Fatima Fertilizer: Earnings trimmed – maintain ‘Buy’

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  • We continue to maintain our ‘Buy’ rating on Fatima Fertilizer Ltd (FATIMA) with a revised TP of Rs32 (potential upside of 12%). Attractive valuations at current levels also validate our view where FATIMA is trading at 2014E P/E of 6.7x and offers an attractive 2014E dividend yield of 11%.
  • Note that the key risk to our investment thesis remains pricing power risk, if the local producers (including FATIMA ) are unable to pass through the impact of additional levy of GIDC on fertilizer fuel-stock gas supply, which are currently being charged at Rs100/mmbtu.
  • Given the recent offtake data we revise down our 2014E/15F earnings estimates by 9% each and consequently our dividend estimates by 14%/13%.
  • Recent data has showed FATIMA ’s focus shifting towards NP production as margins on urea/CAN have declined. Note that NP contributed towards a larger share (41%) in the product mix for FATIMA in 1Q2014.

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FATIMA earnings revised down by 9% each for 2014E-15F

Decline in urea/CAN margins for local producers has tilted FATIMA’s focus towards NP production. Note that NP contributed towards a larger share (41%) in the product mix for FATIMA in 1Q2014. Therefore, the company has prioritized its production in the order of (1) NP, (2) CAN, and (3) urea. This is likely to result in lower offtake for the company going forward. Moreover, FATIMA had also rescheduled its Annual Turn Around (ATA) to April, this year, (March in 2013) resulting in lower production levels in April. That said, we revise down our 2014E/15F earnings estimates for FATIMA by 9% post 1Q2014 results. Similarly, we also cut out 2014E/15F dividend estimates by 14%/13%%.

Expansion plans in the pipeline

FATIMA, along with its group companies, has been aggressively looking into various international propositions to expand its business. Note that, the company is planning to invest in a nitrogen fertilizer plant in the Indiana State of the USA. An amount of US$300mn has been approved to be invested by the Fatima group of companies. Moreover, the company is also undertaking an ammonia revamp project, which is expected to be completed by the end of 2016 or early 2017 and will enhance ammonia production by 300tpd to 1,800tpd. The first phase of the project in which 100tpd of ammonia production will be added is expected to come online by 2015. This revamp project would require FATIMA’s to use all of its allocated 110mmcfd of gas. Currently, it is utilizing ~100mmcfd while 10mmcfd is being diverted to Guddu (now being used by Engro). Therefore, restoration of that gas to FATIMA is critical to reap benefits from the ammonia project.

Reiterate ‘Buy’ with a TP of Rs32

Although we have cut our earning estimates by 9% each for 2014E-15F, we flag FATIMA as one of our top picks in the fertilizer sector with a revised TP of Rs32 (12% potential upside). Attractive valuations at current levels also validate our view where FATIMA is trading at 2014E P/E of 6.7x and offers an attractive 2014E dividend yield of 11%. Note that the key risk to our investment thesis remains pricing power risk, if the local producers (including FATIMA) are unable to pass through the impact of additional levy of GIDC on fertilizer fuel-stock gas supply, which is currently being charged at Rs100/mmbtu. Our back of the envelope working suggest that every Rs100/mmbtu change in GIDC on fuel-stock gas may result in urea price hike of Rs35/bag to negate impact.

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