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  The Economic Coordination Committee (ECC) appears to have approvedthe concessionary gas pricing (US$0.7/mmbtu for 10-years) incentive fo r

Engro’s fertilizer business, though some ambiguity on the timing and

source of the concessionary gas flow remains.

   As per the ECC’s press release, Engro ’s concessionary gas per iod of 10years is to be extended by the number of days for wh ich SNGP could no t

supply gas for operation of the plant.

  On a net basis, we estimate that (1) decrease in feedstock gas price forone of Engro Fertilizer’s plants to US$0.7/mmbtu coupled with (2) recent

hike in GIDC, would increase 2014E EPS for Engro Fertilizer Ltd (EFERT)

by 62% and for Engro Corporation L td (ENGRO) by 36%.

  In the same ECC meeting, it was decided that price differential betweenimported urea and locally produced urea should be eliminated (both to be

priced at Rs1,786/bag). We view this positively as it (1) suggests Engro

may not reduce urea prices further post allocation of concessionary gas

and (2) reduces incentive for dealers to opt for cheaper impor ts.

   Ambiguity on gas source/t iming aside, the above scenar io appearshugely positive for both Engro Corporation and Engro Fertilizer. For

other producers, the situation is less exciting where their pricing power

has been tested with the recent decision to partly reverse urea price hike.

Gas at concessionary rate; Engro’s time to celebrate

The Economic Coordination Committee (ECC) appears to have approved theconcessionary gas pricing (US$0.7/mmbtu for 10-years) incentive for Engro’s

fertilizer business. As per the ECC’s press release, Engro’s concessionary gas

period of 10 years is to be extended by the number of days for which SNGP could

not supply gas for operation of the plant where ENGRO has also issued a notice to

the KSE verifying the same. That said, we flag that the ECC’s statement remains

somewhat ambiguous on the timing and source of the concessionary gas flow and

we await more clarity on the same before building the same into our base case for

both Engro Corporation and Engro Fertilizer. Nevertheless, if the decision to supply

gas to one of Engro’s plants at US$0.7/mmbtu is confirmed, we expect the same to

deliver urea production cost savings to the tune of ~Rs250/bag for Engro Fertilizer.

 As per our calculations, incorporating the best case where the supply from Mari gasis being priced at concessionary rate of US$0.7/mmbtu the decrease in feedstock

gas price for Engro Fertilizer, ceteris paribus, is likely to boost 2014E EPS by

~Rs2.4 (+62% vs. our base case) and drive up our current Target Price of Rs32 by

45% to Rs46. Meanwhile for Engro Corporation, we flag EPS upside of ~Rs6.2

(+36% vs. our base case) for 2014 and theoretical valuation upside of 24% to

Rs222 (base case TP: Rs179) in case the company gets US$0.7/mmbtu gas for

one plant.

Pakistan Chemicals Sector

Concessionary gas looks to be back on

the scene for Engro

KSE100 Index: Closing 26,730.24 (31.54)

Market Price: Rs171.04

Target Price: Rs179 

KATS Code: ENGRO

Bloomberg Code: ENGRO PA

Reuters Code: EGCH.KA

Market Cap: Rs87bn, US$859mn

1-yr Avg. Daily Volume:6.2mn shares, Rs852mn, US$8.4mn

1-yr High / Low: Rs181.38 / 83.80 

Estimated free float: 256mn shares (50%) 

EPS impact: Gas price for Enven

Engro Corp Engro Fert

Base Case (Rs320/mmbtu) 17.0 3.8

US$0.7/mmbtu 23.2 6.2

 ∆% 36% 62%

Source: JS Research

 

ENGRO performance relative to KSE-100

85%

101%

117%

133%

149%

165%

181%

197%

     D    e    c

   -     1     2

     F    e     b

   -     1     3

     A    p    r   -     1     3

     J    u    n

   -     1     3

     A    u    g   -     1     3

     O    c     t   -     1     3

     D    e    c

   -     1     3

ENGRO

KSE-100

 Source: KSE

MORNING BRIEFING

 

Naveed Tehsin

naveed.tehsin@js.com

+ 9221 111-574-111

Ext: 3100

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J a n u a r y 1 7 , 2 0 1 4  

MORNING BRIEFING

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Pakistan market statisti cs (Jan 16, 14)

KSE-100 Index

Previous KSE-100 Index

Change from last closing

Change from last closing (%)

KSE Market Cap. (Rs. bn)

KSE Market Cap. (US$ bn)

Total Volume (Shares mn)

Traded Value (Rs. bn)

Traded Value (US$ mn)

KSE-30 Index

Change from last closing

Change from last closing (%) -0.17%

KSE Futures Volume (Shares mn) 16.80

KSE Futures Value (Rs. mn)KSE Futures Spread

Source: KSE

26,730.24

26,761.78-31.54

-0.12%

3.51%

88.04

19,578.46

-33.26

1,676.15

6,471.08

61.33

348.06

9.29

 

KSE valuations

2013A/E 2014E 2015F

 P/E (x) 10.0  8.8  8.2 

P/BV (x) 2.1  1.9  1.8 

Div. Yield (%) 5% 5% 6%

 Earnings growth 9% 15% 6%

Source: JS Research

 

JS Global Capital Limited

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Tel:+92(21)32799005Tel:+92(21)32799513

Fax:+92(21)32800163Fax:+92(21)32800166

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Urea price differential matched

In the same ECC meeting, it has been decided that the price of imported urea be

raised to the level of locally produced urea, i.e. Rs1,786/bag from Rs1,600/bag

previously so as to curb corruption due to differential in prices. We view this news

positively for the industry as it (1) suggests Engro may not reduce urea prices

further post allocation of concessionary gas and (2) reduces incentive for dealers to

opt for cheaper imports. However, we flag that for peers, the risk of further hike in

gas prices and the fertilizer sector’s resultant inability to pass on the incremental

gas cost remains. To recall, last week government and urea producers reached an

agreement to bring down urea price by Rs114/bag to Rs1,786/bag from

Rs1,900/bag, prior to which urea producers had raised prices by Rs178/bag to

offset the incremental impact of hike in Gas Infrastructure Development Cess

(GIDC). Net allowable increase in urea prices stands at Rs64/bag.

Low pricing power despite ~Rs800/bag price differential

While both Engro Corp and Engro Fertilizer should emerge as winners in the above

scenario, for other producers the situation is less exciting where their pricing power

has been tested with the recent decision to partly reverse urea price hike. This is

despite the fact that the price differential between imported and domestically

produced urea has expanded to ~Rs800/bag at current international urea price of

~US$370/ton (FOB).

Forex reserves up by US 267mn

The country's liquid forex reserves registered an increase of US$267mn during last

week. As per the data, country's total forex reserves surged to $8.32bn as on

January 10, 2014 compared to $8.05bn a week earlier. Reserves held by the SBP

increased by US$222mn to US$3.47bn while those held by commercial banks

witnessed an increase of US$45.4mn to US4.85bn.

Also in Focus

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