Karachi, 11 Oct 2023:The government of Pakistan, in an attempt to address the longstanding energy sector crisis and align with the International Monetary Fund (IMF)'s recommendations, is anticipated to authorize a formidable increase in gas prices ranging from 5% to 193% across diverse segments. A research report from JS Securities Limited elucidates the potential repercussions and developments across various market segments, highlighting the effects on companies in the listed space, fertilizer sector, export-oriented sectors, and other manufacturing entities. The proposed alterations to gas pricing are foreseen to significantly influence residential rates and inflation, whilst striving to curtail the escalation of gas circular debt, which is projected to touch Rs2.7 trillion by September 2023.
From the listed space, a diminution in the tempo of gas circular debt expansion is expected to unlock valuations of OGDC, PPL, SNGP, and PSO. Meanwhile, the imposition of the proposed increase for fertilizer feed and fuel rates is believed to dissolve extant ambiguities in gas prices for Mari-based fertilizer players. However, manufacturers in several sectors may witness an adverse impact on earnings, assuming a limited capacity to transfer the impact to end consumers.
The proposed gas price adjustments, anticipated to be implemented from October 1, 2023, are aimed at both slowing the growth of gas circular debt and aligning with IMF's mandates ahead of its upcoming first review under the Stand-By Arrangement. The IMF has emphasized the necessity of confronting the burgeoning gas circular debt and encouraged the government to collaborate with the World Bank to implement the weighted-average cost of gas pricing law for the subsequent regular Oil and Gas Regulatory Authority determination.
Residential gas prices, particularly for the non-protected segment, are forecasted to witness a hike between 29% and 173%. Fixed rate charges for both Protected and Non-Protected segments are also poised for an augmentation. Despite a direct impact anticipated to be somewhat restrained, given the weight of gas prices at 1% in the basket, secondary implications may pressurize prices of various household items and fertilizer costs, potentially exerting additional stress on the already elevated rural inflation in the subsequent months.
The expected gas price augmentation is poised to generate an assortment of consequences across numerous sectors. In the fertilizer sector, FFC might necessitate an enhancement of Urea prices by Rs500/bag, compared to EFERT's required Rs80/bag, due to its current booking of gas cost at the last revised rates. Export-oriented sectors may confront a substantial 86% leap in gas prices, potentially influencing textile sector margins in forthcoming quarters. Conversely, a selection of cement sector entities like CHCC and LUCK, which utilize gas in their present energy mix, might experience a negative impact from the proposed dual-fold increase from the current price, potentially prompting a further shift to alternative energy sources.
Amidst the unfolding and prospective macro adjustments, stocks resilient to such shifts, primarily from the banking, energy, and fertilizer sectors, emerge as preferred choices, offering enticing dividend yields ranging from 21% to 27%.