Flash Report /
Global

Bangladesh: Manufacturing firms to get relief due to rate cap and tax cut

  • From our coverage, favorable for ACMELAB, RUNNERAU, GHAI, BXPHAR; marginally negative for GLAXOW, OLYMPI, SQUARE

  • From the non-covered companies, positive for BEXIMC, ACI, BASR, BSRM; negative for TITASGAS, JMOIL, PADMAO, MEGH

  • The benefits may not be visible in recent quarters due to the pandemic, but likely to be visible as the economy recovers

Auneea Haque
Auneea Haque

Research Associate

Follow
IDLC Securities
12 August 2020
Published byIDLC Securities

Manufacturing and industrial companies to enjoy the interest rate cap. Earlier this year, the Bangladesh Bank (BB) has issued a circular to cap the interest rate at 9% for all loans except credit card loans. This rate cap, announced in February 2019, has been effective from 1 April 2020, which applies to the existing loans too. We expect this interest rate cap to affect the profitability of several listed companies. Please note that the regulator intended to formulate the policy before the pandemic to reduce the interest burden from the levered companies.

The levered industries and companies to benefit the most from the interest rate cap. The leverage of the market is 0.94x in debt to equity terms and 0.40x in net debt to equity terms. When adjusted for cash-rich companies, the figures stood at 0.96x and 0.64x respectively. In terms of debt to equity, most levered industries include Industrials (1.93x), Cement (1.47x), Energy (1.23x), and Textiles (0.73x). We have the following observations based on the impact of individual stocks.

  • Positive impact on earnings for a few companies in our coverage: ACMELAB (+12.8%), RUNNERAU (+12.1%), GHAI (+10.0%), BXPHAR (+2.1%).

  • Significant earnings impact for highly levered conglomerates such BEXIMC (+61.3%), ACI (expected reduction in loss by BDT800mn); construction material companies such BASR (+23.8%), BSRM (+17.8%), GPH (+14.0%), MICM (recovery from loss); textiles and RMG companies such as MALEK (+23.3%), ENTL (+14.6%). We note that we do not cover any of these stocks.

However, some headwinds ahead for the companies with net cash. Though there is no rate cap for the deposit rates, the cap in the loan rate is likely to reduce deposit rates by 100-200 bps and thus reducing the profitability of the companies with net cash (cash items exceeding total debt). The impact is significant in Energy and Insurance companies. Mentionable companies from the sectors are gas distribution companies such as TITASGAS (-11.0%), oil distribution companies such as JMOIL (-9.3%), PADMAO (-8.3%), MEGH (-7.0%), non-life insurance companies such as RELIAN (-4.9%). Please note that the impact is comparatively lower in our coverage: GLAXOW (-2.6%), OLYMPI (-1.7%), SQUARE (-1.6%).

The lower tax rate for non-listed companies has a low positive impact on earnings. The government has reduced 250 bps corporate tax rate (from 35.0% to 32.5%) for non-listed companies except financials in FY21 budget. This proposal will have some positive impact on certain listed stocks owning one or more non-listed subsidiaries/associates. The reduction in tax rate has a low impact on our coverage: RUNNERAU (+2.1%), GHAI (+1.8%), BRGR (+0.7%), SQUARE (+0.3%). The mentionable listed companies to be benefitted from the tax cut are - KDSALTD (+1.5%), BASR (+1.2%), CONFID (+1.1%), MJL (+1.0%), BSRM (+0.8%), and ACI (+BDT26mn).

Risks and Limitations. The analysis is done based on the pre-COVID FY19 financials since the FY20 financials are yet to be available. Since businesses are adversely affected by the pandemic (construction materials, consumer discretionary, automobiles, etc.), it is less likely that we would observe any positive impact in recent quarters. Rather, the benefit from rate cap and tax rate cut will partially offset the decline in earnings due to the pandemic. However, as the economy and these businesses gradually recover from the impact of the pandemic, the benefits from the lower interest rate and tax rate will become more visible.