GIDC-Impact on Sectors
It has been reported that government has decided to increase the rates of Gas Infrastructure Development Cess (GIDC) for different sectors as indicated in the Finance Act 2015. The GIDC has been raised by PkR200/mmbtu on fuel stock for fertilizer sector, PkR50/mmbtu for general industries, PkR100/mmbtu for Captive Power Plant (CPP) and PkR37/mmbtu for CNG sector, which would enable the government to collect an incremental amount of PkR57bn (total PkR140bn for FY15). Domestic and commercial sectors would continue to be exempted from GIDC while for Independent Power Producers (IPPs) it remains fixed at previous level.
Margin attrition is feared for the fertilizer and textile sector, while increase for CPP may affect some of the major cement players, we believe
Suppress earnings of Fertilizer
Gov’t has decided to increase the GIDC on fuel stock from PkR100/mmbtu to PkR300/mmbtu, while they are already paying PkR300/mmbtu on feed stock except Enven (new plant of EFERT) and FATIMA. Our back of the paper calculation suggest that this increase would reduce the earnings of FFC by PkR1.4/share, EFERT by PkR0.7/share, FFBL by PkR0.6/share and FATIMA by PkR0.3/share. To keep the margins intact the sector may have to increase the urea prices by approx. PkR60/bag (excluding FFBL). FFBL, as a sole DAP producer, may not be able to pass on the impact on it’s DAP production as the commodity prices is a function of international prices.
Twist in the story: no GIDC concession for EnVen and FATIMA
A twist in the story has emerged from the media reports that the government has also withdrawn the GIDC concession given to feedstock on the new fertilizer plants i.e. Engro Enven and FATIMA. Though, we still await clarity on this front, the development bears negative implications for EFERT and FATIMA.
With our assumption of EFERT to get concessionary gas price from 2015, the development would erode the company’s 2015E by PkR2.9/share. To mitigate this impact, EFERT may have to increase urea price by approx. PkR230/bag. The impact on FATIMA would be PkR0.7 on 2014 earnings while it grows to PkR1.5/share on 2015E and beyond.
Margin Attrition of Textile Sector
The increase of PkR50/mmbtu in the GIDC can reduce NML earnings by PkR0.2‐0.3/share, while the impact on NCL to be around PkR0.15‐0.2/share.
Minor Impact on Cement
For captive power plant GIDC has been increased from PkR100/mmbtu to PkR150/mmbtu. Those cement manufacturers that are relying on their captive power plants for their electricity needs are slightly affected by incremental imposition of GIDC. Our calculation suggest, this quantum would suppress the earnings of LUCK and DGKC by PkR1/share (3% of Forecasted EPS of FY15) and PkR0.3/share (2% of forecasted EPS of FY15) respectively. To mitigate the impact, LUCK has to in crease its price by PkR4/bag while DGKC by PkR2/bag.