Engro Fertilizer Limited (EFERT) time ahead seems propitious given partial immunity to increase in gas prices, acquisition of Engro Eximp, Pak Rupee stability and lower interest rate scenario. Moreover, expansion into pesticide and insecticide businesses may potentially add more value to the stock. We opine ‘Outperform’ stance on the stock with revised target price of Rs85.5/sh as we have adjusted our valuations post CY14 results.
Impact: Partial immunity to gas price hike: We foresee margin attrition for the fertilizer sector amid its restricted ability to pass on gas price hike (64% and 53% increase in feedstock and fuel stock prices, respectively). However, we believe EFERT is partially immune to this development given implementation of promised concessionary gas to EnVen plant and fixed tariff structure of Reti Maru. To highlight, we have factored in (1) 30%/10% increase in feed/fuel stocks prices and (2) no change in the urea prices for our sector’s valuation. The company has to increase urea prices by Rs120-130/bag (38% lower than FFC) to mitigate proposed hike.
In case the govt. exempts the sector from rate hike (as indicated by some media reports) we see possible upside to our valuation.
Foisting GIDC becomes blessing: The company holds Rs12.6bn in lieu of GIDC payment, which we have assumed would be paid by Jun’15. Therefore, the payment of GIDC (given recent govt stance) shall not require downward adjustment to our valuations. Holding the said amount on the book post Jun’15 would add Rs227mn per quarter to our estimates.
Benefiting from improving economic conditions: We estimate finance cost to drop by its half to ~Rs3bn. Lower finance cost given stability of Pak Rupee (foreign borrowing) and lower interest rates along with debt repayment and conversions, would work as icing on the cake. The company’s foreign exposure has been reduced to 33%, down 4pps YoY as a component of total borrowing as a result of conversion and debt repayment.