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JS Securities Limited – Morning Briefing

Karachi, January 03, 2018 (PPI-OT): OMCs: Petroleum products sales down 11% YoY in Dec-2017 on lower FO sales

As per channel checks, petroleum product sales in Dec-2017 declined by 11.4% YoY to 1,872k tons. Decline in sales was mainly because of plummeting FO sales (down 44.6% YoY to 431k tons).

Hascol Petroleum (HASCOL) led the volumes growth chart with 13.3% YoY increase along with improvement in market share by 2.5ppts YoY. Shell Pakistan (SHEL) remained the major laggard (-41.2% YoY).

FO sales have dropped dramatically due to lower utilization of FO based power plants. PSO’s FO sales clocked-in at 291k tons during the month, down 47.0% YoY.

Monthly sales trend supports our view that white oil products will be key profitability drivers going forward. We favour HASCOL (TP: Rs372) and Hi- Tech Lubricants (HTL, TP: Rs116) in JS OMC Universe.

Petroleum product sales plummet mainly due to FO

As per channel checks, petroleum products sales in Dec-2017 declined by 11.4% YoY to 1,872k tons. Decline in sales was mainly because of plummeting Furnace Oil (FO) sales (down 44.6% YoY to 431k tons). White oil products continued to march upwards with Motor Spirit (MS) sales clocking-in at 602k tons (+11.8% YoY) and HSD sales at 759k tons (+9.0% YoY). Hascol Petroleum (HASCOL) led the volumes growth chart with 13.3% YoY increase along with improvement in market share by 2.5ppts YoY. Shell Pakistan (SHEL) remained the major laggard with decline in sales by 41.2% YoY. On a sequential basis, petroleum product sales declined by 1.9% MoM, however Attock Petroleum (APL) and Pakistan State Oil (PSO) posted improvements of 7.9% MoM and 0.5% MoM, respectively.

MS sales shine amidst growing demand

In Dec-2017, volumetric growth in MS clocked-in at 11.8% YoY and 6.4% MoM, indicating rising consumption of fuel across the country. HASCOL shined brighter- than-others with YoY/MoM increase of 39.5%/5.5% in volumes followed by Byco Petroleum (BYCO) with YoY/MoM increase of 86.1%/16.4% and PSO with YoY/MoM 12.4%/6.6% increase in the listed OMC sector. During 1HFY18, MS sales improved by 13.0% YoY to 3,744k tons where we believe that year-end FY18 numbers are likely to remain near 7.5-7.6mn tons (+15.0% YoY).

HSD sales also continue to shine on a YoY basis

HSD segment continued to post increase on a YoY basis with overall volumes for Dec-2017 clocking-in at 759k tons (+9.0% YoY). PSO led the charts with increase of 26.2% YoY followed by BYCO (36.6% YoY) and HASCOL (20.3% YoY). On a sequential basis however, volumes declined by 10.9% MoM and we attribute this decline to seasonality as sales during the month of November over 2008-2017 have averaged at ~707k tons compared to average December sales of 598k tons during the same period. In 1HFY18, HASCOL outperformed the industry with incremental market share increase of 4.6ppt YoY, while PSO lost 1.5ppt YoY in market share.

FO sales continue downward spiral

FO sales (-44.6% YoY in Dec-2017) have dropped dramatically due to low utilization of FO based power plants. PSO’s FO sales clocked-in at 291k tons during the month, down 47.0% YoY. Going forward, we believe that focus of local OMCs will shift to white oil products and LNG (in the case of PSO) to curb declining FO sales. In this backdrop, we highlight those companies with lower share in FO segment and potential for market share expansion (in white oil products) such as HASCOL (only 9.1% market share) will potentially remain in focus.

HASCOL and HTL are favoured plays in OMCs

We favour HASCOL (TP: Rs372) and Hi-Tech Lubricants (HTL, TP: Rs116) in JS OMC Universe. Key risks to our investment thesis include (1) less-than-expected sales growth, (2) delay in commissioning of new projects, and (3) volatility in exchange rate and international oil prices.

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