Supreme Court verdict likely to sap fertiliser sector’s energy

KARACHI: Fertiliser sector will bear the brunt of a court verdict that directs manufacturing companies to pay off Rs457 billion to the exchequer on account of gas infrastructure development cess (GIDC) pending for years, analysts said on Thursday.

Analysts said companies which have not already provided for the amount will witness a negative earnings impact.

“Due to its intensive use of gas, fertiliser sector will have to face the brunt compared to other manufacturing sectors,” said Masroor Hussain Zaidi, analyst at BMA Capital. “The companies who were consuming gas and not paying GIDC will have to pay the cumulative amount.”

Largest cash out flow would be witnessed from fertiliser companies to the tune of Rs110 billion, according to Topline Research. Fauji Fertilizer will be required to pay Rs63 billion, followed by Fauji Fertilizer Bin Qasim (Rs22 billion), Engro Fertilizer (Rs19 billion), and Fatima Fertilizer (Rs6 billion).

The Supreme Court of Pakistan on Thursday directed various manufacturing companies to settle their liabilities on account of GIDC, quashing all the petitions pending for years against the levy in favour of cash-strapped government.

GIDC was levied in 2011 by the then federal government to collect fund for different energy projects, including the Iran-Pakistan, Turkmenistan-Afghanistan-Pakistan-India pipeline projects, LNG import and LPG supply enhancement projects. The GIDC was declared unconstitutional by the Peshawar High Court in June 2013, and the judgment was also upheld by the Supreme Court in 2014.

Later, the then government brought a new legislation on the issue in 2015. The aggrieved companies approached the apex court against the order. In 2019, the GIDC (Amendment) Ordinance 2019 was promulgated to waive half of the outstanding liabilities – amounting to Rs208 billion – of fertiliser, textile, power generation and compressed natural gas sectors in addition to writing off late payment surcharge for the past seven years.

Al Habib Capital Markets said cement, steel, chemicals and textile sector are well placed to pay off their GIDC outstanding liability much of which has already been provisioned.

“The GIDC verdict may imply challenges for fertiliser companies due to significant cash outflow, consequent drop in short term investments and the resultant decline in other income, possible acquisition of loans/overdraft facilities to pay GIDC,”

Taurus Securities said the affected companies have an option to file a review petition against the said verdict.

“However, given the possibility of increase in fertiliser prices, an out of the court settlement could also be reached between the fertiliser industry and the government.”

Topline Research said fertiliser companies are sitting on huge cash amounts and are earning substantial amount of interest income on their amount invested in treasury bills and other government papers.

“Due to this decision, companies would be entitled to submit due amount to the government, which will also hurt their recurring other income,” it said. “Decision on Enven (new plant of EFERT) is still unclear. If adverse decision also implies on Enven plant then company may witness additional cash outflow of Rs35-38 billion, which so far has not been provided for. The company will need to raise debt to repay these government dues.”

Fertiliser was the only major one that saw growth in production during the last fiscal year. Large scale manufacturing sector contracted 10.2 percent in FY2020.