Morning Call about – Is there any threat to Fertilizers? – Arif Habib Limited

Karachi, May 14, 2013 (PPI-OT): Fertilizer sector remained dull during CY12 due to various problems, mainly gas unavailability and/or curtailment.

According to Arif Habib Limited however, with the commencement of CY13, the profitability of the sector surged (FFC, FFBL, ENGRO 1QCY13 PAT up 192% YoY), mainly owing to better urea offtake (1QCY13 up 30% YoY) on account of better gas availability (especially for ENGRO and FFBL that faced shortages).

PML’N to prioritize gas for Power over Fertilizer
With PML’N taking lead in Elections 2013 and expectedly prioritizing energy needs (especially for Punjab province as it has been experiencing greatest amount of load-shedding where industries have been suffering the most), and summers going to be full on, gas diversion from fertilizer sector to power sector is talk of the town.

Since new setup’s priority would be to resolve the long-prevailing energy crises, Arif Habib Limited sees diversion of gas from fertilizer plants to the power sector as being one of short term solutions available to the new gov’t. However, numbers do not seem to allow such a diversion for now at least, as the current total shortfall of gas for power sector stands at ~500mmcfd/day while total availability for fertilizer sector (ex. SNGPL network) stands at ~492mmcfd/day (see table).

As of CY12 (mn tons)   Capacity  Production  Utilization   Gas (mmcfd)
FFC                      2.05       2.41          117%          250
Urea                     0.55       0.28          51%            54
DAP                      0.65       0.65         100%            
ENGRO                    2.28       0.97          43%           103
Urea                     0.50       0.34          68%            85
CAN                      0.42       0.37          89%
NP                       0.36       0.26          73%
Total                    5.37       4.00          74%           492

Source: Company Financials, AHL Research

If so, who would be the possible victim?
Unless the long-term gas pipeline plan for fertilizer plants is in place (expected by mid 2014), gas diversion seems a far cry with respect to current scenario. Any diversion of gas to power sector can only be possible by diverting portion of the gas available to the fertilizer sector (~492mmcfd/day). In this case, Arif Habib Limited expects ENGRO and FFBL to remain on the safe side, as the aforementioned companies are already facing gas curtailment (ENGRO promised ~200mmcfd/day, available ~103mmcfd/day,

FFBL promised ~85mmcfd/day, available ~54mmcfd/day). However, though gas flows from the above-mentioned companies are not sufficient to be shared with the power sector, partial gas curtailment of FFC and FATIMA cannot be completely ruled out in the near future, in Arif Habib Limited views.

Arif Habib Limited channels checks suggest there are other ways available by which the new gov’t can manage the current as well as upcoming shortfall (summers, and then winter season). These included gas curtailment on rotational basis or importing more furnace oil for the power sector at least for the short term. In this regard, Arif Habib Limited rules out any possibility of major gas curtailment with respect to the aforementioned companies, however, partial or rotational curtailment could be possible but for a short period of time.

Outlook and Recommendation
Currently, Arif Habib Limited has a ‘Buy’ recommendation on ENGRO and FFBL with Dec-13 price targets of PKR 196/share, 39.4% upside, and PKR 45/share, 17.5% upside, respectively. Arif Habib Limited maintains “Hold” recommendation for FFC, with Dec-13 target price of PKR 126/share.

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