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JS Securities Limited – JS Research (October 04, 2022)

Karachi, October 04, 2022 (PPI-OT): Lower POL product sales add stress on PDL collection

Higher POL product prices, lower auto demand and flash floods continued to contribute to the downward trend in OMC sales, which were reported 22% lower YoY in Sep-2022 at 1.52mnMT. The decline was led by lower sales across the board. This took 1QFY23 sales to 4.5mn tons, down 23% YoY.

Lower OMC sales, coupled with downward revision in PDL, have not boded well for Pakistan’s PDL targets set in understanding with IMF, as news reports already suggest a shortfall of Rs93bn in 2MFY23. While Pakistan is required to take PDL up to Rs50/litre for MS and HSD, both, the government has been decreasing PDL charge to provide relief to masses.

Sep-2022: OMC volumes declined 22% YoY

OMC sales for Sep-2022 declined 22% YoY due to petrol price increases, lower auto sales and lower demand post floods. While petroleum products demand had remained relatively unhurt by price increases till last year, the overall macro backdrop seems to be taking a toll on POL products demands this year. This is clearly evident from the recent sales volumes where POL product sales for 1QFY23 accumulate to 4.5mnMT for Pakistan, lower by 23% YoY.

Decline witnessed across the board

MS sales clocked in at 628kT for Sep-22, a decline of 22% YoY. The decline is witnessed mainly due to a rise in MS price and lower automobile sales. On a MoM basis, demand remained stagnant, declining by 1%. For 1QFY23, demand for MS dropped 21% compared to SPLY.

HSD volumes decreased by 26% YoY to arrive at 520kT. The decrease is witnessed on back of a noticeable increase in diesel prices and economic slowdown due to recent floods in the country compared to last year. Volumes however increased by 5% on a MoM basis.

Demand for FO decreased in Sep-22 as volumes clocked in at 305kT. A decline of 24% YoY was witnessed on the back of higher inventory levels available with power plants, lower economic activity and seasonal improved hydel flows in summer. On a MoM basis, a decline of 7% was witnessed likely due to lower electricity consumption owing to higher HSFO prices.

PDL reversal is unsustainable

Contrary to Fund’s advice, govt further declining PDL on MS by Rs5/litre, to Rs32/litre, w.e.f. Oct-2022, makes the new FMs strategy clear – prioritizing control on CPI. This, with lower MS and HSD sales, have, as per news reports led to a shortfall of Rs93bn for PDL vs budgeted target.

We believe there is a likelihood of increase in PDL in the near future as we gain support from declining global oil prices. For perspective, the country’s ex-refinery prices for MS have declined by 20% in two months. This is despite PKR depreciating against the US$ by almost 10% during the same period. While this will likely worsen inflationary pressures, the move will pave way for more conducive deliberations with the IMF and ensure external stability.

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