Investment Perspective We initiate the coverage of Fatima Fertilizer with BUY recommendation. Our DCF based June-12 TP of Rs18.75/ offers an upside potential of 25.6% from its last close. Product mix to add value to the company’s profitability.
Fatima’s product line consists of
UREA – (Production Capacity 500k tons)
CAN – Substitute of Urea and cheaper by 10%-15% (Production Capacity 420k tons)
NPK- Substitute of DAP and cheaper by 40-45% (Production Capacity 300-320k tons)
Dedicated gas supply of 110mmcfd from MARI network – currently considered best among SNGP/SSGC due to no interruption in gas supply. The feed gas supply is available for 10 years at USD 0.7/mmbtu or (Rs60/mmbtu as against Rs102/mbbtu available to other players) and beyond this period expiration feed gas price would be revised at par with industry rates Fatima is enjoying benefit from both Urea and CAN owing to significant rise in both products prices. Urea was sold around Rs830/ bag in mid Dec-10 now available at Rs1,060/ bag (ex GST) (+27.7%) and CAN was available at Rs710/ bag and now at Rs975/ bag (ex GST) (+37.32%). There is no change in feed gas price for Fatima except slight curtailment of gas by 8-10% on Mari network. Any hike in Urea price
Any hike in Urea price would also be followed by CAN. We have calculated the sensitivity of change in price of UREA & CAN on the profitability of the company. Increase of Rs100/ bag in (UREA and CAN) would improve the earnings of Fatima by EPS 0.50, considering no change in feed gas/fuel cost. NP/NPK which trades at significantly lower price than DAP and key players of this product are Engro, PakArab and importers. We have analysed past trend of NP/NPK vs DAP, outcome depicts demand increases for NP/NPK when DAP gets abnormally expensive as was witnessed 2 years back in global commodity price upswing. Since 16% GST DAP has become expensive and currently at Rs4,100/ bag versus NP at Rs2,700/ bag.
Primary margins on CAN/UREA/NP would remain less volatile and high compared to peers mainly due to cheaper gas availability and stable PhosRock prices the main raw material of NP Company to gain additional income CER in the vicinity of Rs900-1,000 mn and any revision in price to benefit more. Bottom line impact to the tune of EPS 0.50 We expect Fatima to start paying cash dividends from CY12 onwards, more over currently stock is trading at compelling CY12e & CY13e P/E of 5.28x & 4.99x respectively. Our channel check suggests COD likely to be achieved in July’11.
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