Engro Fertiliser is acknowledged as the Engro conglomerate’s flagship, being the chief contributor to the group’s profitability.

Total assets of Engro Fertiliser (Efert) at the close of financial year Dec 31, 2016 stood at Rs102 billion. With 1.33 million paid-up shares and stock market price at Rs57.58 last Wednesday, the market capitalisation of the company works out at Rs 77bn.

Engro Corporation — the parent company — on Jan 1, 2010, demerged Efert into a separate business entity. At the end of 2016, majority shareholding of 56.45pc of Efert was vested in Engro Corporation. The general public held 14.72pc shares while modarabas and mutual funds had accumulated 8.74pc of the company stock.

As part of its strategic initiatives with respect to its subsidiaries and in order to enable the company to diversify its portfolio, Engro Corporation last year divested about a quarter of its holding in Efert.

“The GST is almost equivalent to the subsidy the government gives on urea, which is why replacing the subsidy by GST would not make any difference to market dynamics”

The chief executive officer of Engro Fertilisers Limited, Ruhail Mohammed, told this writer at that time that his company was continuing to explore opportunities, both within the country and abroad, to expand its business within the Agri input space.

He elaborated that in foreign lands, the company was looking into the possibility of manufacturing fertiliser expansion; while within the country Efert was concentrating on expanding the scope of marketing of products such as insecticides, pesticides, phosphates and others.

According to its last annual report, Efert commands 30pc of the urea market share, comfortably ahead of its competitors. Yet, the fertiliser industry, as a whole, is currently passing through tough times.

Due to surplus availability, manufacturers have asked the government to extend the urea export deadline until Dec 2017. “We urged the government in April to extend the deadline, but they haven’t responded,” the Efert CEO said in a statement released last Wednesday.

The government had allowed local manufacturers to export 300,000 tonnes of urea by the end of April 2017. “There is no reason to panic if the government allows the export of 500,000 tonnes to 600,000 tonnes of surplus urea. At present, the industry has an inventory of about 1.5 million tonnes of urea,” said Ruhail.

He reckoned that urea demand would remain similar to last year or around 5.5-5.6m tonnes by the end 2017. Farming economics improved in 2016 compared to 2015 and the situation is expected to remain the same in 2017, which would keep urea demand flat.

Engro Fertiliser has provided the government with many points to ponder for the upcoming budget 2017-18, which could offer relief to the industry.

Ruhail suggests that the government withdraw General Sales Tax (GST) instead of giving subsidy on urea, which he affirms would save the industry from a number of issues. “The GST is almost equivalent to the subsidy the government gives on urea, which is why replacing the subsidy by GST would not make any difference to market dynamics”, contends the Efert CEO.

In the recently released first quarter 2017 results, Efert declared profit after tax (PAT) at Rs1.66bn against PAT at Rs2.12bn in the corresponding quarter of the previous year. Alongside the result, the company announced an interim cash dividend at Rs5.00 per share.

Analyst Aijaz Siddique at Next Capital said that the earnings beat street consensus by a wide margin with re-pricing of the recently re-allocated 26 mmcfd natural gas — at industry rates from 2012 petroleum policy pricing — serving as the primary reason and 31 thousand tonne urea export and lower effective taxation being the secondary reason.

However, earnings declared year-on-year fell primarily on account of lower off-take as well as lower retention prices for both urea and DAP fertilisers.

Analyst Abdul Samad Khanani at Intermarket Securities observed that Efert was able to export 31 thousand tonnes in 1Q to East Africa at FOB prices of $235-245 per tonne. The analyst anticipated the company maintain 90-100pc dividend payout policy to shareholders as re-profiling of loans for longer maturities and at better rates create more room for generous dividend payouts.

Analyst Syeda Humaira Akhter at BMA Capital, in a report of April 26, mentioned that Efert had recently ventured into the pesticides trading business, through an offshore investment, leveraging its vast distribution network countrywide.

“The project is currently under testing phase since Jan’17 and is expected to bear fruit within two to three years”, the analyst said, who also pointed out the key downside risks to the company, which included, more than anticipated increase in gas prices and any decision against the Gas Infrastructure Development Cess (GIDC) payment.

Other downside risks were identified as no extension in exports quota and/or deadline and adverse movement in international fertiliser prices.

Published in Dawn, The Business and Finance Weekly, May 15th, 2017