MMSPL RESEARCH

FERTILIZER INDUSTRY

MIR ZAIN UL HASSAN

Zainulhassan@mmsecurities.com.pk Local Fertilizer industry has long been affected by the changing government plans
Cont:021-35317703-04
and strategies on resource allocation. Since the suppliers of fertilizer companies
(Gas distribution companies) are instructed by the government. The power crisis in
JUNE 17,2014
the country makes the government to trade off the gas supply between power gen-
In Mn tons eration and fertilizer manufacturing. The introduction of GIDC and other charges
Industry urea offtake
7,000 has increased the variable cost for the companies in sector and has caused the de-
6,000
cline in margins.
5,000
4,000 DOWNWARD REVISION IN GIDC
3,000
The surprising turn came for fertilizer sector in FY15 budget, when government pro-
2,000
1,000
posed to equalize the GIDC charges on feed stock and fuel stock, by increasing it to
- Rs 300/mmbtu. If it was implemented it would have put more pressure on already
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C Y2 0 1 1

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burdened Fertilizer sector. However as per the latest amendments to the finance bill
the government has decided to keep the fuel stock charges intact and maintain the
charges as implemented from the beginning of CY14.
Current Price Target Price Yet we don't consider a very positive outlook this year for fertilizer sector due to:

FFC 112 116 1) The upward revision in GIDC charges (Feedstock and duel stock) earlier this

EFERT 59.44 62 year has caused the decline in margins for the sector and the price effect has not
been transferred to the consumers.
FFBL 39.47 42 2) The declining trend in international fertilizer market and the proposed subsidy of
PKR 25 billion on imported fertilizer and does not provides a foreground for in-
crease in prices.
3) The energy crisis prompted the government to announce the gas diversion from
fertilizer sector to the power plants, which will further put the pressure on the com-
panies resulting in production below capacity.

M.M. Securities (Pvt.) Ltd

M. M. Tower, 3 C,
Khayaban-e-Ittehad,
Phase II, Extension,
Defence Housing Authority,
P.O. Box 12414,
Karachi 75500, Pakistan.

Disclaimer: This report has been prepared by MMSPL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been inde-
pendently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only.
Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
MMSPL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. MMSPL, their
respective directors, officers, representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to
make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. MMSPL may make markets in securities or other financial instruments described in this publication, in
securities of issuers described herein or in securities underlying or related to such securities. This document may not be reproduced, distributed or published for any purposes.
 MMSPL RESEARCH
FAUJI FERTILIZER COMPANY

MIR ZAIN UL HASSAN

zainulhassan@mmsecurities.com.pk
Cont:021-35317703-04
Fauji Fertilizer Company (FFC) is the major Fertilizer producer in Pakistan.
It accounts for more than 46% of the total domestic market share for Urea.
JUNE 17,2014
The company has three main production facilities, two of them located in Ma-
FFC Vs KSE-100 Relative Chart
chi Goth and one in Mirpur Mathelo, together all three has a production ca-
35% pacity of 2048,000 tons. The sales revenue of the company has kept on in-
FFC
30% creasing with five year CAGR of 19.48%.
KSE 100
25%
Cy14 SO FAR...
20%
The year 2014 started out with increase in Input (gas) prices, since FFC is not
15%
the recipient of gas at concessionary rates so its marginal cost per ton of pro-
10%
duction increased. The sales growth have remained steady in CY14 for FFC,
5%
it sold 732,000 tons of Urea in 1QCY14 showing decline of 1% YOY. In
0%
1QCY14 company posted PAT of PKR 4.55 Billion (EPS 3.58), a decline of
Jul-13
Jul-13

Sep-13
Sep-13

Feb-14
Feb-14
Jan-14
Jun-13

Dec-13
Dec-13

Jun-14
Aug-13

Oct-13

May-14
Nov-13

Apr-14
Apr-14
Mar-14

-5%
7% as compared to 1QCY13. Despite, sales revenue increased by 7.4% YOY;
-10%
gross margins and earnings declined due to increase in GIDC which resulted
-15%
in higher production cost.
KEY STATISTICS OUTLOOK
Current Price(Rs/Share) 112 For CY14 we expect the company to post PAT of PKR 18.965 Billion (EPS
Free Float shares (ml) 1,273 14.91), which is down by 6% YOY. Our earnings estimate suggest down-
Outstanding Shares (ml) 1,273 ward revision in earnings based on following:
P/E (forward) 7.5 1)From January 2014 government increased the GIDC on feed stock and fuel
52 weeks High 118.15 stock which the manufacturers have not been able to pass it on to consumers.
52 Weeks low 101.37
2) Moreover a declining trend in fertilizer prices and the subsidy allocated by
the government on import of fertilizer.

The script is trading at forward PE 7.5xs our FCF Target price for Dec 14 is
Rs 116/share,providing little upside on current prices we recommend
HOLD.

M.M. Securities (Pvt.) Ltd

M. M. Tower, 3 C,
Khayaban-e-Ittehad,
Phase II, Extension,
Defence Housing Authority,
P.O. Box 12414,
Karachi 75500, Pakistan.

Disclaimer: This report has been prepared by MMSPL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been inde-
pendently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only.
Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
MMSPL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. MMSPL, their
respective directors, officers, representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to
make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. MMSPL may make markets in securities or other financial instruments described in this publication, in
securities of issuers described herein or in securities underlying or related to such securities. This document may not be reproduced, distributed or published for any purposes.
 MMSPL RESEARCH
FAUJI FERTILIZER BIN QASIM

MIR ZAIN UL HASSAN

zainulhassan@mmsecurities.com.pk FAUJI FERTILIZER BIN QASIM is a major player in local DAP market
Cont:021-35317703-04 with the market share of 50%. It has shown impressive revenue and earnings
growth, with five year CAGR of revenue is 15.2%.However since the begin-
JUNE 17,2014 ning of 2014, FFBL has seen severe gas curtailment which led to month long
GGL Vs KSE-100 Relative Chart halt of production for Urea and Dap. As a result of low production and off
35.0% take the companys bottom-line declined significantly in 1QCY14.
30.0% FFBL CY14 SO FAR...
25.0% KSE-100 In 1QCY14 company posted PAT of PKR 48 Million (EPS 0.05) a significant
20.0% decline of 90% as compared to the same period last year. The fact that main
15.0%
revenue drivers of the company Urea and DAP sales were down by 59% and
5% in 1QCY14 as compared to the same period last year. An important con-
10.0%
cern identified from result is the decline in margins, in 1QCY14 gross mar-
5.0%
gins and net margins were 13.73% and 0.8% compared to 21.4% and 6.4% in
0.0%
1QCY13. The declining margins were the result of increase in GIDC on feed-
J u l -1 3
J u l -1 3

S e p -1 3
S e p -1 3

F e b -1 4
F e b -1 4
J a n -1 4
D e c -1 3
D e c -1 3
J u n -1 3

A u g -1 3

J u n -1 4
O c t -1 3

M a y -1 4
N o v -1 3

A p r -1 4
A p r -1 4
M a r -1 4

-5.0%
stock and fuel stock by 52% and 50%, and the company was unable to pass it
-10.0% on to consumers. Further the increased expenditure on Phosphoric acid due to
price in hike resulted in decreased margins; since the Phosphoric acid is
KEY STATISTICS mainly used in DAP production beside natural gas.
Current Price(Rs/Share) 39.47 The company sale picked up from second quarter 2014. Cumulatively in
Free Float shares (ml) 959 5MCY14, company has expectedly sold 172K tons of DAP a 5% decline
Outstanding Shares (ml) 959 compared to the same period last year.
P/E (forward) 9.5 Outlook:
52 weeks High 45.42 For CY14 we expect the company to post PAT PKR 3.949 billion (EPS 4.12),
52 Weeks low 37.54 down by 31% YOY. At this level we recommend the HOLD for the script
with Dec 14 Target Price Rs 42/share.

M.M. Securities (Pvt.) Ltd

M. M. Tower, 3 C,
Khayaban-e-Ittehad,
Phase II, Extension,
Defence Housing Authority,
P.O. Box 12414,
Karachi 75500, Pakistan.

Disclaimer: This report has been prepared by MMSPL. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been inde-
pendently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only.
Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
MMSPL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis before such material is disseminated to its customers. Not all customers will receive the material at the same time. MMSPL, their
respective directors, officers, representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to
make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise, either as principal or agent. MMSPL may make markets in securities or other financial instruments described in this publication, in
securities of issuers described herein or in securities underlying or related to such securities. This document may not be reproduced, distributed or published for any purposes.
 MMSPL RESEARCH
ENGRO FERTILIZER
MIR ZAIN UL HASSAN
zainulhassan@mmsecurities.com.pk Engro Fertilizer has been working on increasing its market share in local urea
Cont:021-35317703-04 market. After a depressed year 2012, where company suffered severe gas cur-
tailment and a bottom line loss, it gained its prominence in 2013 with a YOY
JUNE 17,2014 revenue growth of 64%. In 5mcy14 Company sales have increased by 44%
150.0%
GGL Vs KSE-100 Relative Chart YOY where the industry sales declined by 4% as compared to the same pe-
130.0% KSE-100
riod last year. However the clouds of uncertainty still gathers around the gas
EFERT
110.0% supply since government decided to divert the gas from fertilizer sector to the
90.0% power sector.
70.0%

50.0%
In 1QCY14 company posted PAT PKR 1.437 billion (EPS 1.12) a significant
increase of 122% as compared to the same periods last year. The company
30.0%
sold 451 K tons of Urea in 1QCY14 as compared to 298K tons in 1QCY13
10.0%
tons of Urea an increase of 51% YOY. EFERTS gross margins decreased to
-10.0%
A p r -1 4
A p r -1 4
A p r -1 4
F e b -1 4
F e b -1 4

38% in 1QCY14 as compared to 43% in 1QCY13. The impact is likely of the

M ar -1 4
M ar -1 4

Ju n -1 4
Jan -1 4

M ay-1 4
M ay-1 4

increased GIDC on feed stock and fuel stock since the beginning of CY14. As
per our industry checks up till 2QCY14, the company is not being billed at
concessionary gas rates for feed stock i.e. $0.7 per mmbtu.
KEY STATISTICS Outlook:
Current Price(Rs/Share) 59.44 Government has announced that it will soon divert the Gas from EFERT to
Free Float shares (ml) 1,180 Guddu power plant, expected after 2QCY14, this will likely result in reduced
Outstanding Shares (ml) 1,180 production. Moreover the effect of rise in fuel stock charges will further de-
P/E (forward) 11.5 crease the margins and it is likely that EFERT will not be able to pass it on to
52 weeks High 70.9 the consumers. For the year end CY14 we expect the company to post PAT
52 Weeks low 29.65 6.60 billion (EPS 5.13). This is a downward revision from our earlier estimate
of PAT 6.9 billion (EPS 5.4) due to uncertain outlook about gas supply. The
script is trading at forward PE 11.2xs and FCF target price of Rs 62/share, we
recommend Hold for the script.

M.M. Securities (Pvt.) Ltd

M. M. Tower, 3 C,
Khayaban-e-Ittehad,
Phase II, Extension,
Defence Housing Authority,
P.O. Box 12414,
Karachi 75500, Pakistan.

Disclaimer: This report has been prepared by MMSPL. The information and opinions contained herein have been compiled or arrived at based upon informa-
tion obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or
warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice.
This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be com-
plete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.