GIDC ordinance finally passed; positive for industries
Channel checks indicate that the government may officially announce the promulgation of GIDC ordinance, 2019 in near future.
The revised ordinance would entail waiver of 50% outstanding payables of the fertilizer sector (until Dec’18) and reduction in prospective GIDC (on both feed and fuel) by 50%, whereas GIDC on feedstock of new fertilizer plants (under fertilizer policy 2001) would be reduced to zero.
The said ordinance is expected to have a net positive impact on the fertilizer sector with most positive impact on Fauji Fertilizer Bin Qasim Limited (FFBL) (PKR0.68/sh or 128%) as DAP prices would remain unchanged.
As for the rest of the sector, impact would be neutral to positive as the positive impact of reduction in GIDC would be offset by increase in gas tariff hike in Jul’19. Furthermore, urea prices are expected to remain constant at ~PKR1,850/bag in response to 50% cut in GIDC since the industry had not increased urea prices after the Jul’19 gas tariff hike.
One-off gain on halving of accrued GIDC would be highest for Fauji Fertilizer Company (FFC) at PKR27.1/sh, followed by PKR12.8/sh for FFBL, PKR8.1/sh for Engro Fertilizers Limited (EFERT), and PKR0.5/sh for Fatima Fertilizers Limited (FATIMA).
An interesting element of the proposed ordinance is that the outstanding payables of GIDC would be set off against any pending subsidy claims, GST refunds and DLTL claims on the federal government, thereby reducing strain on balance sheet of companies.
Moreover, rate of GIDC is proposed to be reduced to zero on gas used by export oriented sectors for both captive power and industrial purposes. We flag that amongst export oriented companies, Gul Ahmed Textile Mills Limited (GATM) would benefit the most from reduction in GIDC to zero (~PKR1.0/sh recurring impact). Other Sindh based textile companies that may benefit include Artistic Denim Mills Limited (ADMM) and Feroze1888 Mills Limited (FML).
On the other hand, Punjab based Nishat Mills Limited (NML) may not benefit from the proposed ordinance (on recurring basis) due to its reliance on subsidized RLNG at USD6.5/mmbtu.
Further, Lotte Chemical Pakistan Limited (LOTCHEM) may benefit from the reduction in GIDC, since it qualifies as a zero rated industry, with a recurring impact of PKR0.11/sh and may lead to a one-off reversal on outstanding GIDC amounting to PKR0.68/sh.
We maintain our overweight stance on both the fertilizer and petrochemical sectors and highlight EFERT and LOTCHEM as our top picks within the respective sectors.
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