EUR 9.60 For Business Accounts Only

The Pump, (AKD Monthly Report, August 10' 2023)

FY23 stood as one of the abysmal years in the sector’s history, with total volumes clocking in at 16.6mn tons (down 26.5%YoY), 3 year lows, almost on par with offtakes witnessed back in the pandemic period of 16.3mn tons. Overall, the sector’s market cap has remained up by 6.3% CYTD, with the main board rising by 13% during the same period, resulting in the sector underperforming the broader market by 6.6%. In summary, the fallout witnessed throughout the outgoing fiscal year was majorly due to sharp depreciation of the local currency (prompting exchange losses and shortages), challenges related to working capital, influx of smuggled products and an overall highly regulated margin regime, causing the sector participants to suffer greatly in the face of volatile retail finished product prices. That said, we believe the future volumetric recovery remains intact (by +6-8%) as recuperating economic activity and improved mobility underpins our positive outlook for the sector going forward. Within the sector, we consider APL to remain as our most favored pick. We recommend a Buy stance on the company with a June’24 target price of PkR375/sh

 

Worst possibly behind us: With the first month of the new year behind us – the recovery story during the year may be off to a positive start, with July’23 volumes clocking in at 1.35mn tons (down 6%YoY, unchanged on a MoM basis). Overall, we expect industry offtakes for the full year to remain around ~18.0mn tons, up 6-8%YoY vs. 16.6mn tons in FY23. A look back at FY23 tells us that the sector’s volume still remain to be highly price elastic amidst increasing fuel prices, even with record increase in automobiles on road by 10mn in five years (from 25mn in FY19). Overall, apart from fuel price inflation, the drastic fall in volumes witnessed last year is also attributable towards declining industrial activity (LSM: ↓9.9%YoY during 11MFY23), falling power generation (FY23: ↓9.5%YoY), shock in the auto-sector (↓53%YoY FY23) and the unprecedented wave of inflation that has gripped the economy (7MCY23 CPI: 32.37%). On the gross profitability front, dealers have once again begun petitioning for upward revisions in their margins, up to as much as PkR12/liter (from presently PkR7/liter). However, the decision’s fate rests on the conclusions of a Ministry of Petroleum's report on pump owners' costs/expenses. It may be expected that OMC’s margins may witness a similar increase, given the historical correlation between dealer and OMC margins. Going forward, we have assumed an annualized growth in OMC margin by 9%, to be revised at the start of every calendar year.

 

Industry sales down 6%YoY: July'23 volumetric offtake clocked in at 1.35mn tons, changing by 0%/-6% on a MoM/YoY basis, with FO largely leading the decline (down 59%YoY). However, on an ex-FO basis, total sales have witnessed a YoY uptick of 10%, although still down 3.2%MoM. The outgoing month’s volume has seen an overall volumetric recovery, highest during the calendar year after Jan’23, reaching nearly three-year lows observed in Mar and April’23 amidst rampant influx of smuggled diesel during the annual Rabi harvesting season. On a product wise basis, MS (↑10%MoM), HSD (↑11%YoY) and JP sales (↑10%MoM), remained the most resilient amidst travelling during the Eid holidays and an overall lower base due to flash floods last year. Furthermore, it is worth mentioning that the prices of both MS & HSD have risen by ~PkR45.7/28.5 per liter compared to SPLY, to presently stand at PkR273/273.4 per liter, respectively. These prices represent an increase of 20%/11.6% vs. Aug’22, in line with the current government's plan to pass on the full cost of supply and levies to consumers (PDL: PkR55/50 per liter for MS/HSD).

 

Outlook: With a slight uptick in economic growth expected and an overall tamed inflationary outlook in the present period, it may be safe to assume volumetric recoveries in the overall sector by 6-8%, from declines of 26% witnessed in the outgoing fiscal year. However, volatile crude (and fuel) prices in the near term may be a risk to the outlook as any further upward movements in the international markets may result in a spiraling effect on the domestic currency and in-turn the local prices. Finally, we consider APL to remain as our most favored pick. We recommend a Buy stance on the company with a June’24 target price of PkR375/sh with FY24/25 forward dividends yields of 15%/18%, respectively .