TPL_111813_53639

Engro Fertilizers Limited Initiating Coverage
Floor Price Rs20
Fair value in Worst case scenario Rs15
Fair value in Base case scenario Rs27
Fair value in Best case scenario Rs37
Share outstanding (mn) 1,298
Book Building (mn) 56.25
Initial Public Offering (mn) 18.75
Engro Corp Divestment (mn) 30.00
Engro Fertilizers: Key numbers
2011A 2012A 2013E 2014F 2015F 2016F
EPS * 3.5 (2.3) 3.9 2.4 4.0 6.4
Growth 23% N/M N/M -37% 63% 60%
PE at Rs20 5.7 N/A 5.2 8.2 5.0 3.1
ROE 25% N/M 24% 13% 18% 22%
Div. Yield at Rs 20 0% 0% 0% 0% 10% 20%
* Base Case Scenario
Source: Topline Research
PAKISTAN INSIGHT
Engro Fertilizers - IPO
November 18, 2013
INITIATING COVERAGE
The Research Department of Topline Securities has prepared this report for information purpose. The information on which this report is based
from sources, which Topline Research believes to be reliable, but we do not guarantee that it is accurate or complete. In particular, the report
takes no account of the investment objectives, financial situation and particular needs of investors who should seek further professional advice or
rely upon their own judgment and acumen before making any investment. This report should also not be considered as a reflection on the
concerned company’s management and its performances or ability, or appreciation or criticism, as to the affairs or operations of such company or
institution. Warning: This report may not be reproduced, distributed or published by any person for any purpose whatsoever. Action will be taken
for unauthorized reproduction, distribution or publication.
Topline Securities (Private) Limited
306, Continental Trade Centre, 3 Floor
Block 8 Clifton, Karachi
Pakistan
Tel: +9221-35303330-32
Fax: +922135303349
Betting on more gas
Investing in Engro Fertilizers public offering is betting on additional gas supply to run its
second plant. Though they have efficiently managed to run their new plant (EnVen) on
Mari gas and seek some interim gas allocations. But the actual value of the company
will unlock if government provides them more gas to run both plants. With long-term
gas plan on Economic Coordination Committee (ECC) agenda since last few meetings,
there are bright chances that the new government may soon ratify the allocation made
to four plants in Dec 2012, though the pricing of that gas is still uncertain.
Amid this uncertainty, assigning a target price for Engro Fertilizers IPO is not easy and
investors should take this IPO as a risky proposition that can generate above average
gains or losses due to ambiguity on gas allocation. Looking at Sharif government’s
seriousness to provide business friendly environment, we bet that more gas will be
supplied to them but not at a discounted price. Thus, in base case, we value the stock
at Rs27 compared to minimum offer price of Rs20. Based on one plant (worst case) we
value it at Rs15 and based on two plants at subsidized rate (best case) at Rs37.
New govt. ratification of long-term gas plan awaited
Since the commencement of new US$1.1bn EnVen plant in 2011, the company faced
severe gas outages being on SNGPL network. However, active attempts to secure gas
supplies brought 60mmcfd gas from Guddu Power since July 2013 and 22mmcfd gas
from Mari SML since April 2013.
In Dec 2012, ECC under the previous govt. approved dedicated 202mmcfd gas to the
consortium of four fertilizer manufacturers from five fields. Engro Fertilizers’ share is
79mmcfd. If the decision is ratified by the current ECC, additional gas may flow from
4Q2014 for which Engro Fertilizers will invest around Rs5.3bn for the pipeline.

Debt restructuring and delay in dividends
Engro Fertilizers total debt of Rs64bn in Sep 2013 is better than Rs72bn in Dec 2011.
In recent debt restructuring, senior loans tenor has been extended by another 2.5 years
with a new covenant restricting to pay dividend until 33% (or Rs17bn) of outstanding
loans as at Jun 30, 2012 have been paid off. Thus, in base case, we expect Engro
Fertilizers to pay first dividend for 2015 of Rs2 per share.
Asad I. Siddiqui
asad.siddiqui@topline.com.pk
Tel: +9221-35303331 Ext: 112
Report completed on November 18, 2013.
Prices as of November 12, 2013.
Topline Research is also available on
Bloomberg, Thomson Reuters & Capital IQ
BUY / SUBSCRIBE
Salman Badami
Salman.badami@topline.com.pk
Tel: +9221-35303331 Ext: 136

IPO: Issue Breakup
Stage 1:
IPO (75mn shares)
Book building (56.25 mn shares)
Retail portion (18.75 mn shares)
Stage 2:
Engro Corp's divestment
30mn shares at strike price
Engro Fertilizers EPS: Different Scenarios
2014F 2015F 2016F
Base 2.4 4.0 6.4
Best 2.8 6.4 8.0
Worst 2.0 2.0 2.8
Fertilizer Sector: Peer P/E Comparison
2014F 2015F
FFC 7.3 6.9
FFBL 6.2 5.8
FATIMA 6.1 5.3
EFERT (PE at Rs20) 8.2 5.0
Average 7.0 5.8
Valuation: Fair value range Rs15-37
For valuation of Engro Fertilizers we have devised three different scenarios. In our base
case scenario, we have assumed that both plants will be operational at average 80%
capacity utilization. Though US$4.5/mmbtu is the price for long term gas that is being
quoted by different sources, but we believe, realized gas price will be around
US$6.5/mmbtu (due to US$2/mmbtu GIDC). In this scenario, we arrive at a target price
of Rs27 per share.
Our best-case scenario is based on assumption that the company will be getting long-
term gas supply at US$4.5 per mmbtu and that there will be no GIDC on this supply.
Through this, the company’s fair value will be at Rs37 per share. In worst case, we
have assumed the company’ will continue to receive gas that it is currently receiving (ex
Guddu) and will run its US$1.1bn more efficient EnVen plant. In this case, the fair value
of the company is Rs15 per share.
Engro Fertilizers long-standing demand has been that it should be allocated gas at
US$0.7 per mmbtu, which is as per their agreement with SNGPL for 10 years. In this
case, the company will substantially reduce its urea price and the target price can go
beyond our best case scenario.
Public Offering
Engro Fertilizers, a major subsidiary of listed Engro Corporation (ENGRO), is doing
book building on Nov 19-21, 2013. This will be the second IPO at Karachi bourse of this
calendar year. The timing of this offer cannot get any better as both plants have been
operating at 86% capacity smoothly since Aug 2013 and long term gas price is on the
agenda of ECC.
Engro Fertilizers Limited will issue 75mn ordinary shares, out of which, in the first stage,
56.25mn shares (75% of the total issue and 5.8% of the total paid-up capital) will be
offered through book-building mechanism at a floor price of Rs20/share. The remaining
18.75mn (25% of the total issue), in the second stage, will be offered to the general
public at the strike price to be determined via book-building mechanism. Moreover, up
to 30mn shares will divested by Engro Corporation (ENGRO) at the strike price
determined by the same book-building mechanism which will be offered to HNWI (High
net-worth individuals) and foreign investors on first come first serve basis. The OFS
(offer for sale) of 30mn shares is at the discretion of the company and is not mandatory.
2
Engro Fertilizers: Key numbers (Base case scenario)
2011A 2012A 2013E 2014F 2015F 2016F
Sales (k tons) 1,260 938 1,599 1,497 1,810 1,813
EBITDA (Rs mn) 16,772 11,697 22,584 19,488 21,544 23,920
PAT (Rs mn) 4,589 (2,935) 5,024 3,156 5,148 8,272
EPS (Rs) 3.5 (2.3) 3.9 2.4 4.0 6.4
Div Yield 0% 0% 0% 0% 10% 20%
EV/EBITDA 2.6 3.5 1.7 2.0 1.7 1.3
EV/ton (Rs) 42,923 40,695 38,362 38,288 36,199 31,086

Urea Production (000' tons) & Growth
-30%
10%
50%
90%
-
500
1,000
1,500
2,000
2011A
2012A
2013E
2014F
2015F
2016F
Production (LHS) Production Growth (RHS)
Long-term gas & its pricing: Main earnings driver
Ever since, Engro Fertilizers started commercial urea production of its 1.3mn tons
US$1.1bn EnVen plant in June 2011, the company has been facing gas outages on this
new plant being on SNGPL network. This is because Pakistan has been facing acute
gas shortage as gas production has grown at only 0.5% CAGR in last 5 years in spite of
rising energy needs.
From the start of 2013, however, the company actively pursued alternative solutions to
resolve gas issues. In this regard, the company first diverted Mari gas from its base
plant to its more efficient EnVen plant. This shift brought incremental production
capacity of around 10-15%. Moreover, from July 2013, 60mmcfd gas was diverted from
Guddu power plant which is close for maintenance till 1Q2014 enabling Engro
Fertilizers to operate its both plants at production capacity of 87% in 3Q2013. This
helped the company to post highest ever profits of Rs3.2bn (EPS of Rs2.8) in 9M2013
with EPS of Rs1.48 in 3Q2013 alone.
Going forward, as part of the FFM (Four Fertilizer Manufacturers) consortium, the
company is actively pursuing a long-term gas allocation. In Dec 2012, ECC (Economic
Coordination Committee) approved allocation of 202mmcfd of gas to the FFM
consortium from five dedicated fields (Mari SML, Reti Maru, Kunar Pasaki Deep in
Sindh, Makori East in KPK and Bahu in Punjab). Engro Fertilizer share in this is
79mmcfd while fertilizer plants are to sign Gas Supply Agreement (GSA) directly with
the field operators instead of the Gas Distribution Companies (GDCs) being SNGPL
and SSGC. The field operators will charge weighted average gas price at US$4 per
mmbtu, in addition to US$0.5 per mmbtu tolling charges to SNGPL.
If the decision is ratified by the ECC which is expected soon, additional gas inflow will
start from 4Q2014 enabling the company to run both plants at 80% capacity on
consistent basis. Although Engro Fertilizers demand is to get at discounted price of
US$0.7 per mmbtu that was committed, we think ECC may allocate gas at current
prices along with GIDC and other charges that comes to US$6.5 per mmbtu.
De-leveraging and debt restructuring
Engro Fertilizers is deleveraging its balance sheet since 2011. Currently, as of Sep
2013, the company’s interest bearing liabilities stand at Rs64bn with debt to equity ratio
of 3:1. At 2012 year-end this was Rs69bn with debt to equity ratio 4.4:1 and at end of
2011 it was Rs72bn with debt to equity of 3.9:1. As of Jun 2013, local component
stands at Rs43.bn, while foreign component stands at Rs23bn. Capex of US$115mn is
required for the gas pipeline which will connect the urea manufacturers to different
fields in which Engro Fertilizers’ has to pay US$48mn. The company intends to finance
this through internally generated funds and money from the upcoming IPO.
The company has successfully restructured its debt obligation as senior loans tenor
have been extended by 2.5 years. However, the new debt covenant suggests that
company will not pay dividends until 33% or Rs17bn of the outstanding loans (Rs52bn
as at June 30, 2012) have been paid off. The company is expected to pay this loan by
the end of 2015. Though the company is optimistic that long term gas supply will start
from mid-2014, we feel that this gas will be available from 4Q2014. Nonetheless, Engro
Fertilizers will still be able to post EBITDA of Rs22bn in 2015 vs. Rs16bn posted in
9M2013. This suggests that the company will be in a comfortable position to fulfill its
debt obligations. We expect Engro Fertilizers to pay first dividend for 2015 of Rs2 per
share followed by Rs4 per share for 2016.
3
-40%
0%
40%
80%
120%
-
5,000
10,000
15,000
20,000
25,000
2011A
2012A
2013E
2014F
2015F
2015F
EBITDA (LHS) EBITDA Growth (RHS)
EFERT: EBITDA & EBITDA Growth

EBITDA to grow at 5-year CAGR of 15% (Base case)
With restoration of gas supply to Engro Fertilizers by 4Q2014, we believe, company’s
production will increase at 5-year (2012-16) CAGR of 13% against last 3-year (2010-
12) CAGR growth of just 1%. And since Pakistan is a net importer of urea, the company
will be able to sell all of its produce. Engro Fertilizer’s revenues will grow at 5-year
(2012-16) CAGR of 17% and will reach Rs66bn by 2016, as per our estimates. Engro
Fertilizer’s EBITDA will grow at 5-year (2012-16) CAGR of 15% and will reach Rs24bn
by 2016. Similarly, Engro Fertilizer’s earnings are estimated to grow at 5-year (2012-16)
CAGR of 18% and will reach Rs8.3bn mark by 2016, we believe.
4

Local & International Urea Price Gap
Source: Topline Research, Bloomberg
2014 EPS sensitivity to interest rate
Change in IR EPS impact
50 bps -4.5%
100 bps -9.0%
150 bps -13.5%
200 bps -17.9%
Risk to Investment
Gas curtailment
Gas shortage in Pakistan is the topmost concern for investors with regard to fertilizer
sector profitability. Demand for gas is likely to remain above supply level until gas
import projects or new discoveries come online. Any delay in ratification of long term
gas supply to Engro Fertilizers by ECC may increase risk. However, in case long term
gas supply plan gets delayed, existing cash flows from one plant (EnVen) will be
enough to retire debts and can eventually pay dividends when debt goes down in 2015.
Moreover, company is actively pursuing litigation against Ministry of Petroleum and
Natural Resources and SNGPL against curtailment of gas despite Sindh High Court
(SHC) decision to supply gas to the company. Any favorable decision on this front will
have a positive impact on Engro Fertilizers.
Gas price increase risk
Besides gas curtailment, another fear is the expected hike in gas price. This risk has
emerged in last few months when gov’t was in process of rationalizing gas price across
the board and gained further traction post IMF agreement. In the LoI (Letter of Intent)
the govt. earmarked Rs100bn which will be collected by increasing the cess/levy on
gas. Our discussion with the industry players suggests that the govt. is likely to impose
additional cess/levy of Rs100-150 per mmbtu on feed stock gas of fertilizer companies,
currently getting gas at Rs323 per mmbtu. Moreover, further increase in fuel gas price
cannot be ruled out.
This is not a major risk as locally manufactured urea is currently trading at a discount of
30% to international urea. The space is there for fertilizer companies to pass on the
additional cost impact to the end consumer and maintain its margins. As per our
calculation, with every Rs100 per mmbtu increase in gas price due to cess/levy, the
company will be required to increase price (inclusive of GST) of urea by Rs125 per bag
to maintain margins.
Decline in international urea prices
Another risk to company’s profitability comes from decline in international urea prices.
International urea prices declining significantly pose substitution risk. Since local urea
manufacturers cannot sell at a higher price than international urea, decline in
international prices will negatively affect the pricing power of not just the company but
of whole sector. This will make it difficult for the company to maintain its margins.
We flag low probability to this scenario. Though, international urea price declined
significantly to US$290/ton in July 2013 due to oversupply from China. However, this
oversupply window has closed and as a result we have seen urea prices (FoB) rebound
to US$320 per ton. Moreover, rupee devaluation is also supporting local players.
Increase in Interest Rate
At the time when economy is going through a phase of monetary tightening, investors
flag additional risk to leveraged companies. Engro Fertilizers having debt to equity of
3.1 (as of Sep 2013), is the most leveraged company amongst its peers. With local debt
of Rs43bn we estimate that 1% rise in interest rate will push financial cost upwards by
Rs430mn. After tax impact of this will be 9% on 2014F earnings of Rs2.4 per share.
Going forward, as the debt start to decline, impact of rising interest rate will also be
diluted.
5
0
800
1600
2400
3200
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
International Urea Price Local Urea Price

Production Facilities
Plant Product Annual Capacity(MT)
Base Plant Urea 975,000
EnVen Plant Urea 1,300,000
Zarkhez NPK 150,000
About Engro Fertilizer:
Engro Fertilizers Limited was incorporated in June 2009, following a decision to
demerge fertilizer concern from its parent company (Engro Corporation Limited). Engro
Fertilizers Limited is a wholly owned subsidiary of Engro Corporation and a renowned
name in Pakistan’s fertilizer industry. It is primarily in the business of manufacturing and
marketing of urea and NPK (compound) fertilizers. With the establishment of 1.3mn
metric ton state of the art fertilizer complex in 2011 the company’s annual urea
production capacity stands at 2.3 MT representing 33% of entire Pakistan’s capacity.
The expansion project was undertaken at a total project cost of US$1.1bn with
financing from consortiums comprising of both foreign and local lenders. Engro
Fertilizers’s product line comprises of urea sold under the brand name of Engro Urea
and NPK, a compound fertilizer, as Zarkhez. The company, as an agent to Engro
Eximp, an affiliate, is also engaged in distribution & marketing of phosphate-based
fertilizers mainly DAP.
Engro Fertilizers has been engaged in the fertilizer business since 1965, when Esso
Pakistan Fertilizer was established following the discovery of the Mari gas field near
Daharki, Sindh. In 1978, as part of an international name change program, Esso
became Exxon and the company was renamed Exxon Chemical Pakistan Ltd. Later in
1991, Exxon decided to divest its fertilizer business on a global basis. The existing
Exxon employees at that time in partnership with local financial institutions led a
management buyout of Exxon’s equity stake and subsequently renamed the company
Engro Chemical Pakistan Ltd (ECPL). Over the years, the company has diversified by
establishing several other business lines in the form of subsidiaries. Effective Jan 01,
2010, ECPL was renamed Engro Corporation and adopted a holding company structure
by transferring the fertilizer business to Engro fertilizers as a wholly owned subsidiary.
With its head office in Karachi, Engro Fertilizers Limited employs over 1,200 individuals.
About Engro Corporation
Engro Corporation is a public listed company incorporated in Pakistan with current
market capitalization of Rs73bn (US$680mn). Engro Corporation is one of Pakistan’s
largest conglomerates with businesses extension from fertilizers to power generation.
Currently, Engro Corporation’s portfolio consists of seven businesses that include
chemical fertilizers, foods, a bulk liquid chemical terminal, industrial automation, PVC
resin, power generation & commodity trade. The continual expansions & diversifications
in its enterprises necessitated a broad reorganization in Engro Chemical operations and
management. The main activity of the company is to manage investments in subsidiary
companies and joint ventures. Engro Fertilizers, Engro Polymer, Engro Foods, Engro
Eximp and Engro Power are the subsidiaries of Engro Corporation, while Engro Vopak
is a joint venture.
6
Business Wise Breakup
Business (Rs mn) Revenue PAT
Engro Fertilizers 34,422 3,234
Engro Foods 28,023 1,240
Engro Eximp 18,345 (442)
Engro Polymers 18,137 552
Engro PowerGen 8,074 1,527
Engro Vopak 1,485 890
Source: Engro Corp Presentation
Jan - Sep 2013

Mr. Mohammed Sohail CEO Dir: +92 (21) 35303333-4 sohail@topline.com.pk
Research Team:
Mr. Asad I. Siddiqui Senior Research Analyst +92 (21) 35303330-2 Ext: 140 asad.siddiqui@topline.com.pk
Mr. Vahaj Ahmed Senior Research Analyst +92 (21) 35303330-2 Ext: 125 vahaj.ahmed@topline.com.pk
Mr. Zeeshan Afzal Senior Research Analyst +92 (21) 35303330-2 Ext: 125 zeeshan.afzal@topline.com.pk
Mr. Tahir Saeed Research Analyst +92 (21) 35303330-2 Ext: 133 tahir.saeed@topline.com.pk
Mr. Salman Badami Research Analyst +92 (21) 35303330-2 Ext: 136 salman.badami@topline.com.pk
Mr. Uzair Ahmed Research Officer +92 (21) 35303330-2 uzair.ahmed@topline.com.pk
Mr. Fahad Qasim Database Manager +92 (21) 35303330-2 Ext: 112 fahad.qasim@topline.com.pk
Equity Sales Team:
Mr. M. Rizwan Manager Equity Sales Dir: +92 (21) 35303337 muhammad.rizwan@topline.com.pk
Ms. Samar Iqbal Manager Equity Sales Dir: +92 (21) 35370799 samar.iqbal@topline.com.pk
Corporate Office:
306, Continental Trade Center,
Block 8, Main Clifton, Karachi,
Pakistan.
Phone +9221-35303330-2
Fax +9221-35303349
CONTACT US
Analyst Certification
We, Salman A. Badami & Asad I. Siddiqui, for the views expressed in this report certify
that all the views about the subject matter are accurate depiction of my personal view and
no part of my compensation or any other benefits, was in/will be, directly or in indirectly,
related to the specific recommendation expressed in this report. Furthermore, we do not
hold any beneficial.

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