Stocks remain down as investors waiting for budget 2020-21 outcome
While the Federal Minister Hamad Azhar termed it a ‘relief budget’, investors classified it “a status-quo” and “disappointing”. It surprises many that the principal demand of elimination of capital gains tax for next 12-24 months that was made by the Pakistan Stock Exchange (PSX) and endorsed by the Securities and Exchange Commission of Pakistan (SECP) has been completely, which make the budget neither industry nor capital market friendly. No steps have been taken to reduce the super tax, turnover tax and corporate tax. Tax relief for new listings was also ignored. The budget cuts down subsidies, hikes petroleum levy, freezes salaries and pensions and yet fails to arrest the overall fiscal deficit during FY21.
Karachi Stock Exchange kept downward trend and closed at 34,611.23 points losing 517.35 points or 1.47 percent down on Friday last working day of the week and the announcement of the Budget 2020-21 are on the same day. Trading activities remained low as daily volumes on ready counter decreased to 177.883 million shares as compared to 270.629 million shares traded on Thursday.
Highlighting prevailing imbalances and imprudent economic approach adopted by previous governments, the budget speech was short on major taxation measures, while the expected focus on COVID-19 response was present in developments outlays. Federal Budget FY21 envisages a total budgetary outlay of Rs7,295 billion, down 11%YoY from Budget for FY20.
Net revenue receipts have been projected at Rs3,699 billion with total tax revenue at Rs5,464 billion. Of this, FBR collection target is projected at Rs4,963 billion for FY21 as against Rs3,908 billion for FY20. The targets look very optimistic keeping in view the current economic slowdown. Other Taxes have been projected at Rs501 billion with Rs450 billion coming from Petroleum levy.
Budget deficit for FY21 has been forecasted at Rs3,195 billion or 7.0% of GDP as against 9.1% for FY20. In addition to required austerity, limiting fiscal deficit to 7.0% is contingent on revenue targets where as stated above, analysts remain skeptic on GoP meeting its target
GDP growth for FY21 is projected at 2.1% contrary to negative 0.4% of GDP for FY20. At the same time, long term GDP growth is projected to reach 4.5% by FY23.
CPI is projected at 6.5% for FY21 with long term average at 6.2% for FY21 to FY23.
May 2020 volumetric offtake of oil marketing companies has been reported at 1.5 million tons, up 39%MoM but down12%YoY with petrol posting a 46%MoM increases. After a dull April 2020, HSD sales recovered with an increase of 26%MoM. For 11MFY20, sales volume was reported at 14.8 million tons. Due to the weak power demand, cumulative FO sales declined 34%YoY, where monthly average sales dropped to 165,000 tons as compared to 248,000 tons during the corresponding 11MFY19. Market shares remain in flux with PSO/APL/HASCOL/SHEL accounting for market shares of 42/9/8/7% during May where a comparison with May’19 reveals decreasing share of PSO, while HASCOL increased its share. Amidst loosening of restrictions put in place to control spread of COVID-19, volumes are expected to continue recovering as economic activity returns to normalcy. After the recent issuance of Sukuk-II and news flow indicating finalization of disbursement, PSO stands to be a major beneficiary.
Car sales, as reported by PAMA, have declined by 75%YoY in May 2020 to 4,473 units, while 400-600 units are also expected to have been sold by non-registered car assemblers during the month. The decline in sales is mainly due to the closure of business operations of all major car assemblers, which resulted in no invoicing of cars for majority of the month.
The highest decline was recorded by Honda Car (HCAR) as its units sold were down by 89%YoY in May-2020, followed by Indus Motors (INDU) and Pak Suzuki (PSMC) with declined by 88%YoY and 64%YoY respectively.
In 11MFY20 car sales declined by 54%YoY with HCAR sales are down by 65%YoY, followed by INDU and PSMC posting declines of 57%YoY and 49%YoY, respectively. Atlas Honda (ATLH) recorded motorbike sales of 12,106 units, down by 88% YoY. In 11MFY20, ATLH sales were down by 24%YoY.
Tractor sales are down by 49% YoY. Al Ghazi Tractors (AGTL) reported a decline of 89% YoY, while Millat Tractors (MTL) sales have declined by 26%YoY, it was 70%MoM).
The official notification pertaining to announced subsidy of Rs2.5 billion on GST for tractors remains pending, which has created uncertainty amongst the buyers.
Analysts expect higher sales for the month of Jun 2020 as restrictions imposed by the government have been eased significantly compared to the outgoing month.
In a key development, OGRA has cut RLNG prices in Pakistan by US$1.4/mmbtu to US$6.1-6.3/ mmbtu for the month of June 2020. RLNG prices in Pakistan are set using past three months’ average of Brent crude oil prices.
Analysts reiterate this development as a positive for Sui twins (SNGP, SSGC) as well as Pakistan Economy. Gas marketing companies will benefit through improved cash flows and the country by improved fiscal space.
The government had allocated fixed rate of US$6.5/mmbtu RLNG supply to textile sector as compared to 12-month average rate of US$10.1/mmbtu), the differential of which was being picked up by the government itself.
Currently, Sui companies have receivables of Rs20 billion against the government under this head. Elimination/reduction of this differential will ease cash flow concerns of Sui companies.
The government will benefit from this through greater fiscal space as annual subsidy under this head hovers up to Rs40 billion per annum, which will now reduce substantially for FY21, given the oil prices continue to hover around current levels.
Additionally, SSGC has submitted revised ERR for FY21, after adjusting downward its oil price assumption to US$42.6/bbl for FY21 from US$64/bbl, which resulted in decline in its Revenue Requirement by Rs19 billion.
Similarly, SNGP has also revised down its Revenue Requirement by Rs15 billion. Together, Sui twins have lowered their Revenue Requirements by Rs35 billion, if oil price averages around US$35/bbl.