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Karachi, January 02, 2014 (PPI-OT): In line with its agreement with the International Monetary Fund (IMF), the GoP has raised Gas Infrastructure Development Charge (GIDC) on gas input (excluding domestic consumers).
According to AKD Securities, in this regard, GIDC on fertilizer feedstock has increased by PkR103/mmbtu to stand at PkR300/mmbtu with fuel GIDC rising by PkR50/mmbtu to stand at PkR100/mmbtu. At the same time, GIDC for other industrial units has been raised by PkR50/mmbtu to stand at PkR100/mmbtu. Consequent to the GIDC increase, AKD Securities understands that Engro has already raised its urea price by PkR180 per bag (ex-factory: PkR153.8/bag) where AKD Securities expects the Faujis (FFC & FFBL) and FATIMA to also follow suit. With non-applicability of GIDC on FATIMA’s input cost, the company stands as the biggest beneficiary of the urea price increase, with an incremental EPS impact of PkR0.36 (+7%), taking full year CY14F earnings to PkR4.98/share.
While different textiles will have varying levels of impacts to the GIDC increase, within AKD Securities’ coverage universe, NCL stands as the major loser owing to its high dependence on gas for electricity generation. On an annualized basis, the increase in GIDC translates into a negative EPS impact of PkR0.4 on NCL. Similarly, Cements will also face a tepid increase in manufacturing cost.
Fertilizers – FATIMA rides the industry’s wave! With non-applicability of GIDC on FATIMA, the company stands as the prime beneficiary of the urea price increase with an incremental benefit of PkR683mn (EPS impact: PkR0.36) over CY14F earnings. Consequently, AKD Securities’ CY14 earnings now stand at PkR10.4bn (EPS: PkR4.98). Coming to Engro’s Enven, originally stipulated to be under the Fertilizer Policy 2001 wherein GIDC was to be non-applicable (similar to FATIMA’s case), the company’s current situation wherein the plant is receiving gas from Mari puts it under the ambit of GIDC. Consequently, the company’s manufacturing cost increases by PkR123.7/bag for the Enven plant and by PkR137.9/bag for the base plant, as per AKD Securities’ estimates.
AKD Securities’ full year CY14F EPS for Engro Fertilizer currently (before the current price increase) stands at a conservative PkR3.7 (CY13 full year expected at PkR4.3) where AKD Securities has tentatively incorporated a 6m delay in the long term gas solution.
The price increase coupled with the cost hike translates into an incremental benefit of PkR425.0mn (EPS impact: PkR0.33) for Engro Fertilizer, taking revised full year CY14F earnings to PkR5.2bn (EPS: ~PkR4.0). For Engro Corp.’s 91.9% stake in Engro Fertilizer, this translates into an incremental EPS impact of PkR0.76. Urea manufacturing cost for the two Fauji(s) is likely to increase by PkR145/bag where the post price hike impact is negligible, in AKD Securities’ view. Currently, FFC, FFBL and FATIMA have not yet raised their urea prices, however, AKD Securities expects them to follow suit shortly.
Textiles – NCL takes a hit! Increase in GIDC by PkR50/mmbtu translates into an increase in gas prices by ~8%. The increase will result in varying impacts on different textile companies subject to their dependence on gas, where most textiles utilize gas for processing as well as for electricity generation. NCL, which has a higher dependence on gas for its electricity requirement, will face an annualized negative EPS impact of PkR0.40 (-ve 3%). NML is relatively more insulated against the increase in gas prices as it meets ~30% of its electricity requirement through coal/alternative fuels. Consequently, the annualized negative EPS impact for NML is expected to be PkR0.33 (-ve 2%).
Cements – Tepid Impact! Cement manufacturers with a heavy dependence on gas will face a higher impact from an increase in gas prices. The company most impacted in this regard will be LUCK as it produces electricity primarily on gas. However, the increase in gas tariffs will not significantly impact LUCK’s competitive edge as cost will only increase by ~PkR1.69/bag and will result in a negative EPS impact of PkR0.63 (-ve 2%). The impact on DGKC will be negligible given higher dependence on other sources including electricity from the national grid as well as FO based generation.