January 17, 2014

MORNING BRIEFING

Pakistan Chemicals Sector

Concessionary gas looks to be back on

Naveed Tehsin

the scene for Engro

naveed.tehsin@js.com

+ 9221 111-574-111

KSE100 Index: Closing 26,730.24 (31.54)

The Economic Coordination Committee (ECC) appears to have approved

the concessionary gas pricing (US$0.7/mmbtu for 10-years) incentive for
Engros fertilizer business, though some ambiguity on the timing and
source of the concessionary gas flow remains.

Ext: 3100
Market Price: Rs171.04
Target Price: Rs179
KATS Code: ENGRO

As per the ECCs press release, Engros concessionary gas period of 10

years is to be extended by the number of days for which SNGP could not
supply gas for operation of the plant.

Bloomberg Code: ENGRO PA

On a net basis, we estimate that (1) decrease in feedstock gas price for
one of Engro Fertilizers plants to US$0.7/mmbtu coupled with (2) recent
hike in GIDC, would increase 2014E EPS for Engro Fertilizer Ltd (EFERT)
by 62% and for Engro Corporation Ltd (ENGRO) by 36%.

Market Cap: Rs87bn, US$859mn

In the same ECC meeting, it was decided that price differential between
imported urea and locally produced urea should be eliminated (both to be
priced at Rs1,786/bag). We view this positively as it (1) suggests Engro
may not reduce urea prices further post allocation of concessionary gas
and (2) reduces incentive for dealers to opt for cheaper imports.
Ambiguity on gas source/timing aside, the above scenario appears
hugely positive for both Engro Corporation and Engro Fertilizer. For
other producers, the situation is less exciting where their pricing power
has been tested with the recent decision to partly reverse urea price hike.

Reuters Code: EGCH.KA

1-yr Avg. Daily Volume:

6.2mn shares, Rs852mn, US$8.4mn
1-yr High / Low: Rs181.38 / 83.80
Estimated free float: 256mn shares (50%)

EPS impact: Gas price for Enven

Engro Corp Engro Fert
Base Case (Rs320/mmbtu)

17.0

US$0.7/mmbtu
%

23.2

3.8
6.2

36%

62%

Source: JS Research

Gas at concessionary rate; Engros time to celebrate

ENGRO

197%

KSE-100

181%
165%
149%
133%
117%
101%

Dec-13

Oct-13

Aug-13

Jun-13

Apr-13

85%
Feb-13

As per our calculations, incorporating the best case where the supply from Mari gas
is being priced at concessionary rate of US$0.7/mmbtu the decrease in feedstock
gas price for Engro Fertilizer, ceteris paribus, is likely to boost 2014E EPS by
~Rs2.4 (+62% vs. our base case) and drive up our current Target Price of Rs32 by
45% to Rs46. Meanwhile for Engro Corporation, we flag EPS upside of ~Rs6.2
(+36% vs. our base case) for 2014 and theoretical valuation upside of 24% to
Rs222 (base case TP: Rs179) in case the company gets US$0.7/mmbtu gas for
one plant.

ENGRO performance relative to KSE-100

Dec-12

The Economic Coordination Committee (ECC) appears to have approved the

concessionary gas pricing (US$0.7/mmbtu for 10-years) incentive for Engros
fertilizer business. As per the ECCs press release, Engros concessionary gas
period of 10 years is to be extended by the number of days for which SNGP could
not supply gas for operation of the plant where ENGRO has also issued a notice to
the KSE verifying the same. That said, we flag that the ECCs statement remains
somewhat ambiguous on the timing and source of the concessionary gas flow and
we await more clarity on the same before building the same into our base case for
both Engro Corporation and Engro Fertilizer. Nevertheless, if the decision to supply
gas to one of Engros plants at US$0.7/mmbtu is confirmed, we expect the same to
deliver urea production cost savings to the tune of ~Rs250/bag for Engro Fertilizer.

Source: KSE

JS Research is available on Bloomberg, Thomson Reuters, CapitalIQ and www.jsgcl.com

Please refer to the important disclaimer on the last page

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January 17, 2014

MORNING BRIEFING

Urea price differential matched

Pakistan market statistics (Jan 16, 14)

In the same ECC meeting, it has been decided that the price of imported urea be
raised to the level of locally produced urea, i.e. Rs1,786/bag from Rs1,600/bag
previously so as to curb corruption due to differential in prices. We view this news
positively for the industry as it (1) suggests Engro may not reduce urea prices
further post allocation of concessionary gas and (2) reduces incentive for dealers to
opt for cheaper imports. However, we flag that for peers, the risk of further hike in
gas prices and the fertilizer sectors resultant inability to pass on the incremental
gas cost remains. To recall, last week government and urea producers reached an
agreement to bring down urea price by Rs114/bag to Rs1,786/bag from
Rs1,900/bag, prior to which urea producers had raised prices by Rs178/bag to
offset the incremental impact of hike in Gas Infrastructure Development Cess
(GIDC). Net allowable increase in urea prices stands at Rs64/bag.

KSE-100 Index

26,730.24

Previous KSE-100 Index

26,761.78

Low pricing power despite ~Rs800/bag price differential

KSE Futures Value (Rs. mn)

While both Engro Corp and Engro Fertilizer should emerge as winners in the above
scenario, for other producers the situation is less exciting where their pricing power
has been tested with the recent decision to partly reverse urea price hike. This is
despite the fact that the price differential between imported and domestically
produced urea has expanded to ~Rs800/bag at current international urea price of
~US$370/ton (FOB).

Also in Focus
Forex reserves up by US$267mn
The country's liquid forex reserves registered an increase of US$267mn during last
week. As per the data, country's total forex reserves surged to $8.32bn as on
January 10, 2014 compared to $8.05bn a week earlier. Reserves held by the SBP
increased by US$222mn to US$3.47bn while those held by commercial banks
witnessed an increase of US$45.4mn to US4.85bn.

-31.54

Change from last closing

-0.12%

Change from last closing (%)

6,471.08

KSE Market Cap. (Rs. bn)

KSE Market Cap. (US$ bn)

61.33

Total Volume (Shares mn)

348.06
9.29

Traded Value (Rs. bn)

88.04

Traded Value (US$ mn)

19,578.46

KSE-30 Index

-33.26

Change from last closing

Change from last closing (%)

-0.17%

KSE Futures Volume (Shares mn)

16.80
1,676.15
3.51%

KSE Futures Spread

Source: KSE

KSE valuations
2013A/E 2014E 2015F
P/E (x)

10.0

8.8

8.2

P/BV (x)

2.1

1.9

1.8

Div. Yield (%)

5%

5%

6%

Earnings growth

9%

15%

6%

Source: JS Research

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