Dec 1, 2014

Pakistan Research| Oil

Impact of sliding oil prices on Pakistan

economy
When two super powers fight, the consequences are far reaching for
other countries. Recently OPEC couldnt cut crude production that
has further resulted in decrease in crude prices.
Crude (WTI) closed at US$66.15/ barrel on last Friday, and is down
by 38% since hitting US$107/barrel back in June.

Impact on Pakistan economy

Pakistan is an oil importer country and decrease in international oil
prices will have positive impact on our import bill. During FY14, out
of total USD 41.7bn import bill - USD 14.8bn (35.3%) was expensed
on oil and related products. Now decrease in crude prices will have a
significant impact on our import bill and countrys balance of
payment position.
Government has decreased local oil prices by almost 17% during one
month and passed on partial impact of decrease in global oil prices to
local consumers.
This decrease in petroleum products will hurt Government revenue
by Rs1.5bn per month as per newspaper sources, as government
charges 17% GST and Petroleum levy on petroleum products.
One major impact of decreasing oil will be reflected in CPI inflation
for month of November and December. We may see a great decline in
CPI number during these two months.
Industry

Impact

Recommended script

Power
Paints
Chemical
Packaging
Autos
Cement
General industries
E&P and OMC

Positive
Positive
Positive
Positive
Positive
Positive
Positive
Negative

HUBC, PKGP, EPQL

BERG
EPCL, LOTCHEM
ECOP, TRIPF
HCAR, INDU,PSMC
LUCK, MLCF,FCCL, DGKC
PAEL, TGL

Analyst:
Rajesh Kumar Maheshwari
Mob: +92-332-2074310
Tell: +92-213-2461429-30
rajesh@scstrade.com
www.scstrade.com

SCS Research

Which sector to hurt?

A decrease in international oil prices to hit oil E&Ps and OMCs. The
companies like OGDC, PPL, POL will face decrease in revenue while
PSO, HASCOL, APL, SHEL to incur inventory loss given falling
international and local oil prices.
For a longer run these companies can adjust themselves if oil swings
within 10 dollars range i.e. USD60/barrel USD70/barrel.
Disclaimer: This report has been prepared by Standard Capital Securities (Pvt) Ltd and is provided for information purposes only. The information and data on which this report is based are
obtained from sources which we believe to be reliable but we do not guarantee that it is accurate or complete. Standard Capital Securities (Pvt) Ltd accepts no responsibility whatsoever for
any direct or indirect consequential loss arising from any use of this report or its contents. Investors are advised to take professional advice before making investments and Standard Capital
Securities (Pvt) Ltd does not take any responsibility and shall not be held liable for undue reliance on this report. This report may not be reproduced, distributed or published by any recipient
for any purpose.

Who will be beneficiary?

Power sector

A cut in commodities (oil and coal) prices to ease up supplies in the economy in general and for IPPs in
particular. This is a good omen for IPPs since they may get better FO supplies for the time being. In the
longer term, plants converted on coal to rule the roost in share of better IRR. We like HUBC in power
sector.

Paints industry
Falling oil price will also impact positively on chemical and paint industry. The paint manufactures like
Berger (BERG) will be benefited by two ways. Firstly, decrease in prices of raw material like solvents
which are used in oil paints and also emulsion that are used in water based paints.
The other element which is likely to impact is decreasing freight cost due to plunge in diesel and petrol
prices. Paint manufacturers gross margins can be inched up by 150bps to 200 bps. We have strong buy
signal on BERG.

Consumable chemical and packaging

The prices of commodities used in chemical sector as raw material have directly relationship with
international oil prices. A decrease in oil price will lower down the prices of chemical raw material which
will enhance gross margin by roughly 2.5% because these chemical companies do on pass this impact in
final products prices. Companies include EPCL, LOTCHEM, ECOP, TRIPF etc.

Auto sector:
Our auto sector is dependent on Japanese economy and its exchange rate against USD. Likewise Pakistan,
Japan is net oil importer country and its economy will have positive impact due to falling oil prices.
Currently Bank of Japan has adopted monetary easing policy and Yen is continuously depreciating against
USD. Weakening JPY will have direct impact on manufacturing cost of auto assemblers in Pakistan.
Secondly lowering local oil price will reduce operational cost of auto assemblers. Therefore we see a
slightly jump in gross margins of auto assemblers in next quarter.
We give positive stance for HCAR, INDU and PSMC.

Cement Sector
Cement industry is considered as a highly leverage and economic cycle sensitive industry. With decrease
in fuel prices cost of operational activities decreases and inflation in economy also lowers. A continuous
decrease in inflation will crease ground for cut in DR. Which means in short run cement sector to benefit
from increasing construction activities in low inflation scenario and in long run a cut in DR may lower
finance expenses burden. We like DGKC, MLCF, and FCCL in cement sector.

General Industries
Oil is used as basic fuel in all the industries, this decrease in oil prices would benefit the companies like
PAEL, TGL etc. Its impact will be reflected in next quarters profitability. We have strong BUY stance on
PAEL deciphers lowest expected PE multiple and growth potential in the company.

Disclaimer: This report has been prepared by Standard Capital Securities (Pvt) Ltd and is provided for information purposes only. The information and data on which this report is based are
obtained from sources which we believe to be reliable but we do not guarantee that it is accurate or complete. Standard Capital Securities (Pvt) Ltd accepts no responsibility whatsoever for
any direct or indirect consequential loss arising from any use of this report or its contents. Investors are advised to take professional advice before making investments and Standard Capital
Securities (Pvt) Ltd does not take any responsibility and shall not be held liable for undue reliance on this report. This report may not be reproduced, distributed or published by any recipient
for any purpose.