Based on our initial analysis Federal Budget FY24 is Neutral for the local stock market.
IMF has already hinted that the Budget should be consistent with program objective. According to Sep 2022 IMF Country Report on Pakistan, IMF projected Budget Deficit of 4.0% of GDP and Primary Surplus of 0.5% of GDP for FY24. While government is targeting a fiscal deficit of 6.54% and primary surplus of 0.4% for FY24.
Along with the Budget, IMF is also waiting for credible financing commitment and proper functioning of FX market. It is yet not clear as to how government will repay external loan estimated at around US$22bn in FY24. This will drive the local currency and interest rates in FY24 and has implication to local stock market.
Few of the key measures announced in budget relating to stock market and key sectors includes;
ü Bonus: Re-imposition of 10% final withholding tax on issuance of bonus shares by company (20% for non-ATL). This will force companies to avoid announce investor favorite Bonus shares thereby affecting market trade volume. (Negative)
ü Minimum Turnover Tax: Reduction of minimum tax liability on turnover from 1.25% to 1.0% for companies listed on PSX. Loss making and low margin companies to benefit. (Positive)
ü Super Tax: Rationalization of Super Tax under section 4C to apply on all persons across the board on income above Rs150mn, insertion of additional three new income slabs of Rs350mn to Rs400mn, Rs400mn to Rs500mn and Rs500mn above to be taxed at 6%, 8% and 10% respectively. (Neutral)
ü In tax year 2022 persons engaged in automobiles, beverages, cement, chemicals, cigarette, tobacco, fertilizer, iron and steel, LNG terminal, oil marketing, oil refining, petroleum and gas exploration and production, pharmaceuticals, sugar and textiles had to pay a super tax of 10% where income exceeded Rs300mn. Affected parties later went to court and were asked to pay 50% of the tax. In the FY24 budget all companies with income above Rs 500mn will be required to pay a 10% super tax. Thus tax rate for companies above Rs500m is now 39% meaning that the measure is negative for all other sectors not mentioned in the list last year.
ü Capital Gain Tax (CGT): Government has maintained CGT at current levels as per our initial understanding. (Neutral)
ü Dividend: Tax on dividend remain unchanged as per our initial understanding. (Neutral)
ü Intercorporate Dividend Taxation: No tax relief given on intercorporate dividend tax. To recall, different trade and commerce bodies have proposed to remove taxation on intercorporate dividends in order to promote corporatization. (Neutral)
ü Taxation on Reserves/Retained Earnings: Contrary to market expectation, Government has not imposed taxes on reserves/retained earnings. (Neutral)
ü Additional tax on certain unexpected income, profits and gains: Government may impose upto 50% additional tax on any income, profit or gains that have arisen to any person or class of persons due to any economic factor or factors that resulted in unexpected income for any of the preceding five tax years from tax year 2023 and onwards. (Negative)
ü Extension of Income Tax exemption for one year i.e. upto 30th June, 2024 for resident persons of FATA/PATA. This exemption is affecting Steel rebar producers and it was expected that government may not increase this exemption. (Negative)
ü Incentive for Pharma sector by including one more API and 03 drugs in the existing duty free regime. (Positive)
ü Continuation of concessionary fixed tax rate of 0.25% for IT & ITeS exports for Tax years 2024, 2025 and 2026. (Positive)
ü Extension of exemption for one year granted to a person to profits and gains on sale of immovable property or share of special purpose vehicle to any type of REIT scheme i.e. upto 30th June, 2024. (Positive)
ü Incentive for exporters of Information Technology (IT) and IT enabled services by allowing duty free import of IT related equipment equivalent to 1% value of their export proceeds. (Positive)
ü Re-imposition of 0.6% advance adjustable withholding tax on non-ATL persons on cash withdrawal. (Negative)
ü Reduction of Customs duty from 10% to 5% on non-localized (CKD) of Heavy Commercial Vehicles (HCVs). (Positive)
Pakistan market is currently trading at a record low PE of 2.8x vs. last 5-year and 10 year average PE of 7.2x and 8.1x respectively. We think that this record low PE has incorporated to a larger extent high probability of Debt Restructuring.
We prefer high quality cash rich private firms with stable business. We like selected stocks in the Banking, E&Ps, Cements, Fertilizer and Technology sectors. Our top picks for 2023 includes Meezan Bank (MEBL), MCB Bank (MCB), Mari Petroleum (MARI), Pakistan Oil Fields (POL), Lucky Cement (LUCK), Maple Leaf Cement (MLCF), Engro Fertilizer (EFERT), Systems Limited (SYS) and Interloop Limited (ILP).
Courtesy – Topline Research