After the adverse effect of PkR appreciation, the chorological energy crises, and low demand from China on textile sector’s competitiveness, the Federal Budget FY15 comes with a beacon of hope. The government has tried to facilitate the largest exporting sector by providing them relief on the cost (reduced financial charges) and duty front, so that they can take full advantage of GSP plus status. However, the budget comes with a pinch of salt which has enhanced the allowable limit of GIDC (Gas Infrastructure Development Cess) that has created concern for the investors.
We believe, the federal budget has an overwhelming positive tilt for the textile sector and downplay the possibility of abrupt increase in GIDC. In the textile sector we continue to look favorable towards NML, the largest textile exporter of the country. We have revised the NML earnings by an average of 4% for FY15 and beyond, but have not incorporated the impact of GIDC. Furthermore, we have revised our target price from PkR145 to PkR150/share.
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.
