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Pakistan Strategy: Govt. Finally Notifies the Much Awaited Hike in Gas Tariff

• Government on Oct 04, 2018 finally notified the increase in gas prices (which were approved on Sept 17, 2018), where the industrial gas prices (Commercial, Fertilizer, General Industrial & Captive, Power, Cement, CNG) are up by 30-57% while domestic consumer gas prices are increased by weighted average 22% (or by 10% to 143% varying on different consumable slabs). To note, the Govt. has created 7 slabs for consumers as opposed to earlier 3 slabs.
• We believe, this is a bold step by the new Govt. and is largely in favor of the economy as it is likely to reduce revenues shortfall of Sui companies from Rs152bn to Rs58bn as per Govt. estimates. Further, we expect this to reduce fiscal deficit by 25-30bps and increase CPI by 20-25bps.
• Prices for domestic consumers are increased based on their consumable slabs, where lowest consumption slab (up to 50 cubic meters) is increased by 10% and highest slab based on consumption is seeing increase of 143%.
• Notably, Gas prices for exporters of five zero rated sectors (including textile) are kept unchanged at Rs600/mmbtu. We consider this as a positive event for textile sector as the new Govt. has shown interest towards resolving the sector woes.
• Among sectors, Fertilizer feed gas is increased by 50% to Rs185/mmbtu. While fuel price is increased by 30% to Rs780/mmbtu. To pass on this cost, urea manufacturers will have to increase urea prices by Rs120-130/bag. To note, Engro Fertilizer (EFERT) and Fatima Fertilizer (FATIMA) will be least affected as their feed cost is based on concessionary pricing (US$0.7/mmbtu).
• Gas prices for cement sector is increased by 30% to Rs975/mmbtu. We expect negative bottom-line impact of 5-10% on select cement manufacturers.