Engro’s stock price depreciating

Issues like gas curtailment and magnifying debt servicing are taking their toll on the stock price of Engro Corporation Limited (ENGRO). Because of this local and foreign investors are offloading their investment. The Stock price plunged to a four months low yesterday at Rs168.9 after closing at the lower circuit breaker.
“We believe that the market participants have overplayed the issue of gas curtailment which has opened up an opportunity for investors to take fresh positions in the stock”, said Shahbaz Ashraf at AHL. He added that the stance on the stock is strengthened by the resumption of gas supply to the new urea plant, which as per the management is sufficient enough to operate the plant at 80 per cent load.
In addition to this, a 390mmcfd gas from Zamzama and Sui Fields will further improve the gas supply situation. In our discussion with the management, we learned that the gas supply to the new urea plant has been restored after 10 days of complete shutdown and gas supply resumption is sufficient enough to operate the plant at 80 percent load, he added. Management was confident to announce commercial operations if the plant runs smoothly for at least a couple of weeks. To deal with the gas curtailment issue, the fertiliser Industry recommended that the Government of Pakistan divert 40mmcfd of gas from the IPPs to fertiliser plants on the SNGPL network.
Fuel requirement of IPPs should be met through Diesel instead of gas. This would further ease the gas curtailment issue. It is estimated that the cost of generating electricity through HSD is six times more than the gas. This cost differential as agreed would be shared two-third by the fertiliser sector and one-third by the government and transferred to the affected IPPs. This plan is valid till 30 June, 2011 as the IPPs’ gas supply agreements are only valid till the end FY2011. As a result, according to media reports urea prices would surge by Rs105 per bag.
The key concern for investors is Engro’s interest bearing debt exceeding Rs108 billion including short term borrowings. Around Rs70 billion or 65 per cent of total debt is to be paid by Engro Fertiliser Limited (EFL), which should not be much of a problem given that its 1.3 million ton fertiliser plant functions smoothly and demand dynamics don’t change. Strong cash flows from the foods and energy business would aid the debt situation as well.
The company is in process of listing Engro Foods. According to industry channels, the company is planning to raise Rs1.875 billion through private placement and an offer to the general public in the near term. Private placement of 48 million shares has already been completed and the company is all set to offer 27 million shares to the general public by listing Engro Foods in Karachi Stock Exchange at a price of Rs25 per share.
In addition to this the company also has plans of listing Engro Power and Engro Fertiliser during CY2011. Cash generated through the offers is likely to help the company in reducing its financial leverage going forward.