Pakistan Federal Budget - A New Beginning in Difficult Times


2/21

1

Table of Contents

16 Banks: Good riddance to a hanging sword

13 Electricity: Promises Made Implementation remains the key

14 Fertilizer: Much ado about nothing

15 Textile: Taxes imposed; Outlook remains upbeat

Executive Summary 2

Economy and Fiscal Space: Moving in the Right Direction 3

Capital Markets:A mix bag of triggers 6

Sectors at a glance 7

Sector Outlook

Cements : Volumetric gains to drive growth outlook 10

Autos: Hefty taxes; Volumes in danger 11

OMCs & Refineries: No incentives granted 12

E&P: Muted again 17

Telecom: Nothing New 18

FMCG: Taxing the end consumer 19

Federal Budget 2013-14


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4

Federal Budget 2013-14EconomyandFiscalSpace:MovingintheRightDirection

Outlaytoitsbestuse

Themedas

routing

fiscal

expenditure

towards

the

growth

oriented arenas,

the

major

highlights

of

the

outlayis:

Development spending of PKR780bn (23% of total revenues) establishing our view of positive

spending.

This includesPKR540bn (68%ofdevelopmentspending)expected to bespent forPublicSector

DevelopmentProjects(PSDP).

Themajorprojectsofwhichinclude:

9 PKR115bnfornewdamsandwaterrelatedprojects

9 PKR63bntoNationalHighwayAuthority(NHA)forMotorway

9 PKR57bnforNandipur Powerproject(capacity440MW)

9 PKR51bnforWAPDApowergridupgradation

Theotherconventionalexpenditureswouldinclude:

9 DebtservicingofPKR1.0trn(52%offederalrevenues)

9 IMFandotherloanrepaymentsofPKR367bn(19%ofrevenues)

9 SubsidyofPKR240bn(13%offederalrevenues),ofwhichpowersectorwouldshare92%

orPKR220bn

9 The disbursement for defense would increase by 10% to PKR627bn (33% of federal

revenues)

Withtheseoutlaysandexpectedrevenuemeasurealongwithadjustingforprovincialsurplusof

PKR23bn, the government estimates a deficit of PKR1,651bn (6.3% of GDP) in their finances,

whichwouldbefinancedthroughbankborrowings

BudgetFY14:ExpenseAllocation

InerestPaymnets

32%

DefenceAffairs &Services

17%

FederalPSDP15%

Others15%

Subsidies, 7%

Subsidies7%

Pension5%

PSDP:MajorAllocations

0 100 200 300 400 500 600 700

Others

Water & Power

New

Dev.Initiatives

WAPDA/NHA

Provinces

Revised FY13 Budget FY14

Source: MoF Pakistan, BMA Research


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5

Federal Budget 2013-14RealisticandAttainable

TaxRevenueas%ofGDP

TaxtoGDP&Inflation

0

2

46

8

10

12

14

16

20102011 201112 201213 201314 201415F 201516F

RealGDPGrowth(%) Inflation(%)

0

2

4

6

8

10

12

14

20102011 201112 201213 201314 201415F 201516F

TaxRevenue

as

%

of

GDP

Our microscopic look into the budget and its aggressive targets (revenue collections, PSDP

allocation,lowersubsidies)compelustotermthebillasthefirststepintherightdirection.

However,contrarytonewsflows,thequantumofadditionaltaxes whichweresupposedtobe

introduced inthefinancebilldidntmaterializealongwitha1%reduction incorporate income

tax,bodingwellfortheindustries.

With regards to taxes, we believe the additional measures taken (discussed earlier) have the

ability to increase collection. However, targets seem to be aggressive even if implemented in

truespirit.

Ontax

revenue

front,

we

believe

assumption

to

increase

direct

and

indirect

taxes

by

25%

and

21% respectively will be demanding given nominal GDP growth of 1213%. Hence we believe

government will fall short by PKR65bn and PKR85bn in both direct and indirect taxes

respectively.

Pertainingtothenontaxrevenuetargets,webelievetheprojectionforissuanceofEuroBonds

(PKR49bnorUSD500mn)seemsdifficultasnogroundworkhasbeen doneandisunlikelytobe

materializedinFY14.

Moreover,conditionalityoflandtitletransfers(309properties)setbyEtisalat ontheremaining

amountofPTCLprivatizationproceed(USD800mnorPKR79bn)makes itadifficultbetandthus

weassignsalowprobabilitytothesame.

Though, the incoming government has remained prodevelopment spending, (looking at their

historic trend in Punjab province), we project nonmaterialization of these revenue targets

wouldcompelgovernmenttoreducespending.WebelievefederalPSDPspendingtoremain in

tune of ~PKR450bn which even then would be 19% higher than revised spending for FY13,

bodingwellfortheeconomicgrowth.

NewsflowofanoticeableincreaseinpowertariffsjustifiesthelowersubsidytargetsetforFY14

(keptatPKR240bn)againstrevisedtargetofPKR367forFY13.However,webelieveinthetarget

mayexceedby~PKR50bnheretoo.

Trimmingthegovernmentsaggressivetargetsbothintermsofrevenuesandexpenditures, we

opinethatfiscaldeficitwouldclockat7.1%which is80bpshigherthanthegovernmentsown

targetof

6.3%

Source: MoF Pakistan, BMA Research


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6

Surprisingly when nobody was pinning hopes on the Budget FY14, it has turned out to be

positivefor

the

capital

markets.

Thefinanceministerhasproposedtoreducethecorporatetaxrateby1%to34%forFY14and

furtherprogressivelyreduce itto30% inthenextcoupleofyears.Thestephasbeentakento

supportacrosstheboardcorporatesectoragainstSECPs proposaltoprovidethisrelieftolisted

sectoronly.Nonetheless,itwillbebeneficialforlistedcompaniesonKarachiStockExchange.

To increase tax collections, the finance bill FY14 has also proposed to increase minimum tax

(turnover

tax)to

1%

of

net

turnover

from

earlier

tax

rate

of

0.5%,

boding

negative

for

listed

distributionbusinesses.

ThiswouldnegativelyimpactallthecompanieswhichoperateatlowermarginsincludingOMCs,

Refineries(amidvolatilemargins),smalltextilecompaniesoperatinginlossesorminimalprofits

andotherretailoutlets.

Capital Gains Tax, CVT and FED on broker commission remained intact. However, the bill has

withdrawn

FED

exemption

on

service

provided

by

asset

management

companies

and

a

10%

WHTonprofit/interest earnedonmarginfinancingbybrokershasbeenintroduced.

KSE100Index:PriceVolumeGraph

BMAUniverseValuationSnapshot

RegionalValuations 2013PER

Federal Budget 2013-14CapitalMarket:Amixbagoftriggers

12,000

14,000

16,000

18,000

20,000

22,000

24,000

Jun12

Jul12

Aug12

Sep12

Oct12

Nov12

Dec12

Jan13

Feb13

Mar13

Apr13

May13

0

100

200

300

400

500

600

700

KSEVolumes

mn

(RHS) KSE100

Index

(LHS)

FY12A FY13E FY14E

PER 10.0x 8.6x 7.3x

PBV 2.2x 1.9x 1.7x

Div.Yield 5% 7% 8%

EPSGrowth 10% 17% 18%

8.5x

9.3x

11.0x

12.1x

12.6x

13.5x

15.0x

13.7x

Pakistan

China

Vietnam

India

Thailand

Singapore

Indonesia

Malysia KSE:Eventsandtriggerstowatchoutfor

ResultRally

ForeignFlows

Triggers

June13endCSFPayment

19Jun13IMFMissiontoPakistan

21Jun

13Monetary

Policy

DateEvent

10.0%2016NA2016

8.0%201410.0%2014

8.0%201310.0%2013

8.0%201210.0%2012

7.5%201110.0%2011

Rate

of

taxTax

YearRate

of

taxTax

Year

Holding12MLessthan6Mholding

Slabsofcapitalgainstax

Source: Bloomberg,KSE Website, BMA Research


8/21

7

Federal Budget 2013-14SectorsataGlance

Sector BudgetAnnouncement Impact BMAStance

CapitalMarkets Corporatetaxratecutby1%to34%

Tobeprogressivelyreducedto30%innextcoupleofyears

Turnovertaxincreasedto1%from0.5%

CVT,CGTandFEDonbrokeragechargesmaintained

10%FEDimposedonmarginsfinancingprofitorincome

Neutral to

Positive

Banks Dividend incometobanksthroughmoneymarket instruments,previouslyscheduledtobe

taxedat35%startinginFY14,willnowcontinuetobetaxedat25%

SmallbusinessloanstoindividualsrangingbetweenPKR100,000toPKR2mn(50,000loanto

bedisbursed)toberaisedthroughthebankingsystem

Neutral Marketweight

Cements FederalPSDPraisedby50%toPKR540bn.TotalPSDPupby32%toPKR1,155bn

Turnovertaxjackedupto1%comparedto0.5%inFY13

GSThiked

to

17%,

to

be

charged

based

on

printed

retail

prices

of

cements

WHT levied on distributors reduced from 0.5% to 0.1% of sales; to be collected by

manufacturers. Additionally, manufacturers will withhold 2% sales tax on supplies to

unregisteredparties

Positive Overweight

Textile Increasetheminimumtaxongrossturnoverfrom0.5%to1.0%

2%hikeintaxrateonsuppliestounregisteredpersons

Reduced WHT on distributors to 0.1% to be deducted by the manufacturers (acting as

withholdingagents)


Fertilizer GSTraisedto17%,tobechargedbasedonprintedretailpricesoffertilizer

WHT levied on distributors reduced to 0.1% of sales, which will be collected by


unregisteredparties

Corporatetaxratereducedby1%to34%



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8

Federal Budget 2013-14SectorsataGlance

OverweightNeutral Noincreaseinsalariesofgovernmentemployees

PKR120bnallocated

as

3G

auction

revenue

GSTontelecom servicestoremainunchangedat19.5%

Telecom

OverweightNeutral Dividend target of PKR1011/sh and PKR1213/sh set for FY14 from OGDC and PPLrespectively

PossibilityofasecondaryofferinPPL

ExplorationandProduction

Sector BudgetAnnouncement Impact BMAStance

OilMarketing

Companies

Turnovertaxmaintainedat0.5%

PKR120bnsetaspetroleumlevytarget

GovernmentexpectsPKR1112/shdividendfromPSO


Refineries Turnovertaxmaintainedat0.5%

NochangeindeemeddutyonHSD


Electricity PKR220bnallocatedforsubsidiestopowersectoroutofatotalPKR240bn;making94%of

theentireamount.

AcomprehensiveEnergyPolicytobeannouncedsoonbythegovernment followingthe

resolutionofcirculardebtinthenext60days

Neutralto

Positive

Overweight

Automobile&

Parts

Increaseinsalestaxfrom16%to17%

Impositionof WHTonpurchaseofnewcars

Relaxationofdutyonimportofhybridcarsdependingonenginecapacity

10%FEDoncarsabove1800cc

Negative Marketweight

FMCGs FED on aerated beverages raised to 9% from 6% earlier; capacity based taxation of

aeratedbeveragemanufacturersintroduced

Cigarettestobetaxedasperatwotierratestructure,asopposedtothreetierstructure

previously

Corporate

tax

rate

reduced

by

1%

to

34%,

GST

raised

by

1%

to

17%



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9

SECTORS


11/21

10

BMACoverage

Valuations

KeyBudgetaryMeasures

FederalPSDP

raised

by

whopping

50%

to

PKR540bn.

Total

PSDP

up

by

32%

to

PKR1,155bn

Turnovertaxjackedupto1%comparedto0.5%inFY13

GSThikedto17%.Also,itwouldnowbechargedbasedonprinted retailpricesofcements

WHTleviedondistributorsreducedfrom0.5%to0.1%ofsales;tobecollectedbymanufacturers.

Additionally,manufacturerswillwithhold2%salestaxonsuppliestounregisteredparties

Amaximumof25%initialdepreciationisnowallowedonplantandmachineryinthefirstyearof

COD,downfrom50%allowedpreviously

Impact:Positive

TheunprecedentedriseinPSDP,coupledwithPMLNregimessoundtrackrecordofconceiving

andcompletingmegainfrastructureprojects,drivesourconvictionofaggressivecementdemand

boost

going

ahead.

We

expect

volumes

to

rise

by

at

least

8%

annually

in

FY14

and

onwards,comparedto6%EinFY13

Turnover tax hike to deflate earnings estimates by 1.5%3.0% across BMA Cements Universe,

withLUCKandDGKCremainingtheleastaffectedandACPLthemost

GSThike&retailpricebased imposition,togetherwithothertaxes leviedondealerstojackup

retaildomesticcementpricesbyPKR1015/bag(completepassonassumed)

Outlook:Under

utilized

plants

remain

favorite

HigherPSDPallocationtobenefitunderutilizedplayersthemost.WesuggestexposuretoLucky,

Fauji and Maple Leaf Cement. Improvement in local to export ratios and demand driven price

hikestoplayinthefavorofDGKhanCementintheNorthandAttockCementintheSouth

MaintainOverweightonBMACementUniverse

Federal Budget 2013-14Cements:Volumetricgainstodrivegrowthoutlook

Budget

Impact: Positive

Sector: Cements

SectorStance: Overweight

FY12 FY13E FY14E

P/E 3.8x 5.9x 5.6x

PB 0.6x 1.3x 1.1x

Div.Yield 7% 5% 5%

ROE 17% 22% 21%

Ear.Growth 155% 52% 5%

Cements

TargetPrice

CurrentPrice

TotalReturn

Ratings

LUCK 205 191 12% Add

DGKC 80 80 3% Neutral

ACPL 128 131 7% Add


12/21

11

BMACoverage

Valuations


Increasein

sales

tax

from

16%

to

17%

Impositionof WHTonpurchaseofnewcars

Relaxationofdutyonimportofhybridcarsdependingonenginecapacity

10%FEDoncarsabove1800cc

Corporatetaxrateslashedto34%from35%

Impact:Negative

TheWHTonnewpurchasesofcaralongwith increaseinsalestaxandimpositionofFEDtotriggeraprebuyingphenomenoninJun13escalatingsalesvolumesforthemonth.

However,onabroaderscopethesaidmeasurewillmakecarsexpensivesqueezingthebuyerspowerandlocalmanufacturers pricingpoweralike.

We

dont

see

any

impact

on

margins

as

the

price

increments

would

be

passed

on

to

endconsumers

Thehybridcarsmakeupasmallportionofthe industrydemandand thusrelaxationof importdutyonthesamewouldnotmakeasignificantimpactonexisting manufacturers

Outlook:MarginstostrengthenonthebackofJPYdepreciation

The budget failed to provide any direction to the auto industry (no discussion on AIDPII).

Moreover,it

decreased

the

pricing

power

of

the

assemblers

by

imposing

hefty

taxes

(33%

233%

asperenginecapacity)

Beyond FY13, we expect strong earning rebound based on JPY depreciation against 13% CYTD(marginimprovement)

Though, the budgetary measures resulting in car price increases will keep the volumes underpressure,reducedinfluxofimportedvehicleswillprovidesomesupport.

Weflag

PSMC

as

our

favorite

pick

in

the

sector,

offering

atotal

return

of

24%

Federal Budget 2013-14Autos:Heftytaxes;volumesindanger

FY12 FY13E FY14E

P/E 4.7x 8.8x 6.7x

PB 0.8x 1.1x 1.0x

Div.Yield 11% 5% 7%

ROE 16% 13% 15%


Autos

BudgetImpact: Negative

Sector: Autos

SectorStance: Marketweight

TargetPrice

CurrentPrice

TotalReturn

Ratings

INDU 333 340 4% Neutral

PSMC 180 149 24% Buy


13/21

12

BMACoverage

Valuations


Increasein

turnover

tax

by

0.5%

to

1.0%

GovernmenthaskeptatargetofPKR120bnforpetroleumlevy

Dividend income from PSO may have been targeted at PKR9.011.0/sh (as we await detaileddocuments)

Governmenthaskeptdeemeddutyintactforrefineries

Impact:Neutral

The budget has amended section 113 which does not cover OMCs, Refineries and Utilities(coveredundersection9ofSecondSchedulePartIII).

Hencethesaidsectorsareexpectedfromtherecentincreaseinturnovertaxandwillcontinuetopay0.5%inturnovertax.

Recall,OMCs andRefinerieswerepaying0.5%turnovertaxinFY12despitethepresenceof1.0%

turnovertax

rate.

ThePKR9.011.0/shdividendfromPSOwillremaindependentontheintensity ofcirculardebt

Outlook:Liquidityistheprimetrigger

Theeliminationofcirculardebtthroughonetimesettlementwillfinallyresolvethelongstandingliquidity issue of midstream oil companies. Improved liquidity position will result in smoothoperation,betterpayoutsandreducedrelianceonbankborrowing forworkingcapitalfinance

Recentimprovementingrossrefiningmarginmaybodewellforrefinerysector.

We maintain our liking towards ATRL and APL with better product mix and low exposure tocirculardebt

PSO, the prime beneficiary of circular debt resolution, may continue its upward rally as theenergychainmovesclosertogradualreductionofcirculardebt

Federal Budget 2013-14OMCs &Refineries:Noincentivesgranted

FY12 FY13E FY14E

P/E 7.5x 6.9x 6.4x

Div.Yield 5% 4% 5%

OMC

FY12 FY13E FY14E

P/E 6.2x 6.1x 6.7x

Div.Yield 6% 7% 8%

Refinery

BudgetImpact: Neutral

Sector: OMCs &Refineries


TargetPrice

CurrentPrice

TotalReturn

Ratings

PSO 309 315 0% Neutral

APL 523 557 1% Neutral

NRL 230 237 8% Add

ATRL 215 198 12% Add


14/21

13

BMACoverage

Valuations


PKR220bnallocated

for

subsidies

to

power

sector

out

of

atotal

PKR240bn;

making

94%

of

the

entireamount.

Theamountallocatedtobeutilized in improvingplants efficienciesandupgradationofcertain

existingprojects.

A comprehensive Energy Policy to be announced soon by the government following the

resolutionofcirculardebtinthenext60days

Improvementinfuelmixasapartofamediumtermplan

Impact:NeutraltoPositive

TheallocatedamountofPKR225bnis36%lowerthanlastyearsbudget

Againstexpectations,thebudgetslightlytoucheduponthesubjectofcirculardebt

Much now relies upon the energy policy to be announced later by the government where an

increaseinelectricitytariffishighlyexpected

Governments insistence to hire professional management to run the inefficient Gencos

alongwith stepstobetakentolowertheT&Dlosseswillincreasetherecoveryratioforthesector

Outlook:Bullishnessprevails

Thebudgetremainedanoneventforthepowersectorthoughitclearlyindicatedgovernments

willtoresolvetheenergycrisis.However,implementationremainsthekey

Theresolutionofcirculardebthasmanypositiveimplicationsonthesectorwhereopeningupof

thechokedupbankinglinesandincreaseincapacityutilizationarethefewimportantones

Weremainbullishontheentirepowersectoreyeingkeypowersectorreforms.

Federal Budget 2013-14Electricity:Promisesmade;implementationisthekey

FY12 FY13E FY14E

P/E 5.0x 7.2x 6.8x

PB 0.1x 2.1x 2.0x

Div.Yield 16% 11% 12%

ROE 27% 30% 30%


Electricity

BudgetImpact: NeutraltoPositive

Sector: Electricity


TargetPrice

CurrentPrice

TotalReturn

Ratings

HUBC 56 63 0% Neutral

KAPCO 58 63 3% NeutralNCPL 29 34 1% Neutral

NPL 26 34 16% Reduce


15/21

14

BMACoverage

Valuations

Federal Budget 2013-14Fertilizer:Muchadoaboutnothing


Subsidyon

imported

urea

raised

by

15%

to

PKR30bn.

Pertinently,

only

PKR10bn

was

spent

on

ureasubsidiesinFY13asopposedtoallocationofPKR26bn

GSTwouldnowbechargedbasedonprintedretailpricesoffertilizer

WHT levied on distributors reduced from 0.5% to 0.1% of sales, which will be collected by


unregisteredparties

Amaximumof25%initialdepreciationisnowallowedonplantandmachineryinthefirstyear

ofCOD,downfrom50%allowedpreviously

GSThikeby1%to17%andcorporatetaxratereduction by1%to 34%willalsoapply

Impact:Neutral

We

dont

see

any

impact

on

margins

of

fertilizer

manufacturers

from

these

budgetary

measures.Retailureapriceswouldriseby~PKR1215/bagtoaccountforhigher&retailprice

basedGST

WebelievereliefinWHTimpliedfordealerswouldbeabsorbed.Thequantumofunregistered

buyersoffertilizeristoosmalltomateriallyimpactretailprices

Corporatetaxrelieftotranslateinto1.5%higherearningsacrossthesector

Outlook:ExpectreliefrallyinFaujis Marketweight maintained

Anticipation of feed gas price hike had kept the entire fertilizer sector (ex. FATIMA) under

pressurerecently; leadingENGRO,FFCandFFBLtounderperformthebroader indexby4% in

justoneweek

Wethusexpectreliefrallytoreigniteinterestinthesescrips.CurrentlyFaujis provideenticing

dividendyields

of

over

13.5%

BUY!

Having

said,

we

maintain

ENGRO

as

our

top

pick

FY12 FY13E FY14E

P/E 8.8x 7.7x 6.9x

PB 0.1x 2.6x 2.2x

Div.Yield 10% 10% 10%

ROE 29% 34% 33%


Fertilizer


Sector: Fertilizer


TargetPrice

CurrentPrice

TotalReturn

Ratings

FFC 120 114 19% Buy

ENGRO 174 141 23% BuyFFBL 44 40 25% Buy

FATIMA 37 26 52% Buy


16/21

15

BMACoverage

Valuations


Thebudget

has

proposed

the

turnover

tax

to

be

raised

to

1.0%.

Onapositivenote,WHTonexportsaleshasnotbeenincreased.

IthasalsobeenproposedthattherateofdepreciationonPlant andMachinery(fortaxreporting

purposes)willbereduced25%(previously50%)

Onsuppliesto unregisteredpersonsfurther2%taxhasalsobeenimposed

TheWHTcollectedbymanufacturersonsuppliestodistributors,dealersandwholesalerswillbe

reducedto0.1%(previous0.5%)

Impact:Neutral

The increase in turnover tax to 1.0% will lead to a downside impact of 6%8% in our earnings

estimatesofNMLandNCLonanannualizedbasis.

Theimpositionofadditional2%taxonsuppliestounregisteredpersonswillnothaveanynotable

impactoncompanies sales

The reduction in WHT deducted on supplies to distributors/wholesalers may bode positive as

many distributors shifted towards unregistered manufacturers last year to evade taxes when

0.5%WHTwasimposedinFY13budget

Outlook:FY14

to

be

another

eventful

year

Drivenby,1)betterexportprospects(Chinayarnimportboom+EUdutywaiver),2)steadyyarn

cottonspreadsplusstrengtheningfabricpricesand3) improvement ingas/electricitysupply(on

possibleresolutionofcirculardebt),webelievethesector isallsettowitnessanothereventful

yearinFY14afterwitnessingrobustrecoveryinFY13.

Atcurrenttradinglevels,bothNMLandNCLaretradingatPERof3.1xand3.0xtoourFY14core

EPSestimates

respectively

Federal Budget 2013-14Textile:Taxesimposed;Outlookremainsupbeat

FY12 FY13E FY14E

P/E 3.5x 5.8x 5.2x

PB 0.5x 0.9x 0.8x

Div.Yield 6% 6% 7%

ROE 13% 16% 16%


Textile


Sector: Textile


TargetPrice

CurrentPrice

TotalReturn

Ratings

NML 109 103 11% Add

NCL 65.4 59 19% Buy


17/21

16

BMACoverage

Valuations


Dividendincome

to

banks

through

money

market

instruments,

previously

scheduled

to

be

taxed

at35%startinginFY14,willnowcontinuetobetaxedat25%

Smallbusiness loansto individualsrangingbetweenPKR100,000toPKR2mn(50,000 loantobe

disbursed)tobeprovidedthroughcommercialbanks.

Aimingtopavewayforreductionininterestrates

Impact:Neutral

Stabletaxesondividendincometobringasighofreliefacross thesector,asthehangingsword

ofpotentiallytakingthemupto35%seemstohavebeenremovedpermanently

To reduce tax liabilities, the banks preferred to recieve stock dividends instead of cash from

moneymarketfunds

Smallbusiness

loans

and

mortgages,

to

be

made

available

through the

banking

system,

may

help

kickstartrelativelylowrisklending,whichhasbeenhithertostagnant

Having said, the finance ministerhintedat paving way for furtherslide in interest rates, which

bodes negative for the entire banking system especially when SBP has increased rates on

minimumsavings

Outlook:NeutralSelectiveexposuretohighyieldsadvised

Whilethebankingsectorcontinuestofacethecatch22situationofeverdecreasingspreadsand

staleadvances,weadviceexposuretoselectundervaluedandcleanbooks.Also,attractiveyield

playsandstrongnoninterestincomeheavyP&Ls mustntbeignored

Resultantly,UBL,BAHLandBAFLremainourtoppicksinBMABankingUniverse

Havingsaid, IMFprogramreentry in1HFY14maypaveway forDRhike,reversing fortunes for

theentire

sector

Federal Budget 2013-14Banks:Goodriddancetoahangingsword

FY12 FY13E FY14E

P/E 6.0x 9.1x 7.8x

PB 1.0x 1.4x 1.3x

Div.Yield 10% 8% 10%

ROE 17% 15% 16%


Banks


Sector: Banks


TargetPrice

CurrentPrice

TotalReturn

Ratings

MCB 225 311 23% Reduce

NBP 45 44 19% Buy

HBL 113 114 10% Add

UBL 100 111 2% Neutral

BAFL 19 18 22% Buy

BAHL 34 30 23% Buy


18/21

17

BMACoverage

Valuations


Thebudget

has

not

yet

disclosed

the

details

of

dividend

income

targets.

However,

aPKR3.8bn

YoYhighertotaldividendstargettoPKR68.4inFY14suggestthatthegovt.mayhavesetPKR10

11/shandPKR1213/shinrevenuefromOGDCandPPLrespectively

Thegovernmenthasalsoindicatedtopursueprivatizationofprofitablestateownedentities.This

mayresultinresurgenceofsecondaryofferinginPPL

Impact:Neutral

As expected the budget largely remained a non event for the exploration and productioncompanies

Asperourestimates,OGDCandPPLwillpayoutPKR12/shandPKR15/shrespectivelyinFY14

We expect robust growth in earnings (owing to steady volumetric additions) will allow the

companiestoeasilyfundthetargeteddividendpayouts

Given

the

strong

fundamentals

and

favorable

outlook,

we

believe

the

secondary

offering

will

haveaneutralimpactonstockpriceperformance

Outlook:Positive

InFY14,earningsgrowthwillbemainlydrivenbyrobustvolumetricgrowth.Asperourestimate

incomingoilproductionwillcontribute25%35%toexistingproductionofOGDC,PPLandPOL.

Notable production growth coupled with stable oil/wellhead prices and weaker PKR/USD will

furthersupport

the

growth

in

earnings

Based on lowest FY14E PER of 6.5x in the sector, aggressive E&D activities and exposure to

unconventionaltightgasreserves,wehaveastrongconvictiontowardsPPL

Whereas,highest dividendyield, immunity to circular debt and robust hydrocarbon production

growthformsourinvestmentthesisonPOL

Federal Budget 2013-14E&Ps:Mutedagain

FY12 FY13E FY14E

P/E 6.5x 9.5x 7.3x

PB 2.3x 2.9x 2.4x

Div.Yield 6% 5% 7%

ROE 35% 31% 33%


E&P


Sector: Oil&Gas


TargetPrice

CurrentPrice

TotalReturn

Ratings

OGDC 233 249 3% Neutral

PPL 223 219 9% AddPOL 510 509 10% Add


19/21

18

BMACoverage

Valuations


Noincrease

in

salaries

of

government

employees

PKR120bnallocatedas3Gauctionrevenue

GSTontelecom servicestoremainunchangedat19.5%

Impact:Neutral

Salaryexpense

constitute

28%

of

the

cost

of

goods

sold

and

no

increase

in

salary

would

translate

positivelyintoanearningsimpactofPKR0.27/shespeciallypost VSS

3Gauctiontoaugurwell for theoverallsector,as transition to highmargindata services from

lowmarginvoiceserviceswouldstartimpactingearnings

Reductionincorporatetaxrateby1%tojackupearningsbyPKR0.4/sh

Thecompany

to

remain

under

corporate

tax

rate

net

Outlook:ICHladenresultstocontinuedrivingmomentum

The much awaited auction of 3G license is good news for PTC in terms of improving ARPU.

However,theinvestmentrequiredforacquisitionoftheselicenses(USD1bn)mightagainimpose

ariskondividendpayoutinCY13

The

turnaround

story

in

LDI

segment

alongwith tremendous

potential

in

the

companys

BroadbandandUfone segmentmakesthestockastronginvestmentcase

PTCLremainsourtoppick inthesectorprovidinganamazing totalreturnof60%fromcurrent

tradinglevels

Federal Budget 2013-14Telecom:Nothingnew

FY12 FY13E FY14E

P/E 17.1x 5.9x 9.0x

PB 0.6x 1.2x 1.1x

Div.Yield 0% 13% 7%

ROE 3% 20% 13%

Ear.Growth 42% 435% 34%

Telecom


Sector: Telecom


TargetPrice

CurrentPrice

TotalReturn

Ratings

PTC 33 22 60% Buy


20/21

19

BMACoverage

Valuations


FED

on

aerated

beverages

raised

to

9%

from

6%

earlier;

capacity

based

taxation

of

aerated

beveragemanufacturersintroduced

Cigarettes to be taxed as per a two tier rate structure, as opposed to three tier structure

previously

Corporatetaxratereducedby1%to34%,GSTraisedby1%to7%

Impact:Neutral

Addedtaxtomildlyraiseretailpricesofsoftdrinks,Murree Breweryisonelistedplayer

Higher taxes on cigarettes to further inflate prices, with no material impact on manufacturers

anticipated

HigherGSTtoslightlyraiseendproductpricesacrosstheboard exceptexemptitems.Also,lower

corporatetaxtoincreaseearningsby1.5%

Federal Budget 2013-14FMCG:Taxingtheendconsumer

FY12 FY13E FY14E

P/E 17.9x 26.3x 19.0x

PB 4.7x 7.9x 5.6x

Div.Yield 2% 0% 0%

ROE 26% 30% 29%

Ear.Growth 191% 63% 38%

FoodProducers


Sector: FMCG


TargetPrice

CurrentPrice

TotalReturn

Ratings

EFOODS 136 146 7% Reduce


21/21

20

DISCLAIMER

ThismemorandumisproducedbyBMACapitalManagementLimitedandisonlyfortheuseoftheirclients.Whiletheinformationcontainedhereinisfromsources

believedreliable,wedonotrepresentthatitisaccurateorcompleteandshouldnotberelieduponassuch.Opinionsexpressed mayberevisedatanytime.This

memorandumisforinformationonlyandisnotanoffertobuyor sell,orsolicitationofanyoffertobuyorsellthesecuritiesmentioned.

ANALYSTCERTIFICATION

We, Furqan Punjani, Muhammad Affan Ismail, Farid Aliani and Zoya Ahmed, hereby certify that this report represents our personal opinions and analysis of

information.Allviewsareaccuratelyexpressedtothebestofourknowledge.Wecertifythatnopartofourremunerationislinkedeitherdirectlyor indirectlyto

recommendationsor

analysis

covered

in

this

report.

Federal Budget 2013-14AnalystCertification

[email protected]+922132444465DomesticSalesMuzammilKhan

[email protected]+92213246449632464358HeadofInternationalSalesOmairBegChaghtai

ResearchTeam

FurqanPunjani Economy,

Strategy,

Politics

&

Banks +9221

111

262

111

Ext.

2064 [email protected]

AffanIsmail E&P,Refineries,Chemicals&Textiles +9221111262111Ext.2058 [email protected]

FaridAliani Fertilizer,Cements,Insurance&Food +9221111262111Ext.2059 [email protected]

ZoyaAhmed OMCs,Power,Autos,Telecom +9221111262111Ext.2053 [email protected]

SaminaSherAliKanji DatabaseIncharge +9221111262111Ext.2061 [email protected]

NaseemAkhtarKhattak Layout&ProductDistribution +9221111262111Ext.2060 [email protected]

InstitutionalSalesTeam

Azher AliShahzad DomesticSales +922132444465 [email protected]

JunaidShaharyarGodil DomesticSales +922132444465 [email protected]

SyedImranRizvi DomesticSales +922132444465 [email protected]

Pakistan Federal Budget - A New Beginning in Difficult Times

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