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KASB Securities Limited, 5th Floor, Trade Centre, I.I. Chundrigar Road, Karachi
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Morning Shout
Aijaz Siddique
Aijaz.siddque@kasbsec.com
KASB Securities Limited
+92 21 111 222 000
Industry Overview
Fertilizer | Pakistan
April 28, 2016
Pakistan Fertilizer
REP-039
www.jamapunji.pk
Reversal in gas tariffs may bring
players on an equal footing
Govt. may resort to reduction in feed tariffs to remove inventory glut
As per our channel checks, the government is considering a proposal for reduction in the gas
tariffs in lieu of commitment from manufacturers for a reduction in urea prices. We believe
reversal of gas tariffs to pre-Sep-15 levels and decline in urea prices present an optimal
solution as (1) it would reduce inventory levels, obviating the need for any exports (which would
reduce margins drastically), and (2) it would provide a respite to the farmers and have the same
impact as a subsidy on urea and DAP fertilizers. Cutting fuel rates alone would not be effective
as consumption is ~5mmbtu/ton only. Following reversal in tariffs, quantum of the final
reduction in urea prices will dictate the impact on the earnings of the firms. We have assumed
objective will be to maximize the reduction in urea prices to resolve inventory backlog. We have
discussed below how a reversal in just feed tariffs and reduction in urea prices would affect the
earnings of FFC, FFBL, Efert and Fatima. Furthermore, we have provided a sensitivity analysis
(refer Table 2) of reversal in both feed and fuel tariffs and decline in prices by PRs150/bag.
Reversal in feed tariffs would benefit FFBL and FFC
The performance of the fertilizer sector continues to be hit by double whammy of (1) higher
inventory amid recovery in production and (2) low farmer demand due to increase in cost of
inputs and lower commodity prices. It is highly probable that the govt. would reduce just feed
tariffs back to PRs123/mmbtu. In that case, it can negotiate a price decline of PRs85/bag
(PRs102/bag including GST) which will neutralize the margin impact on FFC. However, it will
negatively affect the bottom-line of Efert and FATIMA as they receive concessionary gas for
their new plants. We have analyzed the impact of such an action:
FFC: Our base case EPS of PRs9.60/sh assumes off-take of 2.348mn tons in CY at average
prices of PRs1820. If FFC decides to completely pass-on the impact of reduced tariff via
PRs102/bag urea price cut for remaining 8-mths, we see upside in earnings due to potentially
improved sales.
FFBL: We believe reversal in feed tariffs might eventually affect the amount of subsidy offered
on phosphate based fertilizers. However, assuming FFBL keeps DAP prices unchanged after
the feed gas tariff is reduced, earnings increase to PRs3.74 due to the higher margins on DAP.
EFERT: As we have incorporated just Enven, which runs on concessionary gas, any reduction
in feed tariffs would not contribute to the EPS. However, if Efert decides to match FFC prices,
earnings will be impacted significantly. In such a scenario we estimate earnings to decline by
~9% from our base case of PRs10.23. If we incorporate both plants, reversal in feed tariffs and
reduction in prices would have a positive impact on the profitability due to increase in volumes.
Fatima: We believe Fatima would be most affected in such a scenario. A reduction in urea and
CAN prices by PRs100/bag, would negatively affect our base case estimates. We expect
earnings to decline to PRs3.82/sh compared to our base case of PRs4.11 for CY16E.
Inventory levels remained high in Apr-16
Total urea inventory crossed 1.2mn tons at the end of Mar-16. However, that does not include
the inventory held by dealers. As we had already flagged in our report on 29’Mar-16, higher
production by Agritech Limited (AGL), DHFL and FFBL due to increased availability of gas
would lead to significant back-log due to low demand this year. Our channel checks suggest
that the inventory levels have continued to remain very high in Apr-16 as well.
Scenario 1: Reversal in Feed
CY16E Base Sce1* %
FFC 9.60 9.60 0.00%
FFBL 3.40 3.74 10.00%
Efert 10.23 9.30 -9.09%
FATIMA 4.11 3.82 -7.06%
Source: KASB Research
Sce1* Reduction in prices of PRs100/bag
Scenario 2: Reversal in feed and fuel tariffs
CY16E Base Sce2* %
FFC 9.60 9.60 0.00%
FFBL 3.40 4.07 19.71%
Efert 10.23 9.15 -10.56%
FATIMA 4.11 3.85 -6.33%
Source: KASB Research
Sce2*: Reduction in prices of PRs150/bag

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Pakistan Fertilizer – April 28, 2016
Index Data & Volume Leaders
Close % Chg
Vol.
US$ mn
KSE30 19,854.51 1.5% 69.96
KSE100 34,269.28 1.2% 101.89
KSE All
Share 23,643.70 1.4% 119.32
ENGRO 312.77 1.8% 13.02
SNGP 33.55 0.8% 8.63
OGDC 126.81 4.9% 7.35
ATRL 260.35 2.9% 7.12
POL 314.52 4.0% 5.06
KSE-100 Intra-day Movement FIPI
33,910
33,975
34,040
34,105
34,170
34,235
34,300
9:30 AM 10:53 AM 12:14 PM 1:35 PM 2:56 PM
High 34,305
Low 33,914
KSE-100: Top Gainers & Losers FIPI
-4% -2% 0% 2% 4% 6%
CPPL
BNWM
ASRL
IGIIL
NESTLE
NML
NCL
FML
EFUL
PAKT
Source: KASB Research
Morning News
Govt. to spend PRs1.5tn on development, eyes 6.5% GDP growth in FY17 (DAWN): On
Wednesday, the federal cabinet has approved Budget Strategy Paper (BSP) for the next fiscal
year with target to spend PRs1.5tn on development, reduce fiscal deficit to 4% of gross domestic
product (GDP), increase economic growth rate to 6.5% and limit inflation to 6%. Finance Minister,
Mr Ishaq Dar acknowledged before the cabinet that the GDP growth rate will miss this year’s
target of 5.5% mainly due to a setback to the cotton crop and projected the growth rate to be 5% in
FY16. He further added that the growth rate is expected to reach 6.5% by the end of next year
driven by (1) capacity additions in gas and power sector, (2) additional investments under the
China-Pakistan Economic Corridor (CPEC), and (3) improved security environment.
All bids for T-bills rejected (Dawn, Analyst Comment): The government rejected all bids in the
recently held T-bill auction. The central bank has set a pre-acution target of PRs225bn. Looking at
the bid pattern, we believe the decision was made due to high bid rates by banks, where bids
started from near the levels of previous auction cut-off rates (6.16%/6.18%/6.20% for
3M/6M/12M). In addition, this reflects the central bank’s signal of no change in monetary policy
stance in our view.
Pakistan’s B3 rating reflects strengthening growth: Moody’s (DAWN): Commenting on
Pakistan’s B3 rating on Wednesday, Moody’s investors service stated that the B3 issuer rating
indicates the sign of strengthening economic growth and progress on structural reforms against a
relatively high government debt burden and political risks. The agency further stated that the
economic output has picked up over recent years and is now rising at a relatively healthy pace.
Moreover, the implementation of the China-Pakistan Economic Corridor and energy sector reforms
will likely boost the economy and improve the operating environment for investment.
PTA to auction 3G/4G license for US$395m (Tribune): In an apparent bid to overcome the
revenue shortfall, the government has tasked the Pakistan Telecommunication Authority (PTA)
with the auctioning a 3G/4G mobile broadband licence at a base price of US$395mn before the
end of current fiscal year on June 30. Recall the auctions held in Apr-14 where a combined
US$1.1bn was raised, the base price for a 3G license was US$295mn and for a 4G licence was
US$210mn.
Technical View
Kamal Ahmed
Kamal.ahmed@kasbsec.com
KSE-100: Index is trading at a major resistance area
The index opened positive and remained positive in the entire last trading session, closing
in the green.
While the index is facing a trend line resistance at 34,500-34,700, it appears that the index
could hold this resistance and could give a corrective move.
A closing above 34,500-34,600 could guide the index further towards 35,000.
However, a closing below 33,400 (200-DMA) would change our stance from bullish to
neutral.
It is recommended to exit trading positions on strength.

3. Page 3
Pakistan Fertilizer – April 28, 2016
International Equity Markets
Asian Markets (Last trading session’s) European Markets (Last Trading Session’s Rates)
Price Abs. Chg. % Chg. Price Abs. Chg. % Chg.
All Ordinaries 5,250.95 -32.7 -0.62 ATX 2,329.96 17.0 0.7
Shanghai Composite 2,953.67 -11.0 -0.37 BEL-20 3,479.58 8.4 0.2
Hang Seng 21,361.60 -45.7 -0.21 CAC 40 4,559.40 26.2 0.6
BSE 30 26,064.12 56.8 0.22 DAX 10,299.83 40.2 0.4
Jakarta Composite 4,845.66 31.6 0.66 AEX General 448.37 0.7 0.2
KLSE Composite 1,692.34 -0.2 -0.01 Swiss Market 8,096.76 19.6 0.2
Nikkei 225 17,290.49 -62.8 -0.36 FTSE 100 6,319.91 35.4 0.6
NZSE 50 6,750.41 -45.3 -0.67 American Markets
Straits Times 2,874.72 -19.9 -0.69 Dow Jones Ind. Average 18,041.55 51.2 0.3
Seoul Composite 2,015.40 -4.2 -0.21 NASDAQ Composite 4,863.14 -25.1 -0.5
Taiwan Weighted 8,563.05 -18.5 -0.22 NASDAQ -100 4,416.64 -36.3 -0.8
KSE-100 Index 34,269.28 421.5 1.25 S&P 500 Index, RTH 2,095.15 3.5 0.2
Source: Bloomberg *Closing 24
th
March
Foreign Portfolio Investment in Equities
Country Day (US$mn) WTD (US$mn) MTD (US$mn) YTD (US$mn) 12M (US$mn) Date
Pakistan -3.4 -8.2 -13.9 -114.6 -325.4 27-4
India 85.7 121.7 485.8 1,699.6 -2,832.3 26-4
Indonesia -27.7 -80.4 89.4 404.8 -2,160.2 27-4
Japan - 5,384.2 15,409.4 -44,879.9 -62,685.5 15-4
Philippines 3.4 43.4 -37.9 38.3 -2,073.8 27-4
South Korea -101.8 300.7 1,868.0 2,626.1 -7,540.0 28-4
Sri Lanka -0.3 1.1 -6.9 -20.7 -78.4 27-4
Taiwan -24.1 212.1 1,095.2 6,076.2 1,777.5 27-4
Thailand -1.6 -41.3 -122.7 420.9 -3,757.6 27-4
Vietnam 2.8 -31.3 -75.4 -122.7 -111.0 27-4
Abu Dhabi 4.3 25.6 183.3 650.1 1,854.1 27-4
Source: Bloomberg, NCCPL
Forex and Money Market snapshot Commodity Prices
Price Abs. Chg. % Chg.
WTI (Crude Oil) 45.33 1.29 2.9
Gold 1,245.83 2.38 0.2
CRB Index 182.49 1.01 0.6
Source: Bloomberg
Fundamental equity opinion key
Investment rating Total return expectation (within 12-month period of date of initial rating)
Buy ≥ 20%
Neutral ≥ 0%
Underperform N/A
Source: KASB
Current Previous Chg.
6-Month KIBOR (Offer) 6.37 6.37 0.00
12-M T-Bill (Average) 6.26 6.23 0.03
10- year PIB (Average) 8.38 8.43 -0.05
PkR/ US$ 104.85 104.83 0.02
Source: KASB Money Market
World Markets and Commodity Prices