The government of Pakistan (GoP) has decided to increase the prices of Petrol (MOGAS), High-Speed Diesel (HSD) & other petroleum products by Rs30/ltr. The new prices effective from 27th May-22 are Rs179.86/ltr for Petrol and Rs174.15/ltr for Diesel.

Even after this increase, the Price Differential Claim (PDC) or subsidy that which government used to disburse to oil companies stands at Rs17.02/ltr and Rs56.71/ltr for MOGAS and HSD as compared to the last PDC recorded of Rs47.02/ltr and Rs86.71/ltr, respectively.

This decision is likely to reduce the increasing receivables of OMC companies wherein we estimate Pakistan State Oil (PSO) receivables from GoP for June-22 will decline by ~Rs32bn (~Rs68/share) and improve the liquidity position of the company. We believe this decision can have an EPS impact of around 3-4% to FY22 earnings assuming delays in payment to the company & rise in borrowings. We maintain our ‘Buy’ stance on the stock. 

We believe that this will also partially reduce the government subsidy amount, which will now be estimated to be ~Rs80bn/month and address concerns from economic perspective. 

It gives a clear signal that government is willing to take tough measures and completely remove subsidies in a gradual manner. It is likely to reduce the fiscal burden on GoP, which was taking a major hit as contributions were estimated to cost around Rs120-140bn in May-22 (annualized impact of 2% of GDP).   

It will also pave the way for the IMF program resumption as it had linked completion of the 7th review with the removal of fuel subsidies which will be positive for our balance of payment outlook.  Furthermore, an increase in petrol prices will also have an inflationary impact where we estimate that a 20% increase in petrol prices will impact inflation by around 100bps.

Courtesy – Topline Securities