Research report: Fresh tariff cut can help large-scale manufacturing

Textile, cement sectors to be major beneficiaries.

KARACHI: The expected cut of Rs2.32 per unit in electricity tariff, as per the announcement of Prime Minister Nawaz Sharif, is going to help large-scale manufacturing, reduce prices and increase country’s exports, said Topline Securities on Friday.

“We believe that a major reason for this reduction in electricity tariff is the sharp decline in international oil prices,” said the report. “But it is not yet clear whether this reduction is for all categories or slabs.”

However, considering that expensive energy was one of the major issues affecting the overall industrial sector, this will provide some support to large-scale manufacturing, the report added.

Furnace oil has contributed more than 37% on average in Pakistan’s energy mix in the last two years. With more than a 35% decline in international oil prices, furnace oil prices in the country have already dropped by 24% since July 2014.

The international oil prices have further dropped by 13% since the end of November 2014, with furnace oil prices expected to decline further, lowering cost of energy generation in the country.

In Pakistan, electricity rates are one of the highest – where off-peak industrial and commercial rates are Rs12.5 per unit and Rs18 per unit respectively during peak hours.

Cement sector profits to improve by 4-7%

Other than Lucky Cement – the largest cement maker in the country with around 18% market share – that relies mainly on power from its gas-fired captive power plant (CPP), the report added that energy costs of the cement sector are expected to decline.

“With the aforementioned power tariff cut, our calculations suggest 4-7% improvement in profits of Topline Cement Universe.”

The biggest beneficiary will be Lafarge Pakistan, followed by Fauji Cement and Kohat Cement, added the report.

5-20% improvement in textile earnings

All companies that rely heavily on grid electricity for their power needs will be prime beneficiaries within the textile sector. Since small-scale textile companies usually rely on the national grid, textile sector earnings are likely to improve by 5-20%.

“Within the Topline Textile Universe, our calculations suggest that Nishat Chunian will have positive earnings impact of around 24% due to the higher reliance on national grid,” said the report.

Published in The Express Tribune, December 13^th, 2014.

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