My take on Budget 2016

Micro finance sector to be regulated – LOMC, CCL to be affected. Interest rate caps and lending procedure will be regulated. Probably linked to CRIB.
Fertilizer subsidy to be scrapped – farmers have the freedom to choose the supplier, competitiveness improves resulting in a change of volumes and margins, entire 25k may not be spent on fertilizer so CIC, AGST to be affected
Canned fruit industry – interest support for expansions – COCO & RAL could make use of this opportunity
Benefits to dairy industry, fish canning – COCO, LMF, Kotmale would benefit
BFL had plans to expand into international markets – this would now be easier
COCO & HVA would benefit from benefits to value added tea industry
Rubber industry – RICH, HAYL to be benefitted
COCO will benefit from proposals to revive value added coconut industry
F&B companies have a lot of opportunities to draw from on the back of growing demand through higher disposable income, exchange competitiveness & govt. support as govt. aims to stabilize prices through enhancing supply
Oil refinery & bunkering business – LIOC could venture into more businesses and do related diversification
Renewable energy – LGL to have more opportunities, VPEL & other power companies etc.
Restrictions of land use – JKH to benefit as they have the largest strategic land bank
Foreign investors to have more attractive returns with dividend being tax exempt and share transaction tax removed
Foreign bondholding capped to 10% which creates more room for equity allocation, Dr. Mark Mobius etc. has mentioned he is interested in SL, Norges Bank & large institutional investors are targeted
Lubricant to gain BOI status – possible opportunity for LGL to strengthen more profitably also, more competition in the medium to long term
Textile industries – MAS, Brandix, TJL, MGT to benefit when expanding through tax concessions. Although TJL may not have plans to make use of this opportunity immediately.
FMCG industry to benefit when expanding in remote areas through tax concessions, improved demand on the back of higher disposable income and salaries, more room for exports – HHL
JKH to be benefitted through new investment Act which will replace the strategic development act
Banking sector may benefit through higher FOREX inflows thus, reduce cost of funding
SL to become a transportation hub – EXPO to benefit through growing exports etc.
EXIM bank – banking sector & listed exports have opportunity to get stake also, low cost funding
Possible FTAs and GSP+
Anti-dumping regulations and export focus to strengthen RCL but de-regulation of tile sector & price revisions to hit RCL in the short term. RCL could start up BOI status projects.
AEL & KAPI may have the opportunity to involve in housing projects. Opportunity to expand overseas with income being tax exempt, joint ventures with skilled foreign partners. Improved cash flow reduces finance cost. Construction of New Town Hall & exhibition centre.
SHL as well as banks through credit card offering to benefit largely through revision of taxes on imports of clothing, shoes, electronics etc. Healthcare & Insurance sectors to benefit from increasing disposable incomes. However, trading profits taxed at 30% so are finance & insurance sectors, SHL’s automobile segment will have a tough time.
JKH & tourist industry may benefit from theme park proposal
Regulation of tourist hotels will allow existing hotel operators to gain a better share of revenue.
Colombo International Financial Centre will encourage banks to be more competitive and enter the regional and global sphere
Voluntary mergers of banks – NDB & DFCC could be possible
Merger of HDFC & SMIB to reduce margins for other housing lenders
SLSB, DB & NSB to be merged – large deposit base that would be more professionally managed means that interest rates could go down
Banks to cease leasing – three key players – COMB, SAMP & HNB all have finance companies as subsidiaries. Will they still remain or do they have to be divested? Banking sector margins could worsen as leasing is a high margin product. Banks to focus more on loans and other products.
LFCs might see an increase in interest expense given that they will have to offer 15% for senior citizens. However, volume growth too will offset this.
Demutualization of CSE and revision of outdated SEC laws to be beneficial for capital markets.
Setting up of debt exchanges is well appreciated.
Merger of stockbrokers could reduce market manipulation.
Setting up of REITs will improve the liquidity of land and boost values. Retailers will benefits from growth of asset prices. However, an asset price inflation boom may happen.
SME Board on the CSE will increase listing and enable investors to diversify into entities with high growth potential. SMEs will have improved corporate governance and less tax evasion. However, it is unlikely for many SMEs to seek listing at this stage of capital markets.
Commodity exchange will be a good move.
45 hour work week, private sector wage increases and introduction of a minimum wage could pose a threat to manufacturers due to cost escalation.
Higher allocation for improvement of education and healthcare sectors is very welcome. Demonstrates the long term focus of the government policy.
Government policy regarding private universities is very modern thinking. This must be appreciated going forward.
IPOs of Lanka Hospitals, Hotel Developers PLC (Colombo Hilton), Hyatt Residencies, Waters Edge, Grand Oriental Hotel, Ceylinco Hospital and Mobitel will release debt burden from the government and improve efficiency of these entities.
SPV for the Expressways and Norochcholai plant is a great idea to retire high cost debt. Very innovative thinking right there. Government is making bold moves.
Open skies policy and domestic airports will benefit tourism – JKH will benefit in the long term.
PPP for Mattala will make it profitable in the long term. Better utilization of the country’s assets.
I do not believe that Sri Lankan Airlines could be made profitable in the next ten years but will definitely cut its losses to a great degree.
Govt. not buying additional vehicles will help the BOP situation. Also, improve income levels of govt. servants. Traffic situation will ease out as more public servants’ vehicles will serve a dual purpose.
Govt. plans to develop entrepreneurship through govt. guaranteed loans for graduates. Loans of up to Rs. 1.5mil for 3 years will be provided. May not be very yielding in the short run but definitely a good move.
Concessions for venture capitalists.
Regulation of three-wheelers is a very good move for the long term benefit of the country. If implemented properly, three-wheeler volumes will decline leading to a negative impact on LFCs especially CDB.
Chassis of old buses and trains to be re-used. Will help improve public transportation at low cost.
Excess vehicles of state entities to be sold off this will drive down used vehicle prices and help BOP, although in a minimal way.
Improvements to railways and park and ride concept.
Monorail for Negombo – Colombo and Kaduwela – Colombo.
Good times ahead for LGL & EXPO’s logistics and shipping business.
Construction and renovation of roads, Megapolis and modernization of cities to improve revenues of the construction sector. Although, margins may not be as high as earlier.
USD 300 minimum wage for migrant workers will increase inward remittances, stabilize exchange situation and increase local demand.
Reduction of gas prices will not affect LGL.
Removal of following taxes:
- Share Transaction Levy
- Construction Industry Guarantee Fund Levy
- Luxury & Semi-Luxury Motor Vehicle Tax
- Tourism Development Levy (TDL)
Simplified tax system:
Higher band of 30% for betting and gaming, liquor, tobacco and banking and financial services, including
insurance and leasing industry and the trading activities. This is a 10% decrease for liquor and a 2% increase for financial services.
15% corporate tax rate for other businesses – this could mean less tax evasion and more income falling into tax – good measure to increase government revenue
Quoted companies must distribute at least 15% as dividends
Surtax at the rate of 25 percent of income tax liability for betting and gaming, liquor & tobacco. Profits of DCSL, LION, BREW & CTC to further deteriorate. Although if illegal circulation of liquor and tobacco based products decline profits may be at an acceptable level.
Rs. 150 Mil liquor manufacturing fee. Same level of excise duty on imported liquor as locally manufactured.
Higher income levels leads to a substitution of “beedi” with cigarettes and hard liquor with beer and imported liquor.
Annual tax free threshold increased from Rs. 720,000 to Rs. 2.4 M. Individual income is taxed at a flat rate of 15% thereafter with no exemptions.
Elimination of 2.5% WHT on FD interest.
VAT to be charged in three bands 0%, standard rate of 8% and 12.5% higher rate for service sector
Wholesale and retail trade will be excluded from VAT
NBT increased to 4%
Full option manufactures price as the tax base. Simple unit rate of excise duty for the vehicles on the basis of cubic centimeters.
Emission test to be Rs. 5000/-. Sector to be liberalized. Higher revenue for LGL in the short term.
A fee of Rs. 750,000 for commercial vehicles and Rs. 1 million for motor cars that are locally assembled.
Export of reconditioned vehicles. Could be good for DIMO, SMOT, UML if they can tap African markets and less developed South Asia.
Vehicle Permits to be abolished and government officers to be compensated.
Stamp duty of 1.5% removed on local purchases made by credit cards, 2.5% for foreign purchases.
Continuation of Mansion Tax except for condominium units.
Sri Lanka will have a 3-band structure of exempt, 15 percent and 30 percent for Customs Duty.
Higher International Telecommunication Operator Levy and Rs. 50k charge per tower. This will further hurt the industry.
Export oriented BOI companies will be permitted to supply to the local market only 5 percent of its products.
Charge Rs. 500,000/- on voluntary liquidation of companies & annual registration fee for companies.
Expected Revenue – Rs. 223 Bn., Expected Expenditure – Rs. 253 Bn.
Revenue is over optimistic as always and expenditure under-estimated.
Much of the revenue generation measures are dependent on new systems and methodologies. A lot of revenue is volatile. Thus, implementation of proposals is key to avoid a huge deficit and high government borrowings.
BOP situation has not been addressed to a great extent.
Market Outlook
Large caps may not appreciate significantly – we can expect a drop but not very significantly.
There will be significant trading opportunities & growth potential for mid-cap stocks.
Market most likely to attract foreign investors following Q4’16 results.
MY STOCK MARKET STRATEGY
·         Currently I do not have any exposure to banking, finance & insurance and will maintain this until prices drop to my expected levels. Banking sector may drop quite significantly while non-bank sector prices will remain stagnant at least till results of two further quarters are out.
·         Take profits on TJL & MGT. There are no significant short term benefits for these counters so prices ought to settle downwards soon – maybe 34.00 levels and re-enter.
·         Take some exposure on SHL at CMP
·         I already have RICH and I will increase the holding at CMP
·         More bullish on COCO, will increase holding at CMP
·         Expecting RCL to drop to Rs. 90 levels
·         Very bullish on AEL
·         Enter poultry sector at CMP as it will rally significantly on earnings of 3Q’16 and 4Q’16
·         Bullish on EXPO
·         Keep some cash ready for IPOs of PIL and soon to be privatized entities

Your analysis seems mostly accurate but I don't see a huge devaluation on cmp of banking shares. It might come down a bit. NTB will come down drastically not others

We'll have to wait and watch.

Anyways, what do you think of the market reaction on other counters? And what counters are you bullish on?

thanks , superb analysis

Take profits on TJL & MGT. There are no significant short term benefits for these counters so prices ought to settle downwards soon – maybe 34.00 levels and re-enter.
·         Take some exposure on SHL at CMP
·         I already have RICH and I will increase the holding at CMP
·         More bullish on COCO, will increase holding at CMP
·         Expecting RCL to drop to Rs. 90 levels
·         Very bullish on AEL
·         Enter poultry sector at CMP as it will rally significantly on earnings of 3Q’16 and 4Q’16
·         Bullish on EXPO
·         Keep some cash ready for IPOs of PIL and soon to be privatized entities

Good analysis my friend. So it is a populist budget.

Thanks Mr Raider for your sterling effort.appreciate it very much.

capitallinkceylon wrote:Your analysis seems mostly accurate but I don't see a huge devaluation on cmp of banking shares. It might come down a bit. NTB will come down drastically not others

I do agree that NTB will have a greater effect from having to cease the leasing business.

But even for COMB, HNB and SAMP the leasing business will not be as profitable as it is now since they will have to invest in a branch network and take on more staff. The banks will also lose capital allowances from the leasing business that will in turn drive up the tax liabilities.

This essentially means that the strategy of these players to promote their LFCs as standalone entities is rather costly. Yet, in the long run strong businesses could be created as these LFCs may pursue inorganic expansion.

Nevertheless, the banks could more aggressively pursue trade financing and other relatively complex banking products which will enable them to maintain ROEs and ROAs.

However, my personal view is that for an export/industry oriented country to develop banks should not make abnormal profits as their high margins will mean poor access to finance for businesses that actually drive output.

raider wrote:

capitallinkceylon wrote:Your analysis seems mostly accurate but I don't see a huge devaluation on cmp of banking shares. It might come down a bit. NTB will come down drastically not others

I do agree that NTB will have a greater effect from having to cease the leasing business.

But even for COMB, HNB and SAMP the leasing business will not be as profitable as it is now since they will have to invest in a branch network and take on more staff. The banks will also lose capital allowances from the leasing business that will in turn drive up the tax liabilities.

This essentially means that the strategy of these players to promote their LFCs as standalone entities is rather costly. Yet, in the long run strong businesses could be created as these LFCs may pursue inorganic expansion.

Nevertheless, the banks could more aggressively pursue trade financing and other relatively complex banking products which will enable them to maintain ROEs and ROAs.

However, my personal view is that for an export/industry oriented country to develop banks should not make abnormal profits as their high margins will mean poor access to finance for businesses that actually drive output.

rider .... what do u think about NDB.......... last Friday it was 52wk low..........

Very good note. Thx raider.

What measures taken for monitoring the depreciation of Rupee value. Could government be able to keep the currency in range of Rs.140-143 against US$. 

Perhaps the issuance of sovereign bond may lift up the reserves level which would help to absorb further depreciation of Rupee. 

Economists in opposition is vehemently criticising lowering the value of Rupee & elaborating how they kept the local currency in strong position in the past.

New Govt elected by people for a change,I think at the moment this govt doing well, we as independent people should give some time to settl..Everthing cant change overnight..especially im really happy about this govt's policy about CSE / Equity Market..

worthiness wrote:Very good note. Thx raider.

What measures taken for monitoring the depreciation of Rupee value. Could government be able to keep the currency in range of Rs.140-143 against US$. 

Perhaps the issuance of sovereign bond may lift up the reserves level which would help to absorb further depreciation of Rupee. 

Economists in opposition is vehemently criticising lowering the value of Rupee & elaborating how they kept the local currency in strong position in the past.

I think huge tax on vehicles discourage buying. That is good for appreciation or keep firm rupee value. Earlier there were uncontrollable vehicle imports and people even couldn't cross the road without waiting 5-10 minutes. Also cancellation of permits also good for now.

kuma524 wrote:

raider wrote:

capitallinkceylon wrote:Your analysis seems mostly accurate but I don't see a huge devaluation on cmp of banking shares. It might come down a bit. NTB will come down drastically not others

I do agree that NTB will have a greater effect from having to cease the leasing business.

But even for COMB, HNB and SAMP the leasing business will not be as profitable as it is now since they will have to invest in a branch network and take on more staff. The banks will also lose capital allowances from the leasing business that will in turn drive up the tax liabilities.

This essentially means that the strategy of these players to promote their LFCs as standalone entities is rather costly. Yet, in the long run strong businesses could be created as these LFCs may pursue inorganic expansion.

Nevertheless, the banks could more aggressively pursue trade financing and other relatively complex banking products which will enable them to maintain ROEs and ROAs.

However, my personal view is that for an export/industry oriented country to develop banks should not make abnormal profits as their high margins will mean poor access to finance for businesses that actually drive output.

rider .... what do u think about NDB.......... last Friday it was 52wk low..........

NDB is a little overvalued for me at the moment.

I feel that it may have some speculative trading going on in these coming days though.

worthiness wrote:Very good note. Thx raider.

What measures taken for monitoring the depreciation of Rupee value. Could government be able to keep the currency in range of Rs.140-143 against US$. 

Perhaps the issuance of sovereign bond may lift up the reserves level which would help to absorb further depreciation of Rupee. 

Economists in opposition is vehemently criticising lowering the value of Rupee & elaborating how they kept the local currency in strong position in the past.

I personally feel that the exchange rate should now settle a little in the coming days, maybe 142-143 levels.

The government expects to stabilise the exchange rate through inward remittances.

SLFINANCEWATCH wrote:New Govt elected by people for a change,I think at the moment this govt doing well, we as independent people should give some time to settl..Everthing cant change overnight..especially im really happy about this govt's policy about CSE / Equity Market..

Yes, we should allow them some time.

But they should not compromise economic fundamentals and make a gamble on government revenue as the state is already saddled with debt.

hettdas wrote:

worthiness wrote:Very good note. Thx raider.

What measures taken for monitoring the depreciation of Rupee value. Could government be able to keep the currency in range of Rs.140-143 against US$. 

Perhaps the issuance of sovereign bond may lift up the reserves level which would help to absorb further depreciation of Rupee. 

Economists in opposition is vehemently criticising lowering the value of Rupee & elaborating how they kept the local currency in strong position in the past.

I think huge tax on vehicles discourage buying. That is good for appreciation or keep firm rupee value. Earlier there were uncontrollable vehicle imports and people even couldn't cross the road without waiting 5-10 minutes. Also cancellation of permits also good for now.

I do not think that a reduction in vehicle buying will have a major impact on the exchange rate although it will impact the BOP to a certain extent.

The tighter exchange controls - with regard to those that are dealing in black money is currently keeping the exchange rates up. Banks do not get enough FOREX these days from illegal sources.

Although very unfair on the people, vehicle taxes and cancellation of permits is quite a good move. However, I feel that this will be a very short term one.