Fauji Fertiliser slumps under urea price drop, development cess

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Amid all the noise of possible reduction in urea prices and imposition of Gas Infrastructure Development Cess (the cess), the stock of Fauji Fertiliser Company Limited (FFC) has lost its vigour by 17.9 per cent, underperforming the benchmark index by 14.5 per cent since start of November 2011. We are of the view that the market has overplayed the aforementioned negatives as positives like strong dividend yield, relatively lower risk of gas curtailment and upwards revision in urea price due to persistence gas curtailment are still intact, said Syed Abid Ali at AHL. Imposition of cess and uncertainty regarding its pass through impact has downplayed on the stock price of FFC.
After imposition of cess, price of feed gas would take a leap of 194 per cent to Rs300/mmbtu. This would require a Rs200 per bag price increase for FFC to keep margins intact. According to earnings sensitivity regarding cess pass through impact on the stock of FFC. If the company is unable to pass through impact of rising cost due to cess, it is likely to erode its CY12 earnings by 14.2 per cent to Rs23.7 per share. We do not rule out the possibility of gradual increase in the Urea prices to pass through of the impact of the cess. ENGRO had to face a stern action by the government, when they increased Urea prices by Rs400 per bag in one go, he added.