Inside Financial Markets

Engro to approach ECC to restore old gas supply accord

engroEngro to approach ECC to restore old gas supply accord

KARACHI: -News Report -The Engro Corporation has decided to call on Economic Coordination Committee (ECC) to endorse the previous government’s decision about gas supply to fertilizer plants as ambiguity over gas supply from Kunnar Pasakhi Deep (KPD) field still persists, analysts said on Monday.
Since there remains some ambiguity over gas supply from KPD despite the agreement signed with it, the Engro Corporation’s management has decided to call on ECC to endorse the previous government’s decision under which Sui Northern Gas Pipelines Limited (SNGPL) will provide gas to Engro Corporation.
This was disclosed by Engro’s top management during a briefing with analysts as the company recently held its analyst meeting to discuss performance of first half of 2013 and future outlook.
Taurus Securities’ analyst Taha Khan Javed stated that Engro clarified recent rumours about fertilizer business’ listing delay, and reiterated its plan of listing in October 2013, with the company intending to offload around 58 percent of its holding through a book-building mechanism.
Javed further sharing the meeting’s discussions said that since almost all the lenders have agreed to loan tenor extension by 2.5 years, long-term gas supply agreement is almost finalised (management has gone to ECC for reconfirmation) and International Finance Corporation is covenant about listing the fertilizer business; all have added up to management’s decision to take the listing route.
The company declared its intention of Powergen Independent Power Producers (IPP) listing post-fertilizer listing.
The Foundation Securities stated in its report about the meeting that Engro is currently operating both its plant, courtesy gas diversion (60 million cubic feet per day) from Guddu power plant in late July. Although the management believes that it’s a very temporary arrangement, slow progress on Guddu power plant may extend availability until mid FY 2013-14.
Engro has in principle reached an agreement with all its lenders on debt re-profiling. The loan tenure has been extended by 2.5 years while some of the covenants have been amended though complete details will be out soon. Both debt re-profiling and Engro Fertilizer divestment would provide liquidity and time cushion, said Foundation Securities’ report.
Habib Metropolitan Financial Services’ analyst Salman Vidhani sharing plans of Engro Polymer Corporation Limited (EPCL) said that the company has planned to add another 15,000 tonnes of Polyvinyl chloride (PVC) resin capacity by mid-2014 and added 10,000 tonnes over next 12 months. The additional will take the total production capacity to 180,000 tonnes. Company already has a VCM plant in place with required capacity (220,000 tonnes) to handle addition PVC production.
Total capital outlay for these planned projects is estimated to cost Rs 900 million to Rs 950 million. Along with balance sheet restructuring need of Rs 550 million, EPCL is expected to get further leverage of Rs 1.5 billion from the capital markets over the next year.
According to the management these projects are estimated to add a cumulative Rs 3 billion to Rs 3.5 billion to the bottomline over the next five years
Management was upbeat on local PVC demand and expects steady PVC/VCM contribution margins over the intermediate term amid significant ethylene capacity in Asia coming online in next two years. EPCL has been allotted 20 MMCFD of gas for captive power generation against which it is receiving 15 MMCFD.

Moreover, according to the Engro’s management the Engro Foods posted an increase of 9.0 percent yearly in first half of 2013’s profit after tax (PAT) although the company faces major supply chain bottlenecks. Gross margins are down 500 basis points while industry-wide sales trends remain flat. Rice business is going through a turnaround with Engro Foods integrating the business value chain with its business model from providing seeds to farmers to retailing the product. The business is currently facing issues with low volumes and higher energy cost, which are likely to resolve by December 2013.
Meanwhile, Engro Polymer posted an increase of 620 percent in PAT with net margins improving 290 bps mainly driven by higher domestic PVC sales (plus 12 percent on yearly basis), higher prices and higher VCM exports. The market for petrochemicals remained buoyant in the first half of 2013, enhancing Engro Polymer’s bottomline.
Similarly, Engro Energy’s topline and the PAT posted an increase of 7.0 percent and 3.0 percent, respectively on yearly basis in the first half of 2013. The company benefited by the resolution of the circular debt pocketing a cash inflow of Rs 9.0 billion, settling payable to SNGPL amounting to Rs 5.4 billion. The company has entered into an MoU with Karachi Electric Supply Corporation for supplying 600 megawatts of electricity.

Sanie Khan

Sanie Khan holds a deep knowledge of the financial markets in Pakistan. Based in Karachi, he has over 20 years of hands-on management experience in financial technologies and managing operations in the financial sector. He was the General Manager at the Pakistan Stock Exchange (PSX) for 17 years. He along-with senior members of Exchange

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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)