"The Government of Sri Lanka has formulated a welfare-oriented budget forecasting an ambitious 6.2% budget deficit. Aside from a decision to depreciate the local currency by 3% to encourage exports, the proposals stay true to their 2011 colour opting not to rock the boat. Sectors tourism, healthcare and apparel seem to be the clear beneficiaries while the telecom sector seems hit by a double whammy on both incoming and outgoing international calls. Of the LKR 1,106bn total revenue, 1,000bn is comprised of tax revenue," BRS said.
"We believe the corporate sector will be encouraged by the somewhat liberalization of the LKR and the incentives shown towards the tourism sectors. We also believe that the holding of customs duty for vehicles too as a positive as the consensus expected a higher vehicle import duty. However, vehicle registration charges have been revised upwards. Tourism related vehicle import duties will be cut by 50% We see benefits to sectors healthcare, beverages and foods, tourism, apparel clothing, logistics services and motor companies.
The 3% depreciation of the LKR will evidently help the exporters, ceteris paribus. However we must note that this move could push up firms’ import raw material costs and reduce margins. Quoted companies, engaged in importing will face thinning margins with this move.
The depreciation of the currency can also cause imported inflation by way of crude oil and wheat imports. In addition, the proposed 10% pay hike to the public sector can also have an inflationary effect given the high proportion of the public sector in the country and may force a private sector pay hike in return.
Banking operations which have a dedicated SME / Development branches will have a lower tax rate of 24% as opposed to the previous 28%. This saving will however apply to those respective branches and we do not believe that there will be a significant bottom line impact for any of the listed banks to re-rate on this regard alone.
One of the most prominent sectors to benefit from this is the healthcare industry. We believe AMSL, SHL, ASIR, NHL, CHL and LHCL will see decreased taxes going forward with the income tax rate on profits from healthcare sector down to 12%. NHL’s average effective tax rate for the last two years amounted to 56% and 28% respectively.
CHL on the other hand maintained a 34% effective tax rate. We believe these counters have more to gain than the ASIR group which pay less corporate tax and ASHA which is on a tax holiday.
Imports of branded apparel items will only be subject to an all inclusive tax of 35% at the point of Customs. Export apparel manufacturers who export a minimum of 75% of their production will be permitted to sell the balance in the domestic market at a concessionary rate.
ODEL and SHL will benefit from the move to make Sri Lankans have more access to ‘sporty’ items with the duties being slashed on shorts/ t-shirts, swimwear and sports shoes.
TJL, KURU, MGT and OGL will benefit from the reduced duty and taxes from the import of yarn which they use to make the greip fabric. In addition to the margin enhancement here, the above companies clearly benefit from the somewhat liberation of the LKR- the absence of which plagued all exporters.
Plantation companies may react negatively to the news of losing 37,000 acres of land, but this is unused land therefore no current earnings will be lost in the process other than the sentiment.
DIST will benefit from liquor produced from local plant material or plant product being subject to a lower excise duty of LKR.100 per litre.
We believe the telecom sector will take a direct hit from the increase in tariffs. The sector is getting a double whammy which the duty on both incoming and outgoing international calls levy going up by US$ 2 cents and LKR 1.00 each. At the present levels of competition, the companies may not find a way to pass this burden entirely on to the consumer further eroding the profitability of the sector.
On a final note-, the factored in a duty hike on motor vehicles that did not materialize. We make this an opportunity to reinforce our ’buy’ recommendations on UML and DIMO. We are of the view that the two companies will continue to beat the consensus in the coming quarter as well," BRS said.
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