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Morning Briefing for November 18, 2011 – Standard Capital

Karachi: Equalization tax on fertilizer plants may not be tenable since gas supplies to remain a problem

According to Standard Capital,

The advisor on Petroleum & Natural Resources has said that the government is studying a proposal to slap an equalization tax on fertilizer plants running on gas in order to prove rise in urea bag prices. Fertilizer company margins have shot up exorbitantly since urea bag prices have increased by more than 50% this year thus benefitting efficient players such as Fauji Fertilizer Company (FFC) and new players such as FATIMA.

Some of the plants who resorted to increase urea prices include Engro Fertilizer who’s new plant got interrupted gas supplies from Qadirpur and did not received designated 100mmcfd gas from Qadirpur throughout the year and hence resulted in a shortfall in urea supplies throughout the year.

Engro got enraged and reportedly increased price of urea to Rs 2000 per 50kg bag but manoeuvred back by the government to keep the prices at an old level of Rs 1580 per 50kg bag at the pretext that government shall arrange gas for them from Sui Southern network and that too only 50mmcfd from promised 100mmcfd from Qadirpur.

The rolling back of prices to nearly Rs 1580 per 50kg still high from local standards since these prices were around Rs 1200 per 50kg only few months ago or at least at the start of the year.

The question of putting equalization tax may be for those plants who are not efficient users of gas supply. It’s being reported that an efficient fertilizer plant produces 42 tons of urea by utilizing one million cubic feet of gas per day whereas there are few who are inefficient users and produce 38 tons with the same gas supply. It’s being sited that this arrangement would be only probable if plant audits could be carried out (which may take some time). The matter is likely to be brought up by the Advisor into Cabinet Committee of economic affairs called ECC.

Reportedly, 4 fertilizer plants, on the network of Sui Northern Gas Pipelines Limited, need 240 mmcfd, but they are currently getting 162 mmcfd thus causing problems for Engro Fertilizer and some other plants such as Agritect and Dawood Hercules. We consider CY11 EPS of preferred scripts such as FFC and Fatima. We also like Fauji Bin Qasim (yielding 5x) given intact margins on DAP fertilizers despite tight position of margins globally. FFBL is placed at a favourable position due to uninterrupted supply of raw material P2o5.

We signal cautious approach on Engro Corp. since company is still not in a favourable position as far as reception of gas supplies is concerned. Pak Arab Fertilizers (not listed) situated at Multan is reportedly receiving prices. Arif Habib Corp. (AHCL) has beneficial ownership in Pak Arab and hence at a favourable situation.

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