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STRATEGY Budget Impact Neutral Hamad Aslam Head of Research 8 MARKET STRATEGY: GRIST TO THE MILL June 7, 2010 Entailing no major surprises, the federal budget FY11 remained broadly neutral for the capital markets. Consensus had been achieved on end of exemption on CGT w.e.f from July, 2010 between the three largest stakeholders i.e. stock exchange, FBR and stock brokers. While a paper on exact modalities on the said tax is awaited from the authorities, the tax brackets are largely in-line with the ones announced in Feb, 2010. CGT; Viewing it as market stabilization vehicle With around 50% of KSE traded volumes dominated by individual investors, their psyche and response to tax imposition remains a crucial determinant of overall market reaction. Individuals are largely hesitant in filing annual tax returns and thus aforesaid tax regime has given birth to concerns on future trading activity on the local bourses. While we do not downplay this concern, we would like to highlight that equity trading activity for all investors (individuals and companies) is already documented via earlier introduced Unique Identification Number (UIN). Moreover, with the CGT having been announced as early as Feb10, the budget announcement is not likely to result in a knee-jerk reaction in the index. On the flip side, we argue that CGT inherently encourages long term investment by reducing the incentive to book short term gains and thus acts as a stabilization vehicle for the market. Sector specific measures; Banks to stand out Unlike previous years, the budget announcement largely maintained a statusquo on most of the government’s sector-specific policies. Commercial Banks however stand to gain from better cash flow arising from increased tax allowance on provisioning expense. Though largely neutral for Textiles, the budget announcement may have a short term positive impact on the sector on the back of delayed implementation of GST reforms (VAT). The reforms envisage elimination of umbrella cover of zero-rating regime for export oriented sectors (specifically textiles) and were thus being anticipated to levy additional taxes on the sector. For the rest of the sectors, budgetary announcements remain largely neutral. Manufacturing sector however may bear marginal increase in cost of production through increased FED on gas tariff and increased minimum wage rate. Higher GST will result in an increase in retail prices for cements and FMCG products; but are likely to be passed on to end consumer without denting the margins. Increase in turnover tax to 1.0% (from 0.5% earlier) will however be negative for companies posting losses on the back of excess depreciation and amortization expenses.
9 Sector wise Budget Impact and BMA Stance Source: BMA Research June 7, 2010 Sector Budget Impact BMA Recommendation Top Picks Commercial Banks Positive MARKETWEIGHT MCB Oil & Gas Exploration and Production (E&P) Neutral MARKETWEIGHT PPL, POL Oil Marketing Companies (OMCs) Neutral OVERWEIGHT PSO Independend Power Producers (IPPs) Neutral OVERWEIGHT HUBC Fertilizer Neutral MARKETWEIGHT ENGRO Cement Neutral OVERWEIGHT ACPL Textile Neutral MARKETWEIGHT Chemicals Neutral MARKETWEIGHT ICI Automobile Neutral MARKETWEIGHT Telecom and Technology Neutral MARKETWEIGHT Refineries Neutral UNDERWEIGHT What next: Our market view remains positive; inter-play of global markets may play a role though KSE100 posted a decline of 8.7% in the month leading to the budget announcement; however this may not be too surprising for many. Studying past index performances since 1998, reveals that uncertainties and concerns have led to an average fall of 4.4% in the month preceding the announcement. Similarly, announcement of policy measures and emergence of consensus on them has later led to consolidation and gradual market recovery. Historical Index movement pre and post budget announcement Budget Dates 07- Days Prior 30-Days Prior 90-Days Prior 2010 5-Jun 1.2% -8.7% 0.1% 07- Days Forward 30-Days Forward 90-Days Forward 2009 13-Jun 2.3% -1.2% 22.7% -0.23% 8.9% 28.4% 2008 11-Jun -0.6% -8.9% -13.7% -5.8% -10.1% -28.7% 2007 9-Jun 2.6% 7.5% 16.3% 1.2% 5.6% -6.5% 2006 6-Jun 4.1% -9.9% -0.6% -11.6% -5.8% -3.9% 2005 6-Jun 5.9% -1.1% -22.9% 4.8% 6.0% 9.6% 2004 12-Jun 0.4% 0.9% 9.6% -2.5% 1.9% -3.9% 2003 7-Jun 1.4% 6.1% 28.3% 3.4% 10.4% 42.0% 2002 15-Jun 4.6% -2.8% -6.3% 0.6% -1.9% 10.6% 2001 18-Jun 0.7% 2.1% -0.1% -2.5% -7.2% -18.0% 2000 17-Jun 6.6% -9.9% -25.5% 1.9% 5.0% 4.2% 1999 12-Jun -1.1% -5.8% 6.8% -6.4% 1.4% 2.8% 1998 12-Jun -2.3% -25.9% -34.3% -4.4% -26.9% -1.7% 1997 13-Jun 4.7% 2.9% 0.4% 0.6% 10.7% 15.0% 1996 13-Jun -2.5% -1.6% 4.1% -0.4% -2.5% -22.0% 1995 14-Jun 1.8% 10.3% -6.3% 1.4% 4.8% 9.5% 1994 15-Jun -0.7% 2.1% -13.0% 2.3% 1.6% -2.3% 1993 16-Jun 1.4% 6.8% 4.7% 4.0% 6.7% 8.9%
Page 1 and 2: 65 Federal Budget 2010-11 Cautious
Page 3 and 4: 3 TABLE OF CONTENTS Budget FY11: No
Page 5 and 6: 5 June 7, 2010 package will have li
Page 7: 7 June 7, 2010 against an average o
Page 11 and 12: ECONOMY Budget Impact Positive Abdu
Page 13 and 14: 13 June 7, 2010 announced in the bu
Page 15 and 16: 15 KEY MEASURES Income tax June 7,
Page 17 and 18: E&P MARKETWEIGHT Budget Impact Neut
Page 19 and 20: OMC OVERWEIGHT Budget Impact Neutra
Page 21 and 22: 21 June 7, 2010 Moreover, seemingly
Page 23 and 24: CEMENTS OVERWEIGHT Budget Impact Ne
Page 25 and 26: CHEMICALS MARKETWEIGHT Budget Impac
Page 27 and 28: 27 Outlook FY11E June 7, 2010 Incre
Page 29 and 30: 29 Top Investment Ideas June 7, 201
Page 31 and 32: BUY Fair Value: PKR 282 Current Pri

omc: no mention; hence safe - BMA Capital Management

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