Cabinet approves 50% reduction in GIDC, FFBL to benefit the most within sector

January 25, 2019 (MLN): The issue surrounding the much controversial Gas Infrastructure Development Cess (GIDC) Act gathered adequate attention in the past few days, given that with the announcement of mini-budget around the corner, the industrial gas consumers anticipated a 50% waiver in the outstanding amount of GIDC payment.

Particularly, the fertilizer sector expected this development amid a buzz that the leaders of the sector had a meeting with finance minister regarding reduction in GIDC.

While the finance supplementary bill stayed clear of this matter, Finance Minister Asad Umar divulged at a post-budget press conference that the cabinet (with Prime Minister Imran Khan in chair) has approved a settlement plan for dispute over GIDC.

He said that the plan will now be presented before the parliament for amendments, after which it can be passed as law. However, he did not disclose the amount of revenue that government is aiming to recover.

Mr. Asad Umar also informed that fertilizer sector will only be subject to the GIDC discount if the companies warrant to share its benefits with farmers in form of Rs.200 per bag price reduction.

In a research note published some time back, Mr. Deepak Kumar, Analyst at Ismail Iqbal Securities shed some light on the potential impact of this anticipated reduction in GIDC, on the fertilizer sector.

It is to be noted that currently fertilizer manufacturers on industry tariff are accruing GIDC of PKR 300/mmbtu on feed stock with no GIDC on feed gas supplied at concessionary rate. Moreover, all manufacturers are accruing GIDC of PKR 150/mmbtu on fuel gas.

Mr. Deepak identified two scenarios in the situation, one where the impact of reduction in GIDC is shared with farmers, and the other scenario where the benefit is not passed on to the farmers.

In the former scenario, the (earning per share) EPS of EFERT and FATIMA are likely to bear a negative impact of PKR 1.5 per share and PKR 0.95 per share.

“However, FFC’s earnings will remain intact since the company will save Rs.200 per bag as a result of the discount and as per the directives, this benefit will be passed on to the farmers, leaving no effect on their EPS,” Mr. Deepak told Mettis Link News.

“In addition, this will benefit FFBL as local prices of DAP are pegged with international prices,” he wrote in his note.

On the other hand, in the unlikely case where the impact is not passed on to the farmers, FFC/FFBL/EFERT and FATIMA’s earnings will surge by around PKR 5, 2.4, 2 and 0.1/share respectively.

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