ELIXIR SECURITIES PAKISTAN

Sector Fertilizer Sector

Fertilizer
Update Gas Allocation and Beyond…
Fair value of Key January 15, 2007
Companies
 This report updates valuation of Engro, FFC and FFBL on account of
recent gas allocation and its impact on the three companies
Engro PKR215
FFC PKR123  After 100MMCFD additional gas allocation, Engro has become a
FFBL PKR28 major growth story in the fertilizer sector. With major investment
of around USD1.0bn in 1.3 million tons/annum Urea project,
diversification initiatives, and expansion in Engro Asahi, ENGRO is a
fundamental growth stock for any portfolio
 Surprise withdrawal of FFC from the bidding process does not augur
well for a company struggling to look beyond the fertilizer business.
With any new project to be finalized yet and Urea growth now
capped for at least ten years, FFC needs to come up with new
Table : Sector performance (%)
projects for earnings growth. However, due to decline in FFC’s
1M 3M 12M share price by 24.8% during CY06, FFC once again looks attractive
Absolute (5.74) (6.76) (18.86) with fair value of PKR123 per share
Relative index (3.51) (1.56) (24.16)  Like Engro, FFBL is also a growth story with major BMRE expected
Source: Elixir Research to come online by 2008. FFBL is currently trading at 14.9x CY07F
EPS of PKR1.95. In our opinion, high multiples for FFBL are not
justified as expansion benefits will be offset within two years due
to end of cash subsidy and feed gas concession

Sector Performance Chart  Almost all companies in the sector are likely to post earnings
decline in CY06 with FFC expected to improve its profitability
Absolute Relative to Index
20% marginally in 2007. FFBL, however, will post earnings dip in 2007 as
10% well, due to expansion related shutdowns planned during the year
0%
 The sector has underperformed relative to KSE-100 index on
-10%
account of subdued growth and uncertainty regarding gas allocation
-20%
-30%  Our stance is overweight for Engro and FFC and underweight for
FFBL at current levels
Jan-06

Mar-06

Jul-06

Sep-06

Jan-07
May-06

Nov-06

Fertilizer Sector Highlights

Source: Elixir Research
PKRmn Engro FFC FFBL
Rating BUY BUY HOLD
Fair Value (PKR/share) 215 124 28
Mohammad Saqib, CFA Upside Potential 24% 16% -5%
(92-21) 241 8274 PER (CY06F) 13.0x 11.8x 11.6x
msaqib@elixirsec.com
PBR (CY06F) 3.3x 4.1x 3.4x
EAT CAGR (CY05-CY10) 16% 4% 3%
Saba Irshad Source: Elixir Research

Elixir Securities Pakistan (Pvt) Ltd.

An InvestFin S S.A. group company
 Fertilizer Sector

In this report
Contents
Industry Overview 3
1 Agriculture Sector 3
2 Key Players 3
3 Key Fertilizers 5
4 Fertilizer Consumption Mix and Pricing in Pakistan 6
5 Demand - Supply Situation 10
6 Fertilizer Policy, 2001 12
Engro Chemical Pakistan Limited (Engro) 14
7 Valuations 15
8 About the Company 23
9 Joint Ventures & Subsidiaries 25
10 Profitability Break-up: Existing and Forecasted 27
11 Key Valuation Risks 30
12 Income Statement 32
13 Balance Sheet 32
14 Cash Flow Statement 33
15 Key Ratios 33
Fauji Fertilizer Company (FFC) 34
16 Valuation 34
17 About the Company 36
18 Assumptions 37
19 Future Outlook 38
20 Income Statement 39
21 Balance Sheet 39
22 Cash Flow Statement 40
23 Key Ratios 40
Fauji Fertilizer Bin Qasim Limited (FFBL) 41
24 Valuation 41
25 About the Company 43
26 Assumptions 45
27 Income Statement 49
28 Balance Sheet 49
29 Cash Flow Statement 50
30 Key Ratios 50

2 ELIXIR SECURITIES PAKISTAN January 15, 2007

Fertilizer Sector

Industry Overview
Agriculture Sector
Fertilizer sector is The undeniable importance of the agriculture sector to the economy of
benefiting from GoP’s Pakistan is reflected in its contribution to national output, employment and
focus on agricultural export earnings. This sector contributes 22% to the country's Gross Domestic
sector to reduce poverty Product (GDP) and employs 43% of total labour force. Growth in this area of
economy is vital for poverty alleviation, as about 66 percent of rural
population is directly or indirectly dependent on the agriculture sector for
sustenance. Pakistan’s major source of foreign exchange earnings is the
textile sector which also relies on agricultural performance. The major crops
of Pakistan are wheat, cotton, rice and sugarcane, which make up 7% of the
country’s GDP.
Fertilizer has a significant contribution in increasing crop yields and
productivity. Proper application of nutrients helps in efficient utilization of
limited natural resources such as land and water. Fertilizers improve crop
yield by removing the deficiency of chemical elements taken from the soil by
harvesting, grazing, leaching or erosion. Coupled with improved seeds, better
insecticides and more effective fungicides, chemical fertilizers play a vital
role in boosting agricultural output.

With proper farmer education and increased awareness, the fertilizer off-take
can improve substantially. Nutrient application in suitable quantities can
further improve farm productivity, thereby helping in eradicating poverty.

Key Players
Based on current capacities of Urea and DAP; FFC, Engro Chemical and FFBL
are three major players operating in Pakistan’s fertilizer sector.
Urea Industry in Pakistan
Manufacturer Urea Capacity Capacity Utilization* Share in Local Production
tons/year
FFC 1,904,000 118% 45%
Engro 850,000 107% 20%
FFBL 551,100 105% 13%
Dawood Hercules 445,500 91% 11%
Pak American 350,000 100% 8%
Pak Arab 92,400 124% 2%
Total 4,193,000 110% 100%
*Based on average utilization of past three years
Source: NFDC Reports

Engro Chemical Pakistan

Engro Chemical is the second largest player in Pakistan’s fertilizer industry
having annual designed capacity to manufacture 850kT of Urea and 100kT of
steam granulated blended fertilizer called NPK. Engro has recently won the
bid for 100MMCFD gas from Qadirpur field. The company now plans to set up a
1.3mn tons per annum state-of-the-art Urea plant. Besides the fertilizer
business, Engro also has investments in joint ventures engaged in chemical
terminal operations; PVS resin manufacturing, and automation and control
businesses. The company has also formed Engro Energy Limited, a subsidiary
to establish a 200MW power plant for which Power Purchase Agreement is

January 15, 2007 ELIXIR SECURITIES PAKISTAN 3

ELIXIR SECURITIES PAKISTAN
CEO Institutional Sales Team (Karachi) Pakistan Debt Brokerage Team
Fax (92-21) 242 0331 Fax (92-21) 241 8925 Fax (92-21) 242 3539

Ashraf Bava, CFA Nasir Muqeet Syed Murshid Ali

(92-21) 2401020 (92-21) 240 1049-52 (92-21) 240 1037-40
abava@elixirsec.com nmuqeet@elixirsec.com murshid.ali@elixirsec.com
Noor Hameed Intikhab Naviwala
(92-21) 240 1049 (92-21) 240 1037-40
nhameed@elixirsec.com inaviwala@elixirsec.com
Pakistan Research Team Irshad-Ul-Haq Khan Amir Iqbal
Fax (92-21) 242 0527 (92-21) 240 1049 (92-21) 240 1037-40
irshad@elixirsec.com aiqbal@elixirsec.com
Mohammad Saqib, CFA Arif Rahman Tauqeer Abbas
(92-21) 241 8274 (92-21) 240 1049 (92-21) 240 1037-40
msaqib@elixirsec.com arif@elixirsec.com tabbas@elixirsec.com
Naveed Ahmed Saleem Moon
(92-21) 242 3104 (92-21) 240 1049
nahmed@elixirsec.com smoon@elixirsec.com
Umair Siddique Madiha Khalid Pakistan Forex Brokerage
(92-21) 242 3104 (92-21) 240 1049 Fax (92-21) 242 3539
usiddique@elixirsec.com mkhalid@elixirsec.com
Maryam Hadi Rahil Kothari
(92-21) 241 8271 (92-21) 240 1461/240 1470
mhadi@elixirsec.com rkothari@elixirsec.com
Faisal Bilwani Mohammad Asif
Lahore Sales Team
(92-21) 241 8271 (92-21) 244 0230
Fax (92-42) 5878237
fbilwani@elixirsec.com masif@elixirsec.com

Amal Haider Fahim Ahmed Zeeshan Atique

(92-21) 241 8271 (92-42) 571 7953-57 (92-21) 247 0386
ahaider@elixirsec.com fahmed@elixirsec.com zatique@elixirsec.com

Zobia Hashmi Tahir Maqbool

(92-21) 241 8271 (92-42) 571 7953-57
zhashmi@elixirsec.com tmaqbool@elixirsec.com
Jehangir Khan Shahzad Ahmed
(92-21) 240 1464 (92-42) 571 7953-57
jkhan@elixirsec.com sahmed@elixirsec.com

The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd. (Elixir Pakistan) The information and opinions contained herein has been compiled or arrived at
based upon information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty,
representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without
notice. This document is for information purposes only, descriptions of any company or companies or their securities mentioned herein are not intended to be complete
and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Elixir Pakistan may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before
the material is disseminated to their customers. Not all customers will receive the material at the same time. Elixir Pakistan, their respective directors, officers,
representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers
described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from
time to time in the open market or otherwise. Elixir Pakistan may make markets in securities or other financial instruments described in this publication, in securities of
issuers described herein or in securities underlying or related to such securities. Elixir Pakistan may have recently underwritten the securities of an issuer mentioned
herein. This document may not be reproduced, distributed or published for any purposes.

Foreign currencies denominated securities are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived
from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

Note to U.K. readers: This report is not for distribution in the United Kingdom to private customers, and investments mentioned in this report will not be available to any
such private customer.
© Copyright 2007, Elixir Securities Pakistan (Pvt.) Ltd.