profitepaper pakistantoday 03rd june, 2012 by Profit Epaper

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Merkel rejects debt sharing as Obama urges end to crisis cloud Page 02 profit.com.pk

Sunday, 03 June, 2012

rently stand at Rs7.15 per liter. Impact

NEUTRAL TO POSITIVE Increase in taxes on cNG would reduce petrol/cNG price differential, hence boding well for petrol sales. Abolishment of FED on lube oil could provide traction to local lubricating sales going forward. For refineries, abolishment of Rs7.15 per liter FED on base oil bodes well for NRL, the only lube refinery of pakistan. We estimate an annualized earning impact of Rs10-12 per share on NRL, assuming the impact is not passed on. However lube prices and margins would continue to be a function of international oil prices. Ipps

KARACHI

STAFF REPORT

xpEct major positives like incorporation of the recentlypromulgated Finance Amendment Ordinance 2012 into the Finance Bill 2012, the new fiscal document is believed to have brought no major surprises for the country’s capital market. the presidential ordinance, which includes the rules for computation of the much-debated capital Gain tax (cGt) and is considered to be a turning point for the volume-starved equity market, is going to get a parliamentary nod with the passage of the new budget. “All in all the Budget FY13 has no major surprises for the capital markets,” said the analysts at topline Research. the budgetary measures, the observers view, would have an impact ranging from neutral to positive on the listed sectors including banks, cement, fertilizer, auto assemblers, insurance, textile, exploration and production, oil manufacturing companies and refineries, Independent power producers, telecommunication, chemicals, pharmaceuticals and Fast Moving consumer Goods. Generally, the fresh budget for local bourses envisages that: No source of investors’ income would be asked for the funding made for at least 45 days till June 30 (2012) or for at least 120 days till June 30 (2014) provided statement of investment is filed along with return and wealth statement. turnover tax reduced from 1 percent to 0.5 percent. For investment in Initial public Offering (IpO), individuals would now get tax credit up to 20 percent of taxable income or Rs 1 million, which ever is less. previously, individuals were entitled to get a tax credit of 15 percent or Rs0.5mn which ever is less. Also the holding period to get a tax rebate has been reduced to 2 years from 3 years. No reduction made in corporate tax

rate of 35 percent. As expected the government ignored the demand of minimum dividend payment by the listed firms. Similarly, the new budget also maintains 10 percent tax on dividend setting aside the Karachi Stock Exchange’s (KSE) proposal. to curb speculation and holding real estate for trading purpose, the government would charge 10 percent and five percent tax on gain on property if sold within one year and two years of its acquisition, respectively. However, there would be no cGt on sales after two years. this may divert some funds from property business towards shares trading. the analysts maintain a positive stance on the bourse which is trading at FY13 estimated pE of 6.5x and dividend yield of 8 percent. In the short run, however, the dwindling pak rupee and meltdown in global stocks may affect local market also, warned they. A sector-wise breakup of budgetary measures and impact is as follows: Banks

MEASURES contrary to media reports tax on tbill remain at 35 percent in line with standard corporate tax unlike market expectation of 40 percent. Dividends received on investments in money market and income funds are now charged at 25 percent instead of 10 percent in 2012. this tax would progressively be increase to 35 percent in 2013. Exemption limit of WHt on cash withdrawals (currently charged at 0.2 percent) increased from 25k to 50k. Reliance on bank and non bank borrowing would keep interest rate high with no major growth expected in private sector credit

Impact NEUTRAL Increase in tax on dividends on investment in funds has no major impact on

banks as 2012 average earnings would be revised down by less than one percent. However, few banks like ABL and UBL, which have higher exposure in funds their profits would be affected by 2 to 4 percent, if they hold funds for short period. On the other hand, the said measure would be slightly negative for those AMcs which are subsidiaries of banks. Moreover, increase in cash withdrawal limit would slightly improve deposit base. “Banks would continue to benefit from higher interest rates and lower provisioning,” the analysts said.

Impact

NEUTRAL Reduction in turnover tax and decrease in export duties would improve textile manufacturers’ earnings. On the flip side, increase in gas cess would be slightly negative. e&p

cement MEASURES

Increase in pSDp, which is also spent on infrastructure development, to Rs873bn, up 20 percent from last year. FED on cement price reduced by Rs100 per ton (Rs5 per bag) to Rs400 per ton (Rs20 per bag). Reduction in turnover tax from 1 percent to 0.5 percent for cement firms having tax losses. custom duty on rubber scrap reduced from 20 percent to 10 percent. Increase in gas cess by Rs87 per mmbtu on captive power plants which would increase cost of power generation.

Impact

NEUTRAL TO POSITIVE the government higher allocation in an election year on development spending may generate local demand for cement. this would boost domestic demand for cement in FY13 which is already up 9 percent during 10MFY12. Moreover, reduction in FED (if not passed on to consumers), low custom duty on rubber scrap and lesser turnover tax would imo 0.5 percent for companies with tax losses. - to encourage normal tax regime and phasing out of presumptive tax Regime (ptR) in three years, lower tax rates are being offered to com-

mercial importers, exporters and suppliers. Increase in gas cess by Rs87 per MMBtU on captive power plants would increase cost of production

MEASURES the government announced customary dividends estimates from state owned E&p and royalty targets on oil and gas for FY13. the government is expecting to receive dividend of Rs8 and Rs10 per share from OGDc and ppL, respectively. the government has announced a target from privatization proceeds of Rs74bn, which implies the government’s intention of conducting ppL’s secondary public offering in FY13.

MEASURES the government has announced total electricity subsidy target of Rs185bn against revised allocation of Rs464bn in the outgoing year. the amount includes Rs120bn for inter-disco tariff differential against last year revised allocation of Rs417bn. Impact NEUTRAL

Given existing tariff differential of 2025 percent in electricity tariff and cost and political compulsion in the election year playing a road block to further reduce tariff-cost gap, we estimate the electricity subsidy to overshoot the initial allocation. As such the budget turned out to be a non-event for the Ipps. However, recent fall in crude and furnace oil price can be a blessing in disguise if this trend of oil continues in FY13 also. telecOm

Impact NEUTRAL the budget remained a non-event for the exploration sector. Furthermore, we expect OGDc and ppL to announce a dividend of Rs10 and Rs16 per share in FY13. Omcs and RefIneRy

MEASURES the government announced pL target of Rs120bn as against FY12 collection estimate of Rs69bn. the government announced its total dividend expectation from pSO for FY13, rendering into cash payout of Rs13 per share. the government announced a gas development surcharge of Rs300 and Rs200 per MMBtU on cNG for north and south zone. Abolishment of FED on lubricating and base oil. FED on base oil is cur-

MEASURES 20 percent increase in Government employee salaries. the Government also announced its total dividend expectation from ptcL for FY13, rendering into cash payout of Rs2 per share the Government announced the revenue from 3G licenses of Rs79bn in FY13. No change in FED for telecom sector

Impact

NEUTRAL TO NEGATIVE Increase in salaries would negatively impact profitability of ptcL as salary expenses contribute around 17 percent of total cost. the increase could dilute ptcL earning by Rs0.3-0.35 per share but, we have already partially priced in the effect in our financial models. Expected revenue of Rs79bn from 3G licenses seems to be an arbitrary number and final revenue would be decided when consultant would be hired.

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Sunday, 3 June, 2012

news

Merkel rejects debt sharing as Obama urges end to crisis cloud

BLOOMBERG

ERMAN hardened her opposition to joint debt sharing in the euro region as president singled out ’s leaders for not doing enough to stop the financial crisis. With Europe’s debt crisis cited last week for canceled IpOs, weaker-than-expected chinese manufacturing figures and a rise in the U.S. jobless rate, Merkel rejected joint debt issuance in the 17-nation euro area as a solution, saying “under no circumstances” would she agree to Germany-backed euro bonds. Now, some “come along and ask for euro bonds, saying all we need are equal interest rates and everything will turn out all right,” Merkel said in a speech to members of her in Berlin today. Instead, what’s needed is an economic overhaul to tackle the lack of competitiveness in Europe, she said. Merkel, the head of Europe’s biggest economy and the largest contributor to bailouts for Greece, and Ireland, is the pivotal player in efforts to resolve the crisis now in its third year. As Spain struggles to avoid becoming the next country to call for a rescue and the euro slides near a three-year low against the dollar, Obama added to pressure from the , and Italy to do more to halt the spread of contagion. euROpean ‘clOud’ Obama, speaking at a fundraiser yesterday as he bids for re-election in November, said that a report showing the slowest month of U.S. employment growth in a year was in large part “attributable to Europe and the cloud that’s coming over from the Atlantic.” the “whole world economy has been weakened by it,” he said. “Europe is having a significant crisis in part because they haven’t taken as many of the decisive steps as were needed to deal with the challenge,” he said at a separate event in . the president’s point person for the European crisis, , treasury undersecretary for international affairs, ended a three-day tour of Europe’s crisis capitals yesterday as work continued on erecting a financial firewall to stem contagion. the European Union is targeting July 9 as the start date for its permanent rescue fund, the 500 billion-euro ($620 billion) European Stability Mechanism, an EU official said.Spanish Storm Brainard held closed-door meetings with government officials in , Madrid, paris, Frankfurt and Berlin in a week when investors flocked to the perceived safety of German and U.S. bonds. the euro fell to almost a three-year low against the dollar and an 11-year low against the yen as uncertainty over the outcome of Greek elections on June 17 shifted to take in , where prime Minister ’s government is struggling to shore up banks amid a recession. “the storm hasn’t disappeared but we aren’t going to sink,” Rajoy said in a speech today in Sitges, near Barcelona. “We are not on the edge of a precipice.” Rajoy called on analysts and investors to moderate “irrational” views of Spain’s financial situation, saying that Spain “will emerge from the storm under its own efforts and with the support of our European partners.” Spanish 10-year yields ended the week at 6.51 percent, approaching the 7 percent level that triggered previous euroarea bailouts, though below a euro-era record of 6.78 percent on Nov. 17. ’s equivalent 10-year bund rate was at 1.17 percent after reaching 1.127 percent, the lowest since Bloomberg began collecting the data in 1989. German two-year yields slid below zero for the first time.

stOcks declIne Irish backing for Europe’s fiscal pact yesterday failed to halt a decline in European stocks for the fourth week in five, with the Index dropping 3.1 percent to 235.09. the benchmark measure has plunged 14 percent from this year’s high on March 16. Merkel lauded Rajoy’s efforts “for the first time to undertake sweeping labor market reforms,” tackle the real- estate crisis and Spanish banks, where she said the situation is “fragile.” “that’s why it’s important to create transparency quickly over what that means for the banks, what the situation is for recapitalization,” she said. Germany and Spain are in close contact over those efforts “as we must tackle the problems of the past and start the future with a clean slate.” ItalIan cRItIcs the German chancellor, who was besieged over her crisis- fighting policy last week by Italian prime Minister and EcB president , took aim at Italy as she cited a “missed opportunity” offered by the euro’s introduction for Europe to overhaul uncompetitive economies. the cheaper borrowing that came with the euro meant “countries like Italy became virtually on a par with Germany in terms of ,” she said. Now “what we have is a situation that we didn’t want,” Merkel said. “the freedom created by this situation wasn’t exploited to improve longterm competitiveness. Instead, the time was used to spend too much money in consumption and too little time in tackling reforms.” Greece, where the crisis first emerged in late 2009, came back into the spotlight as Moody’s Investors Service lowered the country’s highest possible credit rating yesterday, saying there was an increasing risk the country may exit the euro region. Alexis tsipras, head of Greece’s biggest anti-bailout party Syriza, appealed to voters to give him the power to start anew by canceling the terms of the country’s international bailout and restore pensions and wages. the domestic pressure facing Merkel on her crisis response was underscored by an editorial in Germany’s best-selling Bild newspaper today, saying that is reaching the endgame as soon as next week, regardless of the election outcome. Greece “is unravelling,” and ever-more aid cannot deliver the new beginning that Greece needs, said Nikolaus Blome, Bild’s chief political columnist. the Greek state “must be rebuilt, like in a developing nation,” he said. “Someone among the eurozone leaders must finally tell the Greeks the truth: this fresh start can only be achieved with a radical first step. And that means leaving the euro.”

CENTRAL BANKS TO HOLD FIRE... FOR NOW LONDON REUTERS

the intensifying euro zone crisis and uncertain global growth outlook have raised hopes for a policy response from major central banks but, while it could be a close call, they are likely to resist pressure to act in the coming week. the European central Bank, the Bank of England and the Reserve Bank of Australia are all due to meet as data emerges on the euro zone’s service sector, and the manufacturing and trade performances of the big German and U.S. economies. the main focus will be Wednesday’s EcB meeting, and whether dramatic selling of peripheral European government debt by investors in May and a flight into safehaven U.S. treasuries and German government bonds will prompt it to act. One reason to doubt a major shift in policy is that, even after U.S. treasury 10-year notes hit yields not seen in more than two centuries of record keeping, and investors began paying the German government for the right to hold its debt, the move across all markets may not warrant it. “the stresses appear not yet to be big enough across all asset classes for the policymakers to react,” said Richard Batty, global investment strategist at Standard Life Investments. “It all seems to be playing out in investor’s appetite for triple-A government bonds and for the dollar, but there doesn’t seem to be the volatility or sharp falls in equity markets or other stresses in the system, such as the funding market.” In Europe, the spread between threemonth Libor rates and overnight rates, seen as a measure of health of the banking system, has been stable throughout May mainly due to the more than one trillion euros of cheap funds injected into the system by the EcB in December and February. And while May was a bad month for equity markets everywhere and Spain and Italy in particular, the widely watched Dow Jones .DxY and S&p 500 .Spx indexes remain in positive territory for the year to date. those gains were under threat on Friday, however, as disappointing May U.S. jobs data sparked heavy selling, sending the MScI world equity index .MIWD00000pUS back to where it started the year. the VIx index .VIx, often referred to as the market’s fear gauge stood at 25 points, in line with its levels of last December but well below the 48 points seen at the height of last year’s market tur-

moil in August and September. pOlItIcal mOVes A heavy calendar of events throughout June which could help determine how the euro zone crisis unfolds may also encourage Europe’s key monetary policymakers to hold fire. Greek elections are due on June 17, following a first round of French parliamentary elections on June 10. the heads of the G20 group of nations will hold a summit on June 18 and 19, while Europe’s leaders gather at the end of the month to decide their next response to the crisis. But pressure is growing for action from the EcB to calm acute nervousness about a potential Greek exit from the currency bloc, and fears that the cost to Spain of saving its fragile banks will mean the country itself has to be rescued. “the EcB is currently the only institution that can credibly counter a collective loss of confidence on the scale we’re now witnessing,” said Nicholas Spiro, Managing Director at debt consultancy Spiro Sovereign Strategy. Spanish bond yields have surged in the past week to near their highest level since the launch of the euro, raising questions about the country’s ability to fund itself over the longer term without outside help. Spain will provide a big test of investor sentiment when it auctions more government bonds on thursday as its 10-year bond yields hover around 6.5 percent close to the 7 percent level at which other indebted countries have been forced to seek aid. the latest Reuters poll of economists found most still expected the EcB to resist pressure to cut interest rates before the end of next year, but that majority has shrunk from previous polls as gloomy economic data rolls in. Just 11 of the 73 respondents expected the bank to cut rates on June 6. <EcB/INt> the Bank of England is also expected to esist calls to pump more money into the depressed UK economy when it meets on June 7, according to a separate Reuters poll, although it found there was an even chance the central bank would restart the printing presses at some point in future. pOLL3 A slim majority of economists expect Australia’s central bank to keep interest rates unchanged on tuesday, but this is an even closer call as a growing number of banks, including the nation’s top four, are calling for a cut. AURAtE1 Meanwhile, the U.S. Federal Reserve Board’s mid-month policy meeting and the end of its current easing policy, known as ‘Operation twist’, could also bring changes.

Spain wants euro zone fiscal authority MADRID REUTERS

Spain called on Saturday for a new fiscal euro zone authority which would harmonize national budgets and manage the block’s debts. prime Minister Mariano Rajoy said the authority was the answer to the European debt crisis and would go a long way in alleviating Spain’s woes as it would send a clear signal to investors that the single currency is an irreversible project. It is not the first time a European leader has proposed creating such an authority but the woes and the size of Spain - a country deemed too big to fail - may now accelerate talks ahead of a EU summit on June 28-29. the prospect of a Greek euro exit and Spain’s parlous finances have prompted EU policymakers to hurriedly consider measures such as a “banking union”. Germany, the paymaster of the euro zone, and others insist such a move can only happen as part of a drive to much closer fiscal union and relinquishing of national sovereignty. Overspending in the regions and troubles with a banking sector badly hit by a property crash four years ago have sent Spain’s borrowing costs to record highs and pushed the country closer to seeking an international bailout.

the risk premium investors demand to hold Spanish 10-year debt rather than German bonds rose to its highest since the launch of the euro - 548 basis points on Friday. the Spanish government, which has hiked taxes, slashed spending, cut social benefits and bailed out troubled banks, argues that there is little else it can do and the European Union should now act to ease the country’s liquidity concerns. In private, senior Spanish officials have said this could be done by using European money to recapitalize directly ailing banks or though a direct intervention of the European central Bank on the bond market. they have also said the euro zone should quickly move towards a fiscal union to complete its 13year monetary union but Rajoy went a step further by making a formal offer. “the European Union needs to reinforce its architecture,” Rajoy said at an event in Sitges, in the north-eastern province of catalonia. “this entails moving towards more integration, transferring more sovereignty, especially in the fiscal field. “And this means a compromise to create a new European fiscal authority which would guide the fiscal policy in the euro zone, harmonize the fiscal policy of member states and enable a centralized control of (public) finances,” he added.

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Sunday, 3 June, 2012

news

Speculators add copper shorts, little changed for gold NEW YORK REUTERS

Wall S treet si nks on data, D jobs ow neg ative fo r 2012 NEW YORK REUTERS

Stocks fell more than 2 percent on Friday, dragging the Dow into negative territory for the year after a dismal U.S. jobs report added to fears that Europe’s spiraling debt crisis was dragging down the world economy

HE S&p 500 closed at its lowest since early January and ended below its 200-day moving average for the first time in 2012 after the Labor Department said employers created just 69,000 jobs last month, the weakest in a year. the bleak May jobs report caps a week of soft economic data from china and growing problems in Europe as Spain’s bank crisis deepened. the global flight to safety pushed U.S. and German government debt yields to record lows while the VIx .VIx, a gauge of U.S. stock market anxiety, jumped more than 20 percent for the week. “the vast majority of investors are choosing to panic,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin. “It’s been pretty clear for the last year that Europe was going to be a drag for the global economy.” though steep, Jacobsen said he would view the pullback as a buying opportunity unless it pushed the S&p 500 below 1,250. the Dow Jones industrial average .DJI fell 274.88 points, or 2.22 percent, to 12,118.57 at the close. the S&p 500 Index .Spx dropped 32.29 points, or 2.46 percent, to 1,278.04. the Nasdaq composite .IxIc dropped 79.86 points, or 2.82 percent, to 2,747.48. the benchmark S&p 500 ended below its 200-day moving average, which was 1,284.53 late Friday afternoon. Friday’s decline was the largest daily percentage drop for the S&p 500 since November 9, when a spike in Italian benchmark bond yields sent the broad U.S. stock index down 3.7 percent. For the week, the Dow fell 2.7 percent, the S&p 500 lost 3 percent and the Nasdaq dropped 3.2 percent. Financial sector stocks were among the worst hit in Friday’s selloff, with the KBW bank index .BKx down 4.9 percent, its largest daily drop since early November. “Most investors don’t think the problem in Europe is going to infect the U.S. economy as much as it would the U.S. financial system,” Wells Fargo’s Jacobsen said. JpMorgan chase & co (JpM.N) fell 3.7 percent to $31.93 and Bank of America corp (BAc.N) slid 4.5 percent to $7.02. More than six issues fell for every one that rose on the New York Stock Exchange, while on the Nasdaq, more than five stocks fell for every one that advanced. Homebuilders ranked among the weakest stocks. pulte Group (pHM.N) plunged 11.8 percent to $8.26 while D.R. Horton (DHI.N) lost 8.4 percent to $15.21. the pHLx housing sector index .HGx fell 6.3 percent, but it was still up nearly 14 percent for the year. In one of the few positive moves of the day, Newmont Mining (NEM.N) surged 6.7 percent to $50.30 and Barrick Gold (ABx.N) added 7.3 percent to $41.91 as the price of gold scored its biggest one-day rise in slightly more than three years. More than 8.3 billion shares changed hands on the New York Stock Exchange, the Nasdaq and Amex, about 21 percent higher than the year-to-date daily average of 6.85 billion shares.

their net short in copper increased by 3,949 to 6,757 lots and while their net long in gold increased by seven to 77,325 contracts. On silver, speculators trimmed their net long position by 104 to 4,912 contracts. last week, money managers switched to a net short copper position for the first time since January, as market fretted about the impact of a possible exit by from the euro zone and the region’s deepening debt crisis. “It reinforces the already negative sentiment about increasing copper stockpile and production indexes around the world were very weak,” said frank mcGhee, head precious metals trader of Integrated Brokerage services llc. Gold prices lost 6 percent in may and copper prices were heavily pressured as the european debt crisis and signs of slowing economic growth in the united states and other parts of the world hurt metals and commodities. On friday, gold surged 4 percent, its biggest one-day rise in more than three years, as a surprisingly weak u.s. payrolls report added to fears about a global economic slowdown and fueled talk of further u.s. monetary easing. On next week’s cftc report, mcGhee said that gold’s net long could post a big jump on expectations of imminent actions by central banks to boost economic growth.

‘Big Four’ to audit Spain’s banking sector Spain has picked the ‘Big Four’ accounting firms KPMG KPMG.UL, PwC PWC.UL, Deloitte DLTE.UL and Ernst & Young ERNY.UL to carry a full, individual audit of its ailing banks g

MADRID REUTERS

the review, which should take a few months, will complement an ongoing exercise to stress test spain’s banking sector by consultors Oliver Wyman and Roland Berger, whose first results are expected around mid-June. “I can confirm (the names),” the source said. spain’s prime minister mariano Rajoy on saturday said his government would have a clear view of how much money will be needed to recapitalize troubled lenders by the end of June. He also said the government would make clear by then how it intends to inject the money. economy minister luis de Guindos said earlier this week that spain would likely go to the markets to find the 19 billion euros ($23.5 billion) nationalized lender Bankia () said it would need to be cleaned up but investors are doubtful it can manage to prop up the entire sector without outside help. senior eu officials have said privately that the country should instead seek a loan from the european bailout fund but that would necessarily come with tough conditions and a high political cost Rajoy is not willing to assume. the european stability mechanism (esm), due to enter into force on July 1st, has the capacity to lend money to banks but the request has to be made by the state, which receives the money and then transfers it to the lenders. German chancellor angela merkel has so far opposed calls from other european leaders, including from Rajoy or france’s president francois Hollande, to change the rules and allow direct recapitalizations of the banks.

Microsoft to defer revenue FBR collects Rs 1,631b from Windows upgrade offer up to May 31 NEW YORK REUTERS

from saturday, microsoft is offering customers who buy qualifying Windows 7 pcs the option to download an upgrade to Windows 8 pro for about $14.99. the company, whose shares were down 1.3 percent in early trading on friday, said it would recognize the revenue from the offer when consumers actually upgrade or on february 28, when the program expires. “from our perspective it’s business as usual. this is the way they do these big launches,” said cross Research analyst Richard Williams. Windows 8 is the new version of microsoft’s flagship product that provides almost half of its profit. It is the first version that runs on tablet computers as well as pcs, putting microsoft in a stronger position to challenge apple Inc. Based on the timeline for the launch of Windows 7 three years ago, microsoft is on track for a full release of Windows 8 by October or november, when machines running it will be available in stores. microsoft shares were down 37 cents at $28.82 in early trading on friday on the nasdaq.

ISLAMABAD APP

the federal Board of Revenue (fBR) has collected Rs 1,631 billion upto may 31 for the current financial year, a senior fBR official said on saturday. “the fBR has collected Rs 1,631 billion upto may 31 this year against Rs 1,319 billion during the same period last fiscal year showing an increase of 25 percent”, shahid Hassan member Inland Revenue of fBR told app. He said the total revenue during the month of may this year was Rs.182 billion and hoped that the fBR would be able to collect Rs 321 billion during the current month as compared to Rs 248 billion in June last year. He expressed the hope that the fBR would meet the revenue target of Rs 1,952 billion by the end of current financial year.