June 25, 2012 (JS Research)
Gas related woes of the Sui network and the availability of imported urea by the GoP has taken its toll on the fertilizer sector in general, particularly on FFC. As a result the stock has underperformed the market by 8.6% in 2012 till date. The strategy of local urea manufacturers to reduce price by Rs145/bag from May, 2012 so as to get rid of record inventory has paid off for them. Their offtakes have since then showed an improvement. As per industry sources, FFC has been able to capitalize the most on higher urea demand and has recorded substantial growth in urea offtake in May and June with lower prices. We believe it is likely to report an EPS of Rs3.7 in 2Q2012, up 21%QoQ and we continue to maintain a ‘Buy’ call on the stock.
The major beneficiary of the price cut
According to some industry sources, urea offtake for May was recorded at ~330k tons and uptil the mid of June it has already crossed 500k tons. FFC has been the major beneficiary of the price cut strategy. It has been able to capitalize the most on higher urea demand and has recorded substantial growth in urea offtake in May and June. The pre announced rise in urea price of Rs50/bag from June16, 2012 may have induced farmers to procure urea at the lower price of Rs1,650/bag. The high urea sales has more than offsetted the lower urea price for FFC. Incorporating provisional offtake figure along with our own estimates, we believe FFC will be able to report an EPS of Rs3.7 in 2Q2012, up 21%QoQ despite the absence of any dividend income from FFBL.
Gas related woes of Sui network
Currently, the fertilizer plants on the Sui network (SNGP and SSGC) are all closed as the gas supply has been diverted for power generation. As per reports, now FFBL may also get gas on a rotational basis so as to cater to the electricity shortfall in the country. On contrary, the plants on Mari network are somewhat immune to the shortage of gas in the country. However, availability of imported urea remains a key concern for them.
Availability of imported urea
The GoP has been importing urea to fulfil the gap between demand and supply of urea due to gas related woes of the Sui network based fertilizer plants. The availability of imported urea at subsidized rates has been a cause of concern for the local manufacturers. To recall, the budgetary allocation and current international urea prices, GoP can import 1.2mn tons of urea in FY13. However, the demand for urea in the country has historically been ~6mn tons annually. Therefore, keeping in mind the import target set in the federal budget, the local manufacturers may gain the pricing power going forward with relatively reduced availability of imported urea.
Outlook
FFC is trading at 2012E PE of 7.2x and offers a dividend yield of 13.4%. Currently, we have a ‘Buy’ stance on the stock. Since it is on the Mari network, it is somewhat protected from the gas related woes faced by other fertilizer producers on the Sui network. However, the key risk to our investment thesis remains the quantum of pass through of incremental cost after the imposition of Gas Infrastructure Development Cess (GIDC).
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Also in focus
Presidential order issued to provide legal cover
A Presidential Order has been issued to provide constitutional cover for all the decisions taken by the former Prime Minster during the period from April 26 to June 19, 2012. After the disqualification of the Prime Minster, question marks over the validity of the decisions taken had arisen, including the recently announced Federal Budget.
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