- The new Finance Act has replaced the GIDC on ‘Fertilizer – Feed Stock (except for the fertilizer plants having fixed price contracts)’ with ‘Fertilizer-Feed Stock’ only. That means, GIDC on feed stock (PKR300/mmbtu) would be applicable on new plants as well (Engro’s Enven plant and Fatima Fertilizer) effective from Jul 1, 2014.
- The imposition of GIDC on feedstock gas supplies to Enven and Fatima Fertilizer plants may result in these companies to go into litigation against the govt. for not meeting its 10-year legal obligation to supply gas at US$0.7/mmbtu.
- In the current scenario, the cost pass-through of GIDC on fuelstock (impact of Rs18/bag) does not appear to be much of a challenge as it impacts all the fertilizer companies.
- We believe, FATIMA and ENGRO will not be able to pass-through the full impact of GIDC, however, in the best case they may be able to pass-through the incremental cost impact partially which will result in Fauji group, especially FFC to emerge as the prime gainer.
- On the flip side, in the worst case, if this cost impact is not passed through our Target Prices for FATIMA, EFERT and ENGRO will plunge down to Rs24 (From Rs32 currently), Rs55 (from Rs73 currently) and Rs212 (from Rs235 currently), respectively.
Rs300/mmbtu feedstock rate for all fertilizer companies
The new Finance Act has replaced the GIDC on ‘Fertilizer – Feed Stock (except for the fertilizer plants having fixed price contracts)’ with ‘Fertilizer-Feed Stock’ only. That means, GIDC on feed stock (PKR300/mmbtu) would be applicable on new plants as well (Engro’s Enven plant and Fatima Fertilizer) effective from Jul 1, 2014. Moreover, the govt. has increased the GIDC on fuelstock gas supply by Rs50/mmbtu to Rs150/mmbtu. Earlier the new plants were exempt from GIDC on feedstock due to concessionary gas price agreement under fertilizer policy 2001. Note that the FATIMA was already getting gas at cheaper rates (US$0.7/mmbtu) while EFERT was expected to get this rate soon. Nevertheless, the companies are still waiting for clarity and the official notification from the Ministry of Finance.
Another litigation issue…
The imposition of GIDC on feedstock gas supplies to Enven and Fatima Fertilizer plants may result in these companies to go into litigation against the govt. for not meeting its 10-year legal obligation to supply gas at US$0.7/mmbtu. However, it can take a long time to get any resolution, if any, as has been the case with Engro’s concessionary gas supply agreement.
Price pass-through capability
The pricing power of local urea producers has been tested earlier in the year with the decision to partly reverse the urea price hike. Note at that time the price differential between imported urea (pre-subsidy) and domestically produced urea was at ~Rs800/bag, which is currently at ~Rs400/bag. FFC had raised urea price to Rs1,900/bag (from Rs1,722/bag) to pass through the incremental GIDC cost impact but the govt. intervened to reduce the urea price to Rs1,786/bag. In the current scenario, the cost pass-through of GIDC on fuelstock (impact of Rs18/bag) does not appear to be much of a challenge as it impacts all the fertilizer companies.
However, pass-through of GIDC on feedstock gas supply may not be that easy because currently FATIMA is the only beneficiary of concessionary gas rate agreement.
Fatima and Engro to bear the brunt
We believe, FATIMA and ENGRO will not be able to pass-through the full impact of GIDC, however, in the best case they may pass-through the incremental cost impact partially which will result in Fauji group, especially FFC to emerge as the prime gainer. On the flip side, in the worst case, if this cost impact is not passed through our Target Prices for FATIMA, EFERT and ENGRO will plunge down to Rs24 (From Rs32 currently), Rs55 (from Rs73 currently) and Rs212 (from Rs235 currently), respectively. Whereas, for Fauji group it will be a non event. However, we still await (1) clarity and issue of notification to the companies by Ministry of Finance, and (2) reaction of FATIMA and EFERT, before incorporating this current situation into our models.
