In Focus: Engro Chemicals Pakistan Limited (22102008)

Target Price: Rs 292
We expect that Engro will post the CY08 earnings of Rs16.02 per share and PAT Rs3.409 billion, showing yoy growth of 8.1 percent. We maintain our bullish stance for Engro with the target price of Rs292 and upside potential of 62 percent in medium to long term. Based on our valuation. With highest PE multiple of 11.2x among the sector peers, Engro remains the strong as well as less risky bait to be put in investment portfolios.
Urea sales kept top line up, while DAP sales remained extremely depressive
During 8M08, Engro’s urea off takes increased by 36 percent to 730.3k tons compared to 537.3k tones during same period last year, while DAP sales remained very depressive as they declined by 81.5 percent yoy to 36.8k tones. High prices of DAP still keeps the product away from farmers purchase parity, while announcement of increase in subsidy of Rs2,200 on 50kg DAP also remained immaterialized, which intends a depressive outlook of DAP off-takes of Engro during Rabi season. Despite the continuous increment in urea prices, Engro’s urea off-takes are expected to remain strong during 4Q CY08 primarily due to higher prices of phosphates.
Gross margins are expected to decline slightly with increasing cost of import of DAP
Gross profit margin is expected decline slightly by 1 ppt to 20 percent in FY08 yoy due to increase in cost of imported phosphate fertilizers as international price of DAP remained sky rocked during CY08. DAP subsidy contributes huge in limiting the cost of imports for Engro, as the company held huge DAP inventory of 123.1k tones during the month of Sept, implementation of new subsidy program will enhance the gross margins of the company.
High Financial Cost will cling down the bottom line earnings
As Engro has made huge borrowings for its ongoing expansion, financial cost has been a critical factor which affect its bottom line earnings, however we expect that the financial cost will stand at Rs882 million during CY08.
Dividend Income from subsidiaries will contribute 27 percent
As Engro has well diversified business portfolio, its dividend income from subsidiaries is expected to stand at Rs1.3 billion for CY08 which will contribute 40 percent in company’s total before-tax earnings.
Fertilizer sector to have incentive
These steps will activate new rally in fertilizer off-takes during Rabi season. Urea segment which is currently facing supply shortage will continue to do so in next Rabi, because the local prices of urea are very low compared to international prices which currently stands around USD780 per ton (Rs3,000 per 50kg bag). Total domestic urea off takes during 8M stands at 3.60 million tpa while total CY08 off-takes are expected to fall at 5.8 million tpa. DAP off takes are expected to push up with the new subsidy of Rs2,200 and fixed prices of Rs3,050. During 8M DAP off-takes declined by 71 percent to 198k tones, however in the light of prudent Govt. efforts, total DAP off-takes for CY08 is expected to conclude around 650k tones.