June 15, 2021 (MLN): In order to achieve inclusive growth target, improve ease of doing business and accelerate the process of industrialization, government has offered a range of incentives and tax cuts in Federal budget for the upcoming FY22.
Initial impression of the budget is positive with respect to the major industries. More or less every segment of the economy has something positive in the budget. Specially, in lieu with IMF consultation, government has extended required relief for the industrial sector to pick the pace of growth.
Going by the budget document, the increment in earmarked amount of PSDP (Rs9.36billion) is evident that government with pro-growth approach is also taking development projects seriously. The allocated budget has the potential to boost construction activities which will ultimately accelerate the allied steel industry.
Meanwhile, government has allocated Rs100bn for the construction of five dams including Diamer Bhasha, Neelum Jehlum, Dasu Phase-1 and Mohmand dam. The mega construction activities of dams will mainly impact on the demand for steel.
Federal government has also proposed Karachi Transformation Plan and allocated Rs98bn from PSDP and Rs125bn from the Supreme Court Fund. According to Pearl Securities, this entails that the demand of steel is likely to evolve in the Southern region, therefore, steel companies located in the South would ultimately reap the benefits out of it.
With respect to the raw material, government has proposed reduction and exemption of custom duties (CD), additional custom duty (ACD) and regulatory duty (RD) on the import of flat rolled products including Hot Rolled Coil (HRC) and stainless in order to accelerate the production process.
Further it will likely improve margins of listed steel industry such as International Steels (ISL), Crescent Steel and Allied Products Limited (CSAP), International Industries (INIL) and Aisha Steels (ASL). To note, ISL & ASL are being charged 5% CD and exempted from RD.
As per the estimates ,made by Topline Securities, ISL and Aisha Steels (ASL) will have a positive impact of Rs3.46 and Rs1.32/share, respectively if assumed 50% benefit passed on to consumers.
The report further stated that INIL also has 50k tons capacity of CR mill which is not in operation since the beginning of FY21 due to unfavorable duty economics. INIL is currently subject to duty of 13% on import of HRC (shared by management in a conference call).
It is expected that INIL to benefit to the tune of Rs2.12/share on unconsolidated basis (assuming 50k tons) and Rs8.56/share on consolidated basis assuming 50% pass-on.
According to the report by Next Capital, the manufacturers will not fully pass-on the impact of this development in light of strong demand projections for the upcoming FY22 and relying on the recent new-found capacity of consumers to absorb price hikes.
A combination of partial pass-on (by absorbing new price hikes) and improvement of gross margins from 1QFY22 onwards is expected, the report added.
Speaking to Mettis Global over phone, Mairaj Khuwaja, Chief Executive, National Steel Advisory Council said that the proposed reduction in turnover taxes and reduction in CD will have a positive impact. However, manufacturers are still awaiting the release of final SRO as more clarity is required on duty structure is in terms of incentives given to raw material.
Government has also proposed the reduction in turnover taxes from 1.50% to 1.25% which will support the Steel industry further and pave a way towards generating more revenue stream for the government.
It is pertinent to note that in previous years, high turnover taxation discouraged dealers from entering into tax net.
On the other hand, government has also imposed 17% General Sales Tax on the import of steel billets, ingots, ship plates, bars and other long re-rolled profiles to compensate for the removal of 17% FED on the afore-mentioned products.
The report further added that this development is done to increase the revenue allocation for provincial governments as GST is distributable between the provinces and the federal state. On the corporate sector, these developments would largely offset each other.
Imposition of GST on imported products will make it costlier for commercial importers thereby improving pricing power of local players. It is expected that MUGHAL, AGHA, ITTEFAQ & ASTL to be major beneficiaries of this development, a report by BMA Capital said.
The overall impact of the proposed incentives and tax slashes by government will likely be positive and help to expedite the growth momentum in the coming fiscal year.
Copyright Mettis Link News