JS Securities Limited – Morning Briefing

Karachi, June 11, 2018 (PPI-OT): OMCs: Will margin increase solve the problem?

News reports surfaced over the weekend highlighting that Economic Coordination Committee (ECC) approved margin increases for Motor Spirit (MS), High Speed Diesel (HSD) and Liquefied Natural Gas (LNG).

Although official notification is pending, our discussions with the industry officials suggest that the same is expected after Eid-ul-Fitr.

Margins on MS are expected to be revised up by Rs0.09/litre whereas margins on HSD will go up by a larger quantum of Rs0.24/litre.

Margin increase of 1.25ppt is also approved for LNG, counting to 3.75% from 2.50% earlier (US$0.11/mmbtu at current prices).

While we refrain from incorporating any impact in our base case estimates for JS OMCs Universe, we estimate earnings increases ranging from 6%-20% on our coverage, depending on their product mix.

Outgoing government’s favor for OMCs

News reports surfaced over the weekend highlighting that Economic Coordination Committee (ECC) approved margin increases for Motor Spirit (MS), High Speed Diesel (HSD) and Liquefied Natural Gas (LNG). Effective 1st of July 2018, margins on MS are expected to be revised up by Rs0.09/litre or up 3.7% from existing Rs2.55/litre whereas margins on HSD will go up by a larger quantum of Rs0.24/litre to restore parity with MS at Rs2.64/litre (Rs2.41/litre presently). Margin increase of 1.25ppt is also approved for LNG, counting to 3.75% from 2.50% earlier (US$0.11/mmbtu at current prices). The move came as a bit of a surprise as the outgoing regime gave go-ahead for margin increases in its last ECC meeting held on May 30, 2018 for its tenure. We believe that this is possibly to avoid unnecessary delays in margin increase promise for local OMCs as the caretaker setup might have avoided taking unpopular decisions. While the margin increase for MS is understandable, HSD change came out as a bit of a surprise as the ECC in its meeting held on October 6, 2017 had approved deregulation of the product effective from December 1, 2017. Needless to say since this could not be achieved, outgoing administration decided to address industry woes by temporarily linking it to CPI as is the case with MS until modalities of both MS and HSD deregulation are determined.

We believe the move goes in favor of the industry not just because it entails higher profits but also because it will save unnecessary delays in margin revisions witnessed last year when the margins, which were supposed to be revised up effective from July 2017, were revised in October 2017 and made applicable from November 2017.

Waiting for the official notification

While we refrain from incorporating any impact in our base case estimates for JS OMCs Universe, we estimate earnings increases ranging from 6%-20% on our coverage, depending on their product mix. Our back of the envelope calculations based on our FY18E-FY23F volumetric sales assumptions for Pakistan State Oil (PSO), Attock Petroleum (APL) and Hascol Petroleum (HASCOL) suggest an annualized incremental EPS impact of Rs5.39 (~11% of FY18E profits), Rs3.50 (~6% of FY18E EPS) and Rs2.85 (~19% of 2018E EPS) respectively. Until official notification is released, we do not incorporate these changes into our forecasts and remain skeptical of its applicability. It is also worth highlighting here that these are generalized calculations based on specific assumptions and actual results for respective companies may vary (due to tax related or other matters).The risk of these changes not lasting for long may not be ruled out given precarious fiscal deficit position of the country. Apart from fiscal woes, resulting increases in prices from these measures will likely dent demand side when seen in conjunction with recent changes in budget where limits of Petroleum Levy were revised up to Rs30/litre from Rs8.0-Rs14.0/litre earlier. Risks loom over POL products demand, especially MS and HSD where the current caretaker setup decided to hold off price increases despite OGRA’s recommendations for across the board increase. More recently, the Rupee started to depreciate against the Greenback in the interbank market, touching a new low of Rs121/US$, raising further expectations of price increases going forward. Price increases emanating from multiples sources i.e. increase in oil prices, PKR devaluation, OMC margin revision and possible levy adjustments put further pressure on POL demand projections going forward.

You May Also Like

JS Securities Limited – Morning Briefing

Karachi, June 11, 2018 (PPI-OT): OMCs: Will margin increase solve the problem?

News reports surfaced over the weekend highlighting that Economic Coordination Committee (ECC) approved margin increases for Motor Spirit (MS), High Speed Diesel (HSD) and Liquefied Natural Gas (LNG).

Although official notification is pending, our discussions with the industry officials suggest that the same is expected after Eid-ul-Fitr.

Margins on MS are expected to be revised up by Rs0.09/litre whereas margins on HSD will go up by a larger quantum of Rs0.24/litre.

Margin increase of 1.25ppt is also approved for LNG, counting to 3.75% from 2.50% earlier (US$0.11/mmbtu at current prices).

While we refrain from incorporating any impact in our base case estimates for JS OMCs Universe, we estimate earnings increases ranging from 6%-20% on our coverage, depending on their product mix.

Outgoing government’s favor for OMCs

News reports surfaced over the weekend highlighting that Economic Coordination Committee (ECC) approved margin increases for Motor Spirit (MS), High Speed Diesel (HSD) and Liquefied Natural Gas (LNG). Effective 1st of July 2018, margins on MS are expected to be revised up by Rs0.09/litre or up 3.7% from existing Rs2.55/litre whereas margins on HSD will go up by a larger quantum of Rs0.24/litre to restore parity with MS at Rs2.64/litre (Rs2.41/litre presently). Margin increase of 1.25ppt is also approved for LNG, counting to 3.75% from 2.50% earlier (US$0.11/mmbtu at current prices). The move came as a bit of a surprise as the outgoing regime gave go-ahead for margin increases in its last ECC meeting held on May 30, 2018 for its tenure. We believe that this is possibly to avoid unnecessary delays in margin increase promise for local OMCs as the caretaker setup might have avoided taking unpopular decisions. While the margin increase for MS is understandable, HSD change came out as a bit of a surprise as the ECC in its meeting held on October 6, 2017 had approved deregulation of the product effective from December 1, 2017. Needless to say since this could not be achieved, outgoing administration decided to address industry woes by temporarily linking it to CPI as is the case with MS until modalities of both MS and HSD deregulation are determined.

We believe the move goes in favor of the industry not just because it entails higher profits but also because it will save unnecessary delays in margin revisions witnessed last year when the margins, which were supposed to be revised up effective from July 2017, were revised in October 2017 and made applicable from November 2017.

Waiting for the official notification

While we refrain from incorporating any impact in our base case estimates for JS OMCs Universe, we estimate earnings increases ranging from 6%-20% on our coverage, depending on their product mix. Our back of the envelope calculations based on our FY18E-FY23F volumetric sales assumptions for Pakistan State Oil (PSO), Attock Petroleum (APL) and Hascol Petroleum (HASCOL) suggest an annualized incremental EPS impact of Rs5.39 (~11% of FY18E profits), Rs3.50 (~6% of FY18E EPS) and Rs2.85 (~19% of 2018E EPS) respectively. Until official notification is released, we do not incorporate these changes into our forecasts and remain skeptical of its applicability. It is also worth highlighting here that these are generalized calculations based on specific assumptions and actual results for respective companies may vary (due to tax related or other matters).The risk of these changes not lasting for long may not be ruled out given precarious fiscal deficit position of the country. Apart from fiscal woes, resulting increases in prices from these measures will likely dent demand side when seen in conjunction with recent changes in budget where limits of Petroleum Levy were revised up to Rs30/litre from Rs8.0-Rs14.0/litre earlier. Risks loom over POL products demand, especially MS and HSD where the current caretaker setup decided to hold off price increases despite OGRA’s recommendations for across the board increase. More recently, the Rupee started to depreciate against the Greenback in the interbank market, touching a new low of Rs121/US$, raising further expectations of price increases going forward. Price increases emanating from multiples sources i.e. increase in oil prices, PKR devaluation, OMC margin revision and possible levy adjustments put further pressure on POL demand projections going forward.

You May Also Like