax Revenue 2

Gross Revenue Receipts 7

(Less: Provincial Share) 2

Net Revenue Receipts 5

Net Capital Receipts 1

External Receipts 2

Estimated provincial surplus 1

Privatization Proceeds

Bank Borrowing

TOTAL RESOURCES 10

Revenues


12/23


EXPENDITURE

Expenditures on face value show marginal YoY growth; however in view of election yearpolitics, there are concrete risks to overshooting. Total Federal outlay has been earmarked

at PkR3.2tn versus a revised PkR3.11tn last year, up a marginal 3%YoY. Last year, budgeted

expenditures were overshot by 16% or PkR343bn underpinned by Power Sector and

Fertilizer subsidies. Current expenditures are projected at PkR2.61tn down a tepid 1%YoY.

However, this includes a sharp reduction in subsidies at 59%YoY to PkR209bn which we

believe is extremely optimistic. Debt servicing inclusive of repayments, are projected to

increase by 16%YoY and account for 36% of total expenditures. Defense expenditures

logged in line with previous year trends up 7%YoY and at 26% of total expenditures.

Considering election year, we believe the tradition of balancing expenditure subsidies with

PSDP is unlikely. For FY13, the Federal Budget targets Federal development expenditure

at PkR591bn (PSDP PkR360bn) up 24%YoY from a revised PkR478bn last year wherewe expect targets to be inline till the run up in general elections. Inclusive of provincial

allocations, PSDP is targeted at PkR873bn (3.7% of GDP) up 19%YoY versus a revised

PkR743bn last year.

We view targets as conservative particularly in relation to containing subsidies particularly

as PSDP cuts may prove difficult specifically till the run up in general elections. This will

include allocations to complete ongoing projects and schemes (96% allocation) with the

power sector allocation earmarked at PkR185bn. Expenditure side slippages have become

recurring with sharp deviations in subsidies led by power where revised estimates for FY12

place the subsidy bill at PkR512bn against PkR166bn budgeted with tariff differential

subsidies exceeding the target by PkR383bn (inclusive of KESC). We expect this is where

chronic challenges will likely remain where based on our estimates taking only fuel oil

generation; we expect power sector tariff under-recovery in excess of 34% (including the

recent 16% hike) against consumer tariffs for 700-1000 units (as a proxy). .

Even with downside risks to oil prices we believe the GoP will be required to rationalize

power sector tariffs at a brisk pace. Our sensitivity shows for international crude oil pricesat US$90/bbl fuel oil generation costs over an annual basis would exceed consumer tariffs

by PkR165bn. This compares to a total tariff differential allocation of PkR170bn inclusive

12


June 2012

Current Expenditure Budgetversus Actual/PSDP Utilization

Source: Economic Survey Source: MoF, PES & AKD Research

Entrenched Current Expenditures

FY13F Current Expenditures

Source: Economic Survey

0

5

10

15

20

25

FY92

FY93

FY94

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

Current Exp as % of GDP Dev Exp as % of GDP

Defence

21%

Others

21%

Subsidies

8%Debt Servicing

43%

Health Affairs

0%

Public Order &Safety

3%

EconomicAffairs

2%

EducationAffairs

2%

-21.1%

-30.3%

0.5%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

FY10 FY11 FY12


13/23

of KESC allocations and life line consumer subsidies. The overall subsidy package of

PkR209bn includes increasing allocations for FFBL at PkR3.4bn and USC for the sale of

sugar at PkR6bn.

REVENUE: FBR trying to achieve double digit Tax to GDP

Pakistan's tax to GDP (FBR) at 9.3% is one of the lowest in the region. The GoP is targeting

domestic internal revenue generation in FY13 of nearly Pk2.5trn, up 24% YoY to bring tax

to GDP to double digits at 11.1%. While no new tax is imposed, achieving a 25%YoY

increase in Direct tax and 23%YoY increase in Indirect tax is ambitious with our projected

nominal GDP growth target of 15.2%. While this is achievable, it will require continued

focus on improving administrative and collection measures. Of particular note is the

imposition of 1% withholding tax on disributors/dealers, which would help in enhancing

documentation in the economy and curb hoarding practices going forward. In our view,

going by the recent track record of the government, growth in tax collection will gather

pace on the back of 1) efforts to increase tax payer documentation and strengthening

electronic payment, 2) improved tax administration and risk based audit, 3) simplifying the

taxation system by focusing on Income tax and Sales Tax, 4) close watch on Afghan transit

trade and recovering arrears and 5) natural course of PkR/US$ depreciation. .


13


June 2012

Source: PES, Energy Year Book & AKD Research

Fuel Oil Generation cost Power Sector Subsidy Sensitivity

Total and Tax Revenue as % of GDP


5

7

9

11

13

15

17

19

FY92

FY95

FY98

FY01

FY04

FY07

FY10

FY13

Rev as % of GDP Tax to GDP

0%

10%

20%

30%

40%

50%

60%

70%

80 90 95 100 110

-

50

100

150

200

250

300

350

Power Sector Under RecoverySubsidy Burden PkRbn

5.00

7.00

9.00

11.00

13.00

15.00

17.00

19.00

21.00

23.00

FY08 FY09 FY10 FY11 FY1210%

15%

20%

25%

30%

35%

40%

Fuel Oil Generation Cost

Consumer Rates 700 - 1000 Units

Under Recovery (RHS)

Source: Budget Doucments & AKD Research

Breakup of FED Breakup of Customs DutyTax Collections

Source: SBP

Natural Gas

Cement

Others

OtherServices

Cigarettes &Tobacco

ImportedGoods

BeverageConcentrate

POLProducts

POL

Products

Edible

Oil

Others

Iron & steelElectric

machinery

Vehicles

Machinery &Mechanical

appliance

-

40.0

80.0

120.0

160.0

200.0

Jul-11

Au

g-11

Se

p-11

Oct-11

No

v-11

De

c-11

Ja

n-12

Fe

b-12

Ma

r-12

(PkRbn)


14/23

Out of the total tax collection, 57% is through indirect taxation (PkR1,572bn) where sales

tax growth is targeted in line with FY12 and is estimated to increase 26%YoY to PkR1.07trnin FY13. Total indirect collection against FED and Customs/Regulatory Duty is projected

at PkR372bn, up a marginal 5%YoY. This is despite the abolishment of FED on 12 items,

reduction in FED on Cement by PkR100/ton and custom duties on stationery items being

abolished and reduced on pharmaceutical raw material. Petroleum levy is targeted at

PKR120bn, up 74%YoY against the revised FY12 estimate, which in our view is realistic

provided oil prices do not rebound sharply. That said, we expect FY13 target of Income

tax collection (96% of Direct tax) at PkR914bn to be an uphill task.

Non Tax Revenue Measures

The government has budgeted non tax revenue target of PkR730.3bn during FY13 up

43%YoY from a revised estimate of PkR561bn in FY12. On the Non Tax revenue front,

receipts from civil administration and other functions (being 48% of total Non Tax Revenue)

are earmarked at PkR354.2bn in FY13, up 42%YoY. The primary contributor towards the

national kitty remain profits from SBP which are estimated at PkR200bn. SBP profitability

has historically been directly linked with the overall interest rate level in the economy and

Central Bank lending to the private and public sector. We expect this to be a realistic target

where further upside can come from any increase in interest rates. In addition revenue of

PkR150bn is expected under the Defense head which include the logistical support receipts

provided from coalition forces. However this carries risk with the recent uneasy relationship

between the U.S and Pakistan. Partial financing will be done through income from property

and enterprise of PkR179bn, up 91%YoY. This growth will largely be underpinned by

auction of 3G licenses expected to generate PkR79bn which failed to materialize over the

past two years. The miscellaneous receipts target of PkR197bn remains inline with our

projected growth of 16%YoY. Notable drivers include a 28%YoY increase in Gas Development

Surcharge while PkR30bn from Gas Infrastructure Development Cess is conservative (AKD

Research Estimates GIDC at PkR60bn. Royalty collections are forecasted to remain flat

at PkR58bn. Dividend income is forecasted to increased by 10%YoY to PkR64.6bn led by

higher dividend expectations from Pakistan Petroleum Limited (PPL). .

Deficit & Financing: Elusive fiscal deficit target of 4.7% of GDP

With Expenditure to GDP aimed at 18.9% and tax to GDP of 10.1% in FY13, the onus of

financing falls on domestic and external financing. The GoP has historically used development


14


June 2012

Source: SBP & Budget Documents

SBP profits Non Tax Revenue

8%

9%

10%

11%

12%

13%

14%

15%

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

0

50

100

150

200

250

SBP Profits (RHS) Discount Rate ( LHS)

PTA profits(3G auction)

Dividends

SBP ProfitDefense Receipts

Gas Dev.Surcharge

Oil/GasRoyalty

Interest

Others

We expect FY13 target of

Income tax collection (96% of

Direct tax) at PkR914bn to be

an uphill task

This growth will largely be

underpinned by auction of 3G

licenses expected to generate

PkR79bn which failed to

materialize over the past two

years

2011-12 2012-13

(PkRmn) Revised Budget Est.

FINANCIAL INSTITUTIONS 405.9 408.7

National Investment Trust 27 27

National Bank of Pakistan 33 33

Allied Bank of Pakistan 48 48

United Bank Limited 25 28

Habib Bank Limited 65 65

PaK Oman Investment Co, 108 108

Pak Brunei Investment Co, 50 50

Pak China Investment Co, 25 25

Pak Iran Joint Investment Co. 25 25

NON-FINANCIAL INST. 61,543.96 67,842.76

PPL 6,358 9,339

MARI 60 65

PSO 385 450

PARCO 2,400 3,000

SNGPL 174 500

SSGCL 1,115 1,200

GHPL 13,000 13,500

OGDCL 25,000 26,000

PTCL 6,500 6,500

Others 3,276 3,644

Total 58,674 64,607

Dividend Estimates

Source: Budget Brief


15/23

expenditure as a counter balance; however, considering election year, outlays are likely

to remain in line with projections particularly in the run up to general elections. We expecttotal expenditure outlays to overshoot by approximately PkR200bn. The GoP estimate for

FY13 fiscal deficit of PkR1.1trn (4.7% of GDP), in our view, is optimistic and will likely

exceed 6% of GDP. The budget plans to finance this shortfall by PkR135bn from Net

External Financing and PkR971bn from Domestic Sources (Bank and Non Bank borrowing).

In our view, FY13 budget has unrealistically estimated external financing to the tune of

PkR386.9bn, up 71%YoY from the revised FY12 estimate of PkR226.1bn. While only 54%

of budgeted foreign flows materialized during the current fiscal year, we conservatively

expect PkR265bn to materialize in FY13.

Out of the total Capital Receipts long term debt (Floating and Permanent) and NSS have

been highlighted as the two main funding sources with an aggregate target of PkR477bn

in FY13. Coupled with expected recourse to central bank borrowing we believe this could

provide for upside pressure on money market yields.

While Pakistan has positive real interest rates, increasing government borrowing for

budgetary support and uncertain materialization of foreign inflows (leading to a weak

PkR/US$) remain the key risks to interest rate outlook. Should external financing fall below

target and expenditure overshoot by by our estimates in FY13, we estimate deficit

monetization will increase average CPI inflation to 12.5%YoY from budgeted 9.5%YoY and

above our base case estimate of 11%. That said, pressure on fiscal deficit may be contained

with vigilance on inflation and focus on curbing the leakage from PSEs and refocus on

power sector tariff rationalization.


15


June 2012

Source: SBP & AKD Research

Insufficient external flows shift reliance on Domestic Sources

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY08 FY09 FY10 FY11 FY12 JUL-MAR

External as % of financing Domestic as % of financing

While Pakistan has positive

real interest rates, increasing

government borrowing for

budgetary support and

uncertain materialization of

foreign inflows (leading to a

weak PkR/US$) remain the key

risks to interest rate outlook

Source: SBP & AKD Research

Domestic Financing NDA/NFA vs. CPI

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

FY08 FY09 FY10 FY11 FY12 JUL-

MARNon Banks Banks

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Jul-0

9

Oct-0

9

Jan-10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-11

Apr-1

1

Jul-1

1

Oct-1

1

Jan-12

Apr-1

20%

2%

4%

6%

8%

10%

12%

14%

16%

18%

NDA/NFA CPI YoY


16/23

Total External Financing

The government has estimated external loans of PkR274.8bn, up 34%YoY against the

revised FY12 estimate. These include project loans of PkR140.3bn, down 15.3%YoY and

program loans (budgetary support) of PkR41.4bn, up 9.2x. At the same time, GoP expects

a challenging PkR46.5bn from Euro Bonds which we view as unlikely considering increasing

strains in global financial markets.

The budget estimates External Grants of PkR112bn for FY13, up 11.6%YoY from a revised

FY12 target of PkR45bn. Out of this, PkR74.4bn is estimated from Privatization Proceeds

including the SPO of PPL, OGDCL exchangeable bond offering and small ticket items

including Heavy Electrical Complex and NPCC.

Medium Term Budgetary TargetsReal GDP growth has been targeted at 4.3% higher than the 3% average from FY08-FY12.

However in view of continuing infrastructure bottlenecks and chronic energy shortages we

expect real GDP growth to contain at 4.3% only.

The 10MFY12 current account deficit has surged to 1.7% of GDP, due to expanding trade

imbalance and decline in foreign official and private capital inflows. Despite non-materialization

of foreign inflows and US$1.2bn repayment to the IMF, the external sector has been

sustained by surging remittances. This has been possible due to introduction of innovative

schemes like the Pakistan Remittance Initiative (PRI) to enhance the flow of remittances

with the SBP as the processing agent. The initiative envisions Pakistan as a remittance

hub to process all transactions backed by incentive to maximise remittances. The GoPexpect remmittance growth to clock in at 13%YoY for FY13.

For FY13, Pakistan continues to face challenges on the external front with IMF repayments

of US$2.78bn at the forefront. That said, the sell-off in global commodities will dissuade

risks and provide some respite. As for oil, the main import driver, we expect the import bill

to contract by ~US$1.2bn for every US$10/bbl fall in crude price. Furthermore, external

account risk mitigates also include a return to the fold of an IMF program. .

We have provided our sensitivity analysis of Oil (Arab light) price and Oil import bill.

Investment is targeted to improve from the current level of 12.5% of GDP to 13.1% in FY13,

while addressing energy shortages the GoP has committed to utilize the increase in Gas

Infrastructure Development Cess for the construction of Iran-Pakistan (IP) and Turkmenistan-

Afghanistan-Pakistan-India (TAPI) pipelines to overcome the energy shortages.


16


June 2012

External Financing


Project Loans

36%

Programme Loans

11%

Euro Bonds and

others

24%

External grants

29%

GDP Growth (%)


Sectoral GDP Growth Trend (%)


1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

F Y09 F Y10 F Y11 F Y12 F Y13 F Y14

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

FY09 FY10 FY11 FY12 FY13 FY14

Agri Manufacturing Services


Arab light (US$/bbl) 75 100 125

Import bill (US$ bn) 10.18 13.20 16.23

Pakistan oil import bill sensitivity to International Oil


17/23

1M 3M 6M 12M

Absolute (%) 1.4 44.6 91.6 75.0

Rel. Index (%) 2.2 37.4 71.5 61.9



17


June 2012

Dividend income arising from money market/income funds to be taxed at 25% in FY13

and at 35% in FY14, up from 10% at present. More affected banks, in our view, are

ABL, MEBL and HMB. From a macro perspective, this may lead to shift towards

alternative investment avenues including the stock market.

0.2% WHT now deductable on cash withdrawals of PkR50k/day, up from PkR25k/day

previously.

Budgetary impacts are slightly negative at the margin. However, considering that the

much feared increase in corporate tax rate/ tax on T-bills did not materialize, we believe

Banks are in for a sustained bull run across 2HCY12.

Despite higher regulatory risk, our optimism is based on 1) robust balance sheet

growth - deposits up QoQ in 1QCY12, bucking seasonal trend, 2) sustained focus on

risk-free investments and resultant decline in provisions, 3) Likelihood of a reversal

in the interest rate cycle - spreads to sustain at >7% and 4) capital strength amidst

zero risk weight of GoP securities leading to higher payouts. Risks to materialization

of foreign flows (e.g. Eurobonds) as well as selected domestic proceeds (e.g.

privatization) should lead to higher than budgeted bank borrowing which buttresses

our bull case. Our top picks are BAFL and UBL.

1M 3M 6M 12M

Absolute (%) -3.2 7.7 25.1 8.4

Rel. Index (%) -2.3 0.5 5.0 -4.8


Banks Budget Implications - Neutral to Negative

Performance Chart

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

May-11 Aug-11 Nov-11 Feb-12 May-12

KSE-100 Index Banks

FED on cements has been reduced by PkR100 per ton which though positive, is lower

than initial market expectations. The reduction, nevertheless, provides manufacturers

with space to cut prices by PkR5 per bag.

Customs duty on scrap of rubber / shredded tyres has been reduced to 10% from

previous 20%. While positive owing to implementation of Tyre Derived Fuel (TDF)

technology by players such as LUCK, DGKC et al, the impact on cost savings from

TDF remains a bit of an unknown.

PSDP target for FY13 has been set at PkR873bn (Provinces: PkR513bn; Federal:

PkR360bn) compared to PkR730bn in FY12 - up 19.6%YoY which should help continue

the dispatch growth momentum from last year.

The Finance Bill provides for exporters to move towards the normal tax regime (NTR)

from current final tax regime (FTR), should they decide to avail it. Clause 41AA provides

an option to opt for the NTR instead of the FTR, however, stipulates that minimum

tax liability under NTR should not be less than 50% of the realized proceeds at the

time of exports. Given, however, that even the biggest cement exporter (LUCK) is

currently paying a tax (turnover) that translates to just 4.2% (9MFY12 current tax), it

would be ill-advised to enter into NTR and therefore, we deem it unlikely that any

manufacturer will opt for it.

Cements Budget Implications - Positive

Performance Chart

-20%

0%

20%

40%

60%

80%

100%


KSE-100 Index Cements


18/23


18


June 2012

For the tax year 2012 and onwards, the GoP has provided a one time tax regime for

upstream Oil & Gas companies at 40% of profits and gains, net of royalty, subject to

withdrawal of all pending appeals etc and clearance of outstanding tax liability up to

tax year 2011. This is against long standing disputes created over inconsistency

between the Schedule to the Mining Act 1948 and Petroleum Concession Agreements.

E&P companies discharge tax obligations as per respective PCA's at the higher of

55% on profits and gains or 50% of profits and gains before deducting royalty. The

FBR's contention includes the Mining Act providing a floor and ceiling at 55% and

50% before royalty while PCA's are framed for profit and gains only. .

Budget remains largely silent for gas distribution however GDS collection is expected

to improve by 29%YoY to PkR30bn. This underscores improving gas production as

well as downward sticky consumer gas tariffs particularly in 2HFY12 as international

prices come off.

Removal of FED on lubricants ranging from 10% of retail price to PkR7.5/litre on baseoil is positive to improve overall consumption levels as well as for Lube Oil producers

such as NRL which may retain the benefit

1M 3M 6M 12M

Absolute (%) -2.6 -2.1 4.9 0.4

Rel. Index (%) -1.8 -9.3 -15.2 -12.7


Oil & Gas Budget Implications - Positive

Performance Chart

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


KSE-100 Index Oil & Gas

Status quo as far as import duty on CBUs is concerned which is a big relief for the

OEM sector.

Custom duty on imported CKD units reduced to 30% from 35% previously which will

reduce the manufacturing costs for car as well as tractor manufacturers. Negative for

auto parts manufacturers (Thal Engineering and Agri Autos).

Advance tax on 1300cc-1600cc vehicles has been raised by PkR8,125/unit to PkR25k.

We view this as slight negative for INDU but positive for PSMC given its dominance

in the economical category (below 1300cc).

Auto sector has gained 30%CYTD and has outperformed the broader market by 8%

in the said period. However, there has been a recent sell-off in the sector due to fear

of reduction in CBU imort duties in budget FY13. With status quo on import duties

maintained, we believe autos are ripe for a relief rally.

1M 3M 6M 12M

Absolute (%) -1.6 12.4 31.5 6.4

Rel. Index (%) -0.8 5.1 11.4 -6.7


Autos Budget Implications - Neutral to Positive

Performance Chart

KSE-100 Index Automobile and Parts

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


A non-event for the Electricity (Power) sector where the government announced no

tangible steps for curbing or even controlling circular debt.

Total subsidy for tariff differential has been projected at PkR185.3bn compared to

revised figure of PkR464.2bn for FY12, indicating further round of tariff hikes. That

said, we remain skeptic of subsidy targets being met, given revision in FY12 targets

from initial allocation of PkR147.3bn. Electricity tariffs and loadshedding will likely be

one of the focal points of all political parties in the election year expect subsidy

targets to be revised upwards again!

1M 3M 6M 12M

Absolute (%) 3.6 3.8 12.4 8.7

Rel. Index (%) 4.4 -3.4 -7.6 -4.4

Relative PerformanceElectricityBudget Implications - Neutral

Performance Chart

-15%-10%

-5%

0%

5%

10%

15%

20%

25%


KSE-100 Index Power


19/23


19


June 2012

For tax credit purposes, limit of investment in securities and insurance as proportion

of taxable income increased from 15% to 20% and from PkR500k to PkR1mn, whichever

is lower.

Required retention period of shares is also being reduced to 2yrs from 3yrs. The

purpose of these budgetary measures is to encourage retail investment in insurance

schemes, where insurance penetration is extremely low (premiums as % of GDP are

less than 1% with non-life penetration at 0.5% compared with emerging markets

average of 1.3%).

At the same time, FED on livestock insurance has been eliminated which should prove

to be uplifting at the margin.

We see FY13 Budgetary proposals as Neutral to slightly Positive for the Insurance

sector. Potential increase in funds flow to the equity market (as Banks shift away from

money market funds) may be positive for overall stock price recovery, which should

bode well for listed Insurance companies given their hefty reliance on investment

income. At current levels, we retain our preference for AICL.

1M 3M 6M 12M

Absolute (%) 5.3 1.7 27.0 11.6

Rel. Index (%) 6.1 -5.5 6.9 -1.5


Insurance Budget Implications - Neutral to Slightly Positive

Performance Chart

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


KSE-100 Index Insurance

A 100% tax credit for corporate dairy projects for upto five years, given that the

investment is fully equity funded. The move will stimulate development of dairy farming

in the country, and may result in new corporate players in the field. We flag FFC as

a potential beneficiary, as the company seeks to diversify its business operations, in-

line with peer ENGRO.

GST on tea has been reduced to 5% from 16% previously, which is essentially catered

to tackle tea smuggling and will be beneficial for ULEVER.

1M 3M 6M 12M

Absolute (%) 3.3 20.7 49.1 45.2

Rel. Index (%) 4.1 13.5 29.0 32.0

Relative PerformanceFood ProducersBudget Implications - Positive

Performance Chart

-20%

-10%

0%

10%

20%

30%

40%

50%

60%


KSE-100 Index Food Producers

GoP has announced a 20% hike in government employee salaries which is negative

for the service oriented telecom sector.

The GoP has maintained its FY12 dividend target for PTC at PkR6.5bn (DPS PkR2.05)

and the FY13 target has also been kept at PkR6.5bn. We believe that PTC is likely

to announce a dividend this month, which is likely to keep the stock in limelight in the

near term. Recall, GoP has 62% shareholding in PTC.

GST on telecom services has been kept unchanged at 19.5%.

The already ambitious 3G auction target has been increased by PkR4bn to PkR79bn.

The budget appears Neutral on the telecom sector, however, an interim dividend

announcement by PTC is likely to excite in the near term. Furthermore, any tangible

development on ICH will likely lead to a sector re-rating.

1M 3M 6M 12M

Absolute (%) 15.8 30.1 45.6 -14.5

Rel. Index (%) 16.6 22.8 25.5 -27.7


Fixed Line Telecom Budget Implications - Neutral

Performance Chart

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%


KSE-100 Index Fixed Line Telecommunication


20/23


20


June 2012

No news in itself is bad news as far as LOTPTA is concerned as the budget was silent

on PTA import duty implying status quo (import duty at 3%).

Higher gas prices (GIDC) will increase costs for both EPCL and LOTPTA.

1M 3M 6M 12M

Absolute (%) 7.2 5.4 20.0 -2.5

Rel. Index (%) 8.0 -1.9 -0.1 -15.7


Chemicals Budget Implications - Negative

The much feared Gas Infrastructure Development Cess (GIDC) has been increased.

Resultantly, GIDC on feed stock and fuel stock has been enhanced by PkR103/mmbtu

and PkR87/mmbtu respectively which would collectively raise urea production costs

by PkR138/bag.

Urea import subsidy has been set at PkR26bn, which is lower than FY12s revised

number of PkR45bn. Assuming the current landed cost of US$525/ton and retail price

of PKR1600/bag (PkR1379/bag ex-GST), the GoP can import upto 1.2mn tons of urea

in FY13, which will be sufficient to cover up the production loss from Sui supplied

plants, and keep the industry well supplied.

Despite the election year and recent slide in soft commodity prices (cotton in particular),

the government has not announced any targeted relief measures for the agriculture

sector (e.g. increase in wheat support prices), which is likely to keep farmer economics

weak over the near term.

Budget FY13 is broadly negative for the sector given the hike in gas prices and threat

of further urea imports. Urea pricing power is likely to remain depressed owing to the

supply glut as well as threat of further imports which is likely to accrue in less than

full pass-through of GIDC impact. On the flipside, Jun12 urea sales may pick up

significantly ahead of an expected price hike in Jul12. We highlight FATIMA as the

key beneficiary as GIDC is not applied on locked in feedstock rate for new plants.

.

1M 3M 6M 12M

Absolute (%) -3.5 -7.5 -0.6 0.9

Rel. Index (%) -2.7 -14.7 -20.7 -12.3


Fertilizer Budget Implications - Negative

Performance Chart

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


KSE-100 Index Fertilizers

In FY13 budget, PkR5.068bn is allocated for export development fund, up by modest

PkR50mn compared with revised estimate of FY12, which is unlikely to make any

material impact on textile exports.

Gas Infrastructure Development Cess (GIDC) on captive power producers is increased

from PkR13/mmbtu to PKR100/mmbtu (17.1% surge in natural gas cost), further

increasing cost of production of textile manufacturers which have captive power facility

fueled by natural gas.

Exporters (including textile exporters) are provided an option to opt out of Final Tax

Regime (FTR) provided their tax liability does not fall below 50% of tax liability computed

under FTR. The difficulties related to documentation may refrain most of the exportersto opt out of FTR.

Among textile sector, we retain our liking for NML where recent dip in price should be

taken as an attractive entry point.

1M 3M 6M 12M

Absolute (%) 2.3 13.9 26.8 -1.8

Rel. Index (%) 3.1 6.6 6.8 -15.0


Textiles Budget Implications - Neutral to Negative

Performance Chart

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%


KSE-100 Index Textile


21/23


21

Annexure

Salient features of the FY13 Budget are as follows:

Taxation slabs for individuals and AOPs to be reduced to 5 from earlier 17. Further,

taxable income for salaried individuals and AOPs to be increased to PkR400k p.a from

previous PkR350k p.a. Moreover, AOPs will also be taxed at progressive rates rather

than previous flat rate of 25%.

CGT related changes approved by Finance Ordinance, 2012 will now gain statutory

status through Finance Bill 2012.

Expenditure made on BMR will be get tax credit of 20% and shall be adjustable upto 5

years.

Stock exchanges will not collect WHT on carry over trades. NCCPL will collect WHT

@10% on margin financing in share business.

Investment in IPOs and insurance premium will obtain a tax credit; higher of 20% (15%

in FY12) of taxable income or PkR1mn (PkR0.5mn in FY12). Moreover, retention period

has also been reduced from 3 years to 1 year.

Property sold before 2 years of possession will be subject to CGT ranging from 5% to

10%.

Dividend and profit from intra group debt is to be exempted from WHT for the companies

entitled to group taxation.

Tax arbitrage opportunity for banks has been purged by imposing 25% tax in FY13 and

35% in FY14 on dividend received from money market funds and income funds.

Retailers having revenue up to PkR5mn will be subject reduced tax rate of 0.5% from

earlier 1%.

E&P companies have been provided with option to pay tax@40% of profits and net of

royalty gains from FY12 onwards provided these companies withdraw pending appeals

and payment of tax liability up to FY11 by Jun 30'12.

Exporters, importers and suppliers are provided an option to exit Final Tax Regime (FTR)and enter Normal Tax Regime (NTR).

Manufacturers will act as withholding agents to collect 1% tax from traders and distributors

which will be adjustable against tax liability of those traders/distributors.

Expansions in PPE made before Jul 1'11 through 100% fresh equity will get tax credit

for 5 years from commencement of commercial production.

Initial depreciation on building will be reduced to 25% from earlier 50%.

Tax exemption granted on venture companies and private equity is to be extended for

10 years period.

FED on cements will be reduced by PkR100/ton.


June 2012


22/23


22

Import duty on rugged tryres to be reduced to 10% from 20%.

Additional GIDC is to be imposed on fertilizer sector by PkR103/mmbtu on fuelstock and

on PkR87/mmbtu.

GST has been rationalized at 16% for goods.

Sales tax on steel sector enhanced from PkR6/Kwh to PkR8/Kwh.

Minimum price for new brands is floored to 95% of most popular price category brands.

Limit of taxable cash withdrawals (subject to 0.2%WHT) has been on enhanced to 50k

pd from previous 25k pd.

100% tax credit will be provided against tax payable to industrial undertakings includingdairy farming.

15 items, including lub oils, have been exempted from FED.

FED on 88 pharmaceutical raw materials has been reduced.


June 2012


23/23

AKD SECURITIES LIMITEDMember: Karachi Stock Exchange

PAKISTAN

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