Engro raises urea prices

After imposition of Gas Infrastructure Development Cess (GIDC) and rise in gas tariff, ENGRO has raised urea prices by Rs210 per bag to Rs1,790 per bag. However, as has been previously seen, they may face government’s intervention through regulatory bodies.
On the other hand, if things go smoothly it is expected that other urea manufacturers will follow the same price hike and raise their urea prices to Rs1,790/bag. One can recall that Fauji group (FFC and FFBL) has already increased Rs50 per bag to pass on the incremental cost of gas tariff. Therefore, it is expected that they will increase urea prices by another Rs160 per bag.
Fatima fertiliser may come as a major beneficiary of this price hike as GIDC has not been imposed on its feedstock gas prices because of its prior agreement with the government. This increase in price bodes well for the fertiliser sector on the whole, especially after the huge negative impact following the imposition of GIDC.

Fatima major beneficiary
Fatima may come out to be the major beneficiary of this price hike, because it has not been impacted by imposition of GIDC on its feedstock gas supplies. Moreover, it also bodes well for another one of its product Calcium Ammonium Nitrate (CAN) that is linked with the local urea prices, as it is considered to be a close alternative to urea. If we incorporate impact of GIDC and hike in urea price, our EPS is revised to Rs5.1, said Naveed Tehseen at JS.

Engro raises urea prices
As per expectations, Engro has raised urea prices to completely pass through its incremental cost. Therefore, they will be able to retain their margin. However, with declining trend in international urea prices and this current price hike the gap between the local and international prices will narrow down to merely Rs350 per bag. After incorporating the urea price hike, our EPS forecast for 2012 is likely to be maintained at Rs24.4.

Fauji to follow suit
FFC was the first one to pass through its incremental cost due to gas tariff increase by raising urea prices by Rs50 per bag. However, we expect FFC to follow Engro’s price hike to Rs210 per bag, he said, adding that in our view, the company will not be able to pass through its full incremental cost because as FFC can not justify price hike beyond these levels. If we incorporate the impact of GIDC and hike in urea price, our EPS is revised down to Rs25.6 from Rs28.7, he added.

Bin Qasim to take hit
For FFBL, we expect 2012 earnings to take a hit of Rs1.5 per share as the company will not be able to pass on full cost impact, he said, adding that our 2012E EPS is likely to be revised down to Rs6.5. However, the company may also face declining primary margins of DAP in 2012, because of the continuous decline in international DAP prices. That further poses a key risk to our investment thesis.