Stocks of fertilizers, cement and engineering (read: steel) companies took a beating on Thursday shortly after the Supreme Court ruled in favour of the government in the Gas Infrastructure Development Cess (GIDC) case.
As per the court order, private sector companies from fertilizer, steel, cement, textile, chemical and CNG, to name but a few, will have to pay Rs417 billion (dues as of August 31) to the government in 24 equal installments.
As the news spread, the benchmark KSE-100 Index shed 488 points or 1% of its opening value because index heavy weights from the fertilizer and cement sectors were among the worst hit.
The GIDC was imposed in November 2011 by the Pakistan Peoples Party’s (PPP) government on companies that used natural gas either as direct input for their products or as fuel to produce electricity at their power plants.
By collecting this tax, the cash-strapped PPP government wanted to develop gas infrastructure in the country. However, the industrial sector challenged it on the grounds that it was unconstitutional and unreasonable. The Peshawar High Court ruled in favor of the private sector but the industry lost the case in the Sindh High Court. It then moved to the SC, which reserved its judgment in February 2020 before announcing the verdict on August 13. Sixty companies had received GIDC from customers by increasing their prices but no payments were made to the government.
The court verdict will result in massive cash outflows, which will hurt their abilities to pay dividends in the short and medium term.
This was evident from the market’s reaction to the news. The fertilizer sector, which uses gas as a direct input in production, was in the red zone within minutes of the verdict. Fauji Fertilizer Bin Qasim Limited (FFBL)’s share hit its lower limit—falling 7.5%, or the highest it can decrease from its opening value in a day—before trade was suspended. It was closely followed by Fauji Fertilizer Company (FFC) whose share was down by 6%. According to Taurus Securities, FFC, FFBL, Engro Fertilizer and Fatima Fertilizer have to pay Rs62.5 billion, Rs22.2 billion, Rs18.9 billion and Rs5.8 billion respectively.
“Profit taking was already happening and now the verdict on GIDC must have a negative impact on market sentiments,” said BMA Capital Management Head of Research Faizan Ahmed. The market recovered half of its lost value by closing but still ended in red.
The cement sector also took some beating with Lucky Cement, Maple Leaf Cement and DG Khan Cement among those affected by the verdict, but AKD Securities said it expects a muted impact on the sector. For the engineering sector, the decision carries marginal cash flow impact as steel manufacturers have already taken the cost impact.
The GIDC verdict has had a negative impact on all sectors as most of the stocks struggled, said Saqib Hussain, a research analyst at Sherman Securities. “The companies, which didn’t book for GIDC in the past, will face cash flow issues,” he added.
The SC’s verdict also said OGRA cannot take into account the cess while determining the price of gas for the year 2020-21. The court has also ordered the government to start work on the north-south pipeline project within six months along with the Turkmenistan-Afghanistan-Pakistan and Iran pipeline projects as soon as it reaches the Pakistani border. The court said that if Pak-Iran and TAPI projects were not implemented, the GIDC Act would be considered inactive. In addition, the court has ruled that the amount receivable will reach Rs700 billion by this month. So far, only Rs295 billion has been received in cess from companies.
Hussain of Sherman Securities said that the companies have an option to appeal against the verdict to a larger bench in SC, which they may avail.