In the Federal Budget for 2005-06, analysts expect the government to reduce tax on banks, as per its commitment made earlier, abolish duty on import of textile machinery and increase in public sector development projects to boost cement earnings. As per government's tax rationalisation program, corporate tax on banking sector has to be reduced by 300 basis points every year.
The tax rate on banking sector will eventually come down to 35 percent, by FY07, in line with other listed companies. A reduction of 300 basis points in the coming Budget would bring banks' tax rate to 38 percent from 41 percent.
Growth of agriculture sector is estimated at 7.5 percent for FY05, and analysts at Jahangir Siddiqui Capital Markets believe that the new Budget would include many steps to further boost rural economy. Focus would also be on agriculture and SMEs, which would result in credit demand from these sectors.
NSS rates are revised at the end of every six months, in line with PIB yields. The government may increase returns on all, or selected--like Bahbood & Pensioners Benefit Account--schemes by 2-3 percent, amid rising yields on government bonds.
A 300 basis points reduction in corporate tax rate on banks would positively affect earnings of the banks. Theoretically, assuming all things remaining same, this tax reduction would enhance commercial banks' earnings by 5 percent. But this is built into the market prices, and investors will ignore this.
Upward revision in NSS rates can slightly affect the growth of bank deposits as funds may be diverted to these schemes. On the other hand, increasing rates and aggressive monetary stance of SBP would slow down the credit demand that grew by 28 percent on an average in last 2 years (2003 & 2004). However, this cooling down of credit growth would divert banks' funds to better yielding government securities.
Budgetary incentives to agriculture and SMEs may result in higher credit demand from these two sectors. Normally, the return from these sectors is better than other avenues.
Rising interest rates bode well for the banking sector as majority of the lending to corporate sector is floating rate based. "We expect banking sector spread to increase by 50 to 100 basis points in 2005 as the lending rates have moved upward much rapidly than the cost of deposits. Although banks have also increased their deposit rates but for the whole year change in spread will be favourable for banks. But increase in PIB yields is causing 'mark-to-market' losses on bond holding of banks."
However, due to SBP's amendment in prudential regulations, regarding classification of PIBs under 'held-to-maturity' no major impact of this is seen on banking sector equity.
For the third consecutive year in 2004, the commercial banks posted double-digit earnings growth. 1Q2005 results are also encouraging. The outlook is positive on banking sector. "Based on sample of 8 listed commercial banks we expect 44 percent profitability growth in the year 2005. Our top picks are National Bank, Faysal Bank, Bank of Punjab, Askari Bank and Bank Alfalah."
GST on textile products: Aptma has demanded abolition of sales tax on the whole chain of textile products. The request has been made to reduce hassles that textile manufacturers have to face in the tax refund process. The government has already abolished sales tax on PSF, MEG and PTA before the Budget.
Duty on textile machinery: With a view to encourage investment, expansion and BMR activities to cope with the challenges of WTO, textile manufactures have asked the government to allow duty-free import of textile machinery for production of exportable products. It is expected that the government would abolish import duty on textile machinery, currently at 5 percent. It is expected that the government would announce measures for the promotion of textile exports in the Budget FY06.
The government is likely to allow zero-rated sales tax for textile products, including yarn, fabric and other items in the textile chain as the government has to refund major chunk of GST collected on textile products.
With textile items constituting over 60 percent of country's total exports, the government is expected to announce textile-friendly measures to further boost textile exports to narrow the trade deficit.
CEMENT: We do not expect that the government would reduce CED, as reduction in the past was made to facilitate producers who were running in losses at that time.
CAR ASSEMBLERS: The government is likely to reduce import duty on CBUs in the range of 15-25 percent in an effort to fill the demand-supply gap. However, it has been proposed that a reduction should also be made on CKD import so as to protect the local auto industry.
The government is also considering duty reduction on import of steel products from 25 percent to 20 percent to meet the demand of housing and auto industry. Any reduction in import duty on CBUs in the forthcoming Budget FY06 is expected to narrow the demand supply gap, which currently stands at around 40,000 units. Moreover, it will also reduce the delivery period (currently 3 months on an average).
Currently, import duty on CBUs is in 4 slabs ranging from 50 percent-100 percent. On cars below 1350 cc, there is 50 percent import duty (this slab was recently increased from 1300 cc). From 1350 cc to 1600cc cars, import duty is 70 percent. The duty on import of cars between 1600 cc and 1800 cc stands at 80 percent, while duty on above 1800 cc cars is 100 percent. Like last year this time also chances of duty cut on CKDs are minimal.
Assuming an across the board 15percent duty reduction on CBUs, the price of 800c Chevrolet Exclusive (Standard Model), currently stood at Rs515k, could be lowered by Rs 35,000-40,000. Likewise, in 1600cc segment, price of Chevrolet Optra (Standard Model) currently available at Rs 1,095,000 could be lowered by Rs 75,000-80,000. Local assembler prices are expected to remain unchanged. Thus, some shift will be observed from local to imported cars. However, as seen last year, preference for local cars will remain. Of 75k local cars sold during July-February FY05, sale of imported cars was only 3k units. In the coming years share of imported cars in total sales will increase.
But this will not affect the local assemblers because the demand supply gap is huge and will take few years to bridge. Furthermore, the local companies have also started importing cars thereby trying to benefit from that also. Any reduction in import duty on steel products, if announced in the Budget, bodes positive for the industry as local manufacturers use imported steel due to lack of good quality local steel.
Profitability of car manufacturers is highly sensitive to currency fluctuations and imported raw material prices. During Jan-Mar 2005, car manufactures posted a cumulative decline of 38 percent in their profitability mainly on the back of a massive squeeze of 490bps in gross margins, to 4.5 percent, compared to the corresponding period of last year. Going forward, margins of the sector are expected to stabilise as steel prices have started to ease. Moreover, impact of price hike made during the year by the companies would be more evident in the upcoming quarters.
Local car sales on the other hand remained buoyant, up by 28 percent to 100,073 units during Jul-Apr 2005. For FY05, we estimate cumulative car sales to remain close to 125,000 compared to 97,000 in FY04. Next year in FY06, assembled car sales are expected to cross 160,000, an increase of 28 percent. After a decline seen this year, sector profitability will increase next year due to recovery in margins and improving volumes.
Comments
Comments are closed.