Budget brings more negative than positive impacts on stocks

KARACHI: The federal budget announcements for the fiscal year of 2017/18 will have more negative than positive impact on stocks market’s resilience when trading resumes on Monday, analysts said.  

“However, value buying can be expected later specifically in MSCI (Morgan Stanley Capital International) stocks with Pakistan’s inclusion in MSCI Emerging Markets on June 1,” Atif Zafar, an analyst at JS Global said in a report on budget impacts on capital markets.

“We do not believe any sector, as such, stands out,” Zafar said. He said interest can be seen in stocks, like Pakistan State Oil because of potentially higher cash payout and technology firms due to tax incentives.

Analyst Usman Zahid at First Capital Securities said budget appeared positive for fertiliser, textile, fast moving consumer goods, insurance, pharmaceutical and information technology sectors. 

Zahid said overall budget FY18 remained neutral to negative for exploration and production sector.

“It has slight negative implication for cement, steel, bank and automobile sectors,” he added. “Pakistan Petroleum Limited turned out to be a loser due to adverse changes in exemptions structure of Sui fields.”

However, this should be offset by conversion of Sui fields to Petroleum Policy 2012.

On a broader level, overall cash outflows to settle super tax payments in July-September 2017/18 should dent bottom line of all players going forward.

Analysts said the budget is broadly neutral for the banking sector and negative impact of super tax has already been priced into the banking stocks.

Small funds set up to promote home financing and small and medium enterprise sector’s lending are likely to have a negligible impact on the sector given its large asset size compared to the funds.

The banking sector would also have no impact of tax applicable on undistributed profit, given exemption from the said clause.

Analysts said the budget turned out to be neutral for the fertiliser sector as it rationalised sales tax structure, although it failed to address supply glut in the local market.

Some measures to boost agronomy were also taken in the budget, but the budgetary measures failed to address the existing cash flow
issues of the agriculture sector as no relief was provided to urea market and imported urea prices were further reduced.

Urea prices were maintained at Rs1,400/bag, while general sales tax on diammonium phosphate was fixed at Rs100/bag, down from Rs400/bag earlier, and general sales tax on other products was cut to 10 percent.

“We expect fertiliser industry to remain under pressure going forward as weak local dynamics and international prices continue to serve as a double whammy for the sector,” Zafar said.

Analysts said any change in corporate tax rate will have no impact on the profitability of independent power producers (IPPs), except for Kot Addu Power Company Limited.

Overall, the budgetary measures will neutrally affect the IPPs, they added.

Failure to address the circular debt is a key disappointment.

Analysts said the annual budget is a mixed bag of positives and negatives for cement sector with positives mainly emanating from escalation in potential demand. In the near term, however, kneejerk reaction to imposition of higher federal excise duty and super tax may culminate into depressed stock prices, they added.

Zafar said the budget will largely be neutral for textile sector, as the announcement was expected. Overall, the only positive impetus for textile sector from the
budget will be timely disbursement of Rs180 billion worth of textile package by the government.  Automobile sector will indirectly benefit from support to agriculture sector.