Equity Analysis /
Pakistan

Pakistan OMCs: Mild volume recovery unlikely to prolong in the wake of floods

  • POL product demand depicted modest recovery to 1.53mnMT in Aug’22 after a rapid decline of 26% in the previous month

  • We corroborate impact of current floods from the calamity in 2010, where POL product demand will be impacted

  • Hike in OMC margin, a key catalyst for higher earnings outlook and valuation upside, remains to be ratified by Cabinet

Intermarket Securities
2 September 2022

POL product demand depicted modest recovery to 1.53mnMT in Aug’22 after a rapid decline of 26% in the previous month. However, compared to Aug’21, demand stood 22% lower. The cumulative decline for 2MFY23 is 24% YoY which shows demand moderation in face of elevated POL prices and prolonged monsoon spell. Amongst major POL items, FO demand weakened primarily owing to availability of hydel energy. This trend is unlikely to persist owing to gas and hydel energy shortage during winters, resultantly calling forth for higher FO reliance during 2QFY23. We inextricably corroborate the impact of current floods from similar natural calamity witnessed in 2010 (figure in the sidebar), where POL product demand is expected to remain impacted for the most part of 1HFY23 before recovering modestly.   

  • Low FO throughput by refineries after excess piling of FO inventory has also augured well for PSO to be able to scrap import tenders of FO shipments. We saw a similar trend in FO demand during the 2010 floods where it declined by 23% in August 2010. Going by the 2010 demand pattern we may see FO demand pick up in the coming months just like 2010 where it increased by 29% in October of 2010. This will also be a key function of gas and hydel energy shortage.

  • HSD and MS demand will be affected by floods as it has inundated most of the road network. Infrastructure damage from floods along with reduced farmer income due to crop damage will additionally sober the retail fuel demand in the near-term. We also highlight, the decline in auto and tractor sales that has started to affect volumes.

  • Continuous high prices of POL products are likely to persist in the coming months due to high international oil prices and upward revision of levy in accordance with the IMF programme. Inflationary pressures are expected to worsen due to recent floods and we see consumer demand weakening even further, therefore reducing POL product volume.

OMC margin hike awaited

The expected hike in OMC margin, a key catalyst for higher earnings outlook and valuation upside, remains to be ratified by the Cabinet. With the attached risk of high working capital requirement in maintaining supplies relative to dealers, OMCs are at a decent bargain with authorities in obtaining approval from PKR 3.68/litre to 6.00/litre worth of OMC margin. Besides providing great profitability boost, it will also help in overcoming the inflation-driven operating expenses and interest-rate-impacted finance costs. The recent volatility in exchange rate has reduced after the resumption of IMF program, also abating the quantum of PSO exchange adjustment in retail fuel pricing. We reiterate our BUY stance on PSO, underpinned by gas tariff and OMC margin hike. PSO currently trades at a forward PE of 3.0x and we currently have a BUY stance with a TP of PKR 309/share.