Fertilizer Sector October 2011

October 2011
Asad Siddiqui
asad@investcapital.com
9221-111 111 097 (ext 8636)
• EnVen production comes into picture
• Product price on the rise, margins getting strong
• Sector Outlook - Brighter ahead
• FFC - Royal flushing peers’ moves - Buy with total return expected
of 59% with Jun-12 TP of Rs251/share
• FFBL - The little ‘giant’ - ~33% return expected along with Jun-12
TP of Rs72/share
• ENGRO - The price king! - 90% return expected with Jun-12 TP of
Rs265/share
Fertilizer Sector Update
October 2011
FERTILIZER SECTOR CY11
A Publication of InvestCap Research
Pakistan Research
www.investcapital.com
Invest Capital Markets Limited
Urea turns into Gold!
Fertilizer Sec, Mkt. Cap. Rs258.42bn
Top Pick (s) FFC, ENGRO, FFBL
Sector Outlook Positive
Fertilizer Univ. PE (2011E) 6.26x
Fertilizer Univ. Div Yld (2011E) 10.8%
Fertilizer Univ. Ear Gro (2011E) 63.8%
Fertilizer Univ. Return in CY10 22.5%

Contents
Fertilizer Sector Update 3
Sector Outlook 8
Fauji Fertilizer Company Limited 10
Outlook & Recommendation 12
Financials Highlights 13
Key Ratios 14
Fauji Fertilizer Bin Qasim Limited 16
Key Ratios 19
Engro Corporation Limited 21
Key Ratios 26
Notes 27
Date of completion: October 05, 2011
Prices are as of October 04, 2011
October 2011
Pakistan Research

1InvestCap Research
October 2011
FERTILIZER SECTOR 2011
Pakistan Research
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2InvestCap Research
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Pakistan Research
Fertilizer Sector

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N P
NFC / PAK
ARAB, 65%
ENGRO,
22% FATIM A,
13%
C A N
NFC / PAK
ARAB, 49%
FATIM A,
51%
Fertilizer Sector
SSP
Suraj fert,
31%
AGRITECH
(PAFL),
31%
NFC -LCFL
(alhamd),
38%
N P K
ENGRO,
99%
IM PORTED,
1%
UR EA
DAWH, 5%
FATIM A,
8%
ENGRO,
22%
FFC, 51%
PAK
ARAB, 1%
AGRITECH,
2%
IMPORTED,
11%
D A P
IMPORTED,
32%
FFBL (FFC
SONA), 68%
Source: NFDC, InvestCap Research

4InvestCap Research
October 2011
Pakistan Research
Fertilizer Sector Update
Pakistan being an agrarian economy stands with rigorous demand for
everything that ranges from tractors to seeds, from pesticides to fertilizers.
Historically, agriculture has contributed ~22% towards Pakistan's GDP, and
has helped in employing more than 45% of country's labor force directly and
indirectly. Moreover, country's agriculture sector has constantly helped in
providing different industries with raw materials (example textiles).
This gives fertilizer sector immense importance in Pakistan. Currently, country’s
fertilizer sector is equipped with total production capacity of 6.7mn tons of
Urea and 669k tons of Di Ammonium Phosphate (DAP). There are a total of 9
companies, each manufacturing different fertilizer products. As far as
capacity break-up goes, Engro Corp (ENGRO) is now the leading company,
equipped with 34% of the total country's Urea manufacturing capacity. Fauji
Fertilizer Company (FFC) is only second to ENGRO with 31% share of the Urea
installed capacity in the country. Fauji Fertilizer Bin Qasim Limited (FFBL) and
Dawood Hercules have a 10% share each. Fatima Fertilizers Limited (FATIMA)
and AgriTech (AGL) complete the list of Urea manufacturing companies,
having capacity share of 8% and 7% respectively. Meanwhile, FFBL is the sole
producer of DAP in the country.
EnVen production comes into picture
Keeping the country's ever-growing Urea demand in view, fertilizer
manufacturers have constantly increased product capacity during 2006 to
2011, growing at a CAGR of 7% till 2012, when ENGRO's new capacity is
34%
31%
10%
10%
8%
7%
ENGRO FFC FFBL DAWH FATIM A AGL
Industry capacity share
UREA, DAP - PRODUCTION SNAPSHOT
Production CY06A CY07A CY08A CY09A CY10A CAGR CY11E CY12F CY13F CAGR
Urea 4,804 4,755 4,978 5,046 5,151 2% 4,925 5,371 5,630 2%
Growth 2% -1% 5% 1% 2% - -4% 9% 5% -
Cap. Utilization 114% 110% 109% 107% 91% - 79% 80% 84% -
DAP 450 357 471 540 647 9% 650 657 663 1%
Growth 0% -21% 32% 15% 20% - 1% 1% 1% -
Cap. Utilization 101% 80% 70% 81% 97% - 97% 98% 99% -
Source: Company Reports, InvestCap Research
Fertilizer Sec, Mkt. Cap. Rs258.42bn
Top Pick (s) FFC, ENGRO, FFBL
Sector Outlook Positive
Fertilizer Univ. PE (2011E) 6.26x
Fertilizer Univ. Div Yld (2011E) 10.8%
Fertilizer Univ. Ear Gro (2011E) 63.8%
Fertilizer Univ. Return in CY10 22.5%
Source: KSE, InvestCap Research
60%
80%
100%
120%
140%
160%
180%
200%
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Fetilizer Sector
KSE-100

5InvestCap Research
October 2011
Pakistan Research
expected to be in full swing. However, urea production has failed to take off
in similar fashion as compared to the capacity, and is expected to grow by a
mere 0.4% by the end of CY11. However, we do expect production to increase
going forward owing to better and continuous supply of gas. We estimate
urea production to increase by an average ~9% in CY12 and by 5% in CY13.
Following the Urea trend, FFBL also escalated the capacity of it's DAP
manufacturing unit over the period of time, where it grew by a 6-year CAGR
of 7% (CY06-CY11). Going forward, we also expect DAP production to
continue grow at a similar rate i.e. 7%. Unlike Urea, DAP is less dependent on
gas, hence its production remains much more efficient as compared to Urea’s.
Increasing demand to make more room for imports
During the past 5 years, Urea offtake in the country has increased at a CAGR
of only 3.2%. For CY11, we expect countrywide Urea offtake to clock in at
6.23mn tons (up 1% YoY), 80% of which is expected to be produced locally.
Going forward, we expect Urea offtake to grow at 2% for CY12, and 2.5% for
CY13. DAP offtake, on the other hand, has experienced a minor contraction
of 2.2% (5-year CAGR). For CY11, we expect DAP offtake to appreciate by a
decent 12% YoY on the back of low base-effect (DAP offtake was low during
CY10 due to massive flood facing the country). We expect DAP offtake to
grow by 5% and 3% in CY12 and CY13 respectively.
Low gas availability => lower production => Higher price
Fertilizer sector is equipped with an enviable pricing power and this is what
makes the sector highly attractive for making investments. For instance,
during CY11YTD, average Urea prices have gone up by a massive ~60% YoY.
The main reason behind price increase by such massive rate is the acute
supply shortage of gas (basic raw material). While the menace of gas
curtailment continues to sting and hamper country’s economic activity,
fertilizer manufactures are forced to increase their prices in order to curtail
0
1000
2000
3000
4000
2006
2007
2008
2009
2010
2011YTD
DAP Urea
Local urea DAP historical prices(P KR / bag)
UREA, DAP - OFFTAKE SNAPSHOT
Offtake CY06A CY07A CY08A CY09A CY10A CAGR CY11E CY12F CY13F CAGR
UREA 5,235 4,917 5,532 6,478 6,123 4% 6,246 6,371 6,530 2%
Growth 2% -6% 13% 17% -5% - 1% 2% 2% -
Local Portion 90% 95% 92% 78% 84% -2% 80% 81% 83% 0%
DAP 1,508 1,390 775 1,691 1,322 -3% 1,483 1,557 1,612 7%
Growth 0% -8% -44% 118% -22% - 12% 5% 3% -
Local Portion 31% 25% 40% 42% 50% 12% 45% 42% 41% -6%

6InvestCap Research
October 2011
Pakistan Research
their losses. This increase in price on an already low production is proving to
be tough on the farmer. However, this price increase has also aided the
gov’t in a way, as now it has to provide lower subsidy on imported Urea. We
expect Urea imports to be around 1.25mn tons in CY11, and as per our
calculations, every Rs50/bag increase in product price brings gov't subsidy
down by a massive Rs1.25bn. However, we expect the total subsidy on
imported Urea to stand around Rs21.5bn for CY11.
As for DAP, rising price of Phos-acid is forcing FFBL to raise prices so that the
company can maintain its already high margins.
International and local prices converging
If we look at the graph, we see both local and international prices of Urea
move in the same direction. However, YTDCY11 Urea prices have
experienced expansion albeit with a smaller gap between local and int’l
prices. Therefore, any hike in the int’l prices of urea can provide local
manufacturers with further room to increase their prices in the future. At
current levels, Urea’s global price is hovering at a premium of ~46%.
Urea prices rise sharply than input prices
Ever since gas curtailment came into the picture, Urea manufactures were
forced to increase prices by a higher magnitude. As the graph below reveals,
during YTDCY11, Urea price has gone up by more than 40% whereas cost of
the input (gas) has gone up by a mere 3%, suggesting that it has been gas
curtailment instead of any increase in the per mmbtu cost of gas that left
Urea manufacturers with no other option but to increase product price to
maintain their margins.
-
100
200
300
400
500
2006
2007
2008
2009
2010
2011YTD
Local Urea Imported Urea
Avg annual int'l and local urea prices(USD / to n)
-20%
0%
20%
40%
60%
80%
2006 2007 2008 2009 2010 2011YTD
Cumilativ e gas price
increase
Urea price increase
(% change)
Urea price and gas price
Source: Bloomberg, InvestCap Research

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October 2011
Pakistan Research
DAP prices on the march
DAP prices, on the other hand, have escalated at a 24% CAGR (as the graph
reveals), where much of the increase was witnessed post 4MCY11 and
imposition of Sales Tax on fertilizers. However, during the same period DAP’s
primery raw material (Phos-acid)’s prices escalated at 13% CAGR with import
price of DAP increasing by the same quantum. Keeping up with current trend,
we expect Phos-acid prices to rise in the coming quarter, and expect it to
hover around USD1,120/ton, thus we expect local prices of DAP to rise as
well. As far as international prices are concerned, new supply from Ma'aden
is expected to bring the prices of DAP down in the international market.
Rain cum flood impact not significant
The following graph shows provincewise Urea and DAP offtake numbers. The
figure shows the province of Punjab enjoys the lion's share in both Urea and
DAP offtake, keeping in view this trend, we do not expect rain-cum-flood
situation in Sindh to hurt the cumulative offtake of fertilizer in the country,
and expect the offtake levels to stay closer to their annual averages.
0
200
400
600
800
1000
1200
1400
CY06A
CY07A
CY08A
CY09A
CY10A
YTDCY11A
Local DAP International DAP
Phos-acid
Avg annual int'l, local DAP and Phos-acid
prices(USD/ton)
0%
20%
40%
60%
80%
100%
2006A
2007A
2008A
2009A
2010A
7MCY11
2006A
2007A
2008A
2009A
2010A
7MCY11
Punjab Sindh KP Balouchistan
Province wise DAP and urea offtake
DAP Urea

8InvestCap Research
October 2011
Pakistan Research
Sector Outlook - Brighter ahead
Additional gas flows form Qadirpur field and Kunal Pasaki, are expected to
add ~200mmcfd to the sui network grid, which going forward should improve
the supply situation to the fertilizer plants on Sui Network, enabling them with
better flow of gas. However, this is a short term measure, in the long term,
unless any sizable discovery is made gas, outages are expected to occur
regularly with increasing durations. Thus, in the long run fertilizer price rise is
highly likely. Being an agrarian economy we expect demand for Urea to be
ever present.
Regional Attractiveness
Not only on the local front, Pakistan fertilizers stand highly attractive in a
regional contest as well. Following graphs show key ratios and profitability
growth measures on which Pakistan fertilizers (mainly FFC, FFBL and ENGRO)
stand out. The three major companies show higher Earnings Growth, Dividend
Yields and Return on Earnings with lower Price to Earnings, as depicted by the
following charts.
Regional ROE
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FFCPA
FFBLPA
ANHUICH
YIWUCH
RESPIN
RALIIN
SHINDOOCH
ENGROPA
GSFCIN
TPBTB
Regional Earning Growth
0%
2%
4%
6%
8%
10%
12%
14%
TPBTB
FFBLPA
ENGROPA
FFCPA
GSFCIN
SHINDOOCH
YIWUCH
ANHUICH
RALIIN
RESPIN
Regional PE
-
5
10
15
20
25
30
35
RESPIN
RALIIN
ANHUICH
YIWUCH
SHINDOOCH
GSFCIN
FFCPA
ENGROPA
FFBLPA
TPBTB
Regional Dividend Yield
0%
2%
4%
6%
8%
10%
12%
14%
16%
FFBLPA
FFCPA
TPBTB
ENGROPA
GSFCIN
RALIIN
SHINDOOCH
RESPIN
ANHUICH
YIWUCH

9InvestCap Research
October 2011
Pakistan Research
Fauji Fertilizer
Company Limited

10InvestCap Research
October 2011
Pakistan Research
FFC - Royal flushing peers’ moves
Rising Urea prices proved to be most fruitful for FFC, as the company receives
its gas supply from the Mari network. During 1HCY11, company’s topline grew
by a decent 21% YoY on the back of ~37% YoY increase in the price of Urea.
However, had production levels not fallen by 5% YoY during the said period,
topline could have witnessed further growth. Gross margins experienced a
colossal growth of 12.3pps, owning to above-mentioned price increase
coupled with decrease in the cost of production (amid gas curtailment),
while the input charges per unit remained the same. Distribution charges
also rose by 16% YoY mainly due to the rise in the price of diesel (up 20% YoY).
Increase of 89% YoY in other income (higher dividends from FFBL) contributed
heavily in bolstering the bottomline (35% EPS contribution). This increase at
such massive level aided in offsetting 78% YoY increase in other charges of
the company, leading to a bottomline growth of 61% YoY.
FFBL's dividends to keep providing support
FFC has ~51% stake in FFBL, which entitles FFC to enjoy 51% of all the dividends
that FFBL declares (FFBL’s dividend contribution to FFC earnings has
substantially increased to 36% against 20% during CY05-10). During CY11,
FFBL’s contribution to FFC’s earnings is expected to increase to 40%, on the
back of massive increase of 50% in FFBL’s earnings this year. Thus, going forward,
FFC1HCY11 RESULT REVIEW
(Rs mn) 1HCY11 YoY 2QCY11 QoQ
Net Sales 24,221 21% 13,120 18%
Gross Profit 13,693 55% 7,783 32%
Gross Margin 56.5% 12.25pps 59.3% 6pps
Selling and Distribution Cost 2,165 16% 1,148 13%
Finance Cost 471 -5% 242 6%
Other Expenses 1,121 78% 615 21%
Other Income 2,882 89% 919 -53%
Profit after Tax 8,189 61% 4,080 -1%
EPS @ 848mn shares 9.65 4.81
DPS @ 848mn shares 9.25 4.75
Company Discripation
Fauji Fertilizer Company Limited is the
largest urea producer in Pakistan; the
company also enjoys the biggest
market share of the urea market. FFC
was incorporated in 1978 as a
private limited company. This was a
joint venture between Fauji
Foundation (a leading charitable
trust in Pakistan) and Haldor Topsoe
A/S of Denmark. Today the company
has assest bass of ~Rs45bn, making it
one of the leading and most
profitable companies in Pakistan.
-
5.00
10.00
15.00
20.00
25.00
30.00
CY11F
CY12F
CY13F
CY14F
CY15F
0%
5%
10%
15%
20%
25%
30%
35%
FFC EPS
FFBL's contribution
Percentage participation by FFBL(EPS Rs)
FFBL EPS participation in FFC
FFC Gross Margins
25%
30%
35%
40%
45%
50%
55%
60%
65%
CY05A
CY07A
CY09A
CY11E
CY13F
CY15F
Bloomberg Code FFC PK
No. of Shares 848.16mn
Avg Daily Vol (1-Yr) 1.86mn Sh
Last Closing Rs170.62
Target Price (Jun-11) Rs251.00
Upside Potential 47.10%
Dividend Yield (CY12) 15.35%
Total Return (CY12) 62.45%
Return in CY10 22.28%

October 2011
Pakistan Research
FFC’S WIND POWER PROJECT
Project cost USD140mn
Capacity 50mw
Debt financing 70%
Equity financing 30%
Source: Company Reports
UREA PRICE SENSITIVITY WITH EPS
Price/bag (Rs) CY12F CY13F T. Price
Base-case 29.11 29.30 251
20 29.75 29.97 257
40 30.40 30.64 263
60 31.04 31.31 269
80 31.69 31.98 275
100 32.34 32.65 280
2,000
2,100
2,200
2,300
2,400
2,500
2,600
2009A
2010A
2011E
2012F
2013F
112%
114%
116%
118%
120%
122%
Urea Production
Urea Sales
Capacity Utilization
FFC production and sales
(000 tons)
stable income from FFBL is going to boost earnings of FFC, in addtion to core
income increase. Currently, FFBL's participation in FFC's EPS is expected to be
at ~40%, which is expected to stabilize at ~30% during CY12 and CY13.
FFC the biggest gainer of any urea price hike
FFC receives gas supply from Mari-gas fields; hence the company is not facing
as much of a dire situation on gas supply front as players on the SNGP network.
Therefore, any increase in the price of urea coming from ENGRO (over and
above our price assumption, which is same as for ENGRO) is going to be
beneficial for FFC. We have given below a sensitivity that showcases the
impact of Urea price change on expected earnings of FFC.
Company embarking on new ventures
FFC successfully had a financial close of its venture in the wind power project.
As per our discussion with the company’s management, the cost of the project
is expected to be around USD140mn, with debt to equity ratio being at
70:30. The project is expected to come online during early CY13.
This project is going to be beneficial for the company due to virtually non-
extent operating cost. Guarantee of the wind speed insured by the gov’t of
Sindh also makes this project an attractive investment for FFC. From a
valuation standpoint, keeping timeline of the project we have not yet
incorporated the earnings impact of this project, which would have only
made FFC’s already compelling valuations more attractive.

October 2011
Pakistan Research
Outlook and Recommendation
As discussed earlier, the company is not as much plagued as its peers on the
Sui network. Thus, as gas curtailment increases on other fertilizer players in
the sector i.e. Engro, it is going to benefit FFC in form of increased margins
with every increase in Urea price that Engro passes on to consumer in order
to make up for the production loss.
FFC is currently trading at forward PE of 5.86x and 5.8x for CY12 and CY13
respectively, coupled with CY12 and CY13 massive dividend yield of ~15.4%
15.6%. Like FFBL, the company’s main investing trigger is its handsome payout
(90% for CY11E,CY12F and CY13F). We have 'Buy' call on the scrip with Jun-12
Target Price of Rs251/share, which provide a solid 47% upside from current
levels.
FFC VALUATION BREAK UP
Rs mn CY11E CY12F CY13F CY14F CY15F Terminal
FCFE 23,060 26,510 23,302 22,823 23,997 144,732
Cost of equity 21% 21% 21% 21% 21% 21%
Discounted FCFE 26,489 24,433 19,384 17,746 17,741 107,001
Accumulated FCFE 212,795
Number of shares 848
FCFE per share 251
VALUATION CRITERIA
Cost of Equity 21%
Risk Premium 6.5%
Terminal growth 3%
-1
49
99
149
199
249
299
Jan-
06
Sep-
06
May-
07
Jan-
08
Sep-
08
May-
09
Jan-
10
Sep-
10
May-
11
FFC PE Bands
3x
5x
8x
10x
15x
(Rs bn)

October 2011
Pakistan Research
FFC’S INCOME STATEMENTS
(Rs mn) CY09A CY10A CY11E CY12F CY13F
Sales 36,163 44,874 57,936 64,037 66,599
Cost of Sales 20,515 25,310 24,171 24,200 26,114
Gross Profit 15,648 19,564 33,766 39,838 40,485
Selling and Distribution 3,175 3,944 6,144 5,302 5,539
EBIT 12,474 15,619 27,622 34,536 34,945
Financial charges 945 1,087 1,106 1,117 754
Other income 2,801 3,153 5,247 5,625 5,344
Other charges 1,272 1,376 2,334 1,796 1,868
Net Profit before Tax 13,057 16,310 29,428 37,248 37,668
Tax 4,233 5,281 9,656 12,560 12,814
Profit after tax 8,824 11,029 19,772 24,689 24,853
EPS (Rs) @ 848mn shares 10.40 13.00 23.31 29.11 29.30
DPS (Rs) @ 848mn shares 13.15 16.00 20.98 26.20 26.37
FFC'S BALANCE SHEETS
Equity
Issued and Paidup 6,785 6,785 8,482 8,482 8,482
Share Capital 13,083 15,448 24,745 34,125 46,256
Liabilities
Long term Liabilities 7,615 7,035 7,857 6,155 4,697
Current Liabilities 17,855 20,578 23,922 26,993 27,258
Total Liabilities 25,469 27,613 31,221 33,148 31,955
Equity Liabilities 38,552 43,061 56,524 67,273 78,211
Assets
Current Assets 14,917 17,224 30,435 41,484 52,604
Fixed Assets 23,634 25,837 26,089 25,789 25,607
Total Assets 38,552 43,061 56,524 67,273 78,211
FFC'S CASH FLOWS
Cashflow from Operations 13,519 15,917 20,545 30,167 26,548
Cashflow from Investments (5,758) (8,657) 614 (878) (1,044)
Cashflow from Financing (4,842) (9,920) (10,561) (17,160) (14,924)
Net Inflow / Outflow 2,918 (2,660) 10,598 12,129 10,580
Source:Company Reports, InvestCap Research
Financial Highlights

October 2011
Pakistan Research
FFC’S KEY RATIOS
Liquidity ratios
Current Ratio 0.84 0.84 1.24 1.4 1.68
Quick Ratio 0.61 0.66 1.01 1.19 1.45
Captial structure
Times interest earned 14 15 25 27 41
Int bearing debt to equity 0.35 0.25 0.19 0.1 0.04
Total debt to equit 1.95 1.79 1.3 1.05 0.79
Returns ratios
Return on assets (RoA) 23% 26% 34% 34% 31%
Return on Equity (RoE) 67% 71% 79% 71% 56%
Return on Cap. employed 55% 62% 95% 101% 103%
Profitablity margins
Gross margin 43% 44% 57% 58% 57%
EBITDA Margin 37% 37% 45% 56% 54%
Net profit margins 24% 25% 34% 35% 34%
Growth
Sales 18% 24% 25% 6% 4%
EBITDA growth 28% 24% 63% 11% 1%
Net profit growth 35% 25% 72% 10% 1%
General ratios
PBV 11.06 9.37 5.84 4.24 3.26
Payout ratio 126% 123% 90% 90% 90%
Dividend Yield 7.7% 9.4% 12.3% 15.2% 15.4%
PE 16.40 13.12 7.31 5.86 5.82
Source:Company reports, InvestCap Research
Key Ratios

October 2011
Pakistan Research
Fauji Fertilizer Bin
QasimLimited

October 2011
Pakistan Research
FFBL - The little ‘giant’
Following the trend of sector profitability, 1HCY11 proved to be exceptionally
good for FFBL. Company's topline grew by a massive 51% YoY, primarily owing
to price appreciation experienced in DAP, where it grew by ~33%YoY.
Furthermore, product offtake supported this increase as volumes grew by a
solid 29% YoY. The company's gross margins also bolstered by massive 627bps
in 1HCY11, which was mainly due to magnitude of price increase, appreciating
by greater than the increase in raw material cost (Phos-acid, DAP's prime
raw material) that grew by 26% YoY.
An astounding 81% YoY in gross profit coupled with 4% YoY decrease distribution
charges led to a bolstered EBIT margins, rising by stupendous 900bps to .
Financial charges of the company remained almost at the same level as
previous year’s. As a result net profit of the company grew by mammoth
104% YoY.
Margins expected to remain robust
We have seen Phos-acid prices going up by 13% QoQ in 3QCY11, which is
expected to normalize going forward. In immediate terms, we foresee Phos-
acid prices reacting USD1,20-1,150/ton during 4QCY11. On international front,
we foresee supply to be on the rise as Saudi Arabian mining company, Ma'aden,
is expected to come online in 4QCY11. This additional supply is expected to
bring down the price of DAP to an extent in the international market, while at
current point in time, Pakistan is importing DAP at CFR price of USD695/ton.
Though in the short term, increasing cost of Phos-acid is expected to pull
down FFBL’s margins where the company enjoys primary margin of USD310/
ton currently. On the other hand, FFBL’s YTD primary margins have averaged
at ~USD325/ton. This rising cost of Phos-acid in the short term is expected to
be easily passed on to the consumer, as FFBL enjoys exclusive pricing power
being sole producer of DAP in Pakistan.
FFBL1HCY11 RESULT REVIEW
Net Sales 18,017 51% 9,963 124%
Gross Profit 6,929 81% 4,182 152%
Gross Margin 38.4% 621bps 41.9% 780bps
Admin Cost 296 42% 182 159%
Selling and Distribution Cost 1,048 -4% 683 187%
Other Operating Income 741 50% 409 123%
Other Operating Charges 406 116% 235 137%
EBIT 5,921 108% 3,491 144%
Finance Cost 373 13% 266 248%
Profit After Tax 3,514 104% 1,956 126%
EPS (Rs) @ 934mn shares 3.76 2.09
EPS (Rs) @ 934mn shares 3.50 2.25
Fauji Fertilizer Bin Qasim Limited is a
subsidiary of Fauji Fertilizer Company
(51% stake), the company Limited is
the sole manufacturer of DAP in
Pakistan. FFBL previously was known
as FFC-Jordan because of 10% stake
held by Jordan Phospate Mines Co.
However, in 2003 Jordan Phosphate
Mines Co. sold its share, hence the
company was renamed as Fauji
Fertilizer Bin Qasim Limited (FFBL).
FFBL Gross Margins
25%
27%
29%
31%
33%
35%
37%
39%
41%
CY05A
CY07A
CY09A
CY11E
CY13F
CY15F
Bloomberg Code FFBL PK
Target Price (Jun-11) Rs72.00

October 2011
Pakistan Research
Depreciating PKR to impact FFBL’s margins a bit
Since FFBL's prime raw material (Phos-acid) is imported and it is denominated
in USD terms, it stands prone to depreciation in PKR. We have done a
sensitivity that showcases impact of PKR depreciation on FFBL’s earnings
outlook. Phos-acid price has been on the rise off late due to global demand
of the commodity, which coupled with PKR depreciation may put pressure
on copmany’s primary margin, while its pricing power may provide partial
relief.
Being country's sole DAP producer, FFBL's DAP offtake is not expected to go
down despite price expansions. However, DAP margins are at their record
high (primary margin at average USD311/ton) at the moment, and going
forward are expected to normalize to the level of around USD250/ton.
Strong dividends are the major investing trigger for the stock. We have 'Buy'
call on FFBL with Jun-12 Target Price of Rs72/share. The scrip currently offers
an upside of a decent ~17%, alongwith a shining CY12F and CY13F dividend
yield of an average ~15%. At current levels, FFBL is trading at PE of 6.11x and
6.49x for CY12 and CY13 respectively.
PKR DEPRECIATION IMPACT ON FFBL EARNINGS
Rupee Depreciation Change in earnings
5% -3%
6% -6%
7% -8%
8% -10%
9% -12%
10% -15%
FFBL VALUATION BREAK UP
Rs mn CY11E CY12F CY13F CY14F CY15F Terminal
FCFE 6,179 7,924 9,367 8,775 10,673 65,881
Cost of equity 20% 20% 20% 20% 20%
Discounted FCFE 6,758 7,241 7,152 5,598 5,689 35,115
Accumulated FCFE 67,553
Number of shares (mn) 934
FCFE/share (Rs) (Jun-12 TP) 72
Source: Company Reports,, InvestCap Rsearch
-
100
200
300
400
500
600
700
2009A
2010A
2011E
2012F
2013F
0%
20%
40%
60%
80%
100%
Urea Production
Urea Sales
FFBL urea production and sales
snapshot
(000 tons)
-
100
200
300
400
500
600
700
800
2009A
2010A
2011E
2012F
2013F
0%
20%
40%
60%
80%
100%
120%
DAP Production
DAP Sales
FFBL DAP production and sales
snapshot
(000 tons)
VALUATION CRITERIA
Risk free 14.5%
Risk Premium 6.5%
Terminal growth 5%
-1
49
99
149
199
Jan-06
Sep-06
May-07
Jan-08
Sep-08
May-09
Jan-10
Sep-10
May-11
FFBL PE Bands
3x
5x
10x
15x
18x
(Rs bn)

October 2011
Pakistan Research
FFBL’S INCOME STATEMENTS
Net sales 36,725 43,257 56,180 59,784 59,482
Cost of Sales 27,060 29,794 37,198 41,213 41,312
Gross Profit 9,665 13,463 18,982 18,571 18,170
Distribution Expense 2,236 2,585 3,009 2,950 3,100
Administrative Expense 401 700 1,045 1,141 1,163
Operating profit 7,028 10,178 14,927 14,480 13,906
Financial Cost 1,460 934 905 269 287
Other Operating Expense 443 713 1,015 1,116 1,132
Other Income 998 1,033 1,495 1,098 930
Share of Associate's profit / (loss) (315) 121 186 219 243
Compensation from GOP - - - - -
Profit Before Tax 5,808 9,686 14,688 14,412 13,660
Taxation 2,024 3,171 4,908 4,974 4,767
Profit After Tax 3,784 6,514 9,781 9,438 8,893
EPS (Rs) @ 934mn shares 4.05 6.97 10.47 10.10 9.52
DPS (Rs) @ 934mn shares 4.00 6.55 9.70 9.37 8.57
FFBL'S BALANCE SHEETS
Equity
Issued and Paid up 9,341 9,341 9,341 9,341 9,341
Share Holder Equity 10,660 12,210 16,921 16,439 18,039
Liabilities
Current Liabilities 16,747 15,389 12,465 12,117 12,865
Non Current Liabilities 8,818 7,737 7,089 6,441 5,792
Equity and Liability 36,225 35,336 36,474 34,997 36,697
Assets
Current Assets 18,444 18,318 19,816 18,778 21,001
Non-Current Assets 17,781 17,018 16,658 16,220 15,695
Total Assets 36,225 35,336 36,474 34,997 36,697
FFBL'S CASH FLOWS
Cashflow from Operations 22,953 8,520 11,747 9,208 10,091
Cashflow from Investments (5,378) 2,858 (1,413) (617) (558)
Cashflow from Financing (15,869) (8,305) (9,939) (10,568) (7,442)
Net Cash Inflow/Outflow 1,707 3,072 394 (1,977) 2,091

October 2011
Pakistan Research
FFBL’S KEY RATIO
Liquidity ratios
Current Ratio 1.10 1.19 1.59 1.55 1.63
Quick Ratio 1.14 1.22 1.48 1.70 -
Captial structure
Times interest earned 5.65 12.30 17.90 58.72 53.08
Int bearing debt to equity 1.29 0.87 0.34 0.31 0.27
Total debt to equit 2.40 1.89 1.16 1.13 1.03
Returns ratios
Return on assets (RoA) 10% 18% 27% 27% 24%
Return on Equity (RoE) 36% 53% 58% 57% 49%
Return on Cap. employed 31% 49% 105% 102% 90%
Gross margin 26% 31% 34% 31% 31%
EBITDA margins 22% 27% 29% 26% 26%
Growth
Sales 37% 18% 30% 6% -1%
EBITDA growth 11% 39% 41% -3% -3%
Net profit growth 31% 72% 50% -3% -6%
General ratios
PBV 5.41 4.73 3.41 3.80 3.47
Payout ratio 99% 94% 93% 93% 90%
Dividend Yield 6.5% 10.6% 15.7% 15.2% 13.9%
PE 15.25 8.86 5.90 6.11 6.49
Key Ratios

October 2011
Pakistan Research
Engro Corporation
Limited

October 2011
Pakistan Research
ENGRO - The price king!
Engro Corp's core profitability was bolstered by a solid 49% YoY. However,
after inclusion of one-time accounting change corp’s profiability slid well
below market’s expectation.
Topline of the company grew by an impressive 37% YoY during 1HCY11.
However, cost of sales also grew by almost the same proportion, as a result
gross margins of the conglomerate were up by mere 77bps YoY. Engro Foods
was the top participant in the topline expansion of Engro Corp. Despite
expanding admin (up 36% YoY) and distribution cost (up 17% YoY), company’s
operating margins were up 153bps YoY, mainly because operating income
grew by a larger magnitude (up 49% YoY).
Earnings were expected in the bracket of Rs10-11/share during 1HCY11.
However, the company incorporated a one time accounting change, that
allowed them to incorporate financial charges from May-11 (2 months prior
to commissioning of the new plant) instead of capitalizing them along with
other expenses, which raised financial charges of Engro Corp, rocketed
upwards by 96% YoY. As a result the earnings of Engro Corp's prime bread
earner (Engro Fertilizer) was below expectations (EFert EPS at Rs1.9).
The above-mentioned one-off dampened Engro Corp's earnings for the said
period, however, the company remained glued to its history by offering DPS
of Rs2/sh.
Tweaking assumptions to have value fine-tuned
Keeping in view the recent gas curtailment scenario and lower than
contracted level of supply to EnVen, we have done few changes in the
price assumption of Urea, gas levels that we expect EnVen to enjoy, Urea
production figures and offtake numbers. Currently, ENGRO’s USD1.2bn plant
is receiving 80mmcfd gas supply from SNGP, while another 20 mmcfd
additional supply is being provided by the Mari network. As a result, the plant
is producing 3,500 tons of urea per day, against name-plate capacity of
3,850 tons (~91% capacity utilization).
ENGRO CROP 1HCY11 RESULT REVIEW
Net Sales 46,084 37% 24,236 44%
Gross Profit 13,041 40% 6,916 50%
Gross Margin 28.3% 140bps 28.5% 50bps
Admin Cost 1,359 36% 744 31%
Selling and Distribution Cost 3,184 17% 1,636 19%
Other Operating Income 599 -3% 255 -47%
Other Operating Charges 734 29% 456 0%
EBIT 8,363 49% 4,333 61%
Finance Cost 3,674 96% 2,501 131%
Share of Income from JV 239 -8% 120 -6%
Profit After Tax 3,316 4% 1,274 -8%
EPS (Rs) @ 393mn shares 8.43 3.24
DPS (Rs) @ 393mn shares 2.00 2.00
Engro Gross Margins
25%
30%
35%
40%
45%
50%
55%
60%
65%
CY05A
CY07A
CY09A
CY11E
CY13F
CY15F
Engro Corporation is one of the
leading Pakistani business
conglomerates. Having had
undergone an employee led buyout
in 1992. Currently Dawood Hercules
holds 32% stake in the company.
Engro has expanded its businesses
phenomenally in the past two
decades. As a holding company its
subsidiaries include:
Subsidiary Stake
*Engro Fertilizers Ltd 100%
*Engro Foods Ltd 90%
*Engro Eximp Pvt Ltd 100%
*Avanceon Ltd 100%
*Engro PowerGen Ltd 100%
*Engro Polymers Chem Ltd 56%
*Engro Vopak Ltd 50%
Bloomberg Code ENGRO PK
Target Price (Dec-11) Rs251.00

October 2011
Pakistan Research
We expect EnVen's capacity utilization to be at 77.5% for CY12 (down because
we expect capacity utilization to be at 65% during 1QCY12 and 4QCY12),
owing to gas outages during winter season. We assume the production and
offtake to be at ~1070k tons form new plant, total offtake is expected to be
at 1.9mn tons. This is our long term production assumption as well. On cost
front, we expect fuel gas cost per mmbtu to increase by 2.5% and feed gas
cost per mmbtu to increase by 5.25% ( on old plant), both increasing biannually.
In order to fight this increase in costs, we have assumed ENGRO to raise price
of its Urea by 4% annually.
Fertilizer business stability very important for Engro Corp
Engro Fertilizer is currently the bread and butter for the whole Engro Corp
(bottomline contribution of average 70%), and is going to be so in future as
well due to the attractive margins the company earns on its fertilizer (Urea)
sales. However, with acute gas supply shortages, production of Engro Fertilizer
has painted a different picture from what was expected prior to new
capacity coming online. Going forward, we expect gas supply situation to
gradually improve (as Kunal Pasaki field is expected to add 50-100mmcfd to
Sui network). This expected better supply with current level of product prices
makes Engro Fertilizer an attractive subsidiary of the conglomerate.
Ferlizer business holds largest share in Corp’s value
Engro Corp’s profitability and value share break up graph shows 5-year
average forecasted profitability of Corp’s existing subsidiaries coupled with
their individual value contribution to conglomerate’s target price. In this
regard, Engro Fertilizer leads the way in both the profitability and valuation
departments with average 70% and 63% share respectively.
-
500
1,000
1,500
2,000
2,500
CY11F
CY12F
CY13F
CY14F
CY15F
CY16F
CY17F
CY18F
CY19F
CY20F
0%
20%
40%
60%
80%
100%
Total Offtake
EnVen Production
Capacity Utilization EnVen(000 tons)
Long term offtake and EnVen production
-
500
1,000
1,500
2,000
2009A
2010A
2011E
2012F
2013F
0%
20%
40%
60%
80%
100%
120%
Urea Production
Urea Sales
Engro production and sales
(000 tons)
Eximp
7%
Polymer
2%
Power
4%
Vopak
9%
Avanceon
1%
Food
14%
Fertilizer
70%
Profit Contributors
`
Fertilizer
63%
Food
14%
Avanceon
1%
Vopak
6%
Power
4%
Polymer
3%
Eximp
11%
Value Contributors
`

October 2011
Pakistan Research
As far as profitability and value contribution by other subsidiaries are
concerned:
• 3% is contributed by Engro Foods towards valuation and 7% towards
profitability
• Plagued Engro Polymer has 4% share in valuation, while contributes
2% in corp’s profit
• Engro Power enjoys valuation share of 11% and its profitability
participation is at 4%.
• Trading concern, Eximp has participation of 14% and 7% is towards
profitability
• Vopak and Avanceon have contribution of 6% and 1% respectively.
Their contribution towards profitability is at 9% and 1% respectively.
Decreasing interest rates to benefit Engro the most
With expected cut in the discount rate in up coming monitory policies of the
central bank, ENGRO's PKR denominated debt servicing should experience
contraction due to falling KIBOR, as a result of discount rate cut. We have run
a sensitivity, providing different scenarios at different interest levels and
their impact on ENGRO’s Target Price.
The table above highlights the relativity of financial leverage of Engro Corp
with interest rate volatility. In this regard, 50bps rate cut would increase the
target price of the company by 6%. In CY12 we expect policy rate to shed
100-150bps, which should lead to increase in the target price of ENGRO by
10-15%.
IMPACT OF INTEREST RATE CHANGE ON ENGRO
Interest rate decline Target Price Change
Base case (Rs/sh) 265 -
50bps 281 6%
100bps 291 10%
150bps 306 15%
200bps 322 22%

October 2011
Pakistan Research
Better expected profits from the Engro subsidiaries such as Engro Fertilizer,
Engro PowerGen, Engro Foods, and Engro Eximp (though not as much as
previous year’s), are expected to do their bit to offset the expected
profitability loss of the much plagued subsidiary, Engro Polymer and Chemicals
Limited.
We expect Engro Corp to turn the tide and once again prove as to why it has
been and still continues to be Pakistan's premier company as far as profitability
growth is concerned. We iterate a 'Buy on the scrip with Jun-12 Target Price
of Rs265/share, which offers a massive upside potential of ~92%. At current
levels, the company is trading at CY12F and CY13F PE of 2.70x and 2.51x
respectively.
ENGRO VALUATION BREAK UP
(Rs mn) CY11E CY12F CY13F CY14F CY15-20F Terminal
Fertilier (20,304) 16,283 9,049 4,331 127,914 142,605
Foods (4,172) (1,256) 460 1,083 24,646 79,818
Polymer (1,415) (805) (211) 52 13,833 23,378
Power (Div) 674 735 762 812 4,339 1,130
Eximp (Div) 959 1,689 2,041 1,781 11,286 13,956
Avanceon - 10 77 99 949 1224
Vopak (Div) 505 602 686 765 6,923 9,280
Engro Corp
Aggregate FCFF* (SoTP) (26,101) 15,564 9,553 5,522 189,890 271,287
WACC 14.2% 14.2% 14.2% 14.2% 14.2% 14.2%
Discounted FCFF (SoTP) (24,965) 16,011 9,593 5,438 56,401 56,425
Total Firm Value* 104,262
Number of shares 393mn
Jun-12 Target Price (SoTP) (Rs) 265
*Adjusted cashflows for Corp’s shares in the subsidiaries as well as for their leverage and cash balances
VALUATION CRITERIA
Risk free 14.5%
Risk Premium 7%
Terminal growth 5%
-1
49
99
149
199
249
Jan-
06
Sep-
06
May-
07
Jan-
08
Sep-
08
May-
09
Jan-
10
Sep-
10
May-
11
ENGRO PE Bands
3x
5x
10x
15x
20x
(Rs bn)

October 2011
Pakistan Research
ENGRO’S INCOME STATEMENTS
Net Sales 58,152 79,976 97,950 129,253 142,713
Cost of Sales 44,658 59,702 65,606 80,469 91,044
Gross Profit 13,494 20,274 32,344 48,783 51,668
Selling Distribution 6,215 8,290 7,410 8,319 8,870
Other Income 390 897 728 914 1,035
Other Operating Charges 844 958 1,323 2,004 2,232
Finance Cost 2,222 4,201 6,409 10,273 8,532
Share of Income from JV 459 555 555 662 754
Profit before Tax 5,062 8,277 18,485 29,763 33,824
Taxation 1,343 1,836 6,470 8,917 11,308
Profit after tax 3,719 6,441 12,015 20,846 22,516
Attributable to Equity Holders 3,807 6,790 12,071 20,754 22,275
Attributable to Minority Interest -88 -349 -56 92 241
3,719 6,441 12,015 20,846 22,516
EPS (Rs) @ 393mn shares 9.7 17.26 30.69 52.77 56.64
DPS (Rs) @ 393mn shares 6.0 6.0 6.0 8.0 8.0
ENGRO FERTILIZER CASH FLOWS
Cashflow from Operations 9,244 (14,611) 14,544 18,598 21,765
Cashflow from Investments (38,840) (14,695) (23,427) 9,354 (1,678)
Cashflow from Financing 28,274 24,280 (9,813) (13,064) (12,789)
Net Cash Inflow/Outflow (1,322) (5,026) (18,696) 14,888 7,298

October 2011
Pakistan Research
ENGRO KEY RATIOS
CY09A CY10A CY11E CY12F CY13F
Liquidity ratios
Current Ratio 1.07 2.06 0.46 1.05 1.05
Quick Ratio 0.34 1.73 0.05 0.56 0.58
Coverage ratios
Time Interest Earned 3.28 2.85 3.89 3.94 5.02
Gross margin 23% 25% 33% 38% 36%
EBITDA margins 12% 13% 25% 33% 30%
Growth
Sales 42% 38% 22% 32% 10%
EBITDA growth 0% 48% 139% 74% 1%
Net profit growth -12% 73% 87% 73% 8%
General ratios
PBV 1.45 1.37 1.37 0.95 0.72
Payout ratio 21% 12% 7% 4% 4%
Dividend Yield 1% 1% 1% 1% 1%
PE 14.71 8.25 4.64 2.70 2.51
Key Ratios

October 2011
Pakistan Research
Notes:

October 2011
Pakistan Research

October 2011
Pakistan Research
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Fertilizer Sector October 2011

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