NDB Equities on Interim Budget – 2015

• NDB Securities Ltd., on Friday released its initial commentary and analysis on the new Government’s interim Budget 2015. Here are excerpts

The Interim Budget presented by the new regime under the 100-day program targets a 4.4% fiscal deficit to GDP compared to 4.6% estimated in the previous Budget. Furthermore, a significant number of concessions to the general public were evident while imposing certain taxes on the corporate sector.

Budget Highlights – General

• The salary increase of Rs. 10,000 per month for state sector employees – Rs. 5,000 will be increased from February 2015 and the balance by June 2015. This will be in addition to the Rs. 3,000 added since January 2015. The private sector was requested to increase the salary by Rs. 2,500 per month.
• Increase of monthly pension by Rs. 1,000 from April 2015 onwards.
•  Under the decentralised budget the amount provided to each member of the parliament will be doubled from Rs. five million to Rs. 10 million which would facilitate development of remote areas.
• Healthcare expenditure to increase to 3% of GDP from previous budget allocation of 1.4%.
• Education expenditure to increase to 6% of GDP from previous budget allocation of 2.0%.
•  Rs. 1 billion levy imposed immediately on all the casino operators (currently five casinos in operation) which has to be paid before 15 April 2015 as a one off special levy. The annual levy payable under the Betting and Gaming Levy Act will be doubled.
•  SriLankan Airlines and Mihin Lanka are to be merged in order to improve operational efficiencies and reduce losses.
• The new Government will continue to pursue the GSP+ concession which will benefit the apparel industry. In addition, the Government is also seeking removal of the European Union’s ban on fishing (effective 15 January 2015) and resume fish exports to the European Union.
•  Mansion Tax of Rs. 1 million will be levied on owners of all houses valued at Rs. 100 million or more, or on houses above 5000 sq. ft. on an annual basis commencing from 2015.
•  The employment income exempted for the Pay-As-You-Earn (PAYE) tax was increased from Rs. 600,000 to Rs. 750,000, effective from 1 April 2015

Budget Highlights – CSE related

• In order to boost the agricultural sector,
• Fertilizer subsidy would continue whereby fertilizer would continue to be provided at Rs. 350 per 50 kg.
• 50% waiver to be provided for a maximum loan capital of Rs. 100,000 advanced to farmers by commercial banks which are presently overdue.
•  Guaranteed purchase price of paddy, potatoes, tea and rubber to be increased.
• Taxes on thirteen essential goods were reduced (estimated per capita saving from sugar, bread, wheat flour, LPG, kerosene, petrol and diesel is around Rs. 3,389 p.a.).
• Price of 12.5 kg gas cylinder was reduced by Rs. 300 to Rs. 1,596 (effective from midnight 29 January 2015).

* Loan interest payments on gold backed loans value to a maximum of Rs. 200,000 held at state banks to be waived off.

•  Super Gain Tax of 25% on profits is imposed on companies or individuals earning profits of more than Rs. 2 billion in the tax year 2013/14 as a one off payment. Approximately 24 companies in the listed space are expected to be affected by this proposal and the estimated tax collection from them is around Rs. 27 Bn.
•  Tax on motor cars with engine capacity of less than 1,000cc will be reduced to around 15%.
•  Excise taxes applicable on hybrid vehicles will be revised and the depreciation table to be removed effective from mid night 29 January 2015.
•  One-off Rs. 1 billion levy imposed on companies engaged in commercial operations of the Direct-to-Home via satellite operators having more than 50,000 subscribers. A special levy of Rs. 1 billion was also imposed on satellite owners who utilize the location reserved for Sri Lankan satellite.
•  An interest rate cap was imposed on credit card lending, subject to a maximum of 8% over and above the normal lending rates.
•  All liquor and beer manufacturing companies will be liable to pay a minimum of Rs. 200 million per month. Current Government debt
• The estimated outstanding Government debt is Rs. 7,373 billion as at end 2014, reflecting per capita debt of Rs. 357,233. Considering the off balance sheet items with regards to debt, the Government expects per capita debt to increase to Rs. 427,220. As a result, the total debt to GDP of 74.4% as at end 2014 is expected to increase to 88.9%.

Impact analysisSuper Gain Tax Budget proposal
Super Gain Tax of 25% on profits is imposed on companies or individuals earning profits of more than Rs. 2 billion in the tax year 2013/14 as a one off payment. The tax will be paid at the company level.

Key counters affected
JKH, COMB, CTC, HNB, DIST, SLTL, DIAL, LIOC, CARS, SPEN, SAMP, PLC, NEST, CFIN, BUKI, DFCC, AEL, NDB, CINS, LLUB, OSEA, AHPL, SEYB, NTB
Banking, Finance and Insurance
Budget proposal: Concessions given to boost the agricultural sector.
Impact on Sector: This would lead to an increase in micro and SME (Small and Medium Enterprises) lending. The concession will also help improve credit quality of the loans.
Key counters affected: All listed banks and finance companies. HNB, NDB, DFCC, NTB, SEYB and UBC would be mainly affected due to their relatively high exposure on SME.
Budget proposal: Provide 50% tax reduction for the entrepreneurs who commence businesses in vegetable and food processing Industry.
Impact on sector: Currently the outstanding micro loan portfolio of major microfinance institutions and formal banks is Rs. 194 billion and Rs. 39 billion respectively. The SME sector contribution to GDP3 is 30%.
Budget proposal: Cap on the effective annual interest rate on micro finance lending to be 40% p.a.
Impact on sector: The interest income earned by micro finance institutions will be impacted.
Key counters affected: HNB may be affected through Prime Grameen
Budget proposal: Special endeavour to assist SME sector organisation restructuring
Assistance to SME sector industrialists and credit card holders in difficulties listed under CRIB (People with outstanding of Rs. 250,000 or less will be assisted with a repayment plan within six months).
Impact on sector: Finance Ministry in tandem with the banking sector will provide assistance to SMEs to restructure operations. This will improve credit quality of SME loans.
Key counters affected: Listed banks and finance companies may be impacted.
Budget proposal: Age limit of imported passenger buses to be increased from five to 10 years
Impact on sector: Since longer age limit buses will be less expensive, we expect the demand for buses for transport service to increase. Hence, finance company leasing and hire purchase portfolio is expected to grow.
Key counters affected: PLC
Budget proposal: Every citizen to have a bank account
Impact on sector: The deposit base of the banking system will increase with CASA ratio. The larger banks with branches located outside Western province are expected to benefit.
Key counters affected: All banks in the listed space, mainly HNB, COMB and SAMP with a wider branch network.
Budget proposal: Reduction in taxes for cars with engine capacity less than 1,000cc. However, excise taxes applicable on hybrid vehicles will be revised and the depreciation table will be removed
Impact on sector: Leasing and hire purchase opportunities for small motor cars.
Demand for hybrid vehicles may marginally decrease.
Key counters affected: All banks, finance and leasing companies
Budget proposal: Interest rate on NRFC accounts to increase from 3% to 5%.
Impact on sector: We expect minimal impact on the interest expense of banks on the listed space.
Key counters affected: COMB and HNB have relatively higher exposure than the other listed banks.
Budget proposal: Senior citizen deposit interest rate floor increased from 12% to 15% up to Rs. 1 million.
Impact on sector: We expect this to be applicable to both state and private commercial banks.
Further we expect a flight of deposits from finance companies to banks which would negatively affect the funding of finance companies and benefit the banks deposit base.
Key counters affected: Listed banks may benefit positively.
Budget proposal: An interest rate cap was imposed on credit card lending subject to a maximum of 8% over and above the normal lending rates.
Impact on sector: Lower margins to the banks may be negated by the higher volumes due to increased consumer usage of credit cards.
Key counters affected: NTB and SAMP with significant exposure to credit cards while other banks will also benefit
Beverage, Food and Tobacco sectors
Budget proposal: Guaranteed price for procurement of a litre of milk will be increased from Rs. 60 to Rs. 70.
Impact on sector: Negative impact on cost of goods sold.
Key counters affected: NEST, COCO, LMF, LAMB
Budget proposal: Maximum retail price of milk powder to reduce by Rs. 61 to Rs. 325 per 400g.
Impact on sector: Negative impact on margins
Key counters affected: NEST, LMF
Budget proposal: All liquor manufacturing and beer manufacturing companies will be liable to pay a minimum of Rs. 200 million per month.
Impact on sector: It is not clear whether this is a new levy or a minimum payment for all taxes paid by the existing players.
Key counters affected: If it is a new levy, DIST and LION will be negatively impacted.
Chemicals and Pharmaceuticals sectors
Budget proposals:
The guaranteed purchase price of paddy will be increased to Rs. 50 per kg.
Hand tractors price to be reduced for the use of farming community.
50% waiver will be provided for a maximum loan capital of Rs. . 100,000 on overdue loans advanced to farmers by commercial banks.
Impact on sector: The agricultural sector would be revitalised as a result of the given proposals, resulting in more demand being created for fertilizer and other related products.
Key counters affected: Positive impact on LCEY and CIC.

Construction Sector
Budget proposal: Removal of customs duty applicable on cement and steel billets. Additionally, an initiative was proposed to ensure that sand is mined without harming the environment.
Impact on sector: Falling prices of cement and steel billets would reduce the costs of construction significantly, thus enhancing the demand for construction.
Stringent environment laws related to sand mining may have a negative impact. However, this may not overweigh the above mention positive development.
Key counters affected: AEL, KAPI
Diversified Sector
Budget proposal: Reduction of taxes on essential goods, fuel, kerosene and gas prices.
Impact on sector: Increased disposable income of the population which in return impact positively retail business and supermarket chains in general
Key counters affected: JKH, RICH, CTHR,SHL, HAYL, SUN
Budget proposal: An interest rate cap was imposed on credit card lending, subject to a maximum of 8% over and above the normal lending rates.
Impact on Sector: Increased consumer spending
Key counters affected: JKH, RICH, CTHR,SHL, HAYL, SUN
Budget proposal: Guaranteed purchase price on rubber increased to Rs. 350 per kg from Rs. 300 per kg.
Impact on sector: Rubber related manufacturing products may adversely get affected by the proposed guaranteed price.
Key counters affected: HAYL, RICH
Manufacturing Sector
Budget proposal: Reduction in fuel prices and taxes applicable on vehicles with engine capacity of less than 1,000cc by approximately 15%.
Impact on sector: Positive impact on the cost structure and higher demand for complimentary products.
Key counters affected: CERA, LWL, RCL, TKYO, GLAS, ACL, KCAB, DIPD, TJL, LLUB, TYRE
Budget proposal: Removal of customs duty applicable on cement
Impact on sector: The demand for imported cement will increase. This will negatively impact listed counters with domestic production.
A boost in the construction sector would also positively impact the demand for cables required for wiring of buildings, driving the top line.
Key counters affected: TKYO and LCEM, and ACL, SIRA and KCAB
Budget proposal: 30% of EPF balances would be withdrawn to purchase land or build houses.
Impact on sector: Demand will increase for the individual house building segment. Therefore, demand for cement is expected to increase.
Key counters affected: TKYO and LCEM
Budget proposal: The guaranteed purchase price for rubber will be increased to Rs. 350 per kg.
Impact on sector: Companies that source raw material such as rubber are expected to be adversely impacted as a result of higher input cost.
Key counters affected: DIPD and REXP
Motor Sector
Budget proposal: It was proposed to reduce taxes applicable on vehicles with engine capacity of less than 1,000 cc by approximately 15%.
Impact on sector: Increase in number of vehicles sold, driving revenue generated. (E.g. DIMO Batta)
Key counters affected: DIMO
Budget proposal: Reduction in the price of fuel.
Impact on Sector: The lower fuel prices are expected to encourage the use of vehicles, thereby increasing vehicle sales and the number of first time vehicle owners.
Key counters affected: SMOT, DIMO and UML
Budget proposal: Introduction of an annual license fee of Rs. 1.5 million for importers of brand new or used vehicles.
Impact on sector: The present practice of individuals importing vehicles would decrease as the cost would be significant to individuals and smaller scale importers Elimination of competition from smaller players would be beneficial to the larger players.
Key counters affected: SMOT, DIMO and UML
Plantations
Budget proposal: The guaranteed price of rubber will be increased to Rs. 350 per kg.
Impact on the sector: The impact of this proposal is expected to be minimal for listed entities with high exposure to rubber as they will not be able to obtain a price benefit due to their integrated nature of operations.
Key counters affected: KOTA, KGAL and AGAL
Power and Energy Sector
Budget proposal: Reduction in fuel prices and taxes applicable on vehicles with engine capacity of less than 1,000cc by approximately 15%.
Impact on the sector: Since fuel reduction was through the reduction of tax, the estimated margin impact will be minimal. In addition, we expect a positive impact on the increase in average number of trips by motorists due to low fuel costs. New car registration under small car category will also have a positive impact on fuel demand.
Key counters affected: LIOC
Budget proposal: Reduction in LP gas prices by Rs. 300 to Rs. 1,596 per 12.5 kg cylinder.
Impact on the sector: It is unclear as to whether the price decrease is as a result of lower tax or simply due to the reduction of the maximum retail price. If the price decrease is not due to a reduction in tax, LGL will be negatively affected.
Key counters affected: LGL
Telecommunications
Budget proposal: One off levy of Rs. 250 million to be imposed on all licensed mobile telephone operators.
Impact on the sector: This would reduce profits in the listed space in the telecommunications sector by approximately Rs. 500 million. However this is a one-off levy and hence is not expected to impact the long term viability of the industry.
Key counters affected: DIAL and SLTL
Budget proposal: Mobile operators should avoid passing the tax of 25% payable on reloads to the consumer. The company has to bear this cost on behalf of the client.
Impact on the sector: This would impact industry profits since entities would have to bear the tax burden on pre-paid reloads. However, at the same time, usage may increase due to lower pricing, which in turn may result in a volume increase.
As at 30 September 2014, DIAL had approximately 8.3 million pre-paid subscribers, out of a total subscriber base of approximately 9.3 million (89.0%).
Key counters affected: DIAL and SLTL
Budget proposal: Outsourced workers who have been working at Sri Lanka Telecom for more than seven years to be absorbed to the regular workforce.
Impact on the sector: Salaries and wages will increase
Key counters affected: SLT

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