Equity Analysis /

Engro Fertilizers: CY 19 analyst briefing takeaways

    Intermarket Securities
    18 February 2020

    EFERT posted NPAT of PKR16.9bn (EPS: PKR12.64) in CY19, compared to a NPAT of PKR17.4bn (EPS: PKR13.04) in CY18, down 3% yoy. The main reasons for the decline are: (i) higher interest rates increasing finance costs; and (ii) an increase in effective tax rate by 10ppt to 38.4% in CY19, as the company reversed a cPKR1.6bn capital gain on Engro Eximp FZE in CY19.

    Key takeaways 

    • EFERT’s Urea production improved to 2,003k tons in 2019, up 4% yoy, owing to better gas availability and debottlenecking of its base plant. This was the highest production by EFERT in the last five years. However, the company’s market share in Urea shrunk to 32% from 34%, due to supply of Urea by LNG based plants and imports.
    • The company believes that Urea demand will remain at 5.8mn tons in CY20 and all four large players have the capability to produce required demand, without the government needing to allocate subsidized gas to LNG based plants.
    • During December 2019, EFERT received PKR2.0bn from the government as sales tax refunds, which will improve the company’s working capital position in the near future.
    • According to the management, there has been no government pressure on the company to reduce urea prices in the aftermath of GIDC elimination. They believe that they have passed on the whole “proportionate” impact of GIDC applicable to EFERT, which pertains to its base plant.
    • If the government pressurizes EFERT to reduce urea prices to PKR1,600/bag, then it will significantly lower the company’s future earnings. This possibility, however, was not ruled out by the management. In our view, the government will force them to match prices with other manufacturers. FFC and FATIMA are presently selling at around PKR1,700/bag, while EFERT is selling at PKR1,840/bag. EFERT is asserting that they agreed with the government to reduce prices only to the extent of their cost reduction and not to PKR1,600/bag – which is applicable to non-concessionary gas-based producers (FFC) without GIDC imposition.
    • As per EFERT management, despite the price divergence in FFC’s and EFERT’s Urea price, the dealers are buying from FFC at the lower price but selling to farmers at EFERT’s price.
    • On the GIDC case being heard by the Supreme Court related to the retrospective application, the management is expecting a verdict to be announced in tomorrow’s hearing.
    • On the impending gas tariff hike, EFERT expects the ECC to approve Ministry of Petroleum’s recommendation – which is a 64% increase in fuel gas rate (equivalent to about PKR170/bag of Urea).

    For our earlier results note, see here.