omc: no mention; hence safe - BMA Capital Management

OMC
OVERWEIGHT
Budget Impact
Neutral
Muhammad Ali Taufiq
OMC Analyst
19
OMC: NO MENTION; HENCE SAFE
June 7, 2010
While no direct budgetary measures were expected for the Oil Marketing
Companies (OMCs), the industry was largely expecting concretre
announcements from the Finance Ministry to resolve the circular debt menace
in the system. Promises recently made by GoP to inject PKR116bn have been
delayed and the uproar by the entire value chain managed to bring merely
PKR20bn into PEPCO during the month of May10.
Increase in GST to be valuation neutral
As declared in the budget for FY11, GST has been raised from 16% to 17%.
Assuming parity with current PKR/USD rate and intl Ex-refinery prices, the
aforementioned change in GST slab is likely to raise POL product prices by
PKR0.38-0.70/litre (~0.90%) wef July 1, 2010.
Impact of increased GST on retail prices of POL products, assuming parity
with current input prices
POL Products
Source: OGRA, BMA Research
However the measure is expected to be valuation neutral for the sector as GST
on POL products is applied on Prescribed + IFEM price which includes both,
distributor and dealer margin. Hence the aforesaid change in GST slab has
direct incidence on consumers and does not affect the respective margins.
FED raised on gas tariff; No impact on CNG prices
Budgetary measures announced an increase in rate of Federal Excise Duty
(FED) on Natural Gas from PKR5.09/mmbtu to PKR10.0/mmbtu. However with
CNG exempt from FED levy, the aforesaid announcement is not expected to
have any impact on its prices.
CNG dealers currently pay aggregate taxes of ~PKR33/kg (62% of retail price)
in the form of 25% GST, 4% Income tax and 10% WHT. We maintain our view
that decreasing price differential between 1) CNG and MoGas prices and 2) gas
load-shedding at CNG stations will continue to encourage end consumer to
switch to MoGas.
Outlook FY11E
Retail price @ 16%
GST (amount in PKR)
Retail price @ 17%
GST (amount in KR)
Premium Motor Gasoline 69.04 69.64
HOBC 82.04 82.74
Kerosene Oil 65.49 66.06
Light Diesel Oil 62.61 63.14
JP-1 (domestic) 55.36 55.86
JP-4 52.63 53.08
JP-8 (excluding PARCO) 55.08 55.55
We maintain OVERWEIGHT stance on the sector, backed by cheap valuations
and growing offtakes for furnace oil and motor gasoline. Moreover given the
recent unprecedented share price decline of Pakistan State Oil (PSO), we flag
the stock as one of our high conviction ideas. Our DCF based fair value for PSO
stands at PKR409/share, reflecting an upside potential off 50.9% from last
closing price.
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0.87
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