CT CLSA Securities’ take on Interim Budget 2015

Thursday, 5 February 2015 00:01 -     - {{hitsCtrl.values.hits}}

CT CLSA Securities Ltd. (CT CLSA) has come up with an initial analysis and impact assessment of the new Government’s interim Budget 2015. Here are highlights:  
Finance Minister Ravi Karunanayake presenting the 100-Day Revolution statement in Parliament
    EXECUTIVE SUMMARY The 19th Minister of Finance of Sri Lanka Ravi Karunanayake presented Sri Lanka’s Interim National Budget for 2015 in Parliament on 29 January 2015. The Government of Sri Lanka (GoSL) expects to reduce its fiscal deficit to 4.4% for 2015E from its previous estimate of 4.6%, despite populist proposals to increase purchasing power of middle and low income segments of the country. The GoSL revised its debt to GDP ratio to 89% as at 31 Dec 2014 (from 75% as reported previously), keeping in line with the mandate for good governance on account of reclassification of State-Owned Entities (SOE) debt under GoSL debt. Main focal points of the 2015E budget included proposals on improved social safety nets whilst taxing high income segments and creating an equitable platform for taxes and levies. The 2015E fiscal budget largely included populist proposals such as pay hikes targeting low and mid income groups, guaranteed prices amid a possible parliamentary election expected in end 2Q2015E. Financing of major populist proposals to be implemented by imposing a one off tax (super gain tax) in 2015E. Going forward, in order to continue the positive momentum of the aforementioned fiscal proposals, the GoSL mentioned that a more transparent management mechanism of SOEs and management of construction projects will be adhered to. In containing the fiscal deficit, the GoSL has reduced its public investment in the economy to 4.6% for 2015E from a previous estimate of 6.2%. The GoSL further mentioned savings amounting to Rs.38 b (third largest proposal) resulting from better management of projects and processes during 2015E whilst proposing higher (phased) investments in education to increase sustainable growth of the economy in the medium to long term. In this analysis we have highlighted the key proposals of the interim Budget 2015, including the potential impact on key sectors and selected listed companies. It should be noted that the proposals laid out in the budget are not officially finalised by the GoSL, with information also limited in some instances, until the release of gazettes, and thereby the details on some of the proposals could be altered in the weeks ahead. KEY HIGHLIGHTS GENERAL Proposal
  • Implement a one off Super Gain Tax to raise Rs.50 b (largest revenue proposal) - One off payment on any company or individual who has earned profits over Rs. 2,000 m in the tax year 2013/2014 will be liable to pay 25% of their profits Potential impact on listed companies

  • All major blue chip companies: negative

  • Increase employment income threshold for PAYE from Rs. 600,000 to Rs. 750,000 w.e.f. 01 Apr 2015
  • Increase State sector employee (1.3 m employees) salaries by Rs. 10,000: Rs. 5,000 w.e.f. Feb, and Rs. 5,000 w.e.f. Jun 2015 incurring a total cost of Rs. 89,700 m (largest expenditure proposal)
  • Increase pensioners’ monthly pension by an additional Rs. 1,000 w.e.f. Apr 2015. About 550,000 pensioners to benefit from this revision incurring an additional expenditure of Rs. 4,900 m
  • Increase monthly benefits to Samurdhi beneficiaries (low income earners) by 200% w.e.f. Apr 2015, incurring expenditure amounting to Rs. 8,000 m

Potential impact on listed companies  
  • Directly none, positive impact via improved consumer purchasing power
  • Remit levies and dividends amounting to Rs. 25,000 m by Telecommunications Regulatory Commission (TRC), National Lotteries Board (NLB), LITRO Gas Company, Sri Lanka Tea Board, Rajya Arakshaka Lanka Limited (RALL)

Potential impact on listed companies  
  • Directly none, positive on fiscal coffers

  • Reduce the Special Commodity Levy on sugar (Rs. 5,423 m), canned fish (Rs. 1,057 m), sprats (Rs. 657 m), coriander (Rs.635 m), green gram (Rs.519 m), turmeric (Rs.426 m); GoSL will forego Rs. 8,350 m
  • Reduce Import Duty on wheat grain; foregoing revenue of Rs. 8,000 m

Impact on listed companies  
  • Listed companies in consumer oriented businesses: marginally positive

  • Impose a one off Super Gain Tax (refer details under General segment)

Potential impact on listed companies  
  • Commercial Bank of Ceylon (COMB), Hatton National Bank (HNB), Sampath Bank (SAMP), Seylan Bank (SEYB), National Development Bank (NDB), DFCC Bank (DFCC), Nations Trust Bank (NTB), People’s Leasing and Finance (PLC), Central Finance (CFIN): negative impact

  • Increase Senior citizens FD interest rates to 15% per annum for a maximum deposit of Rs.1 m
  • Waive off a maximum 50% of the loan capital of Rs. 100,000 on the loans advanced to farmers by commercial banks and presently overdue

Potential impact on listed companies  
  • All listed banks: marginally negative

  • Waive off interest payments on pawned jewellery to a value not exceeding Rs. 200,000 held at State banks

Potential impact on listed companies  
  • None: Government banks in Sri Lanka are not listed

  • Open commercial bank branches in remote areas
  • Open new customer bank accounts without making any initial charge

Potential impact on listed companies  
  • All listed banks: Neutral

  • Impose a one off levy of Rs. 1,000 m on companies engaged in commercial operations of the Direct-to-Home via satellite operators having more than 50,000 subscribers in Sri Lanka: generate Rs. 2,000 m
  • Impose a one off levy of Rs. 1,000 m on satellite owners who utilise the location reserved for Sri Lankan satellite; generate Rs. 1,000 m
  • Impose a one off levy of Rs. 250 m on all licensed mobile telephone operators in Sri Lanka; generate Rs. 1,250 m
  • Desist mobile facility operators from passing the tax of 25% payable on reload to customers; the company to bear the tax

Potential impact on listed companies  
  • Dialog Axiata (DIAL) and Sri Lanka Telecom (SLTL): negative

  • Introduce a pricing formula for fuel and electricity tariffs based on global market prices; relieve the treasury, Ceylon Petroleum Corporation (CPC) and Ceylon Electricity Board (CEB) of any additional financial burden
  • Reduction of fuel prices w.e.f. 22 Jan 2015
  • The price of a litre of 95 Octane Petrol is down 20% (by Rs.30 to Rs.128), 92 Octane by 22% (by Rs.33 to Rs.117)
  • A litre of Diesel down by 14% (by Rs.16 to Rs.95), Super Diesel by 17% (by Rs.23 to Rs.110)
  • A litre of kerosene down 20% to Rs.65
  • Kerosene reduced by a further Rs.6 per litre to Rs.59 per litre w.e.f. 29 Jan 2015
  • GoSL decided to pass the full benefit of declining global petroleum prices to consumers whilst also reducing the taxes applicable on petroleum products - Loss of Rs.85,000 m

Potential impact on listed companies  
  • Lanka IOC (LIOC) – neutral; margins expected to be unaffected as reduction is by way of tax removal
  • Fuel-intensive manufacturing companies, i.e. Lanka Walltiles (LWL), Lanka Tiles (TILE), Piramal Glass (GLAS): positive

  • Revise excise duty on motor vehicle imports; generate Rs. 7,000 m
  • Generate additional annual license fee of Rs.1.5 m on importers of both new and used vehicles
  • Reduce taxes applicable on motor cars with engine capacity less than 1,000 cc by ~15%
  • Revise excise taxes applicable to hybrid vehicles - changes will be implemented from 30 Jan 2015
  • Remove depreciation table w.e.f. 30 Jan 2015

Potential impact on listed companies  
  • United Motors Lanka (UML), Diesel & Motor Engineering (DIMO), Sathosa Motors (SMOT): marginally positive

ALCOHOL Proposal
  • Reformulate the licensing through a tendering process; generate Rs. 600 m
  • No one person can possess more than three liquor licenses. Until such time the proposed scheme is implemented, the licensing fee will be doubled
  • All liquor and beer manufacturers liable to pay a minimum of Rs. 200 m per month; generate Rs. 5,000 m
  • Discourage small players and rationalise the number of manufacturers
  • Impose a Special Levy of Rs. 250,000 (one off payment) per tavern and liquor sales outlet; generate Rs. 1,000 m

Potential impact on listed companies  
  • Distilleries Co. of Sri Lanka (DIST): positive
  • Ceylon Beverage Holdings (BREW): marginally negative

DAIRY Proposal
  • Raise the guaranteed liquid milk price from Rs.60 to Rs.70 per litre
  • Reduce the MRP of milk powder by Rs.61 to Rs.325 per 400g

Potential impact on listed companies  
  • Dairy producers sourcing local fresh milk: Cargills (Ceylon) (CARG), Lanka Milk Foods (LMF), Lucky Lanka Milk Processing Co. (LLMP), Renuka Agri Foods (RAL) Nestle Lanka (NEST): negative

  • Impose Rs.1,000 m levy on all Casino operators, to be paid before 15 April 2015 as a one off payment (special levy); generate Rs.5,000 m
  • Double the annual levy payable under the Betting and Gaming Levy Act; generate Rs. 400 m

Potential impact on listed companies  
  • John Keells Holdings (JKH): negative

TOURISM Proposal
  • Impose levies/dividends on State-owned Tourist Board; generate Rs. 1,000 m
  • Increase existing five year age limit to ten years for the importation of passenger buses
  • To provide an adequate fleet of buses largely for the tourism industry

Potential impact on listed companies  
  • Aitken Spence (SPEN), Hayleys (HAYL), Hemas Holdings (HHL), John Keells Holdings (JKH): marginally positive

  • Remove the Customs duty applicable on cement and steel billets; loss of revenue of Rs. 3,000 m

Potential impact on listed companies  
  • Access Engineering (AEL), Colombo Dockyard (DOCK), MTD Walkers (KAPI): positive
  • Tokyo Cement Company (Lanka) (TKYO): negative

  • Increase the guaranteed purchase price of rubber, tea and paddy (to Rs. 350, Rs. 80 and Rs. 50 per Kg)

Impact on listed companies  
  • Guaranteed price to support local rubber and tea producers