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Pakistan Strategy: Likely Gas Price Increase Positive for Macros, Negative for Corporate Profits

• Reportedly, Prime Minister Imran Khan has given a go ahead to raise gas prices that were proposed by Oil and Gas Regulatory Authority (OGRA) few weeks back. This will be presented in next Economic Coordination Committee (ECC) meeting for official approval.
• This gas price rationalization is a bold step by the new government and is largely positive for the overall economy as the gas tariff differential which the Govt. is bearing for now will mostly be paid by consumers in future.
• We believe that higher gas tariff will reduce demand of household consumers that were getting gas at a huge discount, thereby rationalizing gas allocation among industrial and other sectors. Consequently, Pakistan dependency on high cost imported gas (RLNG) should come down in medium to long run, thus putting less pressure on external accounts.
• Though good for overall economy this will have negative impact on sectors like Steel, Fertilizer, Textile, Cement and Chemical due to their weak pricing power and relatively elastic demand. On the other hand, gas marketing companies (SNGP and SSGC) would be beneficiaries in terms of better cash flows and likely surplus in  Gas Development Surcharge (GDS). Please refer to our table on next page for sector wise impact on earnings.
• Nonetheless, we expect a big jump of around 250bps in CPI inflation as Govt. plans to increase gas prices by upto 200% for lower slab which is part of CPI basket of Pakistan. This bodes well for the banking sector as higher inflation will lead to higher interest rates and thus better profits, we believe.
• Amid higher cash flows to Sui companies (as their GDS can notably become surplus) we expect it will help in resolving smaller portion of circular debt. Moreover, we believe that this hike in gas prices will improve gas collection to the tune of Rs250bn. This will cover existing outstanding gas differential of Rs100-120bn while remaining will be a surplus cash flow to the National kitty. Consequently, this could help the Govt. to reduce fiscal deficit by around 70bps.
• Apart from gas prices rationalization, PM was also briefed on the demand and supply situation in oil & gas sectors and previous Govt.’s inability to award any exploration license in past 5 years. Any development on exploration front will be positive trigger for domestic oil & gas exploration companies.