4. Introduction
Engro Fertilizers Limited (listed on all 3 stock exchanges of Pakistan), is an 86% owned
subsidiary of Engro Corporation (ENGRO), which is involved in the business of
manufacturing and marketing of urea and NPK (compound) fertilizers.
EFERT is Pakistan’s largest urea player in terms of capacity, with Engro Urea as
Pakistan’s oldest domestic urea brand. Over the years, production capacity of its base
plant has been enhanced from 173 kt/year to 975 kt/year through various projects
including a relocation from USA.
In 2010, it completed construction of the EnVen project which at that time was the
world’s largest single train urea plant, adding 1.3mn tpa of urea production capacity,
making Daharki world’s 5th largest urea production site
As per Fertilizer Policy 2001, EnVen (COD: 2011) was contracted to receive feedstock
gas from the SNGPL network at US$0.70/mmbtu for 10yrs (vs. normal pricing of
US$4.2/mmbtu). After a gap of 04 years, with delays due to GoP back tracking, EFERT
has received confirmation of concessionary gas pricing in Mar’15.
EFERT has entered into an agreement with GENCO II (endorsed by ECC) to install
compressors for Guddu Power Plant at its cost. In lieu of this it is understood that
60MMSCFD of Guddu gas will continue to flow to EFERT till December 2015.
During 2015 , Engro Eximp’s trading arm is being sold to EFERT (subject to
shareholders approval), after which the Company will also be engaged in import and
marketing of phosphate based fertilizers (DAP & MAP) and micronutirents.
5. Revenues
EFERT has posted all-time high sales of PkR61.42bn in CY14.
In CY14 alone, revenue grew by 23%YoY on account of 1) 16%YoY volumetric growth
in offtake to 1.82mn tons urea sold in CY14 and 2) increase in urea prices by 5%YoY.
Production dropped in CY12 to 974k tons (2 plant operational for just 45 days due to gas
curtailment) but has since increased with a CAGR of 37% after gas supply issues were
resolved with the GoP
Debt Profile
Proactive management has reduced D/E to 1.3x in CY14 vs. 4x in CY12. As a result,
financial charges reduced by 33%YoY in CY14 which can further improve in lower
interest rate environment
With debt covenants met in 3Q14, EFERT has initiated dividend payments announcing a
full year dividend of PkR3.0/sh.
At the same time, lower debt can lead to Shariah compliance where domestic Islamic
mutual funds can start adding EFERT, thereby leading to improved price discovery.
Earning Drivers
Last 5-yr GMs average of 43% is reflective of strong pricing power. This has been
buttressed by the higher efficiency of the EnVen plant
EFERT has signed long term GSA with E&P companies to receive additional gas from
dedicated gas fields, giving EFert more more sustainability.
6. EFERT – Products
EFERT – Risks & Mitigants
Gas Availability
The Fertilizer sector competes with the power, industrial and domestic sectors for gas
supply with order of preference being Domestic, power, general industries and cement
sector. Allocation of gas is dependent on Government policy. Risks are mitigated by
signing of long-term GSAs with the E&P companies.
Currently the company has guaranteed gas supply for one plant from Mari gas fields, and
has entered into an agreement with Genco II (endorsed by ECC) under which
60MMSCFD of Guddu gas will continue to flow to EFERT till December 2015 .
Gas Price Increase
Local urea prices already at a discount to int’l urea prices which gives room for price
increase
Rupee devaluation against US$ to further provide room to increase local urea prices
Concessionary gas made available to EnVen plant
Foreign Exchange Impact
7. This could have an adverse impact on the Company considering that it has obtained US$
denominated loans.. However, this is mitigated by 1) the company having partially hedged its
exposure against FX denominated borrowings through forward contracts & FX options ; 2)
recent conversion of IFC loan further reducing USD Debt; and 3) rupee devaluation which will
also increase the landed cost of imported urea; providing fertilizer manufacturers with more
room for increasing prices. The foreign exchange loans have come down to USD 123 m from a
peak of USD 315m in 2011
Interest Rate Risks
EFERT’s profitability can be impacted by 1) increase in domestic interest rates and 2)
PkR depreciation vs. the US$. However, mitigating factors exist as Pakistan is in the
midst of a monetary easing cycle .
Urea Imports
While int’l urea prices are at a premium to local prices, the GoP has resorted to imports
from time to time. Propensity to import can increase if gas is diverted away from the
fertilizer sector and/or int’l urea prices further reduce.
Floods/Natural Disaster
Agriculture growth has been volatile over the last 5yrs on instances of flooding. However, strong
GoP support has led to resilient farmer incomes that has not affected demand for fertilizers. Also,
usually flooding can yield positive effects the following year as farmers benefit from the
replenished water tables and increased soil fertility.
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