Engro Fertilizer Limited

For important disclosure and analyst certification, kindly refer to end of the report
Nov 13, 2013

Engro Fertilizer Li mit ed Chemical s
Much awaited IPO at PKR 20/share Subscribe!

Engro Fertilizers Limited (EFERT) is issuing 75mn ordinary shares, from which
56.25mn shares (75% of the total issue) will be offered through book-building
mechanism at a floor price of PKR 20/share whereas the remaining 18.75mn
(25% of the total issue) will be offered to the general public at the strike price to be
determined through the book-building mechanism. In addition, Engro Corporation
Limited (ENGRO), the parent, aims to divest its existing shareholding up to 30mn
shares in EFERT at the strike price determined by the same book-building.
Offtake expected to jump 4% and 19% in CY14 and CY15 respectively
The companys offtake is expected to increase 4% YoY in CY14, and a massive
19% in CY15, due to better production post long-term gas plan (discussed ahead
in detail). Furthermore, gas diverted from the Guddu power plant is also expected
to keep companys production lifted till Mar-14.
Growth story GP margins to hover around 41%, PAT to soar at 21% CAGR
Gas flows from Guddu along with the long-term gas plan bodes well for the
company, as gross margins are expected to clock in at a CY13-16 average of a
fat 41%. Furthermore, with both of the plants fully operational from 4QCY14
onwards, the PAT of the company is expected to massively jump at a 4-year
CAGR of 21%.
Financial highlight s CY12A CY13E CY14F CY15F CY16F
Net Revenues 30,627 48,842 49,373 58,590 61,401
Net Profit (2,935) 5,019 5,339 7,733 8,935
EPS (PKR) @ 1298mn shares (2.74) 4.10 4.11 5.96 6.89
DPS (PKR) - - - 2.0 3.0
Div yield - - - 10% 15%
P/E (x) n.m 4.87 4.86 3.36 2.90
P/B (x) n.m 1.24 0.90 0.76 0.66
ROE -19% 27% 21% 25% 24%
ROA -3% 5% 5% 8% 10%
Source: Company accounts and AHL Research

Strong cash flow generation ahead dividend expected in CY15F
We foresee strong cash-flow generation amid higher capacity utilization coupled
with stable urea prices. Our analysis suggests, in CY15F, the companys cash
position will be strong enough to declare dividend after fulfilling the IFC
requirement of retiring 33% of its senior debt.
No more worries Debt restructuring approved, gas-related risks mitigated
The companys debt restructuring has been approved with all lenders. The
principle payments of the senior debt, as at J un-12, have been deferred by 2.5
years, which provides the company with enough time cushion to build cash.
Companys Gas Sale Agreements (GSAs) with KPD, Reti Maru and Makori East
are intact. Currently, the company is drawing gas from MARI SML (~20mmcfd),
while Reti Maru (~12mmcfd) flow is expected by end CY13.
Recommendation Subscribe!
Our fair value for EFERT works out to PKR 32.8, translating into a massive
upside potential of 64% (from floor price). The company is expected to be
able to declare cash dividends by CY15. Thus, we recommend Subscribe for
the upcoming IPO.
Fair value 32.83
Floor Price 20.0
Upside 64%
KSE Code -
Bloomberg Code -
Market Cap (US$ m) -
Market Cap (PKR m) -
Outstanding Shares (m)
Free Float -
Major Shareholders Engro Corp.
New Equity (mn shares) 75.00
Thr ough book building 56.25
Thr ough initial public off er ing 18.75
Offer for Sale by ENGRO (mn shar es)
Pr ivat e placement 30.0
Total transaction size (mn shar es) 105.00
Floor price (PKR/share) 20.0
Book building time line (Both days incl.)
19-Nov-13 Tuesday
t o
21-Nov-13 Thrusday
Analys t
Tahir Abbas
tahir.abbas@arifhabibltd.com
+92-21-32462589
Subscri be
www.ar ifhabibltd.com
Shar es
1,222
Company inf or mat ion
About the tr as action
Engr o Fer t ilizer s Limited is a public
company incor por ated on June 29, 2009 in
Pak ist an under t he Companies or dinance,
1984 as a wholly owned s ubs idiar y of
Engr o Cor por at ion Limit ed. The pr incipl e
act ivit y of t he company is manuf actur ing,
pur chasing and mar k eting of f er t ilizer .

2

Engro Fertilizer Limited

Page l eft bl ank i ntenti onall y

3

Contents
CY13 goes green A year of turnaround .......................................................................................................................................................... 5
Operational updates ............................................................................................................................................................................................. 5
Gas availability for EFERT ................................................................................................................................................................................... 5
Fight for the right! Gas at USD 0.7/mmbtu..................................................................................................................................................... 5
Offtake to jump by hefty 19% YoY post long term gas plan .......................................................................................................................... 6
A growth story GP margins to hover around 41%, PAT to jump at 21% CAGR....................................................................................... 6
Product pricing to remain stable ........................................................................................................................................................................ 7
What to expect in CY14? ...................................................................................................................................................................................... 7
Strong cash flow generation ahead dividend expected in CY15F ............................................................................................................. 8
No more worries Debt restructuring approved! ............................................................................................................................................ 8
Risk mitigated Long term plan, gas fumes to be owned by the company................................................................................................ 9
Capex with respect to long term gas plan ........................................................................................................................................................ 9
Valuation ............................................................................................................................................................................................................... 10
S.W.O.T Analysis ................................................................................................................................................................................................. 11
About the Company ............................................................................................................................................................................................ 11
About the Sponsors ............................................................................................................................................................................................ 11
Key risks to the investment case ..................................................................................................................................................................... 12
Financial snapshot.............................................................................................................................................................................................. 14
Regional charm ................................................................................................................................................................................................... 16
Agriculture sector review................................................................................................................................................................................... 17
Fertilizer sector of Pakistan............................................................................................................................................................................... 18
Fertilizer policy, issues & sector performance............................................................................................................................................... 19
Demand drivers ................................................................................................................................................................................................... 20
Supply constraints - gas issues ....................................................................................................................................................................... 22
Gas Infrastructure Development Cess (GIDC)................................................................................................................................................ 25
What is the Long-term gas plan? ..................................................................................................................................................................... 26
Pricing scenario; price cut seems a far cry! ................................................................................................................................................... 27
Outlook ................................................................................................................................................................................................................. 28
Key risks ............................................................................................................................................................................................................... 29
Annexure .............................................................................................................................................................................................................. 31
Abbreviations....................................................................................................................................................................................................... 34
Disclaimer and related information .................................................................................................................................................................. 35
Contact details ..................................................................................................................................................................................................... 36

4

Engro Fertilizer Li mit ed (EFERT)
EFERT is issuing 75mn ordinary shares, from which 56.25mn shares (75% of the
total issue) will be offered through book-building mechanism at a floor price of PKR
20/share whereas the remaining 18.75mn (25% of the total issue) will be offered to
the general public at the strike price to be determined through the book-building
mechanism. In addition to the aforementioned transaction, Engro Corporation
Limited (ENGRO) aims to divest its existing shareholding up to 30mn shares in
EFERT at the strike price determined by the same book-building.
Biggest urea manufacturer 2.27mn tons of urea capacities
EFERT has two fully integrated fertilizer plants with a nameplate capacity of
producing 2.275mn tons of urea. Both of the companys plants are located in Sindh.
Offtake expected to jump 4% and 19% in CY14 and CY15 respectively
The companys offtake is expected to increase 4% YoY in CY14, and a massive
19% in CY15, due to better production post long-term gas plan (discussed ahead in
detail). Furthermore, gas diverted from the Guddu power plant is also expected to
keep companys production lifted till Mar-14.
Growth story GP margins to hover around 41%, PAT to soar at 21% CAGR
Gas flows from Guddu along with the long-term gas plan bodes well for the
company, as gross margins are expected to clock in at a CY13-16 average of a fat
41%. Furthermore, with both of the plants fully operational from 4QCY14 onwards,
the PAT of the company is expected to massively jump at a 4-year CAGR of 21%.
Fi nancial highli ght s CY12A CY13E CY14F CY15F CY16F
Net Revenues 30,627 48,842 49,373 58,590 61,401
Net Profit (2,935) 5,019 5,339 7,733 8,935
EPS (PKR) @ 1298mn shares (2.74) 4.10 4.11 5.96 6.89
DPS (PKR) - - - 2.0 3.0
Div yield - - - 10% 15%
P/E (x) n.m 4.87 4.86 3.36 2.90
P/B (x) n.m 1.24 0.90 0.76 0.66
ROE -19% 27% 21% 25% 24%
ROA -3% 5% 5% 8% 10%
We foresee strong cash-flow generation amid higher capacity utilization coupled
with stable urea prices. Our analysis suggests, in CY15F, the companys cash
position will be strong enough to declare dividend after fulfilling the IFC requirement
of retiring 33% of its senior debt.
No more worries Debt restructuring approved
The companys debt restructuring has been approved with all lenders. The principle
payments of the senior debt, as at J un-12, have been deferred by 2.5 years, which
provides the company with enough time cushion to build cash.
Risk mitigated Long term plan, gas fumes to be owned by the company
Companys Gas Sale Agreements (GSAs) with KPD, Reti Maru and Makori
East are intact. Currently, the company is drawing gas from MARI SML
(~20mmcfd), while Reti Maru (~12mmcfd) flow is expected by end CY13.
Recommendation Subscribe!
Our fair value for EFERT works out to PKR 32.8, translating into a massive upside
potential of 64% (from floor price). The company is expected to be able to declare
cash dividends by CY15. Thus, we recommend Subscribe for the upcoming IPO.
Fair value 32.83
Floor Price 20.0
Upside 64%
KSE Code -
Bloomberg Code -
Market Cap (US$ m) -
Market Cap (PKR m) -
Outstanding Shares (m)
Free Float -
Major Shareholders Engro Corp.
New Equity (mn shares) 75.00
Thr ough book building 56.25
Thr ough initial public off er ing 18.75
Offer for Sale by ENGRO (mn shar es)
Pr ivat e placement 30.0
Total transaction size (mn shar es) 105.00
Floor price (PKR/share) 20.0
Book building time line (Both days incl.)
19-Nov-13 Tuesday
t o
21-Nov-13 Thrusday
Analys t
Tahir Abbas
tahir.abbas@arifhabibltd.com
+92-21-32462589
Subscri be
www.ar ifhabibltd.com
Shar es
1,222
Company inf or mat ion
About the tr as action
Engr o Fer t ilizer s Limited is a public
company incor por ated on June 29, 2009 in
Pak ist an under t he Companies or dinance,
1984 as a wholly owned s ubs idiar y of
Engr o Cor por at ion Limit ed. The pr incipl e
act ivit y of t he company is manuf actur ing,
pur chasing and mar k eting of f er t ilizer .

5

CY13 goes green A year of turnaround
EFERT remains the key beneficiary with respect to gas availability, as the rota-gas
allocation during 1H13 alongside out-of-blue availability of the Guddu (Mari) gas has
been propping up company profitability. Our industry channels suggest EFERT is
expected to receive gas from Guddu till Mar14. However, we still cannot rule out the
possibility of any early diversion of Guddu gas from EFERT.
Operational updates
Currently, EFERT is operating its new plant, EnVen, on the Mari gas network (gas
diversion from the base plant). Total gas availability to the new plant stands at
93mmcfd. We expect EFERT to operate EnVen till the completion of the long-term gas
plan (end 3QCY14), and the gas price to remain at USD 3.2/mmbtu. Even before the
completion of the long-term gas arrangement plan through a pipeline, while the
company is expected to contend for its original GSA price of USc70/mmbtu, the gas
price contract for the pipeline is believed to have been finalized at USD 4.26/mmbtu
(feed gas at USD 3.75/mmbtu, USD 0.51/mmbtu as tolling charge). EFERT is expected
to operate both of its plants at 85% utilization levels once the pipeline becomes
operational by the end of CY14.

CY12 Market share 9MCY13 Market share

Source: NFDC and AHL Research

Gas availability for EFERT
The ECC has already extended the gas supply diversion from the Mari network to
EnVen till the implementation of long term gas plan. However, as per our discussion
with the industry, the govt is discussing several proposals with the EFERTs request to
supply the gas at a subsidized price of USD 0.7/mmbtu while USD 3.2/mmbtu has been
continued at least for CY13.
Fight for the right! Gas at USD 0.7/mmbtu
EFERTs management is continuously under discussion with the GoP regarding the
concessionary feed stock price of USD 0.7/mmbtu for its new plant. While the chances
of the concessionary feed stock price are quite slim, nevertheless, if the GoP honors the
initial contract for EnVen, it would be a major trigger for the company.

FFC
47%
FFBL
5%
ENGRO
18%
FATIMA
7%
DH
Fertilizer
1%
Agritech
1%
Pak
Arab
0%
NFML
21% FFC
42%
FFBL
4%
ENGRO
24%
FATIMA
6%
DH
Fertilizer
3%
Agritech
4%
Pak Arab
0%
NFML
17%

6

Offtake to jump by hefty 19% YoY post long term gas plan
The companys offtake is expected to jump 4% YoY in CY14 mainly due to 6-month
operations of base plant (1QCY14 on Guddu gas and 4QCY14 with long term gas plan).
Furthermore offtake is expected to surge by 19% in CY15 due to better production post
long term gas plan (both plants are expected to remain operational at optimal capacity
of 85%). In addition to this, before the long term gas plan materializes, the picture is
expected to remain lucrative as the company would receive 3-month gas diversion from
Guddu in CY14E. In our base-case, we have assumed that EFERT would receive gas
from Guddu till Mar-14 and the long term gas plan would come online by 4QCY14.

Offtake and utilization Production and offtake

Source: AHL Research
A growth story GP margins to hover around 41%, PAT to jump at 21% CAGR
The companys gross margins remained sluggish in the preceding year following
massive gas curtailment resulting in one plant operational capacity. The Guddu gas
flows along with the long term gas plan bodes well for the company, as gross margins
are expected to clock in at CY13-16 average of a huge 41%. Furthermore, with both the
plants fully operational from 4QCY14 onwards, the net sales are anticipated to jump at
a 4-year CAGR of 8%, taking profit after tax of the company to boost at a 5-year CAGR
of 21%!

GP margins maintained at 41% (avg. of CY13-CY16) PAT to grow CAGR of 21%
65%
70%
75%
80%
85%
90%
1,500
1,625
1,750
1,875
2,000
CY14F CY15F CY16F CY17F
Offtake Utilization (RHS)
k tons
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
800
925
1,050
1,175
1,300
1,425
1,550
1,675
1,800
1,925
CY12A CY13E CY14F CY15F CY16F
Production
Offtake
Utilization (RHS)
k tons
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
Sales GP Margin (RHS)
PKR mn
10%
11%
12%
13%
14%
15%
4,500
5,500
6,500
7,500
8,500
9,500
CY13E CY14F CY15F CY16F
PAT Net Profit Margin (RHS)
PKR mn

7

Product pricing to remain stable
As far as product pricing is concerned, EFERT is expected to maintain urea prices at
current levels with little expectation of any price war in CY13 and beyond, with part gas
provision during the year (Guddu gas). We derive our assumption from the demand-
supply gap of urea, which is expected to remain wide as witnessed from regular imports
being made by the govt. The GoP has already approved 0.5mn tons of urea for the
Rabi season (commencing Nov-13 onwards). Even by 4QCY14, when both of EFERTs
plants are expected to be operational, we rule out any significant price cuts provided by
massive increase in contract gas price, especially for EFERT (at USD4.26/mmbtu
instead of EnVens original contract price of USc70/mmbtu), unless the gas price is
revised downward to the original GSA.
Given huge financial burden and inability to absorb significant hike in the feed gas
prices, increase in urea prices can be expected, instead.
What to expect in CY14?
We have run sensitivity on EFERTs earnings assuming various possible scenarios. For
the base-case of CY14, we have assumed base plant to receive gas for 6 months (3
months from Guddu and 3 months from long term gas plan) and EnVen to operate at
85% capacity level (on Mari gas network) till the completion of the long-term gas plan
(expected by end 3QCY14). Thus for CY14, the feed stock (gas) price for EnVen will be
USD 3.2/mmbtu (PKR 320.42/mmtbu same as current level) while for the base plant, it
would be PKR 320.42/mmbtu till 3QCY14 (plant operational for 3 months) and PKR
426/mmbtu for remaining tenure (expected for long term gas plan). In addition to this,
from 4QCY14 onwards, we have assumed EnVen and base plant to operate at 85%
utilization level, post implementation of the long-term gas pipeline plan.

CY14 Earnings Forecast
Capacity Utilisation
EnVen 85% 85% 85%
Base plant 180 days 90 days 0 days
Production (k tons)
ENVEN 1,105 1,105 1,105
Base plant 400 205 -
Total Production 1,505 1,310 1,105
Off take 1,511 1,347 1,143
Urea Prices (PKR/bag) 1,750 1,750 1,750
Gas prices (PKR/mmbtu)
ENVEN (Mari gas network) 320 320 320
Base Plant (Guddu and Long term gas plan) 320 and 426 320 and 426 320 and 426
Earnings (PKR/share)
ENGRO Fertilizer (EPS) @ 1298 mn shares 4.11 3.41 2.02
Impact on Engro Corporation 10.44 8.66 5.13

8

We foresee strong cash flow generation amid higher capacity utilization coupled with
the stable urea prices. As per the companies cash sweep with the IFC, the surplus
cash after adjustment with capex, principle repayment, pipe line capex and others, the
company is expected to earn going forward would be used as prepayment to the IFC.
Our calculation suggests that in CY15F the companys cash flow per share would be
PKR 5.6/share, which gives an idea that the company would be able to declare cash
dividend after fulfilling the IFC requirement of retiring 33% of its senior debt.

Margins outlook EBITDA to Debt servicing

No more worries Debt restructuring approved!
The companys debt restructuring has been approved with its local lenders. Principle
repayments of the senior debt as at J un-12 have been deferred by 2.5 years. We have
assumed debt repayment of PKR 5.6bn, PKR 12bn and PKR 13.5bn in CY13, CY14
and CY15, respectively. Given the strong expected cash flow generation the company
would be able to easily manage its debt servicing, in our view. The EBITDA of the
company is expected to grow at a 4-year CAGR of 3%, to PKR 25bn by CY16.

0%
20%
40%
60%
GP Margin
NP Margin
EBITDA Margins
5,000
10,000
15,000
20,000
25,000
30,000
EBITDA Debt Servicing PKR mn
EBITDA to Current portion
22.0
22.5
23.0
23.5
24.0
24.5
25.0
25.5
5.0
7.5
10.0
12.5
15.0
Current Portion
EBITDA (RHS)
PKR bn PKR bn

9

Risk mitigated Long term plan, gas fumes to be owned by the company
Gas Sale Agreements (GSA) with KPD, Reti Maru and Makori East are intact. The
company is drawing gas from MARI SML (~20mmcfd), while Reti Maru (~12mmcfd) flow
is expected by the end of this year. The Economic Coordination Committee has yet to
reconfirm the long term gas plan. However the management expressed the confidence,
that ECC would shortly confirm the plan, while a delay of 2-3 months cannot be ruled
out in the execution of the aforementioned plan (3QCY14 now vs. 2QCY14 previously).
In addition, the company has signed Gas tolling agreements (GTAs) with SSGC and
SNGP.

EFERT gas availability and growth Long term gas plan (mmcfd)


Capex with respect to long term gas plan
Given its share in the gas allocation, EFERTs share in the long-term gas pipeline plan
stands ~USD 48mn out of total estimated cost of USD 100mn, and we believe that
EFERT will utilize the funds raised from IPO plus the internal cash flow generation.
Furthermore, the capex with respect to Kunnar Pasaki Deep pipeline is on hold as the
company is awaiting the reconfirmation of long term gas plan by the ECC. However
going forward in CY14, we have incorporated USD 48mn KPD capex in our estimates.

0%
10%
20%
30%
40%
50%
60%
70%
-
20
40
60
80
100
120
140
160
180
200
Long term gas plan
Guddu
SNGP
Mari
Growth (RHS)
mmcfd
Engro , 79
Agri, 25
Pak Arab,
58
DH
Fertilizer,
40

10

Valuation
Our DCF-based fair value for the scrip works out to PKR 32.83/share, translating into a
striking upside potential of 64% from floor price level.
Our valuation is based on the cost of equity 20.6% and 8.5% after tax cost of debt
translating into a WACC of 11.5%. However, as we expect debt to be retired, we have
assumed separate WACC for every year to incorporate the rapidly changing capital
structure. Following strong cash-flow generation, we expect the company to declare
cash dIvidend by the end of CY15F. The stock is currently trading at a lucurative CY14F
PER of 4.9x and PB of 0.9x. Thus, we recommend Subscribe for the IPO.

Dis count ed Cas h Flow Valuation
PKR mn CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 Ter minal
EBIT (1-t) 11,683 11,181 12,630 12,997 13,534 13,701 13,834 13,850
Add: Depreciation 5,065 5,351 5,211 5,147 5,083 5,014 4,940 4,923
Add: Changes in Working Capital 6,931 (5,027) (565) 147 145 123 108 148
Less: Capital Expenditure (2,139) (7,490) (2,076) (2,232) (2,353) (2,423) (2,489) (2,562)
Free Cash Flow 21,539 4,014 15,200 16,059 16,410 16,415 16,393 16,359 102,368
WACC 11.5% 12.7% 13.8% 15.2% 16.1% 17.1% 18.1% 19.0%
Present Value 21,539 3,561 11,733 10,501 9,018 7,455 6,041 4,830
Terminal Growth Rate 4.00%
PV of FCFF 74,679
PV of Terminal Value 30,226
Total PV 104,905
Less: Net Debt 62,293
Equity Value 42,612
No. of Shares (mn) 1,298
Fair value (PKR) - Dec-13 32.83

Valuation Mat r ix
2% 3% 4% 5% 6%
11.0% 35.87 37.68 39.74 42.10 44.83
12.8% 29.93 31.30 32.83 34.56 36.53
13.0% 29.28 30.60 32.08 33.75 35.64
14.0% 26.48 27.62 28.89 30.31 31.90
15.0% 23.94 24.93 26.03 27.24 28.60
R
i
s
k

F
r
e
e

R
a
t
e
Ter minal Gr ow th Rat e

WACC Par amet er s
Risk Free Rate 12.8%
Market Return 19.8%
Beta 1.12
Cost of Equity 20.6%
Cost of Debt 13.1%
After tax Cost of Debt 8.5%
WACC (CY13) 11.5%

11

S.W.O.T Analysis

*Feedstock gas at a fixed rate for ten years
*Fuel efficient plant "EnVen"
*Urea as prime product that stands with relatively inelastic demand
*High entry barriers in the sector amid non availability of natural gas
*High government support to the agri sector
*Opportunity to expand production through de-bottlenecking
*High financial leverage
*Insufficient gas reserves (risk of unavailability of raw material)
*Interest rate volatility (increase)
Source: EFERT IM, AHL Research

T
h
r
e
a
t
s

S.W.O.T Analysis

S
t
r
e
n
g
t
h
s

W
e
a
k
n
e
s
s
e
s

*Limited product mix (mainly Urea maker) to expose company to
risks of varying gov't policies (changing support prices to support
farmer)
*High government support to the agri sector
*Urea has relatively inelastic demand among other fertilizer products
*Local urea prices are considerably lower than international prices
and any surplus can be easily exported

O
p
p
u
r
t
u
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i
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i
e
s

About the Company
EFERT is a public company incorporated on J une 29, 2009 in Pakistan under the
Companies Ordinance, 1984, as a wholly owned subsidiary of ENGRO. The principle
activity of the company is manufacturing, purchasing and marketing of fertilizers.
About the Sponsors
EFERT is a 100% owned subsidiary of ENGRO. The holding company is a public listed
company incorporated in Pakistan and its shares are quoted on all the three stock
exchanges of Pakistan I.e; Karachi (KSE), Lahore (LSE), and Islamabad (ISE).

The principal activity of the holding company is to manage investments in subsidiary
companies and joint venture, engaged in fertilizers, PVC resin manufacturing and
marketing, food, energy, exploration, LNG and chemical terminal and storage
businesses.

12

Key ri sks to the investment case

Discount rate
The heavy debt burden of the company (PKR 62.5bn as of September 2013) makes the
company more vulnerable in the rising interest rate scenario existing in Pakistan.
Hence, any sharp rise in interest rate could dent cash flow and earnings of the
company.
Gas curtailment
Gas is the key input for manufacturing fertilizers. Pakistan is currently facing severe
energy shortages, hence any partial or complete diversion cannot be ruled out. The
major threat could the diversion of gas from long term gas plan to power sector.
Therefore, going forward any such move by the govt could seriously distort the
companys performance.
Lower demand
Due to unforeseeable natural disasters coupled with unavailability of water, the demand
of urea may be lower than estimated. This could reduce the companys earning
substantially.
Gas prices a major dampener? - The 3-scenario analysis
Gas price (feed stock) is expected to play a major role in the short-term for the fertilizer
sector, especially for EFERT and FFC whose sales are solely dependent on urea.
However, we do not foresee any massive gas price hike (i.e. feed equaling fuel). We
see PKR 75-100/mmbtu increase that fertilizer manufacturers would easily pass on to
end consumer (PKR 110-125/bag). Additionally, we have made three scenarios with
respect to the gas prices increase. These include:

Feed stock would raise by 300%
Feed stock price hike would be around PKR 76.67/mmbtu (by reducing subsidy to
PKR 200/bag from the current subsidy of PKR 308/bag, the subsidy per bag due to
the differential of feed and fuel stock prices), and
Feed stock price would surge by 100% excluding GIDC

The govt is yet to finalize gas prices, though the cause of delay is the fear of fertilizer
price hike (substantial in case of equating feed and fuel) due to the aforementioned
increase. The govt is working on different proposals to facilitate farmers (direct farm
subsidy).

13

Feed stock price (PKR/mmbtu)
Currentfeed stock 320.42
Expected increase in feed stock 246.84
Expected r evised f eed stock 567.26
Source: AHL Estimates
Subsidy (PKR/bag)
Currentsubsidy 308.00
Revised subsidy 200.00
Expected revised feed stock 397.09
Expect ed revi sed f eed stock 443.84
1) 300% increase in the current feed stock prices
One of the assumptions is to increase gas prices (feed stock) to 300% from the current
levels. Incorporating this, we expect PKR 246.8/mmbtu increase in the feed stock prices
(see table 01 alongside). Furthermore, in table 02, we have calculated the expected
annualized after-tax EPS impact on our fertilizer universe earnings, and per bag price
that would be required to be passed on to nullify the impact.

FFC 293 343 (6.05) 15.37 -39%
FFBL 332 388 (1.40) 6.67 -21%
Efert 272 318 (4.28) 4.10 -104%
Gas prices increase impact on fertilizer companies
Company
Per bag
(pass-on)
Per bag incl.
GST (pass-on)
EPS impact
(no-pass on)
CY13E
EPS
%

2) Reducing subsidy to PKR 200/bag from the current subsidy of PKR 308/bag
As per meeting of the ECC dated Aug 15, 2013, the officials said that the amount of
subsidy on each bag of the fertilizer would be around PKR 200/bag post gas tariff
increase. Currently subsidy per bag stood at PKR 308. We have estimated the
expected gas price hike (feed stock) by reducing the per bag subsidy to PKR 200. In the
second table alongside, we have calculated the expected annualized after-tax EPS
impact on AHL Researchs fertilizer universe, and per bag price that is required to be
passed on to nullify the said impact.

FFC 91 107 (1. 88) 15.37 -12%
FFBL 103 120 (0. 43) 6.67 -7%
Efert 84 99 (1. 33) 4.10 -32%
Company
Per bag
(pass-on)
Per bag incl.
GST (pass-on)
EPS impact
(no-pass on)
CY13E
EPS
%

3) 100% increase in the current feed stock prices excluding GIDC
The last scenario is the expected 100% increase in the current feed stock prices. As per
our estimates, the expected hike is PKR 123/mmbtu in the aforementioned scenario
(see the RHS table). In the second table, we have calculated the expected annualized
after-tax EPS impact on AHLs fertilizer universe, and per bag price that is expected to
increase to nullify the impact.

FFC 162 190 (3.35) 15.37 -22%
FFBL 179 210 (0.76) 6.67 -11%
Efert 148 174 (2.34) 4.10 -57%
Company
Per bag
(pass-on)
Per bag incl.
GST (pass-on)
EPS impact
(no-pass on)
CY13E
EPS
%

14

Financi al snapshot
Volumes to boost revenues Downward trajectory finance cost and debt to equity

Decliningfinancial charges and borrowings Fallingdebt to equity

Earnings and distribution Flourishingnet margins

Sources; Company Financials, NFDC, AHL Research
-
500
1,000
1,500
2,000
2,500
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
Net revenues
Total Volumes (RHS)
PKR mn k tons
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5,500
6,250
7,000
7,750
8,500
9,250
10,000
Interest expense
Debt to equity (RHS)
PKR mn (x)
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
9,500
10,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
Long term Borrowings
Financial Charges (RHS)
PKR mn PKR mn
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Equity Debt to Equity (RHS)
PKR mn (x)
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
EPS DPS (RHS)
PKR/share PKR/share
10%
11%
12%
13%
14%
15%
4,500
5,500
6,500
7,500
8,500
9,500
PAT Net Profit Margin (RHS)
PKR mn

15

Financi al Summar y, Forecasts and Key Rati os
PKR mn
Income Stat ement CY10A CY11A CY12A CY13E CY14F CY15F CY16F
Net Sales 19,018 31,353 30,627 48,842 49,373 58,590 61,401
Gr oss pr of it 8,910 16,733 9,861 21,012 20,816 23,766 24,542
Gross margins 47% 53% 32% 43% 42% 41% 40%
EBITDA mar gin 38% 55% 40% 47% 46% 42% 41%
Oper at ing Pr of i t 6,615 13,938 6,778 16,961 16,438 18,525 19,040
Other income 458 1,164 379 916 1,041 1,236 1,295
Financial charges 1,351 7,644 10,703 9,363 8,772 7,278 5,974
PAT 3,730 4,588 (2,935) 5,019 5,339 7,733 8,935
Net mar gi ns 20% 15% n.m 10% 11% 13% 15%
Ear nings per Shar e - (PKR) (Adjust ed f or 1298 mn shar es) 2.87 3.54 (2.74) 4.10 4.11 5.96 6.89
DPS (PKR) - - - - - 2.00 3.00
Balance Sheet CY10A CY11A CY12A CY13E CY14F CY15F CY16F
Total Shareholders' Equity 13,640 18,617 15,798 20,967 28,805 34,068 39,110
Non Cur r ent Liabi li t ies
Long TermLoan 62,660 56,398 48,482 53,879 41,879 28,379 22,703
Total Non Current Liabilities 68,205 64,571 55,459 60,857 48,857 35,357 29,681
Cur r ent Liabil it i es
Trade and Other Payables 3,911 5,153 7,960 13,253 8,159 8,706 9,215
Total Current Liabilities 16,209 17,689 26,250 22,664 23,927 26,274 19,273
Tot al Liabili t ies and Equi t y 98,053 100,877 97,508 104,488 101,588 95,700 88,064
Assets
Non Current Assets 84,631 86,540 83,123 80,198 82,338 79,203 76,288
Current Assets 13,423 14,337 14,385 24,290 19,250 16,496 11,777
Tot al As set s 98,053 100,877 97,508 104,488 101,588 95,700 88,064
Cash Flow St at ement CY10A CY11A CY12A CY13E CY14F CY15F CY16F
Cashflow fromoperating activities 4,360 9,279 6,371 17,014 5,662 12,379 14,229
Cash used in investing activities (14,654) (3,517) (1,857) (2,139) (7,490) (2,076) (2,232)
Cashflow fromfinancing activities 12,903 (4,589) (4,920) (3,331) (3,145) (14,169) (17,079)
Net i ncr eas e/(decr eas e i n cash & equi val ent s 2,609 1,173 (406) 11,544 (4,973) (3,866) (5,082)
Cash 3,318 4,491 2,449 16,442 23,012 14,174 5,227
Anal ysis per s har e CY10A CY11A CY12A CY13E CY14F CY15F CY16F
EPS 2.87 3.54 (2.74) 4.10 4.11 5.96 6.89
DPS - - - - - 2.00 3.00
BVPS 10.51 14.35 12.17 16.16 22.20 26.25 30.14
Pr of i t abil it y r at i os CY10A CY11A CY12A CY13E CY14F CY15F CY16F
Gross margins 47% 53% 32% 43% 42% 41% 40%
EBITDA margins 38% 55% 40% 47% 46% 42% 41%
Net margins 20% 15% n.m 10% 11% 13% 15%
Coverage ratio 4.90 1.82 0.63 1.81 1.87 2.55 3.19
P/E (x) 6.96 5.66 n.m 4.87 4.86 3.36 2.90
P/B (x) 1.90 1.39 n.m 1.24 0.90 0.76 0.66
Div yield 0% 0% 0% 0% 0% 10% 15%
Debt to equity 6.19 4.42 5.17 3.98 2.53 1.81 1.25
Debt to assets 0.86 0.82 0.84 0.80 0.72 0.64 0.56
Ret ur n on capi t al CY10A CY11A CY12A CY13E CY14F CY15F CY16F
ROA 4% 5% n.m 5% 5% 8% 10%
ROE 27% 28% n.m 27% 21% 25% 24%

16

Regi onal charm

0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
E
F
E
R
T
D
P
M

V
N
T
C
C
C

T
B
0
0
0
4
2
2
C
H
T
T
C
H

I
N
Price to Earning
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
0
0
0
4
2
2

C
H
T
T
C
H
I
N
E
F
E
R
T
D
P
M
V
N
T
C
C
C
T
B
Price to Book
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
D
P
M
V
N
T
C
C
C
T
B
E
F
E
R
T
T
T
C
H
I
N
0
0
0
4
2
2
C
H
Return on Assets
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
T
C
C
C

T
B
E
F
E
R
T
D
P
M

V
N
0
0
0
4
2
2
C
H
T
T
C
H
I
N
Return on Equity

17

Agri cul ture sector review
The Agriculture sector alone is of immense importance to Pakistan economy; it is one of
the sectors that provide maximum value addition by converting raw gas into urea
granules and benefitting the country in terms of food availability, balance of payment,
poverty reduction, economic growth and transformation towards industrialization. Even
though this sector is one of the most competitive sectors, it still faces many gas
curtailment issues and excess demand over supply.
Pakistan is an agrarian country as its prime exports consist of agriculture good; apart
from ensuring food security, it contributes 21% to GDP and provides employment to
45% of Pakistani population. For sustainable agricultural growth, a prospering fertilizer
industry is extremely crucial.

GDP and Agricultural growth Agricultural share in GDP

Source: Economic Survey 2012-13, AHL Research

5.0%
0.4%
2.6%
3.7%
4.4%
3.6%
1.8%
3.5%
0.2%
2.0%
3.5%
3.3%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
GDP growth Agriculture growth
22%
23%
22%
22%
22%
21%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
21%
21%
22%
22%
23%
23%
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Agriculture Share in GDP
GDP growth (RHS)

18

Fertili zer sector of Paki stan
The fertilizer sector has a total market capitalization of PKR 333.2bn (USD 3.1bn) and
the market capitalization of our sample companies (FFC, FFBL and ENGRO) stood at
PKR 247.2bn (USD 2.3bn). The index weight of total chemical sector is around ~12.6%
in KSE100 index while our sample companies (FFC, FFBL and ENGRO) comprise
~10.2% of the KSE100 index.
Pakistan fertilizer sector comprises seven companies (see table below). The prime
product of the sector is urea, seconded by DAP. The major players of the sectors
include Fauji Fertilizer Company Limited and Engro Fertilizer having total capacities of
2.05mn tons and 2.3mn tons per annum respectively and contributes 68% of countrys
total capacity. Fauji Fertilizer Bin Qasim Limited is the countrys sole producer of DAP
having capacity of 0.6mn tons per annum. In addition to this FFBL urea capacity stands
at 0.5mn tons per annum. The snapshot of Pakistans fertilizer sector is summarized
below in the table:

FFC Goth Macchi, Punjab and Ghotki, Sindh 2.05 2.46 120% Mari gas Operational Urea
ENGRO (Base) Ghotki, Sindh 0.98 0.91 93% Guddu gas (Mari) Operational Urea
ENGRO (Enven) Ghotki, Sindh 1.30 0.12 9% Mari gas (diversion) Operational Urea
FFBL Bin Qasim, Sindh 0.50 0.28 56% SSGC Operational DAP
FATIMA Rahimyar khan, Punjab 0.50 0.34 68% Mari gas Operational NP,CAN
PAK Arab Multan, Punjab 0.09 - 0% SNGP Rotational basis NP,CAN
Agritech Mianwali and Haripur 0.47 0.09 19% SNGP Rotational basis Urea
Dawood Hercules Sheikupura, Punjab 0.45 0.07 16% SNGP Rotational basis Urea
6. 34
4. 28
68%
3. 54
74%
Operati onal Urea capaci ty i n 9MCY13 (mn tons)
Total Capaci ty uti l i zati on i n CY12
Paki stan's Ferti l i zer Sector Snapshot
Company Locati on
Total Urea Capaci ty (mn tons)
Operati onal Urea capaci ty i n CY12 (mn tons)
Urea
capaci ty
(mn tons)
CY12 Urea
producti on
(mn tons)
CY12
Uti l i zati on
Gas suppl i er Current status
Pri mary
products
Total Capaci ty uti l i zati on i n 9MCY13

19

Fertili zer pol icy, i ssues & sector performance
Fertilizer policy was announced taking effect from 1st J uly 2001. The policy was initially
operational for ten years and aimed for an estimated investment of USD 1.2bn in the
sector meanwhile. However, it has completed its tenor and a new policy is awaited. The
basic objective of this policy was to attract investment in the sector, support farmers
through provision of fertilizer products at an affordable price and to ensure best optimal
price and supply of gas to keep the plants utilization at max. The policy has brought
fruitful results in the form of USD 2.0bn investment through green field projects and
BMR activities but the rationalization of gas subsidy as envisioned in the Policy has not
yet been materialized.
Investments through fertilizer policy
EFERT expansion took place with the addition of 1.3mn tons of urea plant coupled with
the 0.5mn tons of new plant set up by Fatima Fertilizer Company (FATIMA). In line with
the fertilizer policy the GoP approved subsidized feed stock for both of the companies at
USD 0.7/mmbtu for the tenure of 10 years. Conversely, the govt failed to honor its
sovereign guarantee resulting substantial gas curtailment for EFERT and its new plant
only received gas for 45 days in CY12.
However, to this date the problem has been cater as the Economic Coordination
Committee (ECC) of the Cabinet has decided to revert the 60mn cubic feet per day
(mmcfd) previously diverted gas back from Guddu Power Plant to Engro Fertilizer after
which the plant will be able to operate on 80-85% of its installed capacity.

Historical urea and Dap capacities Urea demand/supply trend


3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
7,500
C
Y
0
5
C
Y
0
6
C
Y
0
7
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
C
Y
1
3
DAP
Urea
k tons
-
200
400
600
800
1,000
1,200
1,400
1,600
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
C
Y
0
8
C
Y
0
9
C
Y
1
0
C
Y
1
1
C
Y
1
2
Urea Production
Urea Demand
Deficit (RHS)
k tons k tons

20

Demand dri vers
Pakistan is an agricultural country thus need of fertilizers for agri growth and its
contribution in the GDP is significant. There are numerous factors following demand of
fertilizer products in Pakistan. The major demand drivers include increasing cultivatable
area and guaranteed offtake (5 year average of 5.5mn ton) amid govt support to
farmers through the mechanism of different subsidies. Apart from these, other demand
drivers include commodity support prices, water availability, fertilizer prices and growing
population.
Cultivatable area
Cultivatable area is the major aspect in determining fertilizer demand. The higher area
would lead towards growth in the fertilizer offtake and crops production. Despite being
the disaster caused by the major floods back in CY10, the total cultivatable area of
Pakistan showed a modest growth of 0.5% CAGR of 10 years. Likewise, urea offtake
increased by 10-year CAGR of 2% for the same period. As a result, cumulative wheat
and cotton production jumped by CAGR of 2.3% and 3.2% respectively in the last 10
years. Fertilizer offtake and total cropped area remained at its peak in CY09 and stood
at 6.2mn tons and 23.8mn hector, respectively. Therefore, given lower flood-related
devastations in the recent years, the total cultivatable area and fertilizer offtake is
expected to grow going forward, in our view.
Urea offtake and Wheat and cotton production Cropped area and urea offtake
Source: Economic survey and AHL Research

Guaranteed offtake
Pakistans urea demand stood at a 5-year average of 5.5mn tons with the installed
capacity of 6.4mn tons (operational capacity of 4.9mn tons excl. Pakarab, DH fertilizer
and Agritech). The situation shows guaranteed offtake as the local manufacturers
historically managed to sell all of the locally produced urea during a year. Furthermore
the wide demand supply gas is catered through import of urea by the govt to ensure
any short fall of the commodity in the market.

-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
Urea offtake (k tons)
Wheat Production (mn Tonnes)
Cotton Producti on (mn Bal es)
4,000
4,500
5,000
5,500
6,000
6,500
21.0
21.5
22.0
22.5
23.0
23.5
24.0
24.5
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
Total Cropped Area
Urea offtake (RHS)
Mn
Hect
.
k tons
Production and local offtake
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
CY10 CY11 CY12
Total offtake Production Local offtake
K tons

21

Govt support to farmers
Traditionally, support prices for commodities have played a vital role to boosting up the
fertilizer offtake. As an agrarian country, the govt always tends to support farmers
through every possible mode including higher support prices. Wheat support prices are
directly proportional to the fertilizer offtake. We have witnessed an upward trend in
wheat support price since FY11. At present, wheat support price stands at PKR
1200/maund, which is expected to revise upward in the current month.

Wheat support prices
Source: Economic survey and AHL Research
900
950
1000
1050
1100
1150
1200
1250
FY09 FY10 FY11 FY12 FY13
PKR/maund

22

Suppl y constraints - gas i ssues
Pakistan has always been rich in natural gas but increasing demand and limited
exploration activities in the past have resulted in a limit on the availability of this
resource. Currently, the country is facing seasonal outages typically during the winter.
The situation may aggravate in the future as the countrys energy requirements and
industrial growth potential will require a much higher availability of fertilizer resource
when its import bill is already under oil shocks. In this case, the fertilizer sector, which
already consumes 16% of total gas, has limited potential to induce further investors.
CY12 an ailing year for the fertilizer industry
Currently the Industry is facing a major issue in the form of gas curtailment which is
affecting the overall fertilizer production of the country. The 'Year 2012' resulted as the
most challenging year for the industry as due to continuous unannounced gas
shortages the industry was only able to produce 4.9mn tons of urea against an installed
capacity of 6.4mn tons which was 33% lower than its productive capacity.
Plants on SNGPL network face the most severe
As discussed above, one of the biggest reasons of this severe under productivity has
been the widespread gas shortage in Pakistan. Due to this, the fertilizer plants operating
on the Sui Northern Gas Pipeline Ltds network faced the biggest wrath, as they could
only achieve a mere 20% of their productive capacity during CY12.
Due to such gas crisis, fertilizer plants such as Pakarab Fertilizers, Dawood Hercules
(DH) Fertilizer, Agritech and EFERT have produced far below the envisaged level of
production. DH Fertilizer could only manage to produce 17% of its installed capacity i.e.
an accumulated 75k tons of urea production. Similarly, Agritech and EFERTs new
plant production also stood at a disappointing 17% and 20% respectively (CY12).
Sector gas supply on declining trend
Severe gas curtailment has been observed since CY10TD and the gas consumption of
fertilizer sector from SSGC and SNGP network has declined by 5% and 2%
respectively. Conversely, the dedicated MARI gas field showed 5 year CAGR increase
of 4%. However, cumulative gas consumption by the fertilizer sector dropped 7% YoY in
CY12.

Gas supply for fertilizer sector Gas consumption by sectors

Source: EYB and AHL Research

-
50,000
100,000
150,000
200,000
250,000
2
0
0
6
-
0
7
2
0
0
7
-
0
8
2
0
0
8
-
0
9
2
0
0
9
-
1
0
2
0
1
0
-
1
1
2
0
1
1
-
1
2
Total SNGPL
SSGCL Mari Gas Field
mmcfd
Gen.
Industry,
23.0%
Cement,
0.1%
Fertilizer
(feedstock
),13.1%
Fertilizer
(fuel),
3.3% Commerci
al, 3.1%
Domestic,
20.3%
Transport
(CNG),
9.2%
Power,
27.8%
Urea production

3,800
4,000
4,200
4,400
4,600
4,800
5,000
5,200
5,400
CY08 CY09 CY10 CY11 CY12
K tons

23

Gas prices Upward trajectory continues
Feed gas is the basic raw material for making fertilizer especially urea. Initially with the
low consumption of gas in the fertilizer sector amid lower capacity installed, gas prices
were competent as compared with the other sectors, industries and international gas
prices. However, with the incremental capacities coupled with depleting reserve of gas,
the feed and fuel stock prices surged with 5-year CAGR of 34% and 13%, respectively.
However, fertilizer manufactures easily managed to pass on this gas prices impact as
urea prices jumped 5-year CAGR at 25% historically. This showed the ability of the
manufactures to easily pass on the impact of gas prices increase to the end consumers.
Even though, this massive passed to the consumers, local urea is still available at a
discount of 22% to the international urea.

Gas and Fertilizer prices Historical Urea and DAP prices

0
100
200
300
400
500
600
180
380
580
780
980
1180
1380
1580
1780
1980
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Urea
Feed stock
Fuel stock
PKR/bag PKR/mmbtu
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
C
Y

0
7
C
Y

0
8
C
Y

0
9
C
Y

1
0
C
Y

1
1
C
Y

1
2
C
Y
1
3
T
D
Urea DAP
PKR/bag

24

Imported urea and its cost to the national exchanger
Moreover the country is facing problem of imported urea which consequently affects the
import bill and costs heavily to the government. It is estimated that Government of
Pakistan (GoP) has borne a subsidy of PKR 50bn on imported urea and PKR 47bn on
natural gas for feedstock purpose (un-budgeted) by the fertilizer industry during FY13.
Moreover, the problem of imported urea is posing a major challenge to the domestic
market because imported urea is sold on a subsidy lower than local urea so local
producers are forced to cut down their prices which is costly.
To make the problem even worse, there is a presence of plants that make inefficient
usage of gas leading to shortages and, hence, an increase in fertilizer prices in peak
seasons results in reduced product offtake.

Local and international Urea comparison Local and international DAP comparison

Source: Bloomberg, NFDC and AHL Research

0%
10%
20%
30%
40%
50%
60%
70%
400
900
1,400
1,900
2,400
2,900
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
PKR/bag
Local urea
Imported urea
Discount (RHS)
-60%
-40%
-20%
0%
20%
40%
60%
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
PKR/bag
Local DAP
Imported DAP
Premium (RHS)

25

Gas Infrastructure Devel opment Cess (GIDC)
In CY12, the Federal govt applied Gas Infrastructure Development Cess (GIDC) to all
the gas consumers including fertilizer companies, which led gas prices to surge by a
massive PKR 197/mmtbu, translating into a hefty jump of 207% YoY. Following the
imposition of the GIDC, the average urea price per bag went straight up 20% YoY in
CY12. FATIMA and EFERT were the key beneficiaries of the abovementioned Cess
due to their long-term agreements in place with the GoP at subsidized feed-stock price
for ten years. However, only FATIMA enjoyed the aforesaid benefit as EFERT (EnVen
plant) was facing fatal gas curtailment due to shortage of gas on the SNGPL network.
Revision in the GIDC
As per the Budgetary Document for FY13, and the Finance Bill 2012, the govt had
already approved the maximum price of GIDC, i.e PKR 300/mmbtu. However, GIDC for
CY13TD remained intact at PKR 197/mmbtu, which is expected to be the same for the
rest of CY13 as well. Our discussion with the industry reveals that urea manufacturers
are not in a position to bear such a massive hike in gas prices (+52% from current
levels) and, thus, passing on this impact in the urea prices, once increased, would be
the eventual reality.
GIDC termed illegal
On the other hand, the Lahore High court has issued the stay order on GIDC, terming it
illegal. Though the sectors are still paying GIDC but the govt is not allowed to utilize
these funds amid court stay order on the same.
IMF Extended Funds Facility: gas levy on the cards?
To recall, in its Letter of Intent with the IMF, the govt is principally agreed to raise 0.4%
of GDP, ~PKR 105bn, as gas levy. The govt could easily raise this amount by replacing
GIDC to the proposed gas levy. The table below summarizes the collection of GIDC
during FY12, which shows that govt could easily manage and raise PKR 111bn from
this surcharge.

Domestic 261,915 256,676,700 - -
Commercial 39,627 38,834,460 - -
Gen. Industries 286,055 280,333,900 50 14,016,695,000
Pakistan Steel Mills 10,125 9,922,500 - -
Cement 1,266 1,240,680 50 62,034,000
Fertilizer (as Feedstock) 168,694 165,320,120 197 32,568,063,640
Fertilizer (as Fuel use) 43,134 42,271,320 50 2,113,566,000
Power 358,381 351,213,380 100 35,121,338,000
Transport (CNG) 119,000 116,620,000 232 27,030,183,600
Tot al 1,288,197 1,262,433,060 110,911,880,240
Source: EYB, AHL Research
Nat ur al Gas Cons umpt ion By Sect or
2011-12
mmcf t mmbt u
GIDC
(PKR/mmbt u)
Collection fr om
GIDC (PKR)
Sector

Gas prices trend for fertil izer sector
Source: EYB and AHL Research
0
100
200
300
400
500
600
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Feed stock Fuel stock
GIDC
PKR/mmbtu

26

What is the Long-term gas plan?
The govt has approved long term gas plan for fertilizer consortium, from which all the
companies on the SNGPL network would receive gas from dedicated gas fields. The
companies includes, Engro Fertilizer Limited (79mmcfd), Dawood Herculus Fertilizer
(40 mmcfd), PakArab Fertilizer Limited (58mmcfd) and Agritech Limited (25 mmcfd).
Whats in store for EFERT?
EFERT would receive 79 mmcfd of gas from long term gas plan. The breakup of the
aforesaid plan is given below in the tables. Furthermore, The ECC has already
approved the diversion of allocated gas from EFERT's old plant to its new plant till the
implementation of long term gas plan. However, the long-term plan is scheduled to take
around 11 months for completion (operational from 4QCY14).
GSAs with the field operators
As per the KSE notice, the Gas Sale Agreement (GSA) between EFERT and the two
fields i.e. Kunnar Pasaki Deep and Reti Maru has been signed while the term sheet has
been signed between EFERT and Mari SML. Furthermore, the company is drawing
~22mmcfd from Mari SML while Reti Maru is expected to come online by the end of
CY13. As far as gas price is concerned, the weighted average gas price would be
~USD 4.0/mmbtu ~USD 4.5/mmbtu.
Long term plan
Fields mmcfd Availability Timeframe
Kunnar Pasaki Deep 130 Oct-14
Mari SML 22 EFERT drawing
Bahu 15 NA
Reti Maru 10 Dec-13
Markori East 25 J an-14
Total 202
Source: A HL Research

Short term plan
Fields mmcfd Availability Timeframe
Mari SML 22 EFERT drawing
Reti Maru 10 Dec-13
Sara West - NA
Total 32


Companies mmcfd
Engro Fertilizer 79
DH Fertilizer 40
Pak Arab Fertilizer 58
Agritech Limited 25
Total 202
Long term gas plan break up

27

Pricing scenario; price cut seems a far cry!
On the product pricing side, we rule out any price cuts in CY13 and CY14 (post long
term gas plan) mainly due to unavailability of gas on an immediate basis coupled with
higher gas pricing scenario in long term gas plan. Instead, bright possibility exists for
urea price augmentation (to pass on price to consumer), when OGRA is expected to
increase gas sale prices expected soon.
Other side of the story post long-term gas plan
With the successful implementation of the long-term gas arrangement plan assuming
gas price, for plants operating on the SNGPL network, at USD 5.0/mmbtu or ~PKR
535/mmbtu (excluding EFERT, FFC ad FFBL), we expect urea price to rather be raised
from 4QCY14 onwards.
In this regard, as per our calculations, the price for the 17% of the total urea production
(or 0.9mn tons) should be increased by PKR 221/bag (see table below). Particularly, the
cost for EFERTs EnVen could jump by PKR 392/bag or 509% post gas-price increase
(from USc70/mmbtu to USD4.26/mmbtu). However, weighted average gas cost for
EFERT should lead to a hike of PKR 224/bag post long-term plan.
Hence, after the proposed scenario, cost of 34% of total urea production (~2.1mn tons)
is expected to increase by an average PKR 224/bag. Conclusively, going forward, we
do not expect any price reduction from fertilizer companies, hence as analysis shows on
average urea prices are expected to increase by PKR 224/bag once the long-term plan
is in place primarily on account of increase in gas costs. The table further elaborates:
FFC and FATIMA stand as key beneficiaries of price hike
FFC and FATIMA would remain major beneficiaries with respect to any increase in urea
prices ahead, post long-term gas plan. FFC being the major player in the industry is
expected to enjoy windfall gains in this regard while FATIMA would benefit the most
courtesy its subsidized gas agreement with MARI Gas at USc 70/mmbtu.

Gas Pri ce (PKR/mmbtu) Producti on
New Ol d New Ol d mn tons New Ol d
FFC 320 320 24.00 7,680 7,680 2.04 120% 2.45 18,819 18,819
ENGRO (Old) 320 320 23.50 7,520 7,520 0.98 90% 0.88 6,599 6,599
ENGRO (Enven) 426 70 22.00 9,372 1,540 1.30 90% 1.17 10,965 1,802
FFBL 320 320 24.50 7,840 7,840 0.50 50% 0.25 1,960 1,960
FATIMA 70 70 21.00 1,470 1,470 0.50 90% 0.45 662 662
PAK Arab 500 320 24.50 12,250 7,840 0.09 90% 0.08 1,014 649
Agritech 500 320 24.50 12,250 7,840 0.47 90% 0.42 5,149 3,295
Dawood Herculis 500 320 24.50 12,250 7,840 0.45 90% 0.40 4,906 3,140
6.10 50,074 36,925
Gas Cost (PKR mn)
Company
Per ton Feed Gas Cost
Uti l i sati on Capaci ty Conversi on
Urea pricing in CY13TD
Source: NFDC and Bloomberg
1,600
1,800
2,000
2,200
2,400
2,600
2,800
J
a
n
-
1
2
M
a
r
-
1
2
M
a
y
-
1
2
J
u
l
-
1
2
S
e
p
-
1
2
N
o
v
-
1
2
J
a
n
-
1
3
M
a
r
-
1
3
M
a
y
-
1
3
J
u
l
-
1
3
S
e
p
-
1
3
N
o
v
-
1
3
Imported Local PKR/bag
PKR/ton PKR/bag
Increase in Feed gas cost for plants on SNGP excluding ENGRO 4,410

221

Increase in Feed gas cost for ENGRO's ENVEN 7,832

392

Weighted Avg. increase in Feed Stock Cost for Efert 4,475

224


28

Outl ook
Macro outlook
For the economy of Pakistan to prosper, it is important for agricultural yields to go up
which is only possible through the application of fertilizers in the right quantity at the
right time. However given the current situation of the Pakistan economy, the importance
of fertilizers cannot be overlooked considering it has a direct impact on the growth,
output and economic activity of the agriculture sector. Hence, the govt is making
continuous efforts to tackle gas shortage issues through new exploration projects.
However, at this point in time gas shortage and import threat continue to pose a major
challenge to the entire sector.
Sector prospects
As far as sector outlook is concerned, we expect the sectors urea offtake to grow by
5% YoY in CY13. Our assumption with respect to growth in urea offtake mainly stems
from: 1) increase in Wheat Support Price to PKR 1200/maund, 2) low interest rates to
provide farmers with cheap agri-loans, and 3) better demand due to increased
cultivatable areas with improving yields amid favorable weather conditions last year
(absence of massive floods).

Urea production and offtake DAP production and offtake

Impact of the long-term gas plan
As far as the long-term gas plan goes (gas pipeline to SNGPL network), we expect its
materialization from 4QCY14 onwards and the impact on the companies earnings from
there onwards. Product prices may then be interesting to track as we expect a notch-up
given higher gas prices along with pipeline expenditures incurred by the beneficiaries.

2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
mn tons
Production Offtake
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1.80
2
0
0
7
A
2
0
0
8
A
2
0
0
9
A
2
0
1
0
A
2
0
1
1
A
2
0
1
2
A
2
0
1
3
E
mn tons
Production Local Offtake

29

Key ri sks
Gas unavailability
The key risk remains the unavailability of gas to the fertilizer plants, especially on the
SNGPL network. In this regard, the materialization of the long-term plan and its timings
are very crucial for the plants operating on the SNGPL network.
Price reduction
Alongside, pricing risk prevails, as the govt may pressurize the manufacturers to cut
urea prices due to the plants utilizing its optimal capacities once the govt fulfils its
commitment for the dedicated gas supply to all the companies operating on the SNGPL
network. However, we believe the probability of this risk is low, as the govt is assuring
gas supply to all the plants on SNGPL but at a significantly higher gas rate (56% higher
than current levels) than the industry.
Imported urea
Additionally, the imported urea could be a threat to local manufacturers due to its
subsidized price. The difference between the subsidized and the local prices is
negatively related to the local sales. The GoP has already approved import of 0.5mn
tons of urea for the upcoming Rabi season. This remains a threat in the short term.
Political risk / GoP priority
Political instability coupled with govt stance and how it prioritizes gas allocation to the
fertilizer sector would clarify the future of the fertilizer sector. However, with the long-
term gas plan already approved, chances of gas curtailment would minimize as the
plants operating on the SNGPL network would receive gas from the dedicated fields.

30


Page l eft bl ank i ntenti onall y

31

Annexure
Essentially, Fertilizer products are variations of three primary soil nutrients, namely
nitrogen (N), phosphorous (P) and potassium (K). It is the suitability of a nutrient for
crop that determines the usage of a particular fertilizer product. Pakistans soil is
deficient in nitrogen and phosphate; thereby an optimal combination of these nutrients is
necessary to achieve higher yield levels. There are three types of fertilizer available in
the market namely, nitrogenous fertilizers, phosphorous fertilizers and potash fertilizers.
Nitrogenous Fertilizer
Nitrogenous fertilizers include Urea. It comprises of 65% of total nitrogenous, calcium
Ammonium Nitrate (CAN), Ammonium Sulphate (AS). 99.3% of the current production
capacity is used to produce these fertilizers. In CY12, the aggregate performance of
urea plants was 68% of their installed capacity. Primarily, Pakistani soil is pervasively
nitrogen deficient which also induces more production of Urea but currently, urea
production has decreased by 12% compared to CY11.
Process of Manufacturing Urea
Basic raw material for urea production is natural gas in ample and uninterrupted supply.
As a nitrogen-rich fertilizer, Urea (NH2CONH2) is of great importance to the agriculture
industry. It is produced from ammonia and carbon dioxide in two equilibrium reactions:
2NH3 +CO2 NH2COONH4 (Ammonium carbonate)
NH2COONH4 NH2CONH2 (Urea) +H2O
Ammonia is extracted from methane supplied in natural gas, this process makes
production efficient. Urea manufacturing process is as follows:
Step 1:
Synthesis: A mixture of compressed CO2 and ammonia at 240 barg is reacted to form
ammonium carbamate. This is an exothermic reaction, and heat is recovered by a boiler
which produces steam. The first reactor achieves 78% conversion of the carbon dioxide
to urea and the liquid is then purified where as the second reactor receives gas from the
first reactor and recycle solution.
Step 2:
Purification: The major impurities in the mixture at this stage are water from the urea
production reaction and unconsumed reactants (ammonia, carbon dioxide and
ammonium carbamate). The unconsumed reactants are then removed.
Step 3:
Concentration: 75% of the urea solution is heated under vacuum, which evaporates off
some of the water, increasing the urea concentration from 68% w/w to 80% w/w. At this
stage some urea crystals also form. The solution is then heated from 80 to 110oC to re-
dissolve these crystals prior to evaporation.
Step 4:
Granulation: Urea is sold for fertilizer as 2 - 4 mm diameter granules. These granules
are formed by spraying molten urea onto seed granules which are supported on a bed
of air. This occurs in a granulator which receives the seed granules at one end and
discharges enlarged granules at the other all dust and air from the granulator is
removed by a fan into a dust scrubber, which removes urea with water solution then
discharges air to the atmosphere. The final product is cooled in air, weighed and
conveyed to bulk storage ready for sale.

32

Phosphorous Fertilizer
Phosphorous fertilizers, on the other hand, comprise of 27% of total consumption. The
categories of Phosphorous fertilizers are: Di-ammonium Phosphate DAP, Super
Single Phosphate (SSP), Triple Ammonium Phosphate (TSP), and Nitrate Phosphate
(NP). Basic raw material for the production of Phosphorous fertilizers is phosphoric
rock. The reaction of this rock and sulphuric acid makes phosphoric acid; which is used
to make the fertilizer. Currently, very less phosphoric rock is available in Pakistan and
the quality of local rock is not good, nor do we have the production facility. Also, the
production process is very costly and needs heavy investment. As a result, the entire
phosphoric acid is being imported. 99% is imported from Morocco while small
quantities are also imported from Middle Eastern countries and Saudi Arab.
Potash Fertilizer
Potash fertilizers, third type of fertilizers are domestically produced and consumed in
very less quantities. Sulphate of Potash is one of potash products. Potash is usually
applied to fruit, vegetable, and sugarcane crops only, it is imported and only less than
two percent of the farmers apply potash whereas 92 percent apply nitrogen and 83
percent apply phosphate.
Potash is a micronutrient fertilizer. Micronutrient deficiencies are common but less than
five percent of the farmers apply micronutrient fertilizers. Worldwide, nitrogen is most
widely used, followed by phosphate and potash. However, the availability and price of a
product at a given point in time impacts the demand pattern.
However, lack of awareness among farmers also plays a role in determining the use of
fertilizers. Not realizing the benefits of an optimal NP ratio, farmers tend to favor
products available in the market at cheaper rates, this year NP ratio deteriorated to 5.06
due to increase in DAP prices over and above PKR 3900 per bag exceeding NPs
desirable limit of 2:1 and lowering the crop yield. On the other hand, considerable
growth potential remains for the product which could be tapped by continuous education
of the farmer community.
Crop Seasons
Pakistan has two cropping seasons; Kharif being the first sowing season from April-
J une and it is harvested during October-December. Main Kharif crops include rice,
sugarcane, cotton, and maize. Rabi, the second sowing season begins October-
December and is harvested in April-May. Major Rabi crops include wheat, gram, lentil,
tobacco, rapeseed, barley and mustard. With two crop seasons, the fertilizer offtake
with respect to products also registers significant difference due to variations in fertilizer
needs by each crop which consequently affects the demand situation. When talking
about demand scenario, as stated earlier Pakistan is an agri-based economy and for a
healthy crop yield farmers need optimal amounts of fertilizer to enhance crops growth.
Consequently, the overall domestic demand generated is higher than local fertilizer
production which stimulates extensive need for importing fertilizer products like urea,
and DAP etc.

33

Crops Jan Feb Mar Apri l May June Jul y Aug Sep Oct Nov Dec
Ri ce
Sugarcane
Cotton
Mai ze
Jowar
Baj ra
Wheat
Barl ey
Gram
Sowing period Growing period Harvesting period
Khari f Crops
Rabi Crops
Crops Calender of Pakistan

34

Abbrevi ati ons

~- Approximately
AGRI - Agritech Limited
bn - Billion
bps Base points
CY- Calendar Year
DAP - Di Ammonium Phosphate
DAWH - Dawood Hercules Corporation
Div. Yield Dividend Yield
DPS Dividend per Share
ECC Economic Coordination Committee
Efert Engro Fertilizers
EPS Earning per Share
FATIMA Fatima Fertilizer Company Limited
FFBL Fauji Fertilizer Bin Qasim Limited
FFC Fauji Fertilizer Company
GIDC - Gas Infrastructure Development Surcharge
GoP Government of Pakistan
GSA Gas Sale Agreement
Intl International
KSE-100 Karachi Stock Exchange 100 Index
MARI SML MARI Sui Main
mmbtu - Million Metric British Thermal Units
mn - Million
NFDC National Fertilizer Development Centre
NFML National Fertilizer Marketing Limited
OGRA Oil Gas Regulatory Authority
P/B Price to Book
P/E Price Earning
PAK ARAB Pakarab Fertilizers Limited
PKR Pakistani Rupee
QCY Quarter Calendar Year
QoQ Quarter on Quarter
SNGPL - Sui Northern Gas Pipe Lines
USc United States Dollar (cent)
USD United States Dollar
YoY Year on Year

35

Disclaimer and related information
Analyst certification
The analyst for this report certifies that all of the views expressed in this report accurately reflect his personal views about the subject
companies and their securities, and no part of the analysts compensation was, is or will be, directly or indirectly related to specific
recommendations or views expressed in this report.
Disclosures and disclaimer
This document has been prepared by investment analyst at Arif Habib Limited (AHL). AHL investment analysts occasionally provide
research input to the companys Corporate Finance and Advisory Department.
This document does not constitute an offer or solicitation for the purchase or sale of any security. This publication is intended only for
distribution to current and potential clients of the Company who are assumed to be reasonably sophisticated investors that understand
the risks involved in investing in equity securities.
The information contained herein is based upon publicly available data and sources believed to be reliable. While every care was
taken to ensure accuracy and objectivity, AHL does not represent that it is accurate or complete and it should not be relied on as such.
In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors. The
information given in this document is as of the date of this report and there can be no assurance that future results or events will be
consistent with this information. This information is subject to change without any prior notice. AHL reserves the right to make
modifications and alterations to this statement as may be required from time to time. However, AHL is under no obligation to update or
keep the information current. AHL is committed to providing independent and transparent recommendation to its client and would be
happy to provide any information in response to specific client queries.
Past performance is not necessarily a guide to future performance. This document is provided for assistance only and is not intended
to be and must not alone be taken as the basis for any investment decision. The user assumes the entire risk of any use made of this
information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent
evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and
should consult his or her own advisors to determine the merits and risks of such investment. AHL or any of its affiliates shall not be in
any way responsible for any loss or damage that may be arise to any person from any inadvertent error in the information contained in
this report.
We and our affiliates, officers, directors, and employees may: (a) from time to time, have long or short positions in, and buy or sell the
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provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. AHL
generally prohibits it analysis, persons reporting to analysts and their family members from maintaining a financial interest in the
securities that the analyst covers.

2013 Ari f Habib Limi ted, Corporate Member of the Karachi, Lahore and Islamabad Stock Exchanges and Pakistan Merchentile
Exchange. No part of this publication may be copied, reproduced, stored or disseminated in any form or by any means without the
prior written consent of Arif Habib Limited.

36

Contact detai ls
Management Designation Email Telephone
Shahid Ali Habib Chief Executive Officer shahid.habib@arifhabibltd.com +92 -21-3240-1930
Equities Research Designation Email Telephone
Khurram Schehzad Head of Research k.shehzad@arifhabibltd.com +92-21-3246-0742
Syed Abid Ali Assistant Vice President abid.ali@arifhabibltd.com +92-21-3246-2589
Saad Khan Assistant Vice President saad.khan@arifhabibltd.com +92-21-3246-2589
Tahir Abbas Investment Analyst tahir.abbas@arifhabibltd.com +92-2132460717-19 Ext : 248
Numair Ahmed Investment Analyst numair.ahmed@arifhabibltd.com +92-2132460717-19 Ext : 248
Rao Amir Ali Database Manager amir.rao@arifhabibltd.com +92-2132460717-19 Ext : 211
Ovais Shakir Database Officer ovais.shakir@arifhabibltd.com +92-2132460717-19 Ext : 211
Domestic sales Designation Email Telephone
M. Yousuf Ahmed Senior Vice President yousuf.ahmed@arifhabibltd.com +92-21-3242-7050
Farhan Mansoori Vice President farhanmansoori@arifhabibltd.com +92-21-3242-9644
Syed Farhan Karim Vice President farhan.karim@arifhabibltd.com +92-21-3244-6255
Afshan Aamir Vice President afshan.aamir@arifhabibltd.com +92-21-3244-6256
Faraz Naqvi Assistant Vice President faraz.naqvi@arifhabibltd.com +92-21-3244-6254
Furqan Aslam Assistant Vice President furqan.aslam@arifhabibltd.com +92-21-3240-1932
Azhar Javaid Manager Corporate Sales azhar.javaid@arifhabibltd.com +92-21-3246-8312
Business Development Designation Email Telephone
Faisal Khan
Head of Business
Development
faisalkhan@arifhabibltd.com +92-21-3246-6076
Money Market & FX Designation Email Telephone
Zilley Askari
Head of Inter Bank
Brokerage
askari@arifhabibltd.com +92-21-3240-0223
Marketing Designation Email Telephone
Atif Raza Head of Marketing atif.raza@arifhabibltd.com +92-21-3246-8282
Corporate finance and
advisory
Designation Email Telephone
M. Rafique Bhundi Head of Corporate Finance rafique.bhundi@arifhabibltd.com +92-21-3246-0741
Mahmood Kamal Vice President Mahmood.kamal@arifhabibltd.com +92-21-3246-0741

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Nov 13, 2013

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