Karachi, September 15, 2022 (PPI-OT): Pakistan Oil Marketing Sector – will fare better than most

We have a bullish outlook on domestic OMCs for FY23 with an investment thesis premised on i) Revision of OMC margins and possible deregulation alongside refining policy unveil, ii) improved liquidity vis-à-vis potential clearance of circular debt on the back of gas/power sector reforms, iii) downward revision of turnover tax to 0.5% from the previous 0.75% and iv) possible new petroleum policy to aid sector sustainability going forward. As we conclude the summer season – the first with no impact of COVID lockdowns in the last two years – demand for petroleum has fared well in the outgoing fiscal year compared to pre-COVID levels of FY19.

Although for FY23, we expect industry volumes to remain down by 7% to 20mn tons, as throughput decline especially on RFO and HSD may be imminent on the back of curtailed industrial activity, reduced auto sales and an overall slowdown in economic activity. Incorporating the said numbers does not hurt our investment case as margin revisions and overall energy reforms (among other things) act as significant triggers towards our valuations. We highlight APL as our top pick from the sector, with the company being a perfect mix of capital upside and dividend yield. APL’s earnings are expected to increase with a CAGR of 6% for FY23-26 majorly due to retail sales increasing by 4% over the same time period, while an annual revision in margins of ~6% further accentuates earnings. Additionally, consistent expansions in capacity/retail network along with a history of high payouts leads to our expected DPS of PkR50/55/sh resulting in dividend yield of 17/19% for FY23/24.

Offtakes to remain dreary: As we conclude the summer season – the first with no impact of COVID lockdowns in the last two years, the demand for petroleum has fared well in the outgoing fiscal year compared to pre-COVID levels of FY19. Total sales for FY22 stood robust, standing at 22.6mn tones ((Upward) 16%YoY). Said rise was on the back of higher industrial activity (LSM (Upward) 11.7%YoY), power generation ((Upward) 10%YoY), risen auto sales ((Upward) 46%YoY) and overall strong economic activity during the outgoing year. Although for FY23, we expect industry volumes to remain flattish/muted, as throughput decline especially on RFO and HSD may be imminent on the back of curtailed industrial activity/macro slowdown. Furthermore, recent flooding is expected to spread havoc to major sectors including OMCs.

More specifically, HSD offtakes may suffer the said ramifications on the back of overall agri destruction in Sindh/Punjab, as farmer incomes are said to take a hit in the near term. Also, increased water levels in dams due to heavy rainfall during the presently ongoing monsoon season may result in lower than expected RFO demand, as hydel generation has re-emerged due to increased availability. In the long run, we expect MS sales to continue on its long-term growth path of 4% annually on the back of increased urbanization, healthy car sales and increasing per capita income. For HSD, higher base effect due to exorbitant volumes during past 2 years (curb on Iran smuggling, increased power gen.) may hinder growth prospects, for this reason we expect HSD sales to witness laggard 0.5% annualized growth between FY23-27, similar to what was witnessed in FY15-22.