Fertilizer Sector October 2011

October 2011

Asad [email protected] 111 097 (ext 8636)

• EnVen production comes into picture

• Product price on the rise, margins getting strong

• Sector Outlook - Brighter ahead

• FFC - Royal flushing peers’ moves - Buy with total return expectedof 59% with Jun-12 TP of Rs251/share

• FFBL - The little ‘giant’ - ~33% return expected along with Jun-12TP of Rs72/share

• ENGRO - The price king! - 90% return expected with Jun-12 TP ofRs265/share

Fertilizer Sector Update

October 2011

FERTILIZER SECTOR CY11A Publication of InvestCap Research

Pakistan Research

www.investcapital.comInvest Capital Markets Limited

Urea turns into Gold!Fertilizer Sec, Mkt. Cap. Rs258.42bn

Top Pick (s) FFC, ENGRO, FFBL

Sector Outlook Positive

Fertilizer Univ. PE (2011E) 6.26x

Fertilizer Univ. Div Yld (2011E) 10.8%

Fertilizer Univ. Ear Gro (2011E) 63.8%

Fertilizer Univ. Return in CY10 22.5%

Contents

Fertilizer Sector Update 3

Sector Outlook 8

Fauji Fertilizer Company Limited 10

Outlook & Recommendation 12

Financials Highlights 13

Key Ratios 14

Fauji Fertilizer Bin Qasim Limited 16



Key Ratios 19

Engro Corporation Limited 21



Key Ratios 26

Notes 27

Date of completion: October 05, 2011

Prices are as of October 04, 2011

October 2011


Pakistan Research

1InvestCap Research

October 2011

FERTILIZER SECTOR 2011A Publication of InvestCap Research

Pakistan Research

The page has been left blank intentionally

2InvestCap Research

October 2011


Pakistan Research

Fertilizer Sector

3InvestCap Research

October 2011


Pakistan Research

N P

NFC / PAK ARAB, 65%

ENGRO, 22% FATIM A,

13%

C A N

NFC / PAK ARAB, 49%

FATIM A, 51%

Fertilizer Sector

SSP

Suraj fert, 31%

AGRITECH (PAFL),

31%

NFC -LCFL (alhamd),

38%

N P KENGRO, 99%

IM PORTED, 1%

UR EA

DAWH, 5%

FATIM A, 8%

ENGRO, 22%

FFC, 51%

PAK ARAB, 1%

AGRITECH, 2%

IM PORTED, 11%

D A P

IM PORTED, 32%

FFBL (FFC SONA), 68%

Source: NFDC, InvestCap Research

4InvestCap Research

October 2011


Pakistan Research

Fertilizer Sector UpdatePakistan being an agrarian economy stands with rigorous demand foreverything that ranges from tractors to seeds, from pesticides to fertilizers.Historically, agriculture has contributed ~22% towards Pakistan's GDP, andhas helped in employing more than 45% of country's labor force directly andindirectly. Moreover, country's agriculture sector has constantly helped inproviding different industries with raw materials (example textiles).

This gives fertilizer sector immense importance in Pakistan. Currently, country’sfertilizer sector is equipped with total production capacity of 6.7mn tons ofUrea and 669k tons of Di Ammonium Phosphate (DAP). There are a total of 9companies, each manufacturing different fertilizer products. As far ascapacity break-up goes, Engro Corp (ENGRO) is now the leading company,equipped with 34% of the total country's Urea manufacturing capacity. FaujiFertilizer Company (FFC) is only second to ENGRO with 31% share of the Ureainstalled capacity in the country. Fauji Fertilizer Bin Qasim Limited (FFBL) andDawood Hercules have a 10% share each. Fatima Fertilizers Limited (FATIMA)and AgriTech (AGL) complete the list of Urea manufacturing companies,having capacity share of 8% and 7% respectively. Meanwhile, FFBL is the soleproducer of DAP in the country.

EnVen production comes into pictureKeeping the country's ever-growing Urea demand in view, fertilizermanufacturers have constantly increased product capacity during 2006 to2011, growing at a CAGR of 7% till 2012, when ENGRO's new capacity is

34%

31%

10%

10%

8%

7%

ENGRO FFC FFBL DAWH FATIM A AGL

Industry capacity share

UREA, DAP - PRODUCTION SNAPSHOT

Production CY06A CY07A CY08A CY09A CY10A CAGR CY11E CY12F CY13F CAGR

Urea 4,804 4,755 4,978 5,046 5,151 2% 4,925 5,371 5,630 2%

Growth 2% -1% 5% 1% 2% - -4% 9% 5% -

Cap. Utilization 114% 110% 109% 107% 91% - 79% 80% 84% -

DAP 450 357 471 540 647 9% 650 657 663 1%

Growth 0% -21% 32% 15% 20% - 1% 1% 1% -

Cap. Utilization 101% 80% 70% 81% 97% - 97% 98% 99% -Source: Company Reports, InvestCap Research

Fertilizer Sec, Mkt. Cap. Rs258.42bn

Top Pick (s) FFC, ENGRO, FFBL

Sector Outlook Positive

Fertilizer Univ. PE (2011E) 6.26x

Fertilizer Univ. Div Yld (2011E) 10.8%

Fertilizer Univ. Ear Gro (2011E) 63.8%

Fertilizer Univ. Return in CY10 22.5%


Source: KSE, InvestCap Research

60%

80%

100%

120%

140%

160%

180%

200%

Oc

t-10

Jan

-11

Ap

r-11

Jul-1

1

Oc

t-11

Fetilizer SectorKSE-100

5InvestCap Research

October 2011


Pakistan Research

expected to be in full swing. However, urea production has failed to take offin similar fashion as compared to the capacity, and is expected to grow by amere 0.4% by the end of CY11. However, we do expect production to increasegoing forward owing to better and continuous supply of gas. We estimateurea production to increase by an average ~9% in CY12 and by 5% in CY13.

Following the Urea trend, FFBL also escalated the capacity of it's DAPmanufacturing unit over the period of time, where it grew by a 6-year CAGRof 7% (CY06-CY11). Going forward, we also expect DAP production tocontinue grow at a similar rate i.e. 7%. Unlike Urea, DAP is less dependent ongas, hence its production remains much more efficient as compared to Urea’s.

Increasing demand to make more room for importsDuring the past 5 years, Urea offtake in the country has increased at a CAGRof only 3.2%. For CY11, we expect countrywide Urea offtake to clock in at6.23mn tons (up 1% YoY), 80% of which is expected to be produced locally.Going forward, we expect Urea offtake to grow at 2% for CY12, and 2.5% forCY13. DAP offtake, on the other hand, has experienced a minor contractionof 2.2% (5-year CAGR). For CY11, we expect DAP offtake to appreciate by adecent 12% YoY on the back of low base-effect (DAP offtake was low duringCY10 due to massive flood facing the country). We expect DAP offtake togrow by 5% and 3% in CY12 and CY13 respectively.

Low gas availability => lower production => Higher priceFertilizer sector is equipped with an enviable pricing power and this is whatmakes the sector highly attractive for making investments. For instance,during CY11YTD, average Urea prices have gone up by a massive ~60% YoY.The main reason behind price increase by such massive rate is the acutesupply shortage of gas (basic raw material). While the menace of gascurtailment continues to sting and hamper country’s economic activity,fertilizer manufactures are forced to increase their prices in order to curtail

0

1000

2000

3000

4000

2006

2007

2008

2009

2010

2011

YTD

DAP Urea

Local urea DAP historical prices(P KR / bag)

UREA, DAP - OFFTAKE SNAPSHOT

Offtake CY06A CY07A CY08A CY09A CY10A CAGR CY11E CY12F CY13F CAGR

UREA 5,235 4,917 5,532 6,478 6,123 4% 6,246 6,371 6,530 2%

Growth 2% -6% 13% 17% -5% - 1% 2% 2% -

Local Portion 90% 95% 92% 78% 84% -2% 80% 81% 83% 0%

DAP 1,508 1,390 775 1,691 1,322 -3% 1,483 1,557 1,612 7%

Growth 0% -8% -44% 118% -22% - 12% 5% 3% -

Local Portion 31% 25% 40% 42% 50% 12% 45% 42% 41% -6%Source: Company Reports, InvestCap Research


6InvestCap Research

October 2011


Pakistan Research

their losses. This increase in price on an already low production is proving tobe tough on the farmer. However, this price increase has also aided thegov’t in a way, as now it has to provide lower subsidy on imported Urea. Weexpect Urea imports to be around 1.25mn tons in CY11, and as per ourcalculations, every Rs50/bag increase in product price brings gov't subsidydown by a massive Rs1.25bn. However, we expect the total subsidy onimported Urea to stand around Rs21.5bn for CY11.

As for DAP, rising price of Phos-acid is forcing FFBL to raise prices so that thecompany can maintain its already high margins.

International and local prices convergingIf we look at the graph, we see both local and international prices of Ureamove in the same direction. However, YTDCY11 Urea prices haveexperienced expansion albeit with a smaller gap between local and int’lprices. Therefore, any hike in the int’l prices of urea can provide localmanufacturers with further room to increase their prices in the future. Atcurrent levels, Urea’s global price is hovering at a premium of ~46%.

Urea prices rise sharply than input pricesEver since gas curtailment came into the picture, Urea manufactures wereforced to increase prices by a higher magnitude. As the graph below reveals,during YTDCY11, Urea price has gone up by more than 40% whereas cost ofthe input (gas) has gone up by a mere 3%, suggesting that it has been gascurtailment instead of any increase in the per mmbtu cost of gas that leftUrea manufacturers with no other option but to increase product price tomaintain their margins.

-

100

200

300

400

500

2006

2007

2008

2009

2010

2011

YTD

Local Urea Imported Urea

Avg annual int'l and local urea prices(USD / to n)

-20%

0%

20%

40%

60%

80%

2006 2007 2008 2009 2010 2011YTD

Cumilativ e gas priceincreaseUrea price increase

(% change)

Urea price and gas price

Source: Bloomberg, InvestCap Research


7InvestCap Research

October 2011


Pakistan Research

DAP prices on the marchDAP prices, on the other hand, have escalated at a 24% CAGR (as the graphreveals), where much of the increase was witnessed post 4MCY11 andimposition of Sales Tax on fertilizers. However, during the same period DAP’sprimery raw material (Phos-acid)’s prices escalated at 13% CAGR with importprice of DAP increasing by the same quantum. Keeping up with current trend,we expect Phos-acid prices to rise in the coming quarter, and expect it tohover around USD1,120/ton, thus we expect local prices of DAP to rise aswell. As far as international prices are concerned, new supply from Ma'adenis expected to bring the prices of DAP down in the international market.

Rain cum flood impact not significantThe following graph shows provincewise Urea and DAP offtake numbers. Thefigure shows the province of Punjab enjoys the lion's share in both Urea andDAP offtake, keeping in view this trend, we do not expect rain-cum-floodsituation in Sindh to hurt the cumulative offtake of fertilizer in the country,and expect the offtake levels to stay closer to their annual averages.

0

200

400

600

800

1000

1200

1400

CY

06A

CY

07A

CY

08A

CY

09A

CY

10A

YTD

CY

11A

Local DAP International DAPPhos-acid

Avg annual int'l, local DAP and Phos-acid

prices (USD/ton)

0%20%

40%60%

80%100%

2006

A

2007

A

2008

A

2009

A

2010

A

7MC

Y11

2006

A

2007

A

2008

A

2009

A

2010

A

7MC

Y11

Punjab Sindh KP Balouchistan

Province wise DAP and urea offtake

DAP Urea



8InvestCap Research

October 2011


Pakistan Research

Sector Outlook - Brighter aheadAdditional gas flows form Qadirpur field and Kunal Pasaki, are expected toadd ~200mmcfd to the sui network grid, which going forward should improvethe supply situation to the fertilizer plants on Sui Network, enabling them withbetter flow of gas. However, this is a short term measure, in the long term,unless any sizable discovery is made gas, outages are expected to occurregularly with increasing durations. Thus, in the long run fertilizer price rise ishighly likely. Being an agrarian economy we expect demand for Urea to beever present.

Regional AttractivenessNot only on the local front, Pakistan fertilizers stand highly attractive in aregional contest as well. Following graphs show key ratios and profitabilitygrowth measures on which Pakistan fertilizers (mainly FFC, FFBL and ENGRO)stand out. The three major companies show higher Earnings Growth, DividendYields and Return on Earnings with lower Price to Earnings, as depicted by thefollowing charts.

Regional ROE

0%10%20%30%40%50%60%70%80%90%

100%

FFC

PA

FFBL

PA

AN

HU

I CH

YIW

U C

H

RES

P I

N

RA

LI IN

SHIN

DO

O C

H

ENG

RO

PA

GSF

C IN

TPB

TB

Regional Earning Growth

0%

2%

4%

6%

8%

10%

12%

14%

TPB

TB

FFBL

PA

ENG

RO

PA

FFC

PA

GSF

C IN

SHIN

DO

O C

H

YIW

U C

H

AN

HU

I CH

RA

LI IN

RES

P I

N

Regional PE

-

5

10

15

20

25

30

35

RES

P I

N

RA

LI IN

AN

HU

I CH

YIW

U C

H

SHIN

DO

O C

H

GSF

C IN

FFC

PA

ENG

RO

PA

FFBL

PA

TPB

TB

Regional Dividend Yield

0%

2%

4%

6%

8%

10%

12%

14%

16%

FFBL

PA

FFC

PA

TPB

TB

ENG

RO

PA

GSF

C IN

RA

LI IN

SHIN

DO

O C

H

RES

P I

N

AN

HU

I CH

YIW

U C

H


9InvestCap Research

October 2011


Pakistan Research

Fauji FertilizerCompany Limited

10InvestCap Research

October 2011


Pakistan Research

FFC - Royal flushing peers’ movesRising Urea prices proved to be most fruitful for FFC, as the company receivesits gas supply from the Mari network. During 1HCY11, company’s topline grewby a decent 21% YoY on the back of ~37% YoY increase in the price of Urea.However, had production levels not fallen by 5% YoY during the said period,topline could have witnessed further growth. Gross margins experienced acolossal growth of 12.3pps, owning to above-mentioned price increasecoupled with decrease in the cost of production (amid gas curtailment),while the input charges per unit remained the same. Distribution chargesalso rose by 16% YoY mainly due to the rise in the price of diesel (up 20% YoY).

Increase of 89% YoY in other income (higher dividends from FFBL) contributedheavily in bolstering the bottomline (35% EPS contribution). This increase atsuch massive level aided in offsetting 78% YoY increase in other charges ofthe company,� leading to a bottomline growth of 61% YoY.

FFBL's dividends to keep providing supportFFC has ~51% stake in FFBL, which entitles FFC to enjoy 51% of all the dividendsthat FFBL declares (FFBL’s dividend contribution to FFC earnings hassubstantially increased to 36% against 20% during CY05-10). During CY11,FFBL’s contribution to FFC’s earnings is expected to increase to 40%, on theback of massive increase of 50% in FFBL’s earnings this year. Thus, going forward,

FFC1HCY11 RESULT REVIEW

(Rs mn) 1HCY11 YoY 2QCY11 QoQ

Net Sales 24,221 21% 13,120 18%

Gross Profit 13,693 55% 7,783 32%

Gross Margin 56.5% 12.25pps 59.3% 6pps

Selling and Distribution Cost 2,165 16% 1,148 13%

Finance Cost 471 -5% 242 6 %

Other Expenses 1,121 78% 615 21%

Other Income 2,882 89% 919 -53%

Profit after Tax 8,189 61% 4,080 -1%

EPS @ 848mn shares 9.65 4.81

DPS @ 848mn shares 9.25 4.75Source: Company Reports, InvestCap Research

Company DiscripationFauji Fertilizer Company Limited is thelargest urea producer in Pakistan; thecompany also enjoys the biggestmarket share of the urea market. FFCwas incorporated in 1978 as aprivate limited company. This was ajoint venture between FaujiFoundation (a leading charitabletrust in Pakistan) and Haldor TopsoeA/S of Denmark. Today the companyhas assest bass of ~Rs45bn, making itone of the leading and mostprofitable companies in Pakistan.

-

5.00

10.00

15.00

20.00

25.00

30.00

CY

11F

CY

12F

CY

13F

CY

14F

CY

15F

0%5%10%15%20%25%30%35%

FFC EPSFFBL's contributionPercentage participation by FFBL(EPS Rs)

FFBL EPS participation in FFC

Source: Company Reports, InvestCap Research

FFC Gross Margins

25%

30%

35%

40%

45%

50%

55%

60%

65%

CY

05A

CY

07A

CY

09A

CY

11E

CY

13F

CY

15F

Bloomberg Code FFC PK

No. of Shares 848.16mn

Avg Daily Vol (1-Yr) 1.86mn Sh

Last Closing Rs170.62

Target Price (Jun-11) Rs251.00

Upside Potential 47.10%

Dividend Yield (CY12) 15.35%

Total Return (CY12) 62.45%

Return in CY10 22.28%



October 2011


Pakistan Research


FFC’S WIND POWER PROJECT

Project cost USD140mn

Capacity 50mw

Debt financing 70%

Equity financing 30%Source: Company Reports

UREA PRICE SENSITIVITY WITH EPS

Price/bag (Rs) CY12F CY13F T. Price

Base-case 29.11 29.30 251

20 29.75 29.97 257

40 30.40 30.64 263

60 31.04 31.31 269

80 31.69 31.98 275

100 32.34 32.65 280Source: Company Reports, InvestCap Research

2,000

2,100

2,200

2,300

2,400

2,500

2,600

2009

A

2010

A

2011

E

2012

F

2013

F

112%

114%

116%

118%

120%

122%

Urea ProductionUrea SalesCapacity Utilization

FFC production and sales

(000 tons)

stable income from FFBL is going to boost earnings of FFC, in addtion to coreincome increase. Currently, FFBL's participation in FFC's EPS is expected to beat ~40%, which is expected to stabilize at ~30% during CY12 and CY13.

FFC the biggest gainer of any urea price hikeFFC receives gas supply from Mari-gas fields; hence the company is not facingas much of a dire situation on gas supply front as players on the SNGP network.Therefore, any increase in the price of urea coming from ENGRO (over andabove our price assumption, which is same as for ENGRO) is going to bebeneficial for FFC. We have given below a sensitivity that showcases theimpact of Urea price change on expected earnings of FFC.

Company embarking on new venturesFFC successfully had a financial close of its venture in the wind power project.As per our discussion with the company’s management, the cost of the projectis expected to be around USD140mn, with debt to equity ratio being at70:30. The project is expected to come online during early CY13.

This project is going to be beneficial for the company due to virtually non-extent operating cost. Guarantee of the wind speed insured by the gov’t ofSindh also makes this project an attractive investment for FFC. From avaluation standpoint, keeping timeline of the project we have not yetincorporated the earnings impact of this project, which would have onlymade FFC’s already compelling valuations more attractive.


October 2011


Pakistan Research

Outlook and RecommendationAs discussed earlier, the company is not as much plagued as its peers on theSui network. Thus, as gas curtailment increases on other fertilizer players inthe sector i.e. Engro, it is going to benefit FFC in form of increased marginswith every increase in Urea price that Engro passes on to consumer in orderto make up for the production loss.

FFC is currently trading at forward PE of 5.86x and 5.8x for CY12 and CY13respectively, coupled with CY12 and CY13 massive dividend yield of ~15.4%15.6%. Like FFBL, the company’s main investing trigger is its handsome payout(90% for CY11E,CY12F and CY13F). We have 'Buy' call on the scrip with Jun-12Target Price of Rs251/share, which provide a solid 47% upside from currentlevels.

FFC VALUATION BREAK UP

Rs mn CY11E CY12F CY13F CY14F CY15F Terminal

FCFE 23,060 26,510 23,302 22,823 23,997 144,732

Cost of equity 21% 21% 21% 21% 21% 21%

Discounted FCFE 26,489 24,433 19,384 17,746 17,741 107,001

Accumulated FCFE 212,795

Number of shares 848

FCFE per share 251Source: Company Reports, InvestCap Research

VALUATION CRITERIA

Cost of Equity 21%

Risk Premium 6.5%

Terminal growth 3 %

-1

49

99

149

199

249

299

Jan

-

06

Sep

-

06

Ma

y-

07 Jan

-

08

Sep

-

08

Ma

y-

09 Jan

-

10

Sep

-

10

Ma

y-

11

FFC PE Bands

3x

5x

8x

10x

15x

(Rs bn)


October 2011


Pakistan Research

FFC’S INCOME STATEMENTS

(Rs mn) CY09A CY10A CY11E CY12F CY13F

Sales 36,163 44,874 57,936 64,037 66,599

Cost of Sales 20,515 25,310 24,171 24,200 26,114

Gross Profit 15,648 19,564 33,766 39,838 40,485

Selling and Distribution 3,175 3,944 6,144 5,302 5,539

EBIT 12,474 15,619 27,622 34,536 34,945

Financial charges 945 1,087 1,106 1,117 754

Other income 2,801 3,153 5,247 5,625 5,344

Other charges 1,272 1,376 2,334 1,796 1,868

Net Profit before Tax 13,057 16,310 29,428 37,248 37,668

Tax 4,233 5,281 9,656 12,560 12,814

Profit after tax 8,824 11,029 19,772 24,689 24,853

EPS (Rs) @ 848mn shares 10.40 13.00 23.31 29.11 29.30

DPS (Rs) @ 848mn shares 13.15 16.00 20.98 26.20 26.37

FFC'S BALANCE SHEETS


Equity

Issued and Paidup 6,785 6,785 8,482 8,482 8,482

Share Capital 13,083 15,448 24,745 34,125 46,256

Liabilities

Long term Liabilities 7,615 7,035 7,857 6,155 4,697

Current Liabilities 17,855 20,578 23,922 26,993 27,258

Total Liabilities 25,469 27,613 31,221 33,148 31,955

Equity & Liabilities 38,552 43,061 56,524 67,273 78,211

Assets

Current Assets 14,917 17,224 30,435 41,484 52,604

Fixed Assets 23,634 25,837 26,089 25,789 25,607

Total Assets 38,552 43,061 56,524 67,273 78,211

FFC'S CASH FLOWS


Cashflow from Operations 13,519 15,917 20,545 30,167 26,548

Cashflow from Investments (5,758) (8,657) 614 (878) (1,044)

Cashflow from Financing (4,842) (9,920) (10,561) (17,160) (14,924)

Net Inflow / Outflow 2,918 (2,660) 10,598 12,129 10,580Source:Company Reports, InvestCap Research

Financial Highlights


October 2011


Pakistan Research

FFC’S KEY RATIOS


Liquidity ratios

Current Ratio 0.84 0.84 1.24 1.4 1.68

Quick Ratio 0.61 0.66 1.01 1.19 1.45

Captial structure

Times interest earned 14 15 25 27 41

Int bearing debt to equity 0.35 0.25 0.19 0.1 0.04

Total debt to equit 1.95 1.79 1.3 1.05 0.79

Returns ratios

Return on assets (RoA) 23% 26% 34% 34% 31%

Return on Equity (RoE) 67% 71% 79% 71% 56%

Return on Cap. employed 55% 62% 95% 101% 103%

Profitablity margins

Gross margin 43% 44% 57% 58% 57%

EBITDA Margin 37% 37% 45% 56% 54%

Net profit margins 24% 25% 34% 35% 34%

Growth

Sales 18% 24% 25% 6 % 4 %

EBITDA growth 28% 24% 63% 11% 1 %

Net profit growth 35% 25% 72% 10% 1 %

General ratios

PBV 11.06 9.37 5.84 4.24 3.26

Payout ratio 126% 123% 90% 90% 90%

Dividend Yield 7.7% 9.4% 12.3% 15.2% 15.4%

P E 16.40 13.12 7.31 5.86 5.82Source:Company reports, InvestCap Research

Key Ratios


October 2011


Pakistan Research

Fauji Fertilizer BinQasim Limited


October 2011


Pakistan Research

FFBL - The little ‘giant’Following the trend of sector profitability, 1HCY11 proved to be exceptionallygood for FFBL. Company's topline grew by a massive 51% YoY, primarily owingto price appreciation experienced in DAP, where it grew by ~33%YoY.Furthermore, product offtake supported this increase as volumes grew by asolid 29% YoY. The company's gross margins also bolstered by massive 627bpsin 1HCY11, which was mainly due to magnitude of price increase, appreciatingby greater than the increase in raw material cost (Phos-acid, DAP's primeraw material) that grew by 26% YoY.

An astounding 81% YoY in gross profit coupled with 4% YoY decrease distributioncharges led to a bolstered EBIT margins, rising by stupendous 900bps to .Financial charges of the company remained almost at the same level asprevious year’s. As a result net profit of the company grew by mammoth104% YoY.

Margins expected to remain robustWe have seen Phos-acid prices going up by 13% QoQ in 3QCY11, which isexpected to normalize going forward. In immediate terms, we foresee Phos-acid prices reacting USD1,20-1,150/ton during 4QCY11. On international front,we foresee supply to be on the rise as Saudi Arabian mining company, Ma'aden,is expected to come online in 4QCY11. This additional supply is expected tobring down the price of DAP to an extent in the international market, while atcurrent point in time, Pakistan is importing DAP at CFR price of USD695/ton.

Though in the short term, increasing cost of Phos-acid is expected to pulldown FFBL’s margins where the company enjoys primary margin of USD310/ton currently. On the other hand, FFBL’s YTD primary margins have averagedat ~USD325/ton. This rising cost of Phos-acid in the short term is expected tobe easily passed on to the consumer, as FFBL enjoys exclusive pricing powerbeing sole producer of DAP in Pakistan.

FFBL1HCY11 RESULT REVIEW


Net Sales 18,017 51% 9,963 124%

Gross Profit 6,929 81% 4,182 152%

Gross Margin 38.4% 621bps 41.9% 780bps

Admin Cost 296 42% 182 159%

Selling and Distribution Cost 1,048 -4% 683 187%

Other Operating Income 741 50% 409 123%

Other Operating Charges 406 116% 235 137%

EBIT 5,921 108% 3,491 144%

Finance Cost 373 13% 266 248%

Profit After Tax 3,514 104% 1,956 126%

EPS (Rs) @ 934mn shares 3.76 2.09

EPS (Rs) @ 934mn shares 3.50 2.25Source: Company Reports, InvestCap Research

Company DiscripationFauji Fertilizer Bin Qasim Limited is asubsidiary of Fauji Fertilizer Company(51% stake), the company Limited isthe sole manufacturer of DAP inPakistan. FFBL previously was knownas FFC-Jordan because of 10% stakeheld by Jordan Phospate Mines Co.However, in 2003 Jordan PhosphateMines Co. sold its share, hence thecompany was renamed as FaujiFertilizer Bin Qasim Limited (FFBL).

FFBL Gross Margins

25%

27%

29%

31%

33%

35%

37%

39%

41%

CY

05A

CY

07A

CY

09A

CY

11E

CY

13F

CY

15F

Bloomberg Code FFBL PK




Target Price (Jun-11) Rs72.00







October 2011


Pakistan Research

Depreciating PKR to impact FFBL’s margins a bitSince FFBL's prime raw material (Phos-acid) is imported and it is denominatedin USD terms, it stands prone to depreciation in PKR. We have done asensitivity that showcases impact of PKR depreciation on FFBL’s earningsoutlook. Phos-acid price has been on the rise off late due to global demandof the commodity, which coupled with PKR depreciation may put pressureon copmany’s primary margin, while its pricing power may provide partialrelief.

Outlook and RecommendationBeing country's sole DAP producer, FFBL's DAP offtake is not expected to godown despite price expansions. However, DAP margins are at their recordhigh (primary margin at average USD311/ton) at the moment, and goingforward are expected to normalize to the level of around USD250/ton.

Strong dividends are the major investing trigger for the stock. We have 'Buy'call on FFBL with Jun-12 Target Price of Rs72/share. The scrip currently offersan upside of a decent ~17%, alongwith a shining CY12F and CY13F dividendyield of an average ~15%. At current levels, FFBL is trading at PE of 6.11x and6.49x for CY12 and CY13 respectively.


PKR DEPRECIATION IMPACT ON FFBL EARNINGS

Rupee Depreciation Change in earnings

5 % -3%

6 % -6%

7 % -8%

8 % -10%

9 % -12%

10% -15%


FFBL VALUATION BREAK UP

Rs mn CY11E CY12F CY13F CY14F CY15F Terminal

FCFE 6,179 7,924 9,367 8,775 10,673 65,881

Cost of equity 20% 20% 20% 20% 20%

Discounted FCFE 6,758 7,241 7,152 5,598 5,689 35,115

Accumulated FCFE 67,553

Number of shares (mn) 934

FCFE/share (Rs) (Jun-12 TP) 72

Source: Company Reports,, InvestCap Rsearch

-

100

200

300

400

500

600

700

2009

A

2010

A

2011

E

2012

F

2013

F

0%

20%

40%

60%

80%

100%


FFBL urea production and sales

snapshot

(000 tons)

-

100

200

300

400

500

600

700

800

2009

A

2010

A

2011

E

2012

F

2013

F

0%

20%

40%

60%

80%

100%

120%

DAP ProductionDAP SalesCapacity Utilization

FFBL DAP production and sales

snapshot

(000 tons)

VALUATION CRITERIA

Risk free 14.5%

Risk Premium 6.5%

Terminal growth 5 %

-14999

149199

Jan

-06

Sep

-06

Ma

y-07

Jan

-08

Sep

-08

Ma

y-09

Jan

-10

Sep

-10

Ma

y-11

FFBL PE Bands

3x5x

10x15x

18x(Rs bn)


October 2011


Pakistan Research

FFBL’S INCOME STATEMENTS


Net sales 36,725 43,257 56,180 59,784 59,482

Cost of Sales 27,060 29,794 37,198 41,213 41,312

Gross Profit 9,665 13,463 18,982 18,571 18,170

Distribution Expense 2,236 2,585 3,009 2,950 3,100

Administrative Expense 401 700 1,045 1,141 1,163

Operating profit 7,028 10,178 14,927 14,480 13,906

Financial Cost 1,460 934 905 269 287

Other Operating Expense 443 713 1,015 1,116 1,132

Other Income 998 1,033 1,495 1,098 930

Share of Associate's profit / (loss) (315) 121 186 219 243

Compensation from GOP - - - - -

Profit Before Tax 5,808 9,686 14,688 14,412 13,660

Taxation 2,024 3,171 4,908 4,974 4,767

Profit After Tax 3,784 6,514 9,781 9,438 8,893

EPS (Rs) @ 934mn shares 4.05 6.97 10.47 10.10 9.52

DPS (Rs) @ 934mn shares 4.00 6.55 9.70 9.37 8.57

FFBL'S BALANCE SHEETS


Equity

Issued and Paid up 9,341 9,341 9,341 9,341 9,341

Share Holder Equity 10,660 12,210 16,921 16,439 18,039

Liabilities

Current Liabilities 16,747 15,389 12,465 12,117 12,865

Non Current Liabilities 8,818 7,737 7,089 6,441 5,792

Equity and Liability 36,225 35,336 36,474 34,997 36,697

Assets

Current Assets 18,444 18,318 19,816 18,778 21,001

Non-Current Assets 17,781 17,018 16,658 16,220 15,695

Total Assets 36,225 35,336 36,474 34,997 36,697

FFBL'S CASH FLOWS


Cashflow from Operations 22,953 8,520 11,747 9,208 10,091

Cashflow from Investments (5,378) 2,858 (1,413) (617) (558)

Cashflow from Financing (15,869) (8,305) (9,939) (10,568) (7,442)

Net Cash Inflow/Outflow 1,707 3,072 394 (1,977) 2,091Source:Company Reports, InvestCap Research



October 2011


Pakistan Research

FFBL’S KEY RATIO


Liquidity ratios

Current Ratio 1.10 1.19 1.59 1.55 1.63

Quick Ratio 1.14 1.22 1.48 1.70 -

Captial structure

Times interest earned 5.65 12.30 17.90 58.72 53.08

Int bearing debt to equity 1.29 0.87 0.34 0.31 0.27

Total debt to equit 2.40 1.89 1.16 1.13 1.03

Returns ratios

Return on assets (RoA) 10% 18% 27% 27% 24%

Return on Equity (RoE) 36% 53% 58% 57% 49%

Return on Cap. employed 31% 49% 105% 102% 90%


Gross margin 26% 31% 34% 31% 31%

EBITDA margins 22% 27% 29% 26% 26%

Net profit margins 10% 15% 17% 16% 15%

Growth

Sales 37% 18% 30% 6 % -1%

EBITDA growth 11% 39% 41% -3% -3%

Net profit growth 31% 72% 50% -3% -6%

General ratios

PBV 5.41 4.73 3.41 3.80 3.47

Payout ratio 99% 94% 93% 93% 90%

Dividend Yield 6.5% 10.6% 15.7% 15.2% 13.9%

P E 15.25 8.86 5.90 6.11 6.49Source:Company Reports, InvestCap Research

Key Ratios


October 2011


Pakistan Research

Engro CorporationLimited


October 2011


Pakistan Research

ENGRO - The price king!Engro Corp's core profitability was bolstered by a solid 49% YoY. However,after inclusion of one-time accounting change corp’s profiability slid wellbelow market’s expectation.

Topline of the company grew by an impressive 37% YoY during 1HCY11.However, cost of sales also grew by almost the same proportion, as a resultgross margins of the conglomerate were up by mere 77bps YoY. Engro Foodswas the top participant in the topline expansion of Engro Corp. Despiteexpanding admin (up 36% YoY) and distribution cost (up 17% YoY), company’soperating margins were up 153bps YoY, mainly because operating incomegrew by a larger magnitude (up 49% YoY).

Earnings were expected in the bracket of Rs10-11/share during 1HCY11.However, the company incorporated a one time accounting change, thatallowed them to incorporate financial charges from May-11 (2 months priorto commissioning of the new plant) instead of capitalizing them along with

other expenses, which raised financial charges of Engro Corp, rocketedupwards by 96% YoY. As a result the earnings of Engro Corp's prime breadearner (Engro Fertilizer) was below expectations (EFert EPS at Rs1.9).

The above-mentioned one-off dampened Engro Corp's earnings for the saidperiod, however, the company remained glued to its history by offering DPSof Rs2/sh.

Tweaking assumptions to have value fine-tunedKeeping in view the recent gas curtailment scenario and lower thancontracted level of supply to EnVen, we have done few changes in theprice assumption of Urea, gas levels that we expect EnVen to enjoy, Ureaproduction figures and offtake numbers. Currently, ENGRO’s USD1.2bn plantis receiving 80mmcfd gas supply from SNGP, while another 20 mmcfdadditional supply is being provided by the Mari network. As a result, the plantis producing 3,500 tons of urea per day, against name-plate capacity of3,850 tons (~91% capacity utilization).

ENGRO CROP 1HCY11 RESULT REVIEW


Net Sales 46,084 37% 24,236 44%

Gross Profit 13,041 40% 6,916 50%

Gross Margin 28.3% 140bps 28.5% 50bps

Admin Cost 1,359 36% 744 31%

Selling and Distribution Cost 3,184 17% 1,636 19%

Other Operating Income 599 -3% 255 -47%

Other Operating Charges 734 29% 456 0 %

EBIT 8,363 49% 4,333 61%

Finance Cost 3,674 96% 2,501 131%

Share of Income from JV 239 -8% 120 -6%

Profit After Tax 3,316 4 % 1,274 -8%

EPS (Rs) @ 393mn shares 8.43 3.24

DPS (Rs) @ 393mn shares 2.00 2.00Source: Company Reports, InvestCap Research

Engro Gross Margins

25%

30%

35%

40%

45%

50%

55%

60%

65%

CY

05A

CY

07A

CY

09A

CY

11E

CY

13F

CY

15F

Company DiscripationEngro Corporation is one of theleading Pakistani businessconglomerates. Having hadundergone an employee led buyoutin 1992. Currently Dawood Herculesholds 32% stake in the company.Engro has expanded its businessesphenomenally in the past twodecades. As a holding company itssubsidiaries include:

Subsidiary Stake

*Engro Fertilizers Ltd 100%

*Engro Foods Ltd 90%

*Engro Eximp Pvt Ltd 100%

*Avanceon Ltd 100%

*Engro PowerGen Ltd 100%

*Engro Polymers & Chem Ltd 56%

*Engro Vopak Ltd 50%

Bloomberg Code ENGRO PK




Target Price (Dec-11) Rs251.00







October 2011


Pakistan Research

We expect EnVen's capacity utilization to be at 77.5% for CY12 (down becausewe expect capacity utilization to be at 65% during 1QCY12 and 4QCY12),owing to gas outages during winter season. We assume the production andofftake to be at ~1070k tons form new plant, total offtake is expected to beat 1.9mn tons. This is our long term production assumption as well. On costfront, we expect fuel gas cost per mmbtu to increase by 2.5% and feed gascost per mmbtu to increase by 5.25% ( on old plant), both increasing biannually.In order to fight this increase in costs, we have assumed ENGRO to raise priceof its Urea by 4% annually.

Fertilizer business stability very important for Engro CorpEngro Fertilizer is currently the bread and butter for the whole Engro Corp(bottomline contribution of average 70%), and is going to be so in future aswell due to the attractive margins the company earns on its fertilizer (Urea)sales. However, with acute gas supply shortages, production of Engro Fertilizerhas painted a different picture from what was expected prior to newcapacity coming online. Going forward, we expect gas supply situation togradually improve (as Kunal Pasaki field is expected to add 50-100mmcfd toSui network). This expected better supply with current level of product pricesmakes Engro Fertilizer an attractive subsidiary of the conglomerate.

Ferlizer business holds largest share in Corp’s valueEngro Corp’s profitability and value share break up graph shows 5-yearaverage forecasted profitability of Corp’s existing subsidiaries coupled withtheir individual value contribution to conglomerate’s target price. In thisregard, Engro Fertilizer leads the way in both the profitability and valuationdepartments with average 70% and 63% share respectively.


-

500

1,000

1,500

2,000

2,500

CY

11F

CY

12F

CY

13F

CY

14F

CY

15F

CY

16F

CY

17F

CY

18F

CY

19F

CY

20F

0%

20%

40%

60%

80%

100%

Total OfftakeEnVen ProductionCapacity Utilization EnVen(000 tons)

Long term offtake and EnVen production

-

500

1,000

1,500

2,000

2009

A

2010

A

2011

E

2012

F

2013

F

0%

20%

40%

60%

80%

100%

120%


Engro production and sales

(000 tons)

Eximp7%

Polymer2%Power

4%

Vopak9%

Avanceon1%

Food14%

Fertilizer70%

Profit Contributors

`

Fertilizer63%

Food14%

Avanceon1%

Vopak6%

Power4%

Polymer3%

Eximp11%

Value Contributors

`




October 2011


Pakistan Research

As far as profitability and value contribution by other subsidiaries areconcerned:

• 3% is contributed by Engro Foods towards valuation and 7% towardsprofitability

• Plagued Engro Polymer has 4% share in valuation, while contributes2% in corp’s profit

• Engro Power enjoys valuation share of 11% and its profitabilityparticipation is at 4%.

• Trading concern, Eximp has participation of 14% and 7% is towardsprofitability

• Vopak and Avanceon have contribution of 6% and 1% respectively.Their contribution towards profitability is at 9% and 1% respectively.

Decreasing interest rates to benefit Engro the mostWith expected cut in the discount rate in up coming monitory policies of thecentral bank, ENGRO's PKR denominated debt servicing should experiencecontraction due to falling KIBOR, as a result of discount rate cut. We have runa sensitivity, providing different scenarios at different interest levels andtheir impact on ENGRO’s Target Price.

The table above highlights the relativity of financial leverage of Engro Corpwith interest rate volatility. In this regard, 50bps rate cut would increase thetarget price of the company by 6%. In CY12 we expect policy rate to shed100-150bps, which should lead to increase in the target price of ENGRO by10-15%.

IMPACT OF INTEREST RATE CHANGE ON ENGRO

Interest rate decline Target Price Change

Base case (Rs/sh) 265 -

50bps 281 6 %

100bps 291 10%

150bps 306 15%

200bps 322 22%Source: Company Reports, InvestCap Research


October 2011


Pakistan Research

Outlook and RecommendationBetter expected profits from the Engro subsidiaries such as Engro Fertilizer,Engro PowerGen, Engro Foods, and Engro Eximp (though not as much asprevious year’s), are expected to do their bit to offset the expectedprofitability loss of the much plagued subsidiary, Engro Polymer and ChemicalsLimited.

We expect Engro Corp to turn the tide and once again prove as to why it hasbeen and still continues to be Pakistan's premier company as far as profitabilitygrowth is concerned. We iterate a 'Buy" on the scrip with Jun-12 Target Priceof Rs265/share, which offers a massive upside potential of ~92%. At currentlevels, the company is trading at CY12F and CY13F PE of 2.70x and 2.51xrespectively.

ENGRO VALUATION BREAK UP

(Rs mn) CY11E CY12F CY13F CY14F CY15-20F Terminal

Fertilier (20,304) 16,283 9,049 4,331 127,914 142,605

Foods (4,172) (1,256) 460 1,083 24,646 79,818

Polymer (1,415) (805) (211) 52 13,833 23,378

Power (Div) 674 735 762 812 4,339 1,130

Eximp (Div) 959 1,689 2,041 1,781 11,286 13,956

Avanceon - 10 77 99 949 1224

Vopak (Div) 505 602 686 765 6,923 9,280

Engro Corp

Aggregate FCFF* (SoTP) (26,101) 15,564 9,553 5,522 189,890 271,287

WACC 14.2% 14.2% 14.2% 14.2% 14.2% 14.2%

Discounted FCFF (SoTP) (24,965) 16,011 9,593 5,438 56,401 56,425

Total Firm Value* 104,262

Number of shares 393mn

Jun-12 Target Price (SoTP) (Rs) 265

*Adjusted cashflows for Corp’s shares in the subsidiaries as well as for their leverage and cash balances

VALUATION CRITERIA

Risk free 14.5%

Risk Premium 7 %

Terminal growth 5 %

-1

49

99

149

199

249

Jan

-

06

Sep

-

06

Ma

y-

07 Jan

-

08

Sep

-

08

Ma

y-

09 Jan

-

10

Sep

-

10

Ma

y-

11

ENGRO PE Bands

3x5x

10x

15x

20x

(Rs bn)


October 2011


Pakistan Research

ENGRO’S INCOME STATEMENTS


Net Sales 58,152 79,976 97,950 129,253 142,713

Cost of Sales 44,658 59,702 65,606 80,469 91,044

Gross Profit 13,494 20,274 32,344 48,783 51,668

Selling & Distribution 6,215 8,290 7,410 8,319 8,870

Other Income 390 897 728 914 1,035

Other Operating Charges 844 958 1,323 2,004 2,232

Finance Cost 2,222 4,201 6,409 10,273 8,532

Share of Income from JV 459 555 555 662 754

Profit before Tax 5,062 8,277 18,485 29,763 33,824

Taxation 1,343 1,836 6,470 8,917 11,308

Profit after tax 3,719 6,441 12,015 20,846 22,516

Attributable to Equity Holders 3,807 6,790 12,071 20,754 22,275

Attributable to Minority Interest -88 -349 -56 92 241

3,719 6,441 12,015 20,846 22,516

EPS (Rs) @ 393mn shares 9.7 17.26 30.69 52.77 56.64

DPS (Rs) @ 393mn shares 6.0 6.0 6.0 8.0 8.0

ENGRO FERTILIZER CASH FLOWS


Cashflow from Operations 9,244 (14,611) 14,544 18,598 21,765

Cashflow from Investments (38,840) (14,695) (23,427) 9,354 (1,678)

Cashflow from Financing 28,274 24,280 (9,813) (13,064) (12,789)

Net Cash Inflow/Outflow (1,322) (5,026) (18,696) 14,888 7,298Source:Company Reports, InvestCap Research



October 2011


Pakistan Research

ENGRO KEY RATIOS

CY09A CY10A CY11E CY12F CY13F

Liquidity ratios

Current Ratio 1.07 2.06 0.46 1.05 1.05

Quick Ratio 0.34 1.73 0.05 0.56 0.58

Coverage ratios

Time Interest Earned 3.28 2.85 3.89 3.94 5.02


Gross margin 23% 25% 33% 38% 36%

EBITDA margins 12% 13% 25% 33% 30%

Net profit margins 6 % 8 % 12% 16% 16%

Growth

Sales 42% 38% 22% 32% 10%

EBITDA growth 0 % 48% 139% 74% 1 %

Net profit growth -12% 73% 87% 73% 8 %

General ratios

PBV 1.45 1.37 1.37 0.95 0.72

Payout ratio 21% 12% 7 % 4 % 4 %

Dividend Yield 1 % 1 % 1 % 1 % 1 %

P E 14.71 8.25 4.64 2.70 2.51Source:Company Reports, InvestCap Research

Key Ratios


October 2011


Pakistan Research

Notes:


October 2011


Pakistan Research

October 2011


Pakistan Research

MONEY MARKET DESK

(92-21) 3520 8751, 3520 8757, 3520 8767

Naeem Ul Hassan

Nadeem Dar

Mehmood Qureshi

Asif Hussain

Nasir Suria

EQUITY SALES DESK

(92-21) 3520 8727, 3520 8735, 3520 8730-31

Shahrukh Naqvi

Noureen Moin Khan

Nabeel Jafar

Owais Imam

Abdul Samad Tariq

Irfan Ali Muhammad

RESEARCH (92-21) 111 111 097 (8634)

Khurram Schehzad Economy, Strategy and Oil

Farhan Bashir Khan Economy, E&P, Refineries and Telecom

Asad Siddiqui Fertilizers, Chemicals, Banks and Construction

Abdul Azeem Automobile, Gas Distribution, Power and Textiles

Mazhar A. Sabir Mutual Funds and Insurance

Yawar uz Zaman FMCGs, Paper & Board and Construction

Rao Aamir Ali Database Manager

Asim Abbas Research Distribution

FOREIGN EXCHANGE DESK

(92-21) 3520 8778-87

Raheel Abbass

Atif Ali

Naheed Fatima

Qazi Owais

Zain Jafri

Zeeshan Atique

Hammad Rasheed

COMMODITY SALES DESK

(92-21) 3521 35226-28

Ali Kazmi

Shoaib Memon

Shoaib Machiara

CORPORATE FINANCE

(92-21) 3521 35226-28

Asher Saeed

Salman Shahab

Kiran Javed

This report is for information purposes only and we are not soliciting any action based upon it. The material isbased on information we believe to be reliable but we do not guarantee that it is accurate and complete.Invest Capital Markets Limited will not be responsible for the consequence of reliance upon any opinion orstatement herein or for any omission. This report or any part of it may not be reproduced or published withoutprior permission.

www.investcapital.comInvestCapital Markets Limited

Karachi Head OfficeC3C, 12th Lane, Ittehad Commercial Area,Khayaban-e-Ittehad,

Phase- II Ext, DHA,

Karachi,

Telephone + 92 (21) 111 111 097

Fax + 92 (21) 3531 3885

Email [email protected]

Islamabad Office301, Muhammad Gulistan Khan House82E, Blue Area, Fazal-e-Haq Road,Islamabad

Telephone + 92 (51) 3282 5904

Fax: +92 (51) 3227 5202

Peshawar Office1st Floor, State Life Building 34 - The Mall,Peshawar Cantt.

Telephone +92 (91) 3527 6025-28

Fax +92 (91) 3527 3683

Lahore Office16A, Main Gulberg ,Near MCB Tower,Lahore

Telephone +92 (42) 35776701-08

Fax +92 (42) 3577 6710

Documents

Fertilizer Sector October 2011