Fertilizer Sector: The budget a non-event
The Federal Budget 2014-15 is largely a non-event for the fertilizer sector, but post-budget investors’ shines towards the sector points otherwise. Margin attrition is feared as the increase in the maximum limit of Gas Infrastructure Development Cess (GIDC) on fuel is read as a certain hike in the gas prices in the days ahead. Furthermore, marginal reduction in the subsidy allocation despite lower price differential of local and international prices is also taken as a sign of diminishing pricing power of the sector. The relief comes in the form of 1pps scheduled reduction in the corporate tax to 33%.
We downplay the fears of abrupt increase in the GIDC rate due to severity of impact on the country’s industrial production. Thus, in our base case we only see a nominal increase in the GIDC rate. Meanwhile, government focus on indigenous resources acts as a counter to threat of more than ample subsidy allocation. We maintain a ‘stable’ outlook for the sector with Hold on FFC, FFBL and EFERT.
Budgetary measure:
- Reduction of mark up on Export Refinance Scheme (ERF) by 1.9% and on Long Term Finance Facility (LTFF) by 2.4%.
- Duty free import of textile machinery extended for another 2 years.
- Expatiate sales tax refund mechanism
- Establishment of EXIM Bank with paid‐up capital of PkR10bn to facilitate the export orientation sector of the country.
- Rebate on local taxes and levies on FOB value if exports increase by 10%YoY: 4% on Garments, 2% on Made‐ups and 1% on processed fabrics
- Increase in minimum monthly wages from PkR10k to PkR12k
- Increase in the maximum allowable limit of GIDC from PkR100/mmbtu to PkR300/mmbtu for industrial sector.
Impact: GIDC factor overplayed
We see the budget to have a positive tone for the textile sector as government aims to revive the economy by facilitating the export orientation sector. However, the increase in allowable limit of GIDC by PkR200/mmbtu has been read by the investor as already decide increase in the gas price for the industrial sector. This has overshadowed the positive development of reduced EFF and LTFF rate, expatiate sales tax refund mechanism, establishment of EXIM Bank and rebate on local taxes.
We downplay the possibility of an abrupt increase in GIDC as a severity of this on the manufacturing sector is likely to deter the government. Though, we have not incorporated the same in our valuations, PkR50/mmbtu increase in the GIDC can reduce NML earnings by PkR0.2‐0.3/share. Our calculation suggests the impact of the same on NCL to be around PkR0.15‐0.2/share. We have incorporated the impact of ERF and LTFF and revised upwards NML earnings by an average PkR0.7‐0.8/share. Similarly, NCL earning increased by PkR0.15‐0.2/share. While on the other hand early refund mechanism is likely to improve the liquidity of the textile sector.
