Macro Analysis /
Global

Pakistan Strategy: GIDC Update – Supreme Court rules in favor of the government

  • Supreme Court has ruled collection of outstanding GIDC in favor of the government. Companies to pay accruals since 2015

  • Most of the affected companies in our coverage have provided for the expense with no direct earnings impact, except LUCK

  • The full collection of the outstanding GIDC amount of PKR457bn will improve the fiscal deficit by c. 1% of GDP

Intermarket Securities
13 August 2020

Supreme Court orders industrial gas consumers to pay outstanding GIDC in full

The Supreme Court has reportedly adjudged the collection of outstanding Gas Infrastructure Development Cess (GIDC) in favor of the government, requiring companies to pay the full charge (100%) of the outstanding payables since mid-2015. The total outstanding amount that will be paid to the government amounts to PKR457bn, of which PKR164bn is due from the fertilizer sector.

We think that, market consensus expectation was skewed towards a favorable verdict for the affected companies i.e. 50% payment of outstanding cess and the remaining being waived (same as the government proposal before the case became subjudice). 

Largely cash outflow and indirect earnings impact for corporates

Broadly, the decision is negative for Fertilizer companies and industries which consume natural gas (including for captive power plants). Most of the affected companies in our coverage have prudently provided for the expense since 2011 (when GIDC was imposed); hence there is no direct earnings impact for these companies. However, since the decision will cause cash outflow over 24 months (worth the outstanding amount), it will reduce future interest earnings on the cash that has been held back since 2015 (affected companies paid the government in May 2015 and accrued ever since). In some cases, the affected companies will have to borrow to pay the amount and will thus bear greater finance costs in future.

Fertilizers most affected by the decision

Fertilizer sector is the most negatively affected by this decision – particularly, FFC and FFBL. Total outstanding from the four fertilizer companies in our coverage is PKR104.5bn (60% with the Fauji’s). We have summarized the cash and potential earnings impact of the decision below.

FFC: As a result of the cash payment, FFC will lose significant interest earnings on cash balance (amounting to c.19% of its core profits.

FFBL will have to borrow the due amount, which will further dent its future earnings, in the backdrop of weak core profits and large losses from food subsidiaries.

For EFERT (which enjoys concessionary gas rates on feed gas without GIDC), the outstanding balance, and thus earnings impact (from forgone interest income on cash) are relatively lower than in case of FFL and FFBL. 

FATIMA also enjoys concessionary gas rates on feed gas. The company has higher receivable in the form of subsidy and sales tax return than GIDC to be paid on fuel gas only. Thus the company will have no effective cash outflow.