omc: no mention; hence safe - BMA Capital Management

CHEMICALS
MARKETWEIGHT
Budget Impact
Neutral
Sana I. Bawani
Chemicals Analyst
25
CHEMICALS: MIXED REACTION
June 7, 2010
Contrary to market expectations, chemical sector remained largely unaffected
from the new budget for FY11. No new policies were announced for the sector
nor any incentives given as such. We believe the government aims to let the
industry function in the present condition till VAT is enforced in Oct10.
Duty reduction on raw material of pharmaceutical items
One change brought about in Budget FY11 has been a reduction in duty to 5%
on pharmaceutical raw materials and drugs. This is expected to lead to a
reduction in prices of medicines based on imported raw materials. In addition,
drug manufacturers including ICI would also benefit from lower production
costs. However, the product would reach consumers with 1% additional sales
tax, thereby, muting the impact of a reduction in duties on raw materials.
Unchanged duty structure on PTA and PSF imports
Duty on Purified Terephthalic Acid (PTA) remains unchanged at 7.5% since
FY09 while on Polyester Staple Fibre (PSF) it currently stands at 4.5%. With
expectations of a revision in both not being materialized and continuation of
zero-rating; we anticipate a positive response from the market. However,
imposition of VAT in Oct10 would likely abolish zero-rating umbrella cover on
textiles and thus bring the two products under the normal tariff structure from
then onwards.
Furthermore, raw materials for PTA imported by LOTPTA which includes
Paraxylene (PX) and Acetic Acid continue to be zero-rated.
Outlook FY11E
PTA market remains dominated by LOTPTA, the sole domestic producer of
PTA in the country, whereas, PSF is produced by 4 large companies including
Ibrahim Fibres (IBFL) and ICI. LOTPTA would continue to benefit from the tariff
protection while its margins would depend on international prices for PTA and
PX. PX prices have been stable at USD1,020/ton since the last 2 months while
PTA prices are expected to decline in the near future on the back of low prices
for PTA futures and falling crude prices.
We reiterate our BUY call on ICI, which offers 33% upside to our DCF-based
fair value of PKR177/share. Diversified businesses, affiliation with the largest
decorative paints manufacturer, Akzo Nobel, and a strong brand following are
some of the factors which endorse our choice for the company as a value-pick
at these levels. Not only this, but ICI has also continued to post gross margins
in the vicinity of 20% and offers a dividend yield of 7.5% for CY11E.