Due to gas curtailment Engro has once again raised urea prices by Rs176 per 50 kilogram bag (excluding GST) effective from October 4, the analysts said.
“This is the third time prices are increased by the company in last seven months in order to offset its production losses amid higher gas curtailment on SNGPL network,” said Farhan Mahmood, an analyst at Topline Securities.
He said same as past, this price rise remained a blessing for Mari and SSGC fed fertiliser plants (FFC, Fatima and FFBL) where gas curtailment was relatively lower, because other fertiliser firms would follow Engro and would increase the urea fertiliser prices.
Mahmood said this time the price hike by Engro seemed to be more preemptive rather reactive. “We believe that the company has taken into account both the actual gas curtailment during last few months and upcoming winter gas curtailment,” he said. According to the company, the new Enven plant which runs on SNGPL network remained shut for about 28-30 days (including approx. 10 days of Qadirpur ATA) during July 2011- to present. Besides, the analyst said, the other reason of price increase was higher gas curtailment expected in upcoming winters probably for 3-months starting from December 2011 instead of 2 months expected earlier.
“With so much uncertainty on how much the price is reflective of production losses in case of Engro, the price increase affect on profits is easier to quantify incase of FFC and FFBL which directly benefit from price gain as their cost remains more or less constant,” he said.
The analyst said the annual positive impact of recent hike in urea price was approximately around Rs6 per share for the FFC. “Our 2012 EPS has been revised upward by Rs4.2 per share as we were expecting an increase of Rs30 per bag urea prices in 2012.” “Thus assuming current prices to remain same in 2012, our 2012 EPS has increased from Rs24.4 to Rs28.8,” he said. The FFC could pay Rs24.4 in cash dividend in 2012, he said.
Our next year earnings projection is based on 15 per cent gas curtailment as we think that gas curtailment would be limited on Mari network amid dedicated customers and few capacity additions.
“For 2011 we are expecting an EPS of Rs23.9, up 84 per cent from Rs13 per share last year. Our target price has been revised to Rs220 per share, offering 53 per cent return at current levels (inclusive of dividend),” he added.
The analyst said according to his estimates, Rs176 per bag hike in urea price would improve annualised EPS by Rs1.
“Hence, our 2012 EPS for FFBL has been revised upward to Rs10.2 from Rs9.5 earlier.” For FFBL, which operates at SSGC network, we have assumed 18 per cent gas curtailment which is higher than Mari but lower than SNGPL.
“We expect a dividend of Rs10.1 from FFBL in 2012. For 2011 we are expecting an EPS of Rs9.5, up by 36 per cent YoY. This is primarily due to higher margins on urea (amid more than 45 per cent rise in urea prices) and better volumetric sales of DAP (already up 80 per cent in 8M2011). Our target price of the scrip is now Rs68 per share, offering 34 per cent upside at current prices (inclusive of dividend),” Mahmood said.
The analyst said one risk that most of the people are ignoring is the fact that inefficiency did not continue for a longer period of time. “Sooner or later the slow moving government bureaucracy would eliminate this party time for selected fertiliser producers who are minting money in-spite of low gas curtailment on their plants,” the analyst said.
