By: Abdul Azeem
+92-21-35205520-22 (Ext 8633)
Invest Capital Markets Limited
According to media reports, both the gas utility companies would be benefiting by the expected OGRA decision to change their bulk-retail ratio and take it at FY04 position to 56:44 from current 28:72 levels. In today’s Value Seeker we discuss different aspects of this development coupled with other proposed guidelines by ECC.
ECC proposes guidelines to support profitability
The government intention of supplying neutral gas to domestic consumers on preferential basis for making their life easy has critically impacted the profitability of the gas utility companies. The change in bulk to retail ratio derived UFG to higher side, theft of gas is higher in retail consumer than bulk consumers therefore a ~4% rise in UFG allowed benchmark is expected which is currently at 5% (set by OGRA).
In addition to this, ECC also proposed in their guidelines that the followings may not be counted in UFG losses (i) volumes lost on account of dismal law and order situation, (ii) volumes lost due to minimum metering errors and (iii) volumes lost due to pilferage by non-consumers. Moreover, ECC also proposed that certain incomes such as late payment surcharge, royalty income, income from meter manufacturing and from sale of gas condensate/LPG etc, should be counted as non-operating income of the companies.
Post these guidelines approval both the companies are expected to march towards certainty in their profitability.
Outlook: Positive subject to UFG benchmark revision
After the implementation of the said decision, the gas distribution companies would be able to save the significant amount in their profitability. If effective UFG allowed limit reaches at 9.5% and the companies make UFG at 10.5% on annual basis then effectively the companies has to bear the loss of 1%; for SNGP, 1% equal to Rs2.4bn while for SSGC the same is Rs1.4bn. With these developments, we believe, these utility companies will pay a handsome dividend with their upcoming results.