In Focus: End of subsidy on POL products (20102008)

Recently OGRA has announced new POL prices effective from 16 October, 2008, maximum ex-depot sales prices of prime products remain unchanged from last fortnight prices. However, subsidy on POL products has been fully eliminated, owing to substantial decline of 51.6 percent in international oil prices from record level of 147 $/bbl.
Subsidies end, Govt. start earning on POL Products
Govt. had paid subsidy of around Rs52.2bn during first quarter FY09 on POL products. While currently earning PDL of approximately Rs1.02bn in the month of October due to per liter PDL collection of Rs23.12, Rs0.84, Rs3.27 and Rs0.33 on petrol, kerosene, LDO and HSD respectively in current fortnight.
Consumers likely to benefit
Going forward, we expect Govt. may cut down oil prices in the country during next fortnight by Rs10, Rs5 and Rs5 on petrol, LDO and HSD respectively due to further decline in international oil prices in recent days. We expect Arab light would remain in the rang of $75/bbl during next fortnight, while prevailing POL prices are announced on the basis of average Arab light $86.8 /bbl.
Result Preview of NRL 1Q09
Target Prices: Rs307
NRL is scheduled to announce its 1Q09 result. We expect the company will post after tax profit of Rs790.5mn resulting an EPS of Rs9.89 as compared to EPS of Rs6.7 in corresponding period last year, projecting YoY growth of 47.6 percent. The massive growth in bottom line earning would primarily backed by better gross refinery margins during the quarter over same period last year.
Top line is expected to increase by 111 percent
Company's top line is expected to increase by 111.2 percent to Rs47.8bn from Rs22.bn in corresponding period last year. The massive growth in revenue of the company is mainly due to enormous increase in ex-refinery prices which averagely increased by 97.5 percent over same period last year. However, on QoQ basis ex-refinery prices increased by 12 percent.
Increase in furnace oil prices
During 1Q09 furnace oil prices increased by 28.7 percent over last quarter would have positive impact on the profitability of fuel segment of the company. Conversely, it would have adverse impact on Lube profitability owing to feed stock of the segment.
Exchange loss during the quarter
Exchange loss of the company is expected to increase by Rs332.5mn owing, to significant depreciation of 19.4 percent in Pak rupees against US$ on YoY basis. While, Pak rupees has depreciated averagely by 9.7 percent over the last quarter.
Regional gross refinery margins
On the international front, the performance of refineries remained depressed during first quarter of the year on the back of decrease in refinery margins particular in Dubai & Singapore region. Owing to China's lower imports of refined products compared to output of the region, the refinery margins stood at 2.53$/bbl during 1Q09 against 3.29$/bbl in corresponding period last year.
Recommendation
NRL is currently trading at the discount of 74.4 percent from our target prices of Rs307 and maintaining attractive dividend yield of 11.4 percent. Further, it trading at discounted P/E of 2.54x as compared to historic P/E of 4.66x. Based on these fundamentals we recommend Buy stance for NRL at current levels.
Increase in furnace oil prices
During 1Q09 furnace oil prices increased by 28.7 percent over last quarter would have positive impact on the profitability of fuel segment of the company. Conversely, it would have adverse impact on Lube profitability owing to feed stock of the segment.
Exchange loss during the quarter
Exchange loss of the company is expected to increase by Rs332.5mn owing, to significant depreciation of 19.4 percent in Pak rupees against US$ on YoY basis. While, Pak rupees has depreciated averagely by 9.7 percent over the last quarter.
Regional gross refinery margins
On the international front, the performance of refineries remained depressed during first quarter of the year on the back of decrease in refinery margins particular in Dubai & Singapore region. Owing to China's lower imports of refined products compared to output of the region, the refinery margins stood at 2.53$/bbl during 1Q09 against 3.29$/bbl in corresponding period last year.