July 13, 2021 (MLN): Engro Fertilizers Company Limited (EFERT), a well-known and trusted name of Pakistan’s fertilizer industry, is tirelessly working to keep Pakistan green for decades. The principal activity of the company is manufacturing, purchasing and marketing of fertilizers.
Financially, the company holds sound position as its latest financial statement for the 3QFY21 reported a whopping 10x increase in net profits to Rs5.74billion compared to the profits of Rs570.7million in the corresponding quarter last year. This led the company to announce an interim Cash Dividend for the quarter mentioned above at Rs4per share i.e. 40%.
Since financial health of the company depends on the government policies as well, a slight move in policies/measures can leave a notable mark on the profitability.
With regards to EFERT, the dividend payout capacity is expected to erode substantially as Government is committed to collect Gas Infrastructure and Development Cess (GIDC) in multiple installments as per Supreme Court guidance. This includes GIDC on concessionary flows that the company has not booked amounting to Rs38bn in its financials. According to GIDC Act 2015, both new fertilizer companies established under fertilizer policy 2001 and old fertilizer plants would pay GIDC on feed stock and fuel gas supplies, a research report by Foundation Securities noted.
The report further highlighted that EFERT along with other fertilizer companies have already passed on the impact of GIDC to the farmers by increasing their prices. The conviction for GIDC on concessionary gas is further strengthened by company’s agreed clause, in principle that MARI shall charge invoice at OGRA notified gas prices plus applicable duty/taxes in its novation agreement signed with Sui Northern Gas Pipelines Limited and Mari Petroleum Company Limited. Furthermore, in Supreme Court detailed judgment on GIDC issue government has also shown details of GIDC receivables from fertilizer companies using concessionary gas flows.
It is estimated that EFERT’s current GIDC payable on non-concessionary gas stands at Rs19.6bn while company’s overdue GIDC on concessionary flows are Rs38bn. It is assumed that payment of GIDC in 48 monthly installments would start from Aug’21 for the fertilizer universe. This is based on expectation of signing of commercial agreement between Government and Russian firms for construction of North-South project in near future that would be followed by project execution in later half of 2HCY21, the report added.
The research indicated that government would finance its equity portion in the project through GIDC collection proceeds as per Supreme Court directives and GIDC Act 2015. To highlight, in FY22 budget government has also set GIDC collection target of Rs130bn.
Moreover, assuming 48 monthly installments and no adjustment of refunds from Government in the base case scenario EFERT GIDC payment would be approximately Rs6bn, 14.5bn, 14.5bn, 14.5bn, and 8.4bn for CY21, CY22, CY23,CY 24, and CY25 respectively. However, if company gets exemption on GIDC payable on concessionary gas, the valuation would increase by Rs12.5 per share.
The report also underlined that concessionary flows are expected to end in 1QCY22. The working is based on calculation of concessionary flows delivered to the EnVen Plant by SNGPL since its commercial operation date (COD) as per the earlier argument of EFERT’s management.
Subsequently, EFERT’s profitability is expected to decline by approximately Rs4.9bn translating into annualized EPS impact of around Rs2.4 per share. This is despite the fact that EFERT’s concessionary gas flows are expected to end by Jun’21 as per SNGPL based on fertilizer policy 2001. However, company is of the opinion that they should get gas flows at concessionary rates till the end of 2023, the report unveiled.
Under fertilizer policy it is stated that “Plant setup under the fertilizer policy 2001 would receive gas at the Middle Eastern price prevailing on the date of signing of the GSA or US$0.77 per mmbtu (with 10 percent discount) whichever is higher and shall remain fixed at such price till the expiry of 10 years from the date of commissioning”.
Going in to the details, EFERT’s new plant achieved COD in June 2011 and has been getting 103mmbtu concessionary gas under fertilizer policy 2001from MARI HRL. Furthermore, EFERT signed initial gas supply agreement with Sui Northern Gas Pipelines Limited (SNGPL) for a period of 20 years and then post COD of its plant EFERT failed to get required gas allocation for optimal production. Thereafter, ECC directed Sui Northern Gas Pipelines Limited, Mari Petroleum Company Limited and Engro Fertilizers Limited to enter into a novation agreement for the supply of feed gas to the EFERT new plant.
At present, EFERT is in negotiation with the government and SNGPL for extension of concessionary flows for the number of days for which Minimum Contract Quantity of gas under the GSA was not supplied to the company.
In the light of the above mentioned facts, EFERT production is expected to decline by 4%YoY in CY21 foreseeing current supply and demand situation. Moreover, the availability of gas flows to EFERT remain strong on the back of enhanced probability of continuation of current flows from MARI till 2025, priority of gas allocation to Fertilizer from MARI reserves, and strong cash flows of fertilizer business, report added.
To recall, in December 2011, federal government promulgated the Gas Infrastructure Development Cess Act, 2011 to generate funds for development of gas infrastructure project. The aim was to overcome the emerging gas supply crisis given depleting domestic natural gas reserves and continuous decline in gas reserves replacement ratio.
In this regard federal government has initiated multiple projects in collaboration with foreign partners that include TAPI pipeline project, IP gas pipeline project, North South gas pipeline project to transport imported RLNG up country and construction of underground gas storage facilities as a part of initiatives taken to strengthen national security.
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