The reported curtailment of gas in the fast approaching winter season to the country’s leading fertiliser manufacturer, Fauji Fertiliser Bin Qasim Limited (FFBL), would create a 30 to 35k tonnes shortage of Di-Ammonium Phosphate (DAP) in the agrarian economy. The shortage, the analysts believe, would lead to an increase of Rs50 to Rs100 in the per bag price of DAP in the local market. The increase would take the DAP prices to Rs4,100-4,200 from the existing Rs4,070.
Impact of gas shortage
Citing media reports, the analysts at Topline Securities opine that owing to higher gas shortages during the upcoming winter season, the FFBL was likely to face an additional 15-day gas curtailment during next month (December). “This additional gas curtailment would adversely affect the company’s production in 4Q2011 and thus, create a DAP shortage of 30-35k tonnes,” said Farhan Mahmood of Topline Securities. The analyst, however, said the company’s management was yet to confirm this. He said looking at persistent gas shortage of 27-30 per cent on SSGC network, there was a high probability of the shortage materialising, unless the government decides to divert gas from other sectors in the upcoming gas load management meeting on November 29. “If this happens, this would be the first time that FFBL would face winter gas curtailment starting from December,” Farhan said.
Urea and DAP sales
Last year, he recalled, the company had faced gas curtailment of more than 45-days, from January 2011 to mid February, while so far this year the company had witnessed gas curtailment of 27-30 per cent during 2011. This in turn had adversely affected the company’s urea sales as well that declined by 9 per cent in 9M2011 to 339k tonnes as compared to 372k tonnes in the same period last year, he added. On the other hand, the DAP sales had remained robust showing a growth of 32 per cent in 9M2011.
Earning per share of FFBL
“This is primarily due to higher DAP sales in 3Q2011 as some pre-buying of DAP before Rabi season was also witnessed amid fear of gas shortage,” said Farhan.This additional gas curtailment would adversely affect the company’s production thus creating a DAP shortage, he said.
According to the analyst, the supply shortage scenario might exert an upward pressures on the DAP prices that might rise by Rs50 to Rs100 per bag within next few days. “In case there is complete 15-day gas curtailment in December 2011, our estimate suggests that FFBL’s 2011 EPS will reduce by Rs0.35-0.45,” he said. This, Farhan said, was due to the fact that there was generally higher DAP demand in Rabi season. “We have assumed average DAP margin of $250-260 per tonne in 4Q2011.”