Increase in gas prices to affect all sectors

The government has decided to increase gas prices for all sectors including fertilizer, industrial, commercial and domestic consumers with effect from Jan 1, 2012.The gas prices are likely to be increased by Rs197/mmbtu for the fertilizer sector (in form of Gas Infrastructure Development Cess (GIDC)) and Rs13/mmbtu for the industrial consumers.The increase in the gas prices will put downward pressure on the margins of fertilizers, cements and textiles; if not passed through.FertilizerAccording to JS Reseach, on account of GIDC, the GoP has decided to increase fertilizer feedstock gas prices by 193% to Rs299/mmbtu from Rs102/mmbtu. It is likely to impact old urea plants only, while ENGRO’s Enven and Fatima will remain immune to the changes due to their Gas Supply Agreement with the GoP. Therefore, the incremental cost impact on ENGRO due to GIDC will be 50% compared to FFC. To recall, FFC and FFBL have been gainers of previous urea price hikes by ENGRO. However, in this situation, ENGRO will only raise urea prices to cover its incremental cost impact which will see FFC and FFBL taking a brunt on their respective earnings due to a pass through of only 50% of the incremental cost. Consequently, FFC and FFBL’s 2012-14 earnings forecasts to be revised downwards by 15-17% and 18-20% respectively.CementCost of gas constitutes approximately around 20% of the total energy costs in the sector. Assuming a 14% rise in gas prices the incremental rise in costs per bag is roughly around Rs5 per bag. However, in view of the pricing power the cement industry has enjoyed recently, the industry is likely to pass on the cost increase immediately. Thus, cement prices may increase to Rs425-430/bag from current levels of Rs415-420 per bag. We reiterate our ‘Buy’ calls on both LUCK and DGKC as they offer respective upsides of 32% and 49% to our target prices.TextileAlready being faced with gas supply issues and lower cotton prices (Rs4,900 per maund, down 62% from its peak), the textile sector is now set to feel the brunt of increased gas prices from January 1, 2012. The increase in gas prices is likely to bode negative for the textile sector, in general, affecting the margins for the manufacturers. Usually, the manufacturers are able to pass through the incremental cost impact by increasing the end product prices however, we believe small textile units which enjoyed wind falls gains last year to come under immense pressure given the current scenario. Nonetheless, big composite units like Nishat Mills Limited (NML), which have established efficient captive co-generation power plants to run on alternative fuels, will remain immune to such cost hikes. This can be currently maintained ‘Buy’ on NML.IPPsThe cost of gas supplies to IPPs (running on gas) are also expected to be increased by Rs70/mmbtu. However, this is not expected to impact the earnings of IPPs because of their fuel cost pass through agreement with GoP. Although, it may result in heightened circular debt concerns if the power consumer tariff is not increased accordingly.