14 February 2023

Pakistan Economy
KSE100 Index: Closing 41,716.95 ↓ (24.83)

The much-awaited gas prices increase announced

▪ The Economic Coordination Committee (ECC) has reportedly approved increase in gas prices from 10% - 69% for various
segments other than residential, another effort by the government to successfully complete the lingering ninth review of the
ongoing IMF program.
▪ From the listed space, any reduction in pace of gas circular debt expansion would bode well to unlock valuations of OGDC,
PPL, SNGP and PSO. On the other hand, a number of manufacturing sectors would bear negative impact on earnings,
assuming power of passing on the impact to end consumers would be limited.
▪ Fertilizer sector maintains the largest quantum of gas cost in its manufacturing process (~30% of cost of sales), the same
sector witnessing the highest increase in prices as well. However, the sector holds higher pricing power and is expected to
pass on the impact to farmers, which may be around Rs400/bag.
▪ In the ongoing macro adjustments, we highlight E&Ps, fertilizers and banking sectors that may be better positioned amid its
respective business models to weather the impacts.

Non-residential gas prices increased by 10% - 69%...

The Economic Coordination Committee (ECC) has reportedly approved increase JS Research
in gas prices from 10% - 69% for various segments, another effort by the research@js.com
government to successfully complete the lingering ninth review of the ongoing IMF +9221 111-574-111
program. The price increase, which is said to be applicable from 1 January, 2023
to 30 June, 2023, will assist in curtailing pace of gas circular debt pile up, which is
among the key recommendations discussed by IMF. While we await official
publication for confirmation, this was a much-awaited measure as gas circular debt Domestic (Residential) Sector Gas Price
pile up has been magnifying with time. Current outstanding gas circular debt is at Old Proposed
Rs1.6trn, which was estimated at Rs720bn as at Mar-2022 and at Rs620bn as at (Rs/mmbtu) Change
Rate Rate
Jun-2021. The last gas price increase was announced in Sep-2020, that too for Protected
limited segments and within the range of 1% - 6%. Prior to that, 31% gas price Up to 0.25 hm3/month 121 121 0%
increase for all segments (62% for Fertilizer feed gas) was announced in Aug-2019. 3
Up to 0.5 hm /month 121 150 24%
3
Gas price increases in the last 5 years Up to 0.6 hm /month 300 200 -33%
3
Gas prices (Rs/mmbtu) Oct-18 Aug-19 Sep-20 Feb-23* Up to 0.9 hm /month 300 250 -17%
Non-Protected
Commercial 980 1,283 1,283 1,650
Up to 1 hm3/month 300 400 33%
General industry 780 1,021 1,054 1,200
3
Up to 1.5 hm /month 553 600 8%
Captive Power 780 1,021 1,087 1,200
3
Up to 2 hm /month 553 800 45%
Export oriented - process 600 786 819 1,100
Up to 3 hm3/month 738 1,100 49%
Export oriented - captive 600 786 852 1,100
3
Up to 4 hm /month 1,107 2,000 81%
Cement 975 1,277 1,277 1,500
3
Above 4 hm /month 1,460 3,100 112%
Fertilizer-feed (Fauji) 185 300 302 510
Source: News reports, JS Research
Fertilizer-feed (Engro) 80 109 117 140
Fertilizer-fuel 780 1,021 1,023 1,500

Research Entity Notification Number: REP-084 JS Research is available on Bloomberg, Thomson Reuters, CapitalIQ and www.jsgcl.com
www.jamapunji.pk Please refer to the important disclosures and disclaimer on the last page
The much-awaited gas prices increase announced
14 February 2023

Increase Oct-18 Aug-19 Sep-20 Feb-23

Commercial 40% 31% 0% 29%
General industry 30% 31% 3% 14%
Captive Power 30% 31% 6% 10%
Export oriented - process N/A 31% 4% 34%
Export oriented - captive N/A 31% 8% 29%
Cement 30% 31% 0% 17%
Fertilizer-feed (Fauji) 50% 62% 1% 69%
Fertilizer-feed (Engro) N/A 36% 7% 20%
Fertilizer-fuel 30% 31% 0% 47%
Source: News reports, OGRA, JS Research; *Proposed

…to comply with IMF recommendations

IMF in its recent Staff Report has given much attention to the burgeoning gas
circular debt and the need to address the same by establishing reliable circular
debt data, a gas Circular Debt Management Plan (CDMP), and circular debt
projection capacity. In the same report, Pakistan government had ensured it has
begun work on the CDMP, compile gas circular debt related data and structure
regular data systems. To reduce outstanding overdue in the gas sector the
government briefed steps such as (1) regular adjustments to end-user gas prices
as per established formulas, (2) measures to reduce unaccounted for gas losses
and (3) improving liquidity of Sui companies.

The listed space has winners and losers

Energy chain: From the listed space, any reduction in pace of gas circular debt
expansion would bode well to unlock valuations of Oil & Gas Development
(OGDC), Pakistan Petroleum (PPL), Sui Northern Gas Pipeline (SNGP) and
Pakistan State Oil (PSO). On the other hand, a number of manufacturing sectors
would bear negative impact on earnings, assuming power of passing on the impact
to end consumers would be limited.

Fertilizer sector maintains the largest quantum of gas cost in its manufacturing
process (~30% of cost of sales), the same sector witnessing the highest increase
in prices as well. However, the sector holds higher pricing power and is expected
to pass on the impact to farmers.

Gas Cost (Rs/bag)

Before increase Post gas price increase
1,446

1,159
1,081

680 642

381

FFC EFERT FFBL

Source: Company accounts, JS Research

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The much-awaited gas prices increase announced
14 February 2023

Accumulated impact of increase in feed and fuel for FFC computes up to

~Rs400/bag, whereas EFERT would need price increment of Rs295/bag. FFBL
would require an increase of Rs262/bag of Urea and Rs109/bag for DAP against
current Urea prices of Rs2,440/bag (Rs2,585 granular). FFBL would have a higher
price increment requirement for Urea as cost on DAP production cannot be easily
passed on to end consumer since DAP prices are determined as per international
prices. FFBL would not have any impact because of the fuel rate increase as it
uses its own captive power plant for fuel purposes. We highlight ~73% of the Feed
gas used by EFERT’s Base plant is charged at Petroleum Policy 2012 rates, hence
the lower per bag price increase required in the table below.

Fertilizer sector: Gas price increase impact (annualized)

FFC EFERT FFBL

Incremental impact on Feed Gas Rs/mmbtu 218 218 218

Incremental impact on Fuel Gas Rs/mmbtu 558 558 558

Feed requirement mmbtu/ton 24.0 23.7 24.0

Feed requirement (DAP) mmbtu/ton 10.0
Fuel requirement mmbtu/ton 5.0 5.3 0
Applied on the prod. at Fertilizer policy rates Proportion 100% 73% 100%
Feed Rs/ton 5,232 3,758 5,232
Fuel Rs/ton 2,790 2,151 0
Per bag increase required Urea Rs/bag 401 295 262
Feed Rs/ton 2,180
Per bag increase required DAP Rs/bag 109

Relative benefit if prices increase by Rs400/bag 106 31

Urea Offtake for the year mn tons 2.5 2.1 0.6
Additional earnings (before tax) Rsmn 0 4,439 348
EPS impact (after tax) Rs. 0.0 2.0 0.2

Base Case EPS (CY23E) 23* 16.0 4.6

Incremental impact over base case 0.0% 12.5% 3.5%
Source: JS Research ; * Unconsolidated

Export-oriented sectors: In addition, as the Staff Report itself highlighted

uncovered subsidies (especially for export and zero-rated industries) among key
reasons of piling gas circular debt, gas prices for Export-oriented sectors have also
been increased. The ~30% jump in gas prices for Export-oriented sectors has
resulted the segment, that previously received gas at ~22% discount to general
industries, to now receive gas at only ~8% discount to the same. The increase
raises concerns for textile sector margins in coming quarters, limiting the benefit of
recent sharp PKR/US$ devaluation.

Others: Moreover, Engro Polymer (EPCL), is another energy intensive company,

which is expected to take a hit of 7% (annualized), under the assumption that they
run their plant on natural gas throughout the year, owing to 10% increase in gas

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The much-awaited gas prices increase announced
14 February 2023

prices. Moreover, the rate is still lower at Rs1,200/mmbtu, when compared to

RLNG rates that are currently at ~Rs3,700/mmbtu.

Among other manufacturing companies under JS Universe, Lucky Cement (LUCK)

& Cherat Cement (CHCC) consume gas at regular rates but the impact would be
negligible on the two companies as the increase for captive power is lower
compared to other increments and these companies also do not solely rely on gas
for power generation.

Impact on inflation
Given weight of gas prices at 1% in the basket, an average increase of ~25% in Sensitivity by average gas price increase
the said prices may not have a grave impact on inflation through direct increase. Gas price increase CPI Feb-23E
Implications from second-round impact may be more serious. While in our base
65% 30.49%
case we have incorporated a 40% jump in gas prices from the ongoing month, we
55% 30.39%
present a sensitivity of gas price hikes. Please note, these numbers only reflect the
first-round impact, that is the direct impact. A second-round impact also usually 40% (Base Case) 30.24%
follows, broadly reflected in prices of other food and household related items. 25% 30.10%
15% 30.00%
Also, as fertilizer prices are expected to increase post gas price hike, the already
higher rural inflation can continue to witness more pressure in the coming months. Source: JS Research
We highlight, Rural inflation in the headline, food and core inflation has been higher
than urban segment during 7MFY23.

Rural segment reporting higher inflation trend

35.20%

33.70%
28.50%

25.40%

17.70%

17.30%

CPI Food Core

Rural National avg

Source: PBS, JS Research

Prefer stocks resilient to macro adjustments

In the midst of the ongoing and prospective macro adjustments, we prefer stocks
better placed to weather adjustments, broadly from the banking, energy and
fertilizer sectors, which also offer attractive dividend yields in the range of 15-23%.
From the E&P space, we prefer OGDC & PPL over steps towards improvement in
piling of gas circular debt and immediate adjustment in PKR/US$. We also like
MARI over growth and PKR devaluation play. From the fertilizer sector, we like FFC
and EFERT given companies’ respective stable high D/Y at ~19%. In addition, we
also highlight banking sector among prospective sectors to outperform amid
current attractive multiples of 0.6x against Tier I recurring ROE at 23% on long term
interest rates at 12%.

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The much-awaited gas prices increase announced
14 February 2023

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