Fertilizer: Another Urea price hike on the cards!

Further surge in international price creating room for price increase: Recently international Urea price have increased to USD485/ton in June-11 from USD350/ton in Mar-11, which now translates into 88% premium to local prices. Thus a larger room now exists for another price hike as fertilizer plants on Sui network are facing the brunt of the ongoing gas crisis.

Another price hike on the cards: Being on Sui network, Engro continues to feel the heat of continuous gas shutdowns, which has delayed the COD of its new plant. Consequently, we believe another price hike is on the cards, to offset losses from lost production on Sui network. Given curtailment of a mere 15% on Mari, FFC and FATIMA will be the key beneficiaries.

Major beneficiaries to be FFC and FATIMA: For every PKR50/bag increase in local Urea price, EPS of FFC and FATIMA increases by PKR1.19 and PKR0.13 respectively.

Investment perspective: Given the current gas situation prevails; FFC and FATIMA will continue to benefit from any hike in price. Our revised June-12 PT for FFC and FATIMA stand at PKR149 and PKR24 respectively after upward revision of Urea prices. However, we do believe negativity on Engro has been over played and price hike with the compensating increase in margins would help investor sentiments.

Further surge in international price creating room for price increase

Recently international Urea price increased further to USD485/ton from last week’s level of USD450/ton, up 8% indicating 88% premium to local prices. International Urea prices are up 29% from their Mar-11 level of USD350/ton. Gradually magnifying discount of local urea price from international prices creating room for another price hike in a situation where companies on Sui network are facing the brunt of gas shortfall.

Another price hike on the cards

The prevailing gas issue on Sui network has delayed COD of Engro’s new plant. Consequently, we believe continuing gas shutdowns will most likely result in another Urea price hike by Engro in order to offset its revenue losses. In such a scenario, we believe manufacturers operating on Mari network, FFC and FATIMA, will benefit the most given their lower rate of diversion and equal hike in price.

Major beneficiaries to be FFC and FATIMA

Currently the effective rate of diversion (Normal diversion + shutdowns) from Mari network is 15%, whereas on Sui network suffers from 35% effective gas curtailment. Running a sensitivity analysis, we estimate that for every PKR50/bag increase in price of Urea, EPS of FFC and FATIMA increases by PKR1.19 (7%) and PKR0.13 (23%) respectively.

Investment perspective

Given the current gas situation prevails; FFC and FATIMA will continue to benefit from any hike in price. Our revised June-12 PT for FFC and FATIMA stand at PKR149 and PKR24 respectively after upward revision of Urea prices. We believe negativity on Engro has been over played and price hike with the compensating increase in margins would help investor sentiments.

Economic & Political News

Finance Bill 2011 approved by National Assembly

The National Assembly on Wednesday approved Finance Bill 2011 after amendments to certain laws such as bringing down GST to 16% from 17, abolishing 2.5% special excise duty and allowing five-year tax credit to investors intending to set up industry with their own capital.

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The fresh information provided by the State Bank on Wednesday showed that the government suddenly increased its borrowing from commercial banks, which is 100% higher over the same period last year. The government borrowed PKR486bn from banks in the first 11 months (July-May) compared to PKR244bn during the same period of last year.
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