Pakistan OGRA gas decision is short term relief , (AKD Daily, Jul 16, 2020)
- Evaluating OGRA’s Determinations of Estimated Revenue Requirement (ERR) for SNGP & SSGC, wmajor CAPEX allowances, concluding on the short term positives (for consumer, industry) and long term drawbacks of this largely ‘on hold’ regulatory outcome
- Core weighted average gas workings suggest relief from low crude oil prices, which in turn, accompanied by reduced Net Gas Sold Volumes (~5% decline in cumulative gas sold) cushion against drastic escalations in UFG (at least for SNGP), with both utilities overshooting benchmark (6.3%) by ~4%/10% for SNGP/SSGC (10.2%/15.9% determined).
- For Fertilizers, every 10% increase in feed cost results in a negative EPS impact of PkR0.31/sh for FFBL, if only urea price increases to pass on the inflationary impact while DAP price remains unchanged. Henceforth, if gas prices continue at current levels during FY21, this translates into favorable dynamics for FFBL, while remaining Neutral for other Fertilizer players, in our view
- Diversification away from gas for Cement players makes this decision a non-event for cement sector where only LUCK has bulk of its captive power generation on local gas while pricing for players in Punjab is a mix of elevated domestic LNG price and local gas
- We have already incorporated a relatively conservative price hike of 10% in our inflation estimate for FY21, considering the need for adjustment to pay off arrears. That said, the latest determination provides us comfort that the utility adjustment will be more benign and gradual than earlier expected. For now, we keep our FY21 inflation forecast of 7.5%YoY.
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