Karachi, June 14, 2018 (PPI-OT): OMCs: Turbulent end to FY18 is not of their own making
A shaky start to June’18 has materialized in the form of some negative developments for domestic OMCs, namely: 1) sustained hike in cost of supply signified by Jun’18 ex-refinery prices for MS/HSD rising 10/18%MoM and 47/66%YoY – the highest point in 3.5yrs and 2) domestic POL price levels hiked through raising GST (now at 10.7/14.4% of selling price for MS/HSD) taking cumulative MS/HSD pump prices to rise by 18.7/22.5% CY18TD. At the forefront is the weakening of marginal consumption and hampered discretionary demand for retail fuels.
Additionally, the recent mid-month weakening of the PkR vs US% of ~4% opens OMCs to additional weakness from exchange losses, as regional crude benchmarks indicate little room for inventory-based gains (except for de-regulated FO). Moreover, our back of the envelope calculations suggests exchange losses at PSO/HASCOL/APL to amount to PkR0.61/0.92/0.88/sh for 4QFY18/2QCY18E. PSO continues to appeal on the back of continuation of RLNG shipments (segment to near MS’s contribution to GP, covering up the demise of FO), possible RLNG margin hike and FE-25 arrangements (even if receivables are raised for PkR depreciation). At our current TP of PkR399/sh, PSO offers an upside of 22% from current price level.
Margin hike not a done deal: The ECC has reportedly recommended to raise the OMC margin on HSD/MS by PkR0.23/0.09/litre to PkR2.64/litre each (vs. PkR2.41/2.55/litre previously) and dealer margin on HSD/MS by PkR0.26/0.12/litre to PkR2.93/3.47/litre (vs. PkR2.67/3.35/litre previously). Additionally, the ECC has recommended to raise PSO/PLL margin on LNG from 2.50% at present to 3.75%. Applicable from FY19F, we await notification of the same to incorporate these into our estimates. Citing events leading to a reluctant margin indexation during FY18, we believe these measures may be anything but smooth sailing, with final say on OMCs and dealer margin indexations being left to the incoming Government.
FY19F margin hike impact: Crystallization of margin hikes for FY19F are on cue and incorporated as a part of CPI-linkage in our forecasts. To that end, reported doubling of LNG margins are particularly value accretive for PSO to tune of ~PkR6.25/sh, while the incremental impact on APL and HASCOL comes out to be negligible (as we had already linked retail fuel margins to CPI inflation in our models). Additionally, the levy of 1% non-refundable WHT on LNG cargoes at import stage against normal tax on profit previously leaves immense room for NM accretion, despite significant growth in RLNG volumes (34.1%YoY for 9MFY18 at 3.3mn tonnes) where we have assumed sustained peak RLNG volume of 4.2mn tonnes moved annually.
Devaluation is a dampener: PkR devaluation at the tail-end of FY18 is an added dampener for the sector where regional crude benchmarks indicate little room for inventory-based gains (except for de-regulated FO). Moreover, our back of the envelope calculations suggest that recent PkR depreciation (at PkR119/US$) can lead to exchange losses for PSO/HACOL/APL translating into a negative impact of PkR~200mn/132mn/~73mn (PkR0.61/0.92/0.88/sh) on profitability for 4QFY18/2QCY18E. We await any mitigating measures (mid-month price hike of ex-refinery component) and stability on the external front to incorporate the same in our forecast.