Following Budget 2024, the PSX saw a historic bull market with a staggering increase of more than 3400 points. This suggests that the stock market would greatly benefit from the funding. It appears that nothing will stop the KSE100 Index from reaching 100,000, especially with the impending IMF program and falling interest rates. Let’s examine the budget’s specifics and how it affects different industries.

Macroeconomic Stability: The Key to Stock Market Performance

The primary surplus serves as a gauge for macroeconomic stability, which is the first factor investors should consider in a budget. As of right now, the budget targets a 2% primary surplus, with a 1.4% IMF target anticipated. This is critical because macroeconomic stability and stock market re-rating—that is, the rise in the PE ratio—are strongly associated, with the primary surplus serving as a vital signal.

The primary surplus is computed as follows: all taxes less all expenses, excluding interest. There are reasons to think that the government’s objective of Rs13 trillion in tax collection might not be met. Even though it appears impossible to achieve and raises the possibility of a mini-budget, the main surplus objective (primary surplus) can still be met if tax collection is below the cushion of Rs. 700 billion included in the budget. Furthermore, as was the case last year, it is unlikely that the PSDP allotment will be used to its fullest extent.

Indirect Factors Affecting the Stock Market

• Fixed Income Mutual Funds Tax: Increased to 25%.
• Real Estate Taxes: Increased at the time of transfer.
• Capital Gain Tax: Fixed at 15%, applicable only to future purchases.

Sector-Wise Analysis

Before delving into an in-depth examination of each sector, it is imperative to comprehend the overall consequences of Budget 2024 on the economy of Pakistan. Macroeconomic stability, which is a major factor in the performance of the stock market, has been made possible by the budget. The primary surplus aim of 2% is in line with IMF projections, and thus suggests a positive economic future. Different industries, such as steel, cement, and automobiles, will probably be impacted by this stability in different ways. Each industry will have different opportunities and difficulties. Let’s now examine the precise effects of the budget on each sector, giving investors a better understanding of what to anticipate in FY25.

The primary surplus serves as a gauge for macroeconomic stability, which is the first factor investors should consider in a budget. As of right now, the budget targets a 2% primary surplus, with a 1.4% IMF target anticipated. This is critical because macroeconomic stability and stock market re-rating—that is, the rise in the PE ratio—are strongly associated, with the primary surplus serving as a vital signal.

The primary surplus is computed as follows: all taxes less all expenses, excluding interest. There are reasons to think that the government’s objective of Rs13 trillion in tax collection might not be met. Even though it appears impossible to achieve and raises the possibility of a mini-budget, the main surplus objective (primary surplus) can still be met if tax collection is below the cushion of Rs. 700 billion included in the budget. Furthermore, as was the case last year, it is unlikely that the PSDP allotment will be used to its fullest extent.

Indirect Factors Affecting the Stock Market

• Fixed Income Mutual Funds Tax: Increased to 25%.
• Real Estate Taxes: Increased at the time of transfer.
• Capital Gain Tax: Fixed at 15%, applicable only to future purchases.

Auto Sector

The Budget 2024 has a significant impact on the auto sector, particularly on hybrid local cars, as the sales tax has been increased from 8.5% to 25%. This measure was later reversed. This hybrid policy aims to reduce the oil import bill but will likely affect the sales of companies like Indus Motors, which recently launched the Corolla Cross, and Sazgar, known for their hybrid vehicles. If a substantial percentage of sales for these companies were from hybrid cars, their profitability could be significantly impacted. Additionally, while there is no major change for tractors, the sector will be influenced by agricultural economics, farmers’ profits, and government schemes. The automobile parts sector sees no major changes, but an improvement in auto sales could positively impact their business. Similarly, there are no significant changes for cables and white goods manufacturers, though a gradual increase in demand is expected over the next year.

Cement Sector

A proposed Rs100/bag FEC hike is projected to drive up prices in the cement sector and result in an eventual Rs120 increase in bag pricing. Cement sales may take longer to recover as a result, but the construction and agriculture industries’ performance will be more important. The demand for cement will increase if the construction industry picks up steam and the agricultural sector continues to thrive. Companies without captive power plants, like Bestway, Gharibwal, and Kohat, may benefit from an electricity package offered by the PM if it is applicable to all industries. PSDP allocation is positive, however, the real impact will depend on the actual amount spent.

Fertilizer, Food, and Glass Products

The fertilizer sector remains largely unaffected by the budget, with gas prices being the main concern, varying for different companies like FFC and EFERT. In the food sector, a proposed 18% sales tax on milk could negatively impact companies such as Nestle, At-Tahur, FrieslandCampina, and Fauji Foods. For glass products and tiles, there are slight changes in some imported duties, but nothing major. The electricity package, if approved, will benefit companies in these sectors.

Steel, Banks, and Chemicals

The budget has little effect on the chemicals industry; instead, the pricing of products internationally continues to be the most important determinant. Since most chemical industries don’t use the grid, they won’t be greatly impacted by the electricity package. The IFRS 9 adjustment has been disallowed for tax reasons, which is a small modification for the banking industry but not a big deal. The anticipated elimination of the sales tax exemption for FATA and PATA (which did not happen), as well as the electricity package, which, if local businesses are included, could greatly assist enterprises like Mughal, Agha, Aisha, and Amreli, are two crucial issues for the steel sector. Removing this exception could benefit the steel industry by lowering imports via these areas.

Textile Sector

Textile exporters face a major negative change with a new tax on profits, potentially reducing margins by 25%. The electricity package will likely have no major impact on listed textile companies, especially those with captive power plants, as the cost of gas-generated electricity remains competitive. A special provision in the budget for PIA indicates the government’s serious intent towards privatization, allowing for a 10-year loss adjustment.

Other Industries

Although the circular debt flow in the gas industry has been improving since late 2023, budgetary forecasts of OGDC and PPL dividends in the oil and gas exploration sector have been unreliable for the past few years due to missing payments. The elimination of custom duty on diesel to 0% is a significant negative for refineries, since it may lower profitability and cause the refinery policy to fail. However, discussions are still underway, and this may be changed in the final finance act. FED has been applied on the sugar industry. Reintroducing a 18% sales tax on mobile phones after three years could have a big effect on Airlink’s assembly company, which had previously benefited by selling phones at a lower price than those from imports.

Although the Budget 2024 includes a variety of reforms in a number of sectors, macroeconomic stability is the main focus, which is encouraging for the stock market. Before making an investment, investors should thoroughly research each sector because the economy is dynamic and changes can happen quickly. To make wise investing decisions, stay informed and keep up with advancements.

ARN Financial Advisors focus its research on each sector alongwith the impact of political regulations and other pacts such as IMF on each sector, & we include all aspects of our research in our advisory services for our clients guiding clients towards financial success and long-term investment strategies.