Morning Call about Gas prices revision on the card – Arif Habib Limited

Karachi, December 12, 2012 (PPI-OT): Impact on inflation and major sectors

Gas Prices hike: Inflation to inch up a bit
OGRA recently suggested an increase in the gas tariff for industries, including fertilizers, power houses, cements, CNG and the domestic customers to be effective from January 1, 2013.

According to Arif Habib Limited, the question arises, what will be the impact of this rise on the overall inflation? The gas price decline since Jul’12 (~49% average) YoY in the gas component helped lower overall CPI by an estimated 77bps, 45% contribution in inflation decline. Thus, with the implementation of the proposed ~10% rise, the same component of CPI basket should register a surge of only ~16bps (gas component weight at ~1.58%). This effect will trickle down on other items of the CPI basket that are directly impacted by any change in gas prices. Incorporating the hike, even if Arif Habib Limited keeps an average of 9% inflation for 2HFY13, yet the annual CPI for FY13 should remain below the targeted 9.5% i.e. at ~8.9%.

“Pass on”: only lifeline available to Fertilizer sector
Expected gas price increase would be critical across the board given upcoming election scenario, with persistent gas curtailment on SNGP network and lower fertilizer offtake amid sluggish demand. According to OGRA’s recommendation feed stock would increase by PKR 9.25/mmbtu while fuel by PKR 39/mmbtu. Desirably, fertilizer sector has to pass on this increase to consumer, which should mean an increased Urea price to farmers. FFC and FFBL should increase the price by PKR 24/bag, while ENGRO by PKR 20/bag. Conversely, in case of impact absorption by companies, this would be slightly negative for fertilizers except FATIMA and ENGRO (Enven only). In that case, annualized EPS impact on FFC, FFBL and ENGRO should be PKR 0.59 (3.8%), PKR 0.10 (2.2%) and PKR 0.19, respectively. On the other hand, FATIMA should have a positive earnings impact of PKR 0.11 due to fixation of its gas prices (mainly feed stock).

Cements to feel very little brunt
The direct impact of the proposed gas price increase would be visible on LUCK among Arif Habib Limited’s cement universe stocks, as most of the cement companies operating in the Northern region are utilizing national grid for their power requirements due to low availability of gas. As per Arif Habib Limited’s estimates, a PKR 39/mmbtu rise in gas prices would have an impact of PKR 2/bag. If this impact not passed on, LUCK should have an annualized EPS impact of PKR 0.4/share (1.4%) on its bottomline.

Muted impact on Independent Power Producers
The impact of the hike in gas prices would remain muted as far as Independent power producers (IPPs) as the fuel cost is essentially a pass through component. KAPCO is the only IPP in Arif Habib Limited’s coverage that uses gas for power generation. However, gas being a minor component of fuel mix, the bottomline is expected to be least affected by the said rise in gas tariff.