AKD Securities Limited

Member Karachi Stock Exchange

Equity Research / Pakistan

Todays Daily
GIDC under scrutiny, what's in it for fertilizers?
The Islamabad High Court (IHC) has declared the imposition of Gas Infrastructure Development Cess (GIDC) as illegal. Recall that GIDC of PkR50/mmbtu is imposed on fuel stock gas, which is applied uniformly for other sectors including textile and cement. For fertilizers, GIDC of PkR197/mmbtu is applied for feedstock gas. Importantly, the new fertilizer plants (FATIMA and Enven) are exempt from GIDC on feedstock. Cost impact of GIDC on a per bag basis for urea is PkR240/bag. The removal of GIDC will have mixed impact on fertilizer sector: positive for the Faujis (FFC and FFBL), neutral to negative for ENGRO and negative for FATIMA, where the estimate an annualized EPS impact of PkR1.1 for FATIMA in case urea prices . are reduced to pass on the impact of GIDC removal.
KSE 100 - Index Current Previous Chg. 17,242.74 17,205.27 0.22%

Mkt Cap. (PkRbn/US$bn) Current Previous Chg. 4,326 / 44.26 4,307 / 44.07 0.42%

Daily Turnover (mn) Current Previous Chg. 272.76 277.63 -1.8%

AKD Daily

Friday February 01, 2013

Value Traded (PkRmn/U S$mn) Current Previous Chg. 6,046 / 61.87 5,746 / 58.80 5.2%

SCRA Flow FYTD (US$mn)

News and Views

Pakistan's Forex Reserves fell to US$13.549bn in the week ended Jan 25'13, from US$13.705bn the week before. SBP reserves came down to US$8.654bn from US$8.809bn while commercial bank reserves increased to US$4.895bn as compared to US$4.896bn the week before. SBP has decided to cut the EFS rate by 0.1% bringing it down to 8.2%. SBP will also announce its Monetary Policy on Feb 8'13 where we expect no change in the DR. In other news FBR has provisionally collected PkR1,003bn for 7MFY13, an increase of 6.8% YoY. IHC has declared the GIDC illegal and unconstitutional. This will lower urea prices which is a positive for FFC and FFBL, as both incur GIDC while slightly negative for Fatima. Commerce Minister Amin Fahim has said that the cabinet has approved MFN status for India, however Pakistan will not go ahead with complete normalization of trade with India till the concerns of some Pakistani industries are addressed. The Commerce Secretary Munir Qureshi said on Thursday that Pakistan will apply for GSP Plus status this month and is waiting for the go ahead from Pakistan's Trade Minister in Brussles.

29-Jan-12 252.70 28-Jan-12 252.33 Val. Chg 0.38

(mn) 700 600 500 400 300 200 100 0

(Index) 18,500 17,500 16,500 15,500 14,500 13,500 12,500 11,500 10,500

Jan-12

Jul-12

Volume (LHS)

KSE-100 Index

Ayub Ansari ayub.ansari@akdsecurities.net

UAN:111-253-111 Ext: 693

Important disclosures, including investment banking relationships and analyst certification at end of this report. AKD Securities does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
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AKD Securities Limited

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GIDC under scrutiny, what's in it for fertilizers?

The Islamabad High Court (IHC) has declared the imposition of Gas Infrastructure Development Cess (GIDC) as illegal. Recall that GIDC of PkR50/mmbtu is imposed on fuel stock gas, which is applied uniformly for other sectors including textile and cement. For fertilizers, GIDC of PkR197/mmbtu is applied for feedstock gas. Importantly, the new fertilizer plants (FATIMA and Enven) are exempt from GIDC on feedstock. Cost impact of GIDC on a per bag basis for urea is PkR240/bag. The removal of GIDC will have mixed impact on fertilizer sector: positive for the Faujis (FFC and FFBL), neutral to negative for ENGRO and negative for FATIMA, where the estimate an annualized EPS impact of PkR1.1 for FATIMA in case urea prices are reduced to pass on the impact of GIDC removal. IHC declares GIDC as illegal: The Islamabad High Court (IHC) has declared the imposition of Gas Infrastructure Development Cess (GIDC) as illegal. GIDC was imposed by the GoP for the purpose of fund mobilization for the infrastructure development for the Iran-Pakistan gas pipeline. GIDC has been imposed on industries as well as CNG sectors and in 1QFY13, the GoP collected a total of PkR8.6bn under the GIDC head. Current structure: GIDC of PkR50/mmbtu is imposed on fuel stock gas, which is applied uniformly for other sectors including textile and cement. For fertilizers, GIDC of PkR197/mmbtu is applied for feedstock gas. Importantly, the new fertilizer plants (FATIMA and Enven) are exempt from GIDC on feedstock. Cost impact of GIDC on a per bag basis for urea is PkR240/bag (PkR226/bag for feed and PkR14/bag for fuel), where if GIDC is removed and the impact fully passed on, urea prices can be reduced by ~PkR280/bag (including 16% GST impact) to ~PkR1,400/bag. . Potential impact of GIDC removal on fertilizers: The removal of GIDC will have mixed impact on the fertilizer sector, positive for the Faujis (FFC and FFBL), neutral to negative for ENGRO and negative for FATIMA. The Faujis will benefit from reduction in GIDC as it will provide them room to pass on the benefit from removal of GIDC to end consumers, which in turn will help boost urea offtake and reduce urea inventory carrying cost. Recall, urea sales over the last three years have been on a consistent decline, where rising urea prices have curtailed demand. While ENGRO will also benefit from improved demand dynamics, in the long term removal of GIDC will be negative for ENGRO as the stated purpose of GIDC is to develop gas infrastructure in the country which would address the gas shortage concerns as well as eventually restoring gas supply to Enven. FATIMA will be the clear loser from removal of GIDC as lower urea as well as CAN prices will eat into the companys margins. A PkR280/bag decline in urea and PkR250/bag fall in CAN prices (CAN is a close substitute to urea and sells at ~10% discount to urea) will result in an annualized earnings decline of PkR1.1/share or 24% of our CY13F earnings for FATIMA. .
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Fertilizer Sector Price Performan.
1M Absolute (%) 0.5 3M 1.3 12M CYTD -1.5 -46.7 0.5 -2.2

Rel. Index (%) -1.5 -17.0

Source: AKD Research

Fertilizer Sector Vs. KSE100-Index

60% 50% 40% 30% 20% 10% 0% May-12 Sep-12 Mar-12 Jan-12 Jul-12 Nov-12 Fertilizer CY12A Jan-13 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 CY09A CY10A CY11A -10%

AKD Daily

Friday February 01, 2013

KSE-100 Index

Source: AKD Research

Urea offtake Vs. Price

(mn tons) 6.00 5.00 4.00 3.00 2.00 1.00 -

Offtake (LHS)

Price (PkR/bag)

Source:NFDC & AKD Research

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AKD Securities Limited

Member Karachi Stock Exchange

Our take: While the IHC has declared GIDC as illegal, we believe that removal of GIDC could be a complicated process with potential for delays in actual implementation. However, in the near term share price performance, particularly of FATIMA could be dragged by the GIDC issue. .

AKD Daily

Friday February 01, 2013

I,Ayub Ansari, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is/or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. I further certify that I do not have any beneficial holding of the . specific securities that I have recommendations on in this report.

Rating Definitions
Buy Accumulate Neutral Reduce Sell > 20% upside potential > 5% to < 20% upside potential < 5% to > -5% potential < -5% to > -20% downside potential < -20% downside potential

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