The ECC has approved the increase in OMC and dealer margins on petrol and HSD, which will be effective by the next biweekly petroleum price changes (16 December 2021). OMC margins have been increased by PKR0.71/litre on both fuels from PKR2.97/liter to PKR3.68/liter, while dealer margins on petrol and HSD are up by PKR0.99/liter and PKR0.83/liter to PKR4.90/liter and PKR4.13/liter, respectively. The combined change of PKR1.5-1.7/liter is only about 1% of the retail prices as on 1 December 2021.

Note that the increase of nearly 25% is greater than the average inflation of 8.9% during FY21, where OMC margins are supposed to be increased by the average CPI of the previous year by every July. But this revision will be late by about 6 months and the previous revision in FY20 (of 7%) was less than the applicable CPI (10.9%).

This will have an annualized EPS impact of about PKR9.0/8.0/4.5 per share on PSO/APL/SHEL, assuming the same volumes as during FY21. But we highlight that we had already increased the OMC margins by CPI in our estimates; hence the incremental earnings impact beyond FY23f could be about half of that stated above.

During the deliberations at the ECC and Petroleum Division, the idea of deregulating the margins of retail fuels was discussed. Presently this is applied to only HOBC, where OMCs determine the margins themselves (hence variable prices) but its total volumes were less than 1% of total POL sales during FY21. We do not think that the industry is mature and ready enough for such a deregulation of petrol/HSD margins, and this should not be passed in the near term.

The event improves the investment case for the OMCs, ahead of potential slowdown in petroleum demand (10-20% yoy in recent years) due to high retail prices and tightening fiscal and monetary policies, in our view. Our top picks remain PSO (Buy, June 2022 TP of PKR316/sh) and APL (Buy, June 2022 TP of PKR470/sh).

In case of PSO, we highlight other positives such as continued growth in market share; slowdown in circular debt buildup (ahead of resumption of IMF program which will trigger more Energy sector reforms); another large penal income from IPPs expected for 2QFY22 results; and imminent passage of Refinery Policy lifting prospects for its subsidiary, Pakistan Refinery (PRL).

Courtesy – Intermarket Securities Limited.