Fortune Research - EFERT - Staying Afloat Despite Regulatory Headwinds (Detailed Report)

28th February 2020 REP-070
Engro Fertilizers Limited (EFERT)

Staying afloat despite regulatory headwinds
We initiate coverage on Engro Fertilizers Limited (EFERT) with a BUY stance
Investment Case
based on our Dec’20 Target Price of PKR 67.08/share. We have used DDM
Target Price 67.0 methodology under a cost of equity of 16.5% (Rfr – 11%; MRP – 6%; Beta – 0.91).
Stance BUY While the company continues to face regulatory headwinds, we believe that
Key Stats maturity of demand cycle and lack of pricing power puts it in an arena of most
KATS Code EFRET defensive scrips where the company can potentially give an unmatched dividend
Bloomberg Code EFERT PA yield of 18%. This is in addition to the 4.9% potential upside; that too after taking
Reuters Code ENGR.KA a beating from the GIDC curtailment. Our estimates provide a DPS of PKR 11.50
O/S shares (mn) 1,335.3 and PKR 10.00 for CY20 and CY21, respectively.
Market Cap (PKR'mn) 88,784 Recent regulatory interventions have caused attrition in pricing power of sector
Market Cap (US$'mn) 574.7 and with further interventions also looming on the horizon, we expect urea
Avg Daily Vol (mn) 1.7 volumetric offtake to remain stable in the near term. EFERT continues to rejoice
Free Float 45.0% the higher margins from DAP imports which are expected to keep margins intact,
Current Price 63.9 on a relative scale; complemented by the concessionary gas price till the time it
Target Price 67.1 lasts. EFERT trades at a forward PE of 5.9x/5.5x for CY20-21 exhibiting all
Upside to TP 5% attributes of a perfectly defensive scrip. Our stance can be explained by:
52 week range (PKR) 60.9-78.6
Rating BUY Concessionary pricing structure: EnVen’s concessionary gas under Fertilizer
policy 2001 allows it to access feedstock gas for USD 0.70/mmbtu till 2QCY23
52-week Performance (non-concessionary gas supply till CY2033) translating into USD 1.22/mmbtu
of competitive advantage
Downward pricing pressures amidst food inflation: Slashing of GIDC cess
and it’s proportional cost reduction has effectively eroded any topline
growth. Convergence of pricing structure with FFC (PKR140/bag further
down) possibly be only solution to sustain offtake levels
Export potential realization: Continuous gas availability, possible inventory
oversupply and regional players scaling back production could culminate
into an export gap with the company putting itself at forefront due to
underutilized capacity
Key Risks: Major risks to our thesis include: 1) Agri support is withdrawn, 2)
Performance (%) 1M 3M 12M
lagged or no pass-on of gas hikes and sales tax revision, 3) PKR depreciation
Absolute -7.3 -1.6 -13.9
Relative 3.2 -25.6 -12.3
constricting COGS, 3) Unfavorable GIDC decision leading to payment of arrears,
4) Delayed rate cut, and 5) Gas curtailment from MARI network.
Hasnain Martaza Key Financials CY18A CY19A CY20E CY21E CY22E
hasnain.murtaza@fortunesecurities.com Sales (PKR'mn) 109,197 121,355 112,324 117,499 120,998
(+92 21) 35309119 Gross Margin (%) 32% 33% 31% 31% 28%
EBITDA Margin (%) 29% 30% 26% 25% 22%
Fortune Securities Limited PAT (PKR'mn) 17,414 16,871 14,549 15,652 14,409
EPS (PKR) 13.04 12.63 10.90 11.72 10.79
Head Office
DPS (PKR) 11.00 13.00 11.50 10.00 9.00
3rd Floor, Razi Tower, BC-13,
Dividend yield (%) 15% 19% 18% 15% 14%
Block No. 9, KDA Scheme No. 5
Clifton, Karachi BVPS 34.09 32.93 30.70 32.44 34.18
Phone: (92 21) 35309101-09 PE (x) 5.7 5.5 5.9 5.5 5.9
Fax: (92 21)35309155 PB (x) 2.17 2.13 2.08 1.97 1.87
ROE (%) 38% 38% 35% 36% 32%
Payout - Earnings (%) 84% 103% 106% 85% 83%
Source: Company Accounts, Fortune Research
Fortune Securities Limited |Equity Research

www.jamapunji.pk
Investment Thesis Key Risks
 Government support for agriculture exerting upside pressure on  Inability to pass on inflationary pressures trimming the already
demand for products low pricing power
 Concessionary gas agreement continues to provide competitive  Unfavorable GIDC decision by Supreme Court
advantage
 Higher than expected devaluation increasing EnVen cost
 Gas hikes are easily passed on to consumers structure and stretching import costs
 Uptick in international prices expanding delta  Gas curtailment hampering smooth production
 Dividend yield continues it’s impressive performance  No rate cut, keeping financial constraints intact
seen in the last 12 months
Shareholding Pattern
Company Profile
 EFERT is a public company incorporated in Pakistan in Jun’09 as Engro Corp.
a subsidiary of ENGRO
 The principal activity of the company is manufacturing, 16% Directors, Exec.
purchasing and marketing of fertilizers Banks, DFIs
 The company enjoys c. 32% market share in the most used 13%
fertilizer of Pakistan; urea. It also boasts 25% market share in DAP 56% Insurance
(the most heavily imported fertilzer) Modarbas & M. Funds
9%
 EFERT has the largest single-train urea plant in the country with
a total capacity of 1.3 mntons. The company spent USD 1.1bn for 1%4% Gen.Public
the project and obtained continuous gas supply for EnVen for 20 Others
years
Valuation – Target Price PKR 67.08/share

Our DDM based Dec’20 target price of PKR 67.08 per share offers total stock return of 22.9%.
Valuation Matrix CY20 CY21 CY22 CY23 CY24 Important Assumptions

Dividends 11.50 10.00 9.00 6.75 6.25 RFR 11%
Discounted Dividends 11.50 8.59 6.64 4.27 3.40 MRP 6%
PKR/share Beta 0.91
PV of Dividends 34.39 Cost of equity 16.5%
Terminal Value 44.09 Borrowing rate dynamic
PV of Terminal Value 23.97 Tax rate 29.56%
Equity Value 58.36 Cost of debt dynamic
Add: Cash & Cash eqv. 8.72 Terminal Growth 2%
Equity Value 67.08 WACC dynamic
Source: Fortune Research Source: Fortune Research
2|P a g e Fortune Securities Limited |Equity Research

Renewed emphasis for agriculture
Agriculture is likely to come out as a Agriculture has always been regarded as a bedrock for Pakistan’s economy, but in the
major contributor to Pakistan’s past decade we have witnessed a declining trend in agriculture’s contribution towards
economic growth in FY20 GDP growth. The agricultural share in GDP which stood at 22% in FY10 declined to
18.53% during FY19. However, with economic pressures receding industrial growth,
agriculture will once again be expected to push the economic cycle of the country.
Agricultural share in GDP growth GDP Composition
Source: PBS, Fortune Research Source: PBS, Fortune Research
The government has enacted policies to enhance agricultural productivity with major
funding allocated through PM National Emergency Program (financed through PSDP
releases) and the wider disbursements of agricultural credit to improve stagnant
productivity of important crops like wheat, rice, sugar and cotton.
GDP growth rate in comparison to agriculture growth rate
Source: PBS, Fortune Research

Pakistan’s agricultural seasons
Pakistan has two agricultural The agricultural landscape of Pakistan can be demarcated between 2 seasons; Kharif
seasons: & Rabi. Kharif season’s sowing starts after the end of winter season in April and it runs
- Kharif: April till September till late June. Kharif is associated with the production of the country’s staple crops
Stable crops mostly including rice, sugarcane, cotton, maize and pulses. The harvesting period commences
- Rabi: October till May from early October and ends in late December to early January.
Cash crops mostly
Rabi is the second Pakistani agricultural season whose sowing pattern coincides with
Kharif’s harvesting period (Oct-Dec) while the harvesting period is a short 2 month
period before the summer starts (April-May). Wheat, the most important staple is
produced in Rabi season. The cash crops of the country like gram, barley, mustard,
rapseed and lentils are also a feature of Rabi season.
Volaility in water availability..
In spite of being an agricultural country, water availability for irrigation has been on a
declining trajectory affecting the yield/hectare of the country.
Rabi Water Availability (MAF) Kharif Water Availability (MAF)
Source: NFDC, Economic Survey, Fortune Research Source: NFDC, Economic Survey, Fortune Research
Special measures have been proposed in the PM National Emergency Program with 3
Water availability has been a key
concern for Pakistan and
projects initiated under a combined allocation of PKR 220bn to reduce water logging
government has proposed projects and salinity across the agricultural strip; promoting an equitable distribution of water
to the tune of PKR 220bn to curtail across districts, improving crop yields to ensure food security, construction of high
water problems efficiency drip & sprinkler irrigation system, construction of small ponds and water
retaining reservoirs etc.
Declining agricultural land pressurizing already stagnant productivity
With major emphasis substantiated towards water availability, the goal of bringing
additional land under production has also been earmarked. The 3.8% decline in area
under cultivation of five major crops in FY19 can be attributed towards a multitude of
factors:
Unfavorable weather conditions at vital stages of crop development (a 2-5 degree
Celsius increase in Sep’19 compared to previous years) has put severe pressure on
cotton production
The outbreak of whitefly pests and the locusts attack damaging standing crops
and trimming down production
Quickly diminishing economic returns for farmers owing to inflationary pressures
in input materials

Disposal problems relating to sugar-cane combined with pricing disputes and
delayed payments to sugar-cane growers by sugar mills discouraging farmers
Declining agriculture in land* (‘000 hectare) No significant growth in productivity
Source: *5 major crops, Economic Survey, Fortune Research Source: Economic Survey, Fortune Research
PKR 19.3bn, PKR 11.4bn and PKR Three specific projects have been initiated to provide productivity enhancement for
3.9bn have been allocated for the wheat, rice and sugar-cane; over a 5-year period. The funds allocated will be utilized
productivity enhancement of to upgrade crop processing methods with the use of modern machinery and abundant
wheat, rice and sugarcane, availability of high yielding crop inputs (certified seeds).
respectively
Another agricultural program of National Oilseeds Enhancement Program has also
been prioritized with PKR 10.2bn proposed to be invested over a period of 5 years, in
which a subsidy mechanism has been revitalized. Up to 20 acres of land, a subsidy of
PKR 5000/acre has been provided as a relief to the farmers, and another subsidy of
50% has been granted for the purchase of oilseed machinery.
Product mix of fertilizers
Urea has been the preferred fertilizer of farmers, whose product share has averaged
Urea and DAP have been the leading
66% during the last decade. It contains the highest nitrogen nutrient of any product,
fertilizer nutrients in the demand
giving the nutrient-deficient soil of the country some much needed boost to improve
and make up a share of 65% and
crop yields. While urea burdens the responsibility of being the biggest nitrogen-based
21%, respectively
nutrient provider, DAP fulfills the phosphoric needs with its high water solubility,
couple with concentrated 46% phosphoric content and increased effectiveness in
developing the root structure of plants. DAP is the most heavily imported fertilizer
commodity as its production is only carried out by FFBL (capacity of 675 ktons) with
EFERT, FFC and a bunch of small players importing from Chinese and Gulf markets to
fulfill the demand of Pakistan. DAP’s share in the overall product mix averaged 20%
over the past decade.
Products ('000 tons) CY19 CY18 YoY % share
Urea 6,228 5,811 7% 65%
DAP 2,031 2,241 -9% 21%
NP 544 453 20% 6%
CAN 472 609 -22% 5%
NPK 72 68 5% 1%
SSP 65 101 -36% 1%
Others 149 103 45% 2%
TOTAL 9,561 9,387 2%
Source: NFDC, Fortune Research

Unconventional fertilizers leaving their mark
Many manufacturers are now With government’s focus towards improving farmer economics, enhanced by
focusing on improving soil concentrated efforts by manufacturers to promote a balanced nutrient application to
productivity by introducing a more maximize soil productivity, many other products have enjoyed a measure of success
balanced nutrient application like within the farming community whose application is linked towards a specialized value
NPK and NP where EFERT has taken addition in crops rather than basic run-of-the-mill functionality.
command
NPK (Zarkhez) by EFERT has been a smash hit for the company in upper Sindh due to
its niche product pitch of being the only provider of all 3 important nutrients
(Nitrogen; Phosphorous; Potassium) in a high quality and balanced dosage. Its
application is usually done on cash generating products rather than on staple dietary
products.
CAN offers a 10% and 26% nutritional capacity in Calcium (only product offering
Calcium nutrient) and Nitrogen respectively, proving especially handy in times of
reduced water availability to tackle low moisture.
NP (Sarsabz) is extremely popular in upper Sindh and lower Punjab with EFERT and
Fatima group being its major suppliers. It possesses a balanced percentage of
phosphoric and nitrogen based nutrients in the ratio of 20:22. It is utilized as a top-
dresser in crops growth phase and is found especially effective on soils possessing
higher pH values.
Dangerously high NP Ratio Nitro nutrients picking pace
Source: NFDC, Fortune Research Source: NFDC, Fortune Research
But are things as rosy as they seem?

Pakistan’s fertilizer consumption A closer look at consumption pattern paints a concerning picture. Nitrogen-based
continues to follow a harmful fertilizers can prove quite harmful if they are over-applied/balancing amount of
pattern which has lowered soil phosphoric and potash nutrients are not applied to negate the effect. The
productivity recommended Nitrogen to Phosphorous Ratio (N:P) for Pakistan’s agricultural land is
recommended at 2:1. On a decade long analysis, the closest Pakistan’s agricultural
industry has ever reached to this coveted number has been in CY16 (2.68:1) and this
coincided during the time period of subsidy distribution. After the discontinuation of
subsidy in CY17, this ratio has again started to incline with CY19 ratio registering
(3.19:1).
With a shift in DAP trade dynamics on the horizon, its steep differential to urea prices
and Pak Arab’s NP plant on an indefinite closure, it is expected that this ratio will
continue to deteriorate exerting even more pressure on already-declining crop yields.
This puts even greater emphasis on the timely implementation of National Emergency
Program’s policies and the redirection of resources towards HVA (High Value Added)
crops improving farmer incomes.

FFC and EFERT leading the pack
EFERT and Fauji group lead the urea Fertilizer sector is heavily influenced by Engro and the 2 groups; (Fauji and Fatima)
and DAP market with a combined evident through their high market shares. Although CY19 witnessed market share
share of 72% and 88%, respectively attrition because of commercial operations of imported RLNG based plants
(Fatimafert & Agritech; increased production capacity and dealer discounts
incentivized market penetration which improved by 8ppt to 11.6%), the combined
Fauji groups’ grip on urea market still rounded up to 48% (-5.5ppt). EFERT also saw a
slight decline from its all-time high of 34.2% in CY18 to settle at 31.9%.
Urea Market Share - CY18 Urea Market Share - CY19
In spite of a 9.1% decline in DAP offtake during CY19 (2.03 mntons), FFBL still managed
to maintain their DAP sales at c.700 ktons improving its presence to 34% (+3.2ppt).
FFC & EFERT both witnessed substantial decline in their offtake numbers (51%/16%
YoY) bearing the brunt of low demand caused by import compression and weakening
currency sweeping the country.
DAP Market Share - CY18 DAP Market Share - CY19

The players and their homegrounds
Most of the urea manufacturers are Company Products Capacity Location Gas supplier
on the SNGPL network which are Urea 2,275 District Ghotki MARI, SNGPL
EFERT
either allocated from indigenous NP & NPK 100 Port Qasim MARI, SNGPL, OGDC
gas production or RLNG; EFERT has FFC Urea 2,048 Goth Machhi & Mirpur Mathelo MARI
a combination of pipeline gas DAP 650 Port Qasim SSGC
FFBL
allocated to its plants Urea 550 Port Qasim SSGC
Urea 500 Chichoki Mallian (near Sheikhupura) MARI
FATIMA CAN 420 Chichoki Mallian (near Sheikhupura) MARI
NP 360 Chichoki Mallian (near Sheikhupura) MARI
Fatimafert Urea 450 Chichoki Mallian (near Sheikhupura) SNGPL (RLNG)
CAN 450 Multan SNGPL
Pak Arab NP 350 Multan SNGPL
Urea 100 Multan SNGPL
Urea 433 Mianwali SNGPL (RLNG)
AGL
SSP 81 Haripur Hazara SNGPL
Source: Company Accounts, NFDC Annual Review, Fortune Research
Post BMR in CY09, FFC has been producing above its installed capacity, consistently
clocking c.120% utilization levels. EFERT has 2 urea plants; Base & EnVen. Their strategy
involves maximizing production from EnVen plant and subsequently relying on Base
plant to touch 2mn production level. Fatimafert and Agritech plant rely on SNGPL
network (also recipients of RLNG). FATIMA has been utilizing its urea plant at an average
utilization of 90% over CY15-19.

CY19 setting the trend for fututre years
Dec’19 proved to be a revelation for the industry as it completely disrupted the bleak
picture for CY19 with offtake of 1.345 mntons. We expect CY19 to be regarded as a
disruptive year whose changing dynamics will engulf the sector in which we foresee
regularly imported RLNG (14% YoY growth in CY19) being utilized as a raw material to
run otherwise offline plants.
Fatimafert & AGL capturing market share (‘000 tons) Dec'19 changing dynamics (‘000 tons)
With agricultural sector shouldering the burden of moving the growth needle of the
CY19 changed the momentum for
economy, we expect these historical levels to sustain during the short to medium
the industry right at the turn of the
term. Our investment case predicts a moderate 1% offtake growth in urea in CY20
year. Agriculture sector will likely
stirred by the slashing of GIDC cess subsequently leading to decline in prices, efforts
provide much needed impetus to
to bring additional agricultural land under cultivation of wheat, sugarcane and cotton
Pakistan’s economic cycle
(whose fertilizer mix is heavily nitrogen based) and the steep differential to DAP prices.
During the long-run, we could foresee urea demand declining from their peak levels
and normalizing towards 5.8-6.0 mntons figure as the country will move towards
nutritionally more suitable fertilizers with CAN and NP witnessing an uptick in their
demand.
The road to self-sustainability in urea
The unavailability of gas (the main raw material) was the main reason behind
Pakistan’s net importer status of urea during the initial half of last decade (avg. of 940
ktons imported every year during CY11-15). Urea industry offtake has ranged between
Demand vs Supply (‘000 tons)

5.5-5.8 mntons during CY13-18 with imports covering the differential when
production doesn’t prove sufficient. However, with the consistent flow of natural gas
available to EFERT’s EnVen plant and the increasing mix of imported RLNG in the
country’s energy mix, the industry was able to utilize its installed capacity to post 7.2%
offtake growth in CY19 to touch 6.2 mntons with the aid of 101 kton imports.
Reliance on imports rapidly declining ringing alarm bells for DAP
Unlike urea, DAP will not be able to Contrary to our stance on urea, we don’t believe that DAP offtakes could reach
witness major demand growth in previous levels of 2.2-2.3 mn tons under current macroeconomic environment and
the years ahead as the government industry dynamics and especially without initiation of a subsidy mechanism to the tune
continues to stress reduction in of PKR300-500/bag as witnessed during CY15-17. CAGR of DAP offtake stood at an
imports impressive 14.6% during the consideration period, however with the rollback of
subsides, the offtakes have suffered a significant setback of -4.4%/-9.1% in CY18-19.
Being a highly price-sensitive commodity, the 17% CAGR improvement in retail prices
on the back of substantial PKR depreciation over a 2-yr period also didn’t help to
stimulate growth
The drastic reduction in DAP imports during the year will be a recurring theme in the
future with the government pushing towards self-sustainability in agricultural
products. We expect DAP imports to continue to hover between 1-1.1 mntons mark in
the medium term helping the country improve its twin deficits.
Composition of DAP offtake (‘000 tons)
The over-reliance on imports constituting in the composition of offtakes during the

subsidy period (CY15-CY17) can be witnessed with an average of 67% dependency
observed with FFBL (the only local DAP manufacturer in the country churning out
roughly 100 ktons in excess of its capacity every year) plugging the deficit in demand-
supply dynamics. With the current macroeconomic policies, external account
pressures and high interest rate environment increasing cost of working capital
requirements, we believe this high figure will firmly follow a declining trajectory in the
medium term reminiscent of the average figures observed during pre-subsidy time
period (50% during CY11-14). Our base case involves production of 750 ktons by FFBL
in medium-term (CY20-22) with receding inventory pressures resulting in dependency
of imports touching averages of 55% as percantage of total offtake.
Substitution effect likely to kick in
Our forecasts inculcate a negative 3-year CAGR of 2% of DAP resulting in a substitution
effect settling in with NP & NPK’s 3% constant growth rate in the medium term filling

the gap. However, towards the end of our investment thesis, we project a stable sales
trajectory.
How does EFERT fare in such shifting dynamics
EFERT might only be able to keep With the industry expected to produce more than indigenous gas reliant plants’
margins balanced until the end of capacity leading to increased availability of urea, we believe EFERT will once more
concessionary gas agreement while witness a slight attrition of its market share. Furthermore, the pricing differential
only a possibility of urea exports currently being observed between itself and FFC (PKR 140/bag) also underlines the
fares well for the company difficulty the company will encounter to grow at the same pace as industry offtakes
(1% industry growth vs. 0.2% decline in company sales).
Declining mkt. share (‘000 tons) Shouldering declining DAP demand (‘000 tons)
Our investment case also involves the end of concessionary gas agreement in 2QCY23
substantially increasing production costs from EnVen, compelling the company to seek
new avenues to drive growth. Coincidentally, the slight decline in nitrogen-based
products in the long term is also projected to occur during the infamous post-
concessionary period dangerously looming over EFERT’s horizon exerting even further
downside pressure on prices with EFERT likely to bear additional brunt of this
development (assuming lower capacity of EFERT to pass on inflationary costs).
Shedding the net importer status
With the country’s status as a net importer of urea during CY11-15, the industry did
not experience any inventory pileup situation, but with the supply of undisrupted gas
from Mari network from CY15 onwards, the sector started to utilize its unused
Heavy Importer (CY11-CY15) (‘000 tons)

capacity. This culminated into excess inventory situation which compelled the sector
to approach ECC to seek approval for urea exports and the country exported 635 ktons
of urea in FY17 earning USD 150mn during the process.
Imported RLNG has become an With demand steadily improving and the country’s emphasis on reducing its reliance
important feature in Pakistan’s on agricultural products, another solution was brought to the table; RLNG imports
energy mix and industrial needs used as raw materials to run otherwise offline plants. Fatimafert and Agritech were
growing 14% YoY in CY19 awarded 70mmcfd at subsidized rates to help alleviate any urea shortage (after
imports of 100 ktons in the summer) during Rabi season in CY19 and these plants
contributed an additional 750 ktons to bring the production at an all-time high of 6.17
mntons (10% YoY growth).
Demand of urea expected to remain flattish at 6.2 mntons, we expect the country to
continue to provide RLNG to both Fatimafert & Agritech. Both the companies have
already approached the Ministry of Industries & Production seeking subsidized RLNG
imports, however with spot RLNG prices hovering as low as USD 5.5-6.0/mmbtu
(owing to declining crude oil prices and the regulatory implications of IMO) these
companies are willing to enter into a take-or-pay contract on a 2-year basis by directly
sourcing the cargoes. If the regulatory process gets marred with difficulty resulting in
delays, the country will miss the opportunity of procuring these cargoes at rates on
which no subsidy would be required. In that case, these companies would negotiate
at procuring a tariff structure similar to zero-rated sectors (USD 6.5/mmbtu).
Higher production in CY19 was Subsidy, Exports and Improved production (CY16-19) (‘000 tons)
owing to LNG allocation to non-
operating urea plants. Demand of Gas hikes
urea is expected to remain flat inflate costs
Exports above
going forward, in our view approved PKR2000/bag
by ECC
Recent food inflation puts everything in a conservative perspective

With all the chaos surrounding the wheat and sugar-cane trade dynamics, we believe
the government will take an extremely cautious stance regarding food security and
the consequential inflationary impact. Indigenous gas reliant plants possess the
capacity to manufacture 5.5mn tons at 100% capacity and even conservative demand
projections will merit the import of expensive urea; further increasing already
spiraling food inflation. In a nutshell, we firmly believe that supply of RLNG to both FFL
& AGL is a matter of when and not if.
So, if demand does not sustain, risks of supply-glut a possibility?
If demand does indeed revert back to normalized levels of 5.5-5.6 mntons, it would
definitely create an inventory pileup situation, however, there is a caveat to the entire
situation; the industry’s ability to export where EFERT is perfectly positioned to be the
major beneficiary. With undisrupted gas availability assumed for MARI & SSGCL
network based plants, we do not foresee Pakistan falling under the net importer
category anymore. On the contrary, we believe that China’s goal of zero growth in

fertilizer use can leave a window of opportunity for the country to capture a net
supplier position in the region.
EFERT on the forefront of export realization
EFERT stands geared to export any During CY17, ECC allowed a quota of 300 ktons to be exported but due to continued
excess urea output, as it did so in supply overhang situation during the year, this figure jumped up towards 635 ktons in
CY17 which EFERT’s share was 223 ktons. If a situation reminiscent to CY17 arises again, the
company will take advantage of its unutilized capacity (88% capacity utilization
currently) and negotiate to be positioned ahead of competitors because of bearing
GIDC impact more than any other company and transferring benefits to its consumers.
In any case of exports, EFERT’s share in export numbers will most likely be more than
its declining local market share proving to be an upside risk to our valuation.
The shift in pricing mechanism
The sector has undergone a radical shift in its business model during the last decade
and the effects have not been spared on the pricing model. Being a habitual net
importer of urea because of unavailability of gas (the main raw material) during the
earlier part of this decade (avg. of 940 ktons imported p.a. during CY11-15), the
industry withheld an inherent power of passing on any impact of volatility observed in
international prices. The delta observed between landed costs and retail prices
(manufacturers like to refer to this as “Benefit passed on to farmers”) registered
roughly around average of PKR700/bag during this timeframe, enabling a healthy
The fertilizer players have buffer for manufacturers to pass on inflationary or weakening currency related hikes.
undergone a shift in pricing strategy However, as Pakistan moved towards self-sustainability in urea production towards
for urea. They initially used to be a the end of the decade, the international prices dropped to a mere yardstick for
price setters but now they are price
comparing against local prices. The introduction of VAT and the 23% depreciation of
takers as the government keeps a
currency over CY18-19 have once again opened up a sizeable differential (delta was
keen eye on affordability dynamics
PKR 350/bag in Dec’19) in spite of international urea prices shedding 16.2% from the
for farmers
start of the year.
Urea prices – local vs international International Urea and DAP (USD/ton)
Source: NFDC, Fortune Research Source: Commodity Market Outlook (World Bank), Fortune Research

How are things internationally?
Current landed cost mechanism The commodity prices started to decline as additional capacities came online in Brazil,
Exchange Rate (USD: PKR) 154.75 India and China changing global dynamics and creating a supply overhang situation
Import Value (USD/ton) 285 during CY11-15. As international prices underwent 11% CAGR decline, the local prices
Equivalent Value (PKR) 44,104
Landing charges (%) 1.00% tepidly moved upwards with a 7% CAGR over the 4-yr period.
Landing Cost (PKR) 44,545
Custom Duty % (VAT) 3.00% Stringent environmental policies to implement China’s zero growth policy on fertilizer
Sales tax (%) 17.00% usage, increased production of phosphates from Morocco and Saudi Arabia, volatility
Excise Duty (%) 1.40% regarding China-US trade relationship, lower input costs and soft demand growth have
Income tax (%) 6.00%
Total Purchase price 56,750 exerted downward pressure on prices creating an oversupply situation in recent years.
Hypothetical figures Moving forward into the new calendar year, the World Bank in its Commodity Market
Source: Fortune Research
Outlook expects the rebound of both volumetric growth as well as prices. Slight uptick
can be witnessed in Jan’20 numbers as DAP prices (fob US Gulf) inched upwards from
USD 238/ton in Dec’19 to USD 265/ton.
Importance of pricing in a margin dominated business
Pricing has proved to be absolutely instrumental for topline growth because urea
offtakes have only risen by a modest 2.05% CAGR over the past 5 years. Subsidy
mechanism, gas price hikes, inflationary cost pressures and changes in sales tax are
now the major catalysts behind the movement of retail prices.
EFERT’s pricing under tight scrutiny
Recently, there has been a lot of spotlight emphasized on this topic after the slashing
of GIDC cess putting EFERT in an absolutely unique position. EFERT was the first
company who proportionately reduced their prices (PKR 160/bag) in order to pass on
the impact of reduction in GIDC cess from 300/mmbtu and 150/mmbtu in feed/fuel
to 5/mmbtu in both raw materials. Nonetheless, the sector is currently experiencing
a pricing disparity as FFC has only reduced their prices by PKR 300/bag in spite of
proportion cost reduction being c. PKR 385/bag.
Urea EPS (PKR)
PKR/bag* 10.90 11.72 10.79 8.20 6.04
1,600 8.23 8.72 7.46 4.52 1.99
1,650 9.12 9.72 8.57 5.75 3.34
1,700 10.01 10.72 9.68 6.98 4.69
1,750 10.90 11.72 10.79 8.20 6.04
1,800 11.78 12.72 11.90 9.43 7.40
1,850 12.67 13.73 13.01 10.65 8.75
1,900 13.56 14.73 14.13 11.88 10.10
*estimated to grow 2% p.a. CY20 onwards
Meanwhile dealers have an arbitrage opportunity

This has left the door ajar for dealers to take advantage of this opportunity (majority
of dealers have business relationships with both EFERT & FFC) who are procuring at
FFC rates and selling them at EFERT rates.
With massive inflationary pressures already wreaking havoc on poor farmers, we
believe that EFERT will ultimately transfer the PKR140/bag differential towards the
community by converging its price structure with FFC. We expect this development to
materialize during the Rabi sowing season. Our base case assumption involves an
average Dealer Transfer Price of PKR 1750/bag for the year.

Expanding delta denting offtake growth
EFERT has been enjoying high DAP margins have improved in the local market after a decline of USD 100/ton during
margin from its imported DAP the year in international prices of various suppliers and flattish retail prices. These
offtake depressed prices couldn’t prove sustainable enough to accredit pricing power as DAP
prices remained range-bound between PKR 3550-3700/bag.
Manufacturers pointed towards the imposition of 3% VAT on imported products and
the weakening currency as the major factors for keeping prices flattish during the year.
Offtake growth was sacrificed for these margins (avg. PKR 375/bag premium on landed
cost during the year).
Spread between local & intl. DAP prices (PKR/bag)

EFERT’s DAP offtake decreased by 8.2% against declining industry growth of 9.35%.
The differential between DAP & Urea has spiraled to the extent that buying one 50kg
DAP is roughly equivalent to purchasing two 50kg urea bags. This will bolster urea
demand growth at the expense of soil productivity, but it will definitely not help to
stimulate DAP’s demand. We forecast average DAP prices to take a little stumble
during the year to reinvigorate lost sales, settling at PKR 3500/bag.
DAP EPS (PKR)

PKR/bag* 10.90 11.72 10.79 8.20 6.04
3,350 10.19 10.90 9.84 7.13 4.81
3,400 10.42 11.18 10.16 7.49 5.22
3,450 10.66 11.45 10.47 7.84 5.63
3,500 10.90 11.72 10.79 8.20 6.04
3,550 11.13 12.00 11.11 8.56 6.46
3,600 11.37 12.27 11.42 8.91 6.87
3,650 11.61 12.54 11.74 9.27 7.28
*50% impact of hike in intl. prices and depreciation is passed on

The gift of competitive advantage
EnVen’s concessionary gas under Fertilizer policy 2001 allows it to access feedstock
gas for USD 0.70/mmbtu till 2QCY23 (non-concessionary gas supply till CY2033). In-
spite of dollar indexation (PKR devaluation trimming margins) and the abolishment of
GIDC, EFERT enjoys a superior cost structure (USD 1.22/mmbtu; at prevailing exchange
rate) against its competitors. However, this competitive advantage has seen its fair
share of controversial moments. With the GIDC Act of 2015 imposing cess on
concessionary gas players, the companies had to resort to judicial measures obtaining
a historic stay order against the government in late 2016. EFERT (also FATIMA) has
accrued GIDC arrears on their statements, however, no payment has been made to
the government.
Est. EnVen costs (PKRmn)
The concessionary agreement which

is scheduled to end in CY23 is based
on the assumption that initial
disruption of concessionary
schedule in CY11-12 would be
compensated by extending 2 years
The massive decline from CY15 to CY16 can be attributed towards the removal of GIDC
cess from cost calculations. The gradual inclination witnessed from CY18-CY22 has the
average devaluation of 6% of PKR relative to USD to thank. With this looming
competitive advantage scheduled to end in CY23, the full force of this phenomena will
be felt by the company in gross margins as they are projected to fall by c. 9ppts during
CY23-24 (assuming these cost-push pressures are not passed on).
But will this advantage stand in the face of impending hike?
The government in the heat of food security concerns and food inflation outruns has
deferred the gas hike till the start of next fiscal year in a bid to pass on the impact of
lower input costs to farmers. With increasing regulatory influence on the sector’s
pricing in spite of being a deregulated market according to Fertilizer Policy 2001, it’s
definitely a likelihood that significant pushback will be received to maintain local
prices at depressed levels.
FFC has backed their stance of not proportionally passing on the GIDC impact based
on this rationale. Similarly, it would be a difficult scenario for EFERT (in spite of
possessing superior cost structure), if inflationary pressures are not passed on.
FUELSTOCK (PKR/mmbtu) FEEDSTOCK (PKR/mmbtu)
EPS (PKR) GM (%) EPS (PKR) GM (%)
1,021 10.90 11.72 31.42% 300 10.90 11.72 31.42%
1,343 10.43 10.75 30.55% 315 10.82 11.57 31.29%
1,672 9.95 9.75 29.66% 706 8.96 7.70 27.81%
Source: Fortune Research Source: Fortune Research
Recommendation OGRA: PKR 1,343/mmbtu Recommendation OGRA: PKR 706/mmbtu
MoF: 1,672/mmbtu MoF: PKR 315/mmbtu

We believe that a hike in gas tariff at the start of FY21 cannot be safely predicted right
now because it would greatly depend on how the market reacts to the Budget
announcement, furthermore it remains to be seen when inflation will clock in single
digits again. The present government has already slashed down a major cost
component to bring down retail prices and hiking up gas tariffs within 6 months would
send a negative sentiment out. Our base case forecasts currently incorporate
reduction in GIDC cess and current tariff structure. If a gas hike is indeed witnessed, it
would be to the tune of 5%/32% hike in feed/fuel effectively translating into PKR
95/bag for EFERT.
GIDC – The perennial anti-hero

Gas Infrastructure Development Cess (GIDC) was levied during CY11 by the
government in order to fund construction projects in the country to optimize the
efficiency and improve capacity of gas usage. Projects including Iran-Pakistan pipeline,
Turkmenistan-Afghanistan-Pakistan-India and multiple RLNG pipelines were
earmarked as the key beneficiaries of this cess. However, the utilization and the
imposition of GIDC has always been an extremely debatable topic between the
industrialists and the government with assistance of courts regularly required to shed
clarity.
GIDC has been more of a burden GIDC Amended Act 2015

than necessity The constituency of this “tax on tax” was deemed illegal in CY14, however, the then
government passed the GIDC Amended Act 2015, in which even further controversy
was created. In this amended proposal, the new plants established under Fertilizer
Policy 2001 were also subjected to the cess. EFERT & FATIMA were directly affected
by this and they once again utilized the legal process to obtain a historic stay order
against the government in Oct’16. From that point onwards, EFERT has only been
accruing GIDC rate (PKR 300/mmbtu on feed & PKR 150/mmbtu on fuel) on its base
plant.
Win-win situation was proposed but alas
The present government wanted to resolve this decade-long issue for the government
by proposing a realistic situation for both parties. The Presidential Ordinance 2019
passed in Aug’19 proposed a prospective 50% reduction of GIDC rates on old plants
while completely abolishing any cess on new plants on the condition of 50% payment
of GIDC arrears. This was a win-win solution for both parties, but the pressure exerted
by opposition parties against this Ordinance ultimately forced the government to
intervene and revoke this Ordinance within 10 days of its initiation. The
manufacturers, who had patiently absorbed PKR200/bag impact of hike in feed/fuel
rates effective from Jul’19 immediately passed on the impact to consumers breaking
the PKR 2000/bag ceiling on urea prices.
Decision reserved
The Supreme Court on 20th Feb’20 announced that they are reserving their judgment
on the issue of GIDC levy of 2015 after conducting regular hearings since 11 th Feb’20.
According to newsflows, it’s indicated the country’s apex court was not satisfied with
the progress made on projects for which GIDC was actually levied. Furthermore, there
were also some question marks regarding the accounting treatment, as it was included
in “tax revenue” line item in the budget.

With these indicative factors available, we foresee a possibility of fertilizer
manufacturers ultimately winning the verdict against the govt. and that would bring a
fresh one-off wave of earnings growth for the sector.
EFERT Accruals After-tax EPS impact Net cash adj. Net cash adj.
Waived off Waived off Subsidy rec. GST rec.
(PKRmn) impact (PKR) impact impact (PKR)
15,351 50% 7,675 5,449 4.08 6,368 2,343 1,036 0.78

15,351 75% 11,513 8,174 6.12 6,368 2,343 4,873 3.65
15,351 100% 15,351 10,899 8.16 6,368 2,343 8,711 6.52
Source: 1HCY19 Company Accounts, Fortune Research
Riding the yield curve

A closer look at the other income portion of the company’s earnings highlights a huge
dependence on revenue earned through subsidy mechanism. On an average basis,
76% of other income over CY15-CY18 period has been earned through government
plugging the promised subsidy amount back into the company. With no subsidy
mechanism expected over the horizon, EFERT has reverted towards smartly riding the
yield curve by relying on high PIB and T-bill yields to compensate for the missing chunk.
The 3QCY19 number represents the first time during the previous 4-yrs that the
company has managed to achieve PKR 1bn from its financial assets. We expect the
company to complete the calendar year with PKR 2.6bn earned through financial
instruments.
Capacity to unlock further shareholder value

EFERT is going through a stable and impressive de-leveraging process which is
expected to phase out during CY22 shedding financial constraints for the company and
freeing up additional cash flows potentially unlocking additional payout stream.
Through the phasing out of this process, the majority of financial cost expenditure will
be derived from short term borrowings which will be utilized in working capital
requirements. With no capacity expansions lined up in the near to medium term and
CAPEX requirements easily manageable through CFO, we assume no additional long
term facility to be utilized by the company.
Aggressive de-leveraging planned ahead (PKRmn)

High dividend yield consistently dwarfing 10-Year PIB
. EFERT, with it’s outstanding payout structure will provide a 15.3% dividend yield for
EFERT will likely be a great defensive
scrip going forward, especially when
CY20 making it one of the highest dividend paying stocks in KSE-100. The dividend
ETFs come into play to provide a yield has traded above the 10-Year PIB (considered risk-free investment) for 4
dividend income for the tradeable consecutive years and no indication suggests the trend to deviate from it’s normal
fund course. This almost makes EFERT a “must-have” in an equity portfolio in spite of a 3.2%
downside from LDCP, we believe EFERT as one of the safest defensive scrips in the
Pakistani volatile market.
Div. yield vs Risk free rate
Source: SBP, Fortune Research

Key risks
Exchange Rate
A more than anticipated exchange rate depreciation would not only raise import
structure of the country but would also erode competitve advantage utilized through
dollar indexation
Gas Curtailment
Natural gas is the most important element in the manufacturing process and any
curtailment regarding it’s supply chain would create severe disruptions in the market
dynamics of the country.
Supreme Court ruling in favour of government
Although a scenario on the lower side of probability spectrum, the effect of this verdict
will nonetheless result in a significant cash outflow for the company. According to our
back of the envelope calculations, GIDC accruals will stand at PKR 19.35bn at year end.
A verdict demanding full payment of these arrears would entail dilution of cash & cash
equivalents amounting to PKR14.5/share.
Restriction on passing on inflationary costs
Inability to pass on gas hikes would be absolutely detrimental for the company as it
would trim gross margins which have averaged around 30% by 5-6ppts. Owing to food
inflation outruns pushing inflation even higher than policy rate, we don’t expect the
government to drop another gas tariff hike bomb on consumers. Furthermore, we also
believe that fertilizer manufacturers will not be budged by the demands of the
government to further reduce prices after already obliging to decrease prices
(effective Feb’20)
Continued decline in international prices
Decrease in international prices accredits the perceived pricing power of the sector
under which they are not able to pass on the impact of local inflationary pressures and
they have to absorb these impacts.

Company Financials
Income Statement (PKRmn) CY17A CY18A CY19E CY20E CY21E
Gross Sales* 81,982 112,795 123,869 115,658 121,006
GST* 4,853 3,599 2,515 3,334 3,507
Net Sales 77,129 109,197 121,355 112,324 117,499
Cost of Sales 53,911 73,880 81,815 77,026 81,316
Gross Profit 23,219 35,316 39,540 35,298 36,183
Selling & Distribution Expenses 7,245 8,008 8,736 10,108 10,642
Administrative Expenses 1,293 1,585 1,248 1,851 1,982
Other Income 5,866 2,062 4,352 2,786 2,773
Other Operating Expenses 1,234 1,432 2,623 1,672 1,739
EBIT 19,313 26,353 31,284 24,453 24,593
Depreciation & Amortization* 5,092 5,195 5,316 5,212 5,131
EBITDA 24,404 31,548 36,601 29,665 29,724
Finance Cost 2,648 2,071 3,887 3,798 2,302
PBT 16,665 24,282 27,398 20,655 22,291
Taxation 5,509 6,869 10,526 6,106 6,639
PAT 11,156 17,414 16,871 14,549 15,652
EPS (PKR) - recurring 8.35 13.04 12.63 10.90 11.72

DPS (PKR) 8.50 11.00 13.00 11.25 10.00
*values which will be available in annual report
Balance Sheet (PKRmn) CY17A CY18A CY19E CY20E CY21E

Fixed Assets 73,398 72,691 71,341 70,280 69,462
Long term loans and advances 135 143 143 143 143
TOTAL Non-Current Assets 73,533 72,834 71,484 70,423 69,604
Current Assets (excl. Cash & ST Inv.) 28,324 36,418 38,014 31,076 32,575
Cash & Short term Inv. 9,959 8,469 11,645 11,913 8,392
TOTAL Current Assets 38,283 44,887 49,659 42,989 40,967
TOTAL ASSETS 111,816 117,721 121,143 113,412 110,571
Share Capital & Share Premium 16,738 16,738 16,738 16,738 16,738
Reserves 36 364 (45) 118 146
Unappropriated Profit 25,696 28,421 27,283 24,139 26,439
TOTAL EQUITY 42,470 45,523 43,976 40,996 43,323
Long term borrowings 22,784 25,715 17,026 7,026 2,763
Deferred Liabilities 9,454 7,162 7,162 7,162 7,162
Other non-current liabilities 175 193 193 193 193
TOTAL Non-Current Liabilities 32,412 33,069 24,380 14,380 10,117
Trade & other payables 21,966 29,072 37,621 38,211 40,369
Current portion of Borrowings 8,120 5,096 8,699 9,999 4,263
Short term borrowings 5,264 1,010 2,150 5,500 8,500
Accrued interest/markup 595 426 795 804 477
Other current liabilities 988 3,525 3,522 3,522 3,522
TOTAL Current Liabilities 36,934 39,129 52,787 58,036 57,131
TOTAL LIABILITIES & EQUITY 111,816 117,721 121,143 113,412 110,571
Cash Flow Statement (PKRmn) CY17A CY18A CY19E CY20E CY21E

Net cash from operating activities 24,388 20,935 33,076 28,564 15,344
Net cash from investing activities (11,320) (4,043) (3,932) (4,117) (4,277)
Net cash from financing activities (11,301) (17,957) (25,968) (24,179) (14,589)
Net increase/(decrease) in cash 1,767 (1,066) 3,176 268 (3,521)

Analyst Certification
The research analyst on the cover of this report certifies that: 1) all of the views expressed in this report accurately reflect his or her personal
views about any and all of the subject securities or issuers; 2) no part of any of the research analyst’s compensation was, is, or will be directly
or indirectly related to the specific recommendation(s) or view(s) expressed by the research analyst(s) in this report; 3) he/she does not
have a financial interest in any and all of the subject securities or issuers aggregating more than 1% of the value of the company(s); 4) he/she
or its close relative has not served as a director/officer/associate in the past three years in any and all of the subject securities or issuers; 5)
he/she or its close relative has received any compensation from any and all of the subject securities or issuers in the previous 12 months;
and 6) he/she has not traded in the subject security(ies) or issuer(s) in the past 7 trading days and will not trade in the next 5 trading days
of issuing a coverage initiation or a material Target Price revision report.
Valuation Methodology Key risks

To arrive at period-end Target Price(s), FSL uses different valuation ‒ Decline in international Urea & DAP prices
methodologies: ‒ Depreciation of exchange rate
‒ Discounted Cash Flow (DCF, DDM) ‒ Inability to pass on inflationary costs
‒ Relative Valuation (PE, PB, PS, PCF) ‒ Gas curtailment
‒ Equity and Asset return based methodologies (EVA, RI, etc.)
Acronyms Rating
bps basis points LCY Local Currency BUY TSR > 15%
BVPS Book Value per share MRP Market risk premium HOLD -10% > TSR > 15%
CAGR Compounded Annual Growth Rate NAV Net Asset Value SELL TSR < -10%
CAPM Capital Asset Pricing Model NPV Net Present Value
DCF Discounted Cash Flow PB Price-to-Book Value NR Not Rated
DDM Discounted Dividend Model PCF Price-to-cash flow TSR = Capital gain + DY
DE Debt-to-Equity PE Price-to-Earnings Old Rating
DPS Dividend per share PKR Pakistani Rupee Overweight TSR > 15%
DY Dividend yield ppt percentage point Marketweight 0% > TSR > 15%
EPS Earnings per share PS Price-to-Sales
Underweight TSR < 0%
EUR Euro PV Present Value
EV Enterprise Value RFR Risk-free rate
EVA Economic Value Added RI Residual Income
FCF Free Cash Flow ROA Return on Assets
FCFE Free Cash Flow to Equity ROE Return on Equity
FCFF Free Cash Flow to Firm SOTP Sum Of The Parts
FCY Foreign Currency TP Target Price
g Growth TSR Total Stock Return
IRR Internal Rate of Return USD US Dollars
JPBV Justified Price-to-Book Value WACC Weighted average cost of capital
Disclosure
The investment recommendation(s) take into account both risk and expected return. FSL based the long-term Target Price estimate on
fundamental analysis of the subject security(ies)’s future prospects, after having taken perceived risks into consideration. FSL have
conducted extensive research to arrive at the investment recommendation(s) and target price(s) for the subject security (ies). Readers
should understand that financial projection(s), target price estimate(s) and statement(s) regarding future prospects may or may not be
realized. Forward looking statement(s), opinion(s) and estimate(s) included in this report constitute FSL’s judgment as of this date and are
subject to change without prior notice. The target price(s) stated in reports on company update(s), initiation(s) and corporate action
adjustment(s) of stocks listed on the PSX are on a 12-month basis. All other reports on PSX-listed securities, such as scoops, sector or
company commentaries, do not include, denote, or imply any changes to target price(s).
Disclaimer
The research report prepared by Fortune Securities Limited (hereinafter referred as FSL) are based on public information and the report is
for information purposes only and does not constitute nor it is intended as an offer or solicitation for the purchase or sale of security(ies)
or other financial instruments. FSL makes every effort to use reliable, comprehensive information, but it makes no representation that the
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the specific investment objectives, financial situation/financial circumstances and the particular needs of any specific person. Investors
should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies
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Fortune Research - EFERT - Staying Afloat Despite Regulatory Headwinds (Detailed Report)

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Fortune Research - EFERT - Staying Afloat Despite Regulatory Headwinds (Detailed Report)

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28th February 2020 REP-070

Engro Fertilizers Limited (EFERT)

Fortune Securities Limited |Equity Research

Valuation – Target Price PKR 67.08/share

Valuation Matrix CY20 CY21 CY22 CY23 CY24 Important Assumptions

2|P a g e Fortune Securities Limited |Equity Research

Agricultural share in GDP growth GDP Composition

Source: PBS, Fortune Research Source: PBS, Fortune Research

Source: PBS, Fortune Research

3|P a g e Fortune Securities Limited |Equity Research

4|P a g e Fortune Securities Limited |Equity Research

Declining agriculture in land* (‘000 hectare) No significant growth in productivity

5|P a g e Fortune Securities Limited |Equity Research

Source: NFDC, Fortune Research Source: NFDC, Fortune Research

But are things as rosy as they seem?

6|P a g e Fortune Securities Limited |Equity Research

Urea Market Share - CY18 Urea Market Share - CY19

Source: NFDC, Fortune Research Source: NFDC, Fortune Research

DAP Market Share - CY18 DAP Market Share - CY19

Source: NFDC, Fortune Research Source: NFDC, Fortune Research

7|P a g e Fortune Securities Limited |Equity Research

8|P a g e Fortune Securities Limited |Equity Research

Source: NFDC, Fortune Research Source: NFDC, Fortune Research

Source: NFDC, Fortune Research

9|P a g e Fortune Securities Limited |Equity Research

Source: NFDC, Fortune Research

The over-reliance on imports constituting in the composition of offtakes during the

10|P a g e Fortune Securities Limited |Equity Research

Source: NFDC, Fortune Research Source: NFDC, Fortune Research

Source: NFDC, Fortune Research

11|P a g e Fortune Securities Limited |Equity Research

Source: NFDC, Fortune Research

Recent food inflation puts everything in a conservative perspective

12|P a g e Fortune Securities Limited |Equity Research

Urea prices – local vs international International Urea and DAP (USD/ton)

13|P a g e Fortune Securities Limited |Equity Research

Meanwhile dealers have an arbitrage opportunity

14|P a g e Fortune Securities Limited |Equity Research

Source: Company Accounts, Fortune Research

DAP EPS (PKR)

15|P a g e Fortune Securities Limited |Equity Research

Est. EnVen costs (PKRmn)

The concessionary agreement which

Source: Fortune Research

16|P a g e Fortune Securities Limited |Equity Research

GIDC – The perennial anti-hero

GIDC has been more of a burden GIDC Amended Act 2015

17|P a g e Fortune Securities Limited |Equity Research

15,351 50% 7,675 5,449 4.08 6,368 2,343 1,036 0.78

Riding the yield curve

Capacity to unlock further shareholder value

Aggressive de-leveraging planned ahead (PKRmn)

Source: Company Accounts, Fortune Research

18|P a g e Fortune Securities Limited |Equity Research

Source: SBP, Fortune Research

19|P a g e Fortune Securities Limited |Equity Research

20|P a g e Fortune Securities Limited |Equity Research

EPS (PKR) - recurring 8.35 13.04 12.63 10.90 11.72

Balance Sheet (PKRmn) CY17A CY18A CY19E CY20E CY21E

Cash Flow Statement (PKRmn) CY17A CY18A CY19E CY20E CY21E

21|P a g e Fortune Securities Limited |Equity Research

Valuation Methodology Key risks

22|P a g e Fortune Securities Limited |Equity Research