Budget 2024-25: Impact on export-oriented sectors

The Government of Pakistan (GoP) has proposed significant changes in the Federal Budget for 2024-25 that could affect the export-oriented which is or, is already under strain. Here’s a breakdown of the key changes and their potential impact.

Taxation Changes

Shift to Normal Tax Regime

The GOP has proposed to bring export-oriented sectors under the normal tax regime. Previously, these sectors enjoyed a final tax rate of 1% on export revenue.

Potential Impact

This change could disincentivize exports, further hurting export revenues and worsening the trade balance. The All Pakistan Textile Mills Association (APTMA) has highlighted that Pakistan’s corporate tax rate of 39% is one of the highest in the region, compared to:

• India: 29.1%
• Bangladesh: 27.5%
• Vietnam: 20%

Bangladesh also offers a 10-year tax holiday to new entrants in the textile sector.

Company-specific Impact

The worst affected company in the Insight Research coverage universe is ILP, which has about 93% of its revenue from exports. If the proposed tax changes are implemented, the impact on the bottom line for various companies is estimated as follows:

Company	Export Share of Topline	Estimated Impact on Bottom Line
ILP	~93%	-30%
GATM	~20%	-20%
NML	~15%	-15%
NCL	~10%	-10%

Cost Pressures

Power Tariffs

The industry was hopeful for relief in power tariffs, but due to a lack of fiscal space, the textile sector did not receive any significant support. APTMA notes that grid power rates are approximately 16.4 cents/kWh, which is 100% higher than the regional average, making the local industry less competitive.

Recent Announcement

The Prime Minister of Pakistan announced a reduction in energy tariffs by PKR 10.69/kWh, lowering the rate to PKR 34.99/kWh for the industrial sector. However, further details are not yet available.

Sales Tax Increase

The government has increased the sales tax on POS for retailers from 15% to 18%, which will further strain liquidity and margins already affected by multiple energy price hikes.

Liquidity Issues

APTMA reports that the sector has PKR 140 billion in working capital stuck under the refund regime and PKR 24.3 billion in pending payments from various incentive policies.

Margins and Earnings

Metric	GATM	ILP	NML	NCL
Gross Margins (3-year avg)	29%	21%	14%	16%
Gross Margins (TTM based)	31%	18%	11%	13%
Net Margins (3-year avg)	14%	6%	9%	7%
Net Margins (TTM based)	13%	2%	4%	0%
EPS FY25	17.65	7.17	4.63	7.31
Impact of 1.50% tax on Exports	-5%	-9%	-10%	-9%
Impact on profit under normal tax rate	-30%	-20%	-15%	-10%

Company Revenue (in PKR million)

Company	FY20	FY21	FY22	FY23
GATM	2,804	4,087	3,352	3,682
ILP	2,408	4,329	4,225	4,759
NML	3,490	4,617	9,298	11,199
NCL	1,436	1,525	1,328	3,510
Total	10,139	14,558	18,203	23,150

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Disclaimer:

The information in this article is based on research by nsight research. All efforts have been made to ensure the data represented in this article is as per the research report. This report should not be considered investment advice. Readers are encouraged to consult a qualified financial advisor before making any investment decisions.