Despite soft global outlook, local industry to remain upbeat!

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1 Despite soft global outlook, local industry to remain upbeat! Fertilizer Sector Weak int l market created downward pressure on fertilizer sector The current year 2015 has so far remained largely unremarkable from global investors viewpoints. Most major equity indices have remained in the red, while declining commodity prices amid slowing global demand has adversely affected commodity traders in general. The performance of the global fertilizer market was no exception as lagging demand resulted in 25% decline in international prices during CY15TD. Despite the negative trend so far, we cannot overrule that fertilizer prices might have bottomed out and could take an upturn ahead amid growing consumption in emerging and developing countries, which continue to rely heavily on the agriculture sector to support their economy. Local industry to perform, despite challenges The local fertilizer sector is expected to remain in the limelight for our forecasted horizon (CY15-20), considering that agriculture contributes roughly one-fifth to the nation s GDP. One key area of concern is gas shortage, which could lead to underutilization and lower profitability. Secondly, pressure on local prices is also a downside risk to our valuations. At present, the sector is operating at 81% capacity due mainly to gas curtailment. In order to fill the demand-supply void, the government has been importing urea. Further, in order to alleviate the pressure of gas shortage on local fertilizer manufacturers, the government has employed various options, such as gas supply on a rotational basis and temporary need-based allocation for the short term, while also announcing a long term gas plan for the future. Secondly, we expect local manufacturers to maintain their margins going forward, as seen recently, when excess demand helped manufacturers from passing on the additional costs of gas tariff hike to the consumer. ENGRO Diversification strategy paying off through deep valuations ENGRO is the top pick in our universe, with our SoTP based target price of PKR 433.5/share implying an upside potential of 48% from current levels. The growth is primarily driven from fertilizer business along with food business amid better volumes and stable margins. Future Thar coal projects amounting to USD 2bn is a potential upside risk to our valuations. FFC Attractive yields plus gas advantage makes it a safe bet! Being the market leader in terms of offtake, the safest bet in the fertilizer sector with 11% attractive dividend yield along with diversified investment base into 1) Financial services, 2) Alternate energy, 3) Food business, and 4) Exploring offshore investment options. Our SoTP based Jun-16 target price works out at PKR 140.7/share offering 15% upside potential from current levels. FFBL Core business plus new ventures adding to company s profitability! The company is the sole producer of DAP fertilizer with diverse investment base, including 1) Financial Services, 2) Alternative energy, 3) Meat business, 4) Coalbased power plant, and 5) Food business. With the announcement of KISAN package by the government the company is expected to maintain its market share in DAP. Our SoTP based Jun-16 target price is PKR 65.0/share implying an upside potential of 14% from current levels. Exhibit: Financial Snapshot () Current Price Target Price* Upside (%) P/E (x) P/B(x) DY (%) ENGRO EFERT FFC FFBL Source: Bloomberg, AHL Research, * Jun-2016 ENGRO PA Target Price Current Price Upside (% ) EFERT PA Target Price Current Price Upside (% ) FFC PA Target Price Current Price Upside (% ) FFBL PA Target Price Current Price Upside (% ) AHL Universe Performance (mn tons) 190% 160% 130% 100% 70% Nov-14 Source: Bloomberg Analyst: Jan-15 Tahir Abbas D: UAN: , Ext: 248 F: AHL Universe Mar-15 May-15 E: tahir.abbas@arifhabibltd.com Jul-15 Sep-15 BUY BUY BUY BUY KSE Nov-15 Current Prices as of Nov 16th, 2015; FATIMA PA being our group company is not under our coverage.

2 Commodity Prices - Boom to Gloom A boom that lasted for over a decade initiating in the year 2000 known as super cycle boom was unlike any other and led to swelling commodity prices from sustained demand growth from emerging markets (mainly China and India). Rising incomes and population growth led to higher consumption, consequently spiking prices. In 2014 for instance, China and India accounted for over 12% and 4% of the global oil consumption, respectively, and used 28% of the global energy, whereas their share of world agricultural consumption remained stable at 22% and 10%, respectively from the previous period. Economic activities in both countries intensified by three-fold from 2000 to 2014 to 16% while their contribution to global population stayed steady at 37%. In 2015, most commodity prices witnessed a downward trajectory, indicating the end of the super cycle, on the back of supply glut and subdued demand. Energy prices too tumbled owing to declining oil prices, whereas natural gas prices are projected to fall below 2014 levels across markets in US, Europe and Asia. Already high levels of agricultural inventories and abundant supplies are also estimated to adversely affect agricultural prices, including raw material prices while fertilizer prices (a cost central to farmers) are projected to decline amid weak demand. According to the World Bank, a move towards a more services-based growth as opposed to an industrial growth will slow down China s overall growth below 7% by 2017 and past that, with a gradual decline to 0.3% p.a. growth in population over the next decade. India, on the other hand, will excel with overall growth of greater than 7% up to 2017 and robust population growth of 1% in the coming decade. Both countries will average above the developed countries growth (2-3%), however their diminishing combined growth pace casts a valid expectation of a global shift, with decelerating metals consumption and mild growth in agricultural demand, putting downward price pressure on commodities. Exhibit: GDP Growth projections - China & India (%) China India F 2017F Source: World Bank Global Economic Prospectus Jun-2015 Fertilizer Sector Page 2

3 Demand & Supply Dynamics of Global Harvests Wheat- Multi-year new highs of buffer capacity expected In recent years, global wheat inventory levels have stayed in surplus keeping prices in check. Output accretion in countries like Australia, China, Morocco, Turkey, Ukraine and the United States are expected to drive global wheat production expansion in 2015 to 735Mt, (up by 2Mt from 2014). While wheat consumption projections for 2015/16 also show positive growth of 2% to 727Mt. Future utilization comes mainly from wheat usage as feedstock led by robust demand from Asia and North America, estimated to increase to 144Mt (4.2% YoY) in 2015/16. Countries in the EU, the Russian Federation and the United States are expected to expand their buffer inventory capacities, as a cushion against unforeseen production bottlenecks, thus leading global wheat inventories to rise to a 13 year high level of ~206Mt in Projections of per capita consumption of wheat in 2015/16, is expected to remain constant from last year at 67(kg/year). Rice- Bleak Supply Expectations Rice prices continue to be unattractive, a trend set in motion since September 2014, discouraging major rice producers to expand production. This coupled with unfavorable weather conditions amid the prevailing El Niño glitch, adversely effected the 2015 paddy crops. Meagre global rice projections estimate production to drop in all states to 493Mt in 2015, barring Latin America, Caribbean and Europe. Forecasts of smaller rice inventories (down by 3.5%) to 164Mt in 2016 amid production (493Mt) falling short of consumption (499.9Mt) puts future food security under pressure. Trade of rice however is projected to pick up in 2016 to 45Mt (after a 3% drop in 2015) subject to demand from Indonesia, the Democratic Republic of Korea and the Philippines. Fertilizer Sector Page 3

4 Global Agricultural Prices Outlook Wheat While initial estimates seemed glum, crop trends continued to surprise pleasantly amid improving weather conditions with expectations of another bumper crop in the current year (2015). With buffer supplies secured from the previous seasons already in place, the adverse pressure on prices continued to dampen international wheat prices, so much so that the benchmark US wheat (No. 2 Hard Red Winter), FOB. US Gulf averaged at a 5 year low to USD 218/ton in August/September (down 60% from September 2014). Rice International rice prices have witnessed record lows during recent times despite consumption exceeding production going forward. This has mainly been an influence of tumbling prices of other major crops. While import prices remained bearish in Asia (particularly in India and Pakistan) where demand stayed subdued amid greater production achieved (not a norm in other regions of the world). Moreover, strong competition globally, restricted export prices in most key regions. The benchmark Thai 100% B rice, FOB. Bangkok was thus 14.5% below its January 2015 level at USD 367/ton. Fertilizer Sector Page 4

5 Availability of Nutrients Globally Soil and plants require various nutrients aided by fertilization which results in maximum yield per hectare of land. These generally include nitrogen (N), phosphorus (P) and potassium (K) as well as sulphur, calcium and magnesium. Relative presence of each nutrient in soil has a key impact on output. However, soil in less developed countries suffers from nutrients deficit while developed countries have nutrients in surplus for cultivation leading to disparity in the nutrients balance. On average, 60% of the mineral fertilizer is now produced in developing countries, with major production in Eastern Asia (particularly in China which is the largest producer globally), followed by North America and India while countries like Russia, the Middle East and Caribbean produce substantial amounts on the back of significant natural gas and oil reserves. Although consumption of fertilizer is mostly in Southeast Asia, South Asia, Europe and North America. Nitrogen forms 74% of the fertilizer used in the world today and its consumption continues to grow as regimes in Asia and Africa make constant efforts to rely less on imports and expand their internal agricultural capacities. Globally a relentless argument has been raised over the years to weigh in the pros and cons of mineral fertilizer use. CY15 - Testing Times for Global Fertilizer Demand and Prices According to the World Bank, global consumption in CY15 is anticipated to fall amid weak demand in US, Europe and Asia as well as currency depreciation. This is in line with the 4% decline in fertilizer prices in the first quarter of the year owed to lower crop prices and restricted purchases from buyers who expected further price cuts. Urea prices were down 6% while phosphate prices dipped 3-5%, however potassium prices jumped a tad bit. Downbeat Global Fertilizer Demand Perspective Short term - FY16 Future fertilizer demand can be seen driven by greater need for feed use in developed and emerging economies and growth in food consumption in less developed countries due to their burgeoning population. However, fertilizer demand seems modest for FY16 following relatively bleak crop prices, projected to grow by a meager 1% YoY to Mt. Sufficient growth will be witnessed in phosphorous demand of 1.1% to 41.8 Mt, followed by 1% growth in nitrogen demand of Mt and 0.8% rise in demand of potassium to 31.8 Mt with leading changes awaited from South Asia, East Asia and North America. Exhibit: Global Urea Capacities, Demand & Utilization Rate Exhibit: Global DAP Capacities, Demand & Utilization Rate (Mn tons) Capacity Demand Utilization rate (RHS) 90% 85% 80% 75% 70% 65% 60% (Mn tons) Capacity Demand Utilization rate (RHS) 90% 85% 80% 75% 70% 65% 60% E 2015E 2016E 2017E E 2015E 2016E 2017E Source: IHS, IFA, IFDC, AHL Research Fertilizer Sector Page 5

6 Exhibit: Short term Forecasts for World Fertilizer Demand (Mt nutrients) N P2O5 K2O Total E Change 1.30% 2.50% 4.20% 2.00% F Change 1.00% 1.10% 0.80% 1.00% Source: IFA, AHL Research Long term - FY15-20 Although it may take a few years to reach more satisfactory levels of inventories-toconsumption (given no major policy changes and reasonable weather conditions), but in the medium term it seems as though global commodity prices and stock levels would remain range-bound. Cumulative fertilizer demand is anticipated to grow to 200 Mt by FY20 (at an annual rate of 1.7% p.a) with highest growth projections in countries of Africa (4.4% p.a), Sub-Saharan Africa (6.3% p.a) and Latin America (3% p.a), encouraged by promising policy and economic climate and wider arable area. Improved efficiency from nitrogen use will restrict growth rates to 1.3% p.a to Mt whereas phosphorous demand would reach 45.7 Mt (up 1.8% p.a) and potassium demand will clock in at 35.3% (2.6% p.a growth) in FY20. Exhibit: Medium-Term Forecasts for World Fertilizer Demand (Mt nutrients) N P2O5 K2O Total Avg to E /20 (F) Avg. Annual Change 1.30% 1.80% 2.60% 1.70% Source: IFA, AHL Research Fertilizer Sector Page 6

7 Steady progression of the global fertilizer supply In FY14, the global fertilizer supply thrived in order to meet the colossal world demand and restock existing distribution channels while fertilizer manufacturers operated on an 80% average installed capacity. Future projections for individual nutrients are as follows: Nitrogen In FY19 the global nitrogen supply is expected to reach 174 Mt (mounting 19% since FY14) to meet demand of 157 Mt steered mostly by the increased fertilizer consumption in Africa, that is, it would be sufficient to meet the probable demand and arrange for an annual surplus of 18 Mt. Probable urea supply in FY19 will be 211 Mt (FY14: 179 Mt, CAGR: 4%), to meet demand of 198 Mt (up 32 Mt since FY14). Some 60 new units (20 units in China alone) are expected to commence operations between 2014 and 2019 to meet the robust demand of urea in industrial uses from South Asia, East Asia (China) and Europe, while Africa and North America would contribute 18% and 15%, respectively to the capacity growth. Phosphate Supply of global phosphate rock is expected to grow by 16% (35 Mt) to 255 Mt from FY14 to FY19 whereby 80% of this will be contributed by Saudi Arabia, Jordan, Morocco and China. Growth in total global phosphoric acid capacity (62.9 Mt in FY19, up 7.8 Mt over FY14) will enable supply to reach 51.1 Mt in FY19 (increasing 2.5% p.a since FY14) compared to forecasted consumption of 48.3 Mt (annual growth rate of 2.4% since FY14). Around 30 new units are expected to add to the global capacity to mainly support DAP growth. Potash Amid the 25 ongoing expansion plans and 4 other key greenfield projects to come on stream in Canada, Russia and Belarus, capacity of potassium is expected to widen by 16% to 60.8 Mt in FY19 (FY14: 52.2 Mt). 70% of the world production of potash (51.8 Mt in FY19, 9 Mt addition over FY14) will come from North America (Canada), Eastern Europe/Central Asia (Russia & Belarus) and East Asia (China). This will be ample to meet global demand of 39.5 Mt (annual growth rate of 2.5% since FY14), providing bulk of 12 Mt in FY19. Fertilizer Sector Page 7

8 Outlook for Fertilizer Prices Urea Outlook for Urea prices continues to appear gloomy on the back of surplus supply, diminishing production costs (Chinese manufacturer s achieving optimal production at negligible cost levels amid decelerating coal prices and weaker yuan) and an unappealing demand situation caused by USD appreciating against most currencies along with feeble crop prices. India however can become a key player regulating prices in the upcoming months with news regarding its growing import appetite. In the long-run though India s reliance on import may decline in the future amid their government s decision to provide subsidized gas at USD3.82/mmbtu as opposed to the previous USD4.66/mmbtu. Exhibit: Global Urea Capacity & Demand (Mn tons) E 2015E 2016E 2017E Region North America Latin America Western Europe Central Europe Eurasia Africa Asia Oceania Global Capacity Consumption North America Latin America Western Europe Central Europe Eurasia Africa Asia Oceania Global Demand Source: IHS, IFA, IFDC, AHL Research Fertilizer Sector Page 8

9 Phosphate On a comparative basis Phosphate prices dipped by a mere 3% (FOB, USA) till the beginning of October this year although counties like India and Brazil continue being stressed and suffer from depreciating currencies, adverse weather conditions, low credit/liquidity and surplus stocks. Uncertainty in global markets will also keep demand in check. On the flipside the VAT imposition in China (to discourage phosphate exports) raised prices a little but it may not have a long term impact as global consumption for phosphate appears depressed. Varying DAP rates circled the markets with USD455/t for Chinese exports to Pakistan and USD355/t cfr to Brazil while Chinese demand in the West is yet to be asserted. Exhibit: Global DAP Capacities & Demand (Mn tons) E 2015E 2016E 2017E 2018E Region North America Latin America Western Europe Eastern Europe FSU Middle East Africa South West Asia China South East Asia Japan Australia Total Global Production Consumption North America Latin America Western Europe Eastern Europe FSU Middle East Africa South West Asia China South East Asia Japan Australia Total Global Consumption Source: IFDC, IHS, IFA, Bloomberg, ANDA, FAJ, AHL Research Key Risks to Fertilizer Outlook The global fertilizer outlook is dependent on a number of reservations and peripheral factors among: (i) rebound in oil prices; (ii) prices of other commodities; (iii) exchange rate fluctuations; (iv) regional geopolitical environment; (v) major policy changes; (vi) subsidy schemes; (vii) organic nutrients used as a substitute; (viii) greater efficiency in nutrient consumption; and (ix) retreat in energy prices. Fertilizer Sector Page 9

10 Pakistan Agriculture Sector The Agriculture sector alone is of significant importance to Pakistan s economy contributing ~21% to country s GDP while at the same time ensuring food security and providing employment to 45% of Pakistani population. Pakistan is an agrarian country as its prime exports consist of textiles (an output of agricultural activities). Pakistan Fertilizer sector Fertilizer is one of the few sectors that provides maximum value addition by converting raw gas into urea granules and benefits the country in terms of food availability, balance of payment, poverty reduction, economic growth and the drive towards industrialization. Even though this sector is extremely crucial for sustainable agricultural growth, it remains competitive, faces severe gas curtailment issues and excess demand. The fertilizer sector has a total market capitalization of PKR 656bn (USD 6.2bn) and the market capitalization of our sample companies (FFC, FFBL, ENGRO and EFERT) stands at PKR 472bn (USD 4.5bn). The index weight of the total fertilizer sector is ~15.0% in KSE100 index while our sample companies (FFC, FFBL, ENGRO and EFERT) comprise ~11.1% of the KSE100 index weight. Pakistan fertilizer sector is comprised of seven companies (see table below). The prime product of the sector is urea followed by DAP. The major players of the sectors include Fauji Fertilizer Company Limited (FFC) and Engro Fertilizer Limited (EFERT) having installed capacities of 2.05mn tons and 2.3mn tons per annum respectively, contributing 67% to country s total capacity. Fauji Fertilizer Bin Qasim Limited (FFBL) is the country s sole producer of DAP having capacity of 0.65mn tons per annum. In addition to this FFBL urea capacity stands at 0.5mn tons per annum. The snapshot of Pakistan s fertilizer sector is summarized below in the table: Exhibit: Pakistan's Fertilizer Sector Snapshot (Mn Tons) Location Urea Capacity Urea Production Utilization (%) Gas Supplier Current Status Primary Products FFC Goth Macchi, Punjab and Ghotki, Sindh Mari Gas Operational Urea ENGRO Ghotki, Sindh Mari Gas Operational Urea FFBL Bin Qasim, Sindh SSGC Operational DAP FATIMA Rahimyar khan, Punjab Mari Gas Operational NP,CAN PAK Arab Multan, Punjab SNGP/LNG Rotational Basis NP,CAN Agritech Mianwali, Punjab and Haripur, KPK SNGP Rotational Basis Urea Dawood Hercules Sheikupura, Punjab SNGP Rotational Basis Urea Total Urea Capacity 6.34 Operational Urea Capacity 5.17 Total Capacity Utilization 82% Source: AHL Research Fertilizer Sector Page 10

11 Local Fertilizer Industry Fertilizer use in Pakistan was initiated in early 1950 s and 1960 s by imports of Nitrogen, phosphorous and potassium based fertilizers. Soon the government increased focus on tactical investments to build the local fertilizer industry with help from foreign companies to develop native fertilizer plants. Pakistan s generous gas supply in the late 1960 s equipped local producers to multiply fertilizer production of gas based fertilizers (nitrogen and phosphate) so that the country relied on fewer imports. DAP and potassium had to be imported nonetheless amid their reliance on non-gas production support. In about 71% of the total fertilizer production (7.8mn tons) comprised of urea while 21% was DAP and Potash based production. In CY14 and, the industry operated at utilization levels of 76% and 81% respectively. It is pertinent to note that 100% utilization of urea capacity would have been adequate to meet domestic demand in the said years. In CY14 about 87% of total fertilizer consumed in Pakistan was locally produced, comprising of 71% of Urea, 21% of DAP and 8% others for domestic consumption. Exhibit: Industry Capacities (000 tons) CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 Urea Fauji Fertilizer Company 2,048 2,048 2,048 2,048 2,048 2,048 2,048 2,048 Fauji Fertilizer Bin Qasim Engro Fertilizer ,275 2,275 2,275 2,275 2,275 Dawood Hercules Agritech Limited Pak Arab Fertilizer Fatima Fertilizer Total 4,458 4,457 4,976 6,378 6,378 6,378 6,378 6,378 DAP Fauji Fertilizer Bin Qasim Total NP Pak Arab Fertilizer Fatima Fertilizer Total CAN Pak Arab Fertilizer Fatima Fertilizer Total TOTAL Fertilizer 5,658 5,812 6,677 8,447 8,563 8,563 8,563 8,563 Source: NFDC, AHL Research Fertilizer Sector Page 11

12 Fertilizer policy 2001 overview The fertilizer policy of 2001 was envisioned to enable new fertilizer manufacturers to compete with imports from the Middle East by getting subsidized gas to meet local demand of fertilizer. Subsidy for fertilizer manufacturers comes in the form of natural gas at lower rates, which is a substantial amount as the fertilizer industry uses 17% of the gas reserves in Pakistan. Fuel stock gas on the other hand allocated to fertilizer manufacturers is based on a standardized market price. Fertilizer policy was announced taking effect from 1st July The policy was initially operational for ten years and aimed for an estimated investment of USD 1.2bn during its tenure. The basic objective of this policy was 1) to attract investment in the sector, 2) support farmers through provision of fertilizer products at an affordable price and 3) to ensure best optimal price and supply of gas to keep the plants utilization at max. The policy brought fruitful results in the form of USD 2.0bn investment through green field projects and BMR activities however, the rationalization of gas subsidy as envisioned in the Policy has not yet been materialized. Investment via policy 2001 EFERTs expansion took place with the capacity addition of 1.3mn tons of urea plants whereas 0.5mn urea, 0.4mn NP and 0.4k CAN were set up by Fatima Fertilizer Company (FATIMA). In line with the fertilizer policy the GoP approved subsidized feed stock for both of the companies at USD 0.7/mmbtu for the tenure of 10 years. Conversely, the gov t failed to honor its sovereign guarantee resulting in substantial gas curtailment for EFERT and manufacturers operating on the SNGPL network. However, to date the problem has not been catered for as the Economic Coordination Committee (ECC) of the Cabinet has decided to revert 60mn cubic feet per day (mmcfd) previously diverted, back from Guddu Power Plant to EFERT after which the company has been able to operate at 80-85% utilization of its installed capacity. It is interesting to note that the Guddu gas is a temporary arrangement for EFERT and set to expire in Dec-15 while other manufacturers on SNGPL are to operating on rotational basis. Fertilizer Sector Page 12

13 Demand drivers Pakistan is an agricultural country thus need of fertilizers for agricultural growth and its contribution to the GDP is significant. There are several factors affecting demand of fertilizer products in Pakistan. The major demand drivers include 1) greater cultivatable area and guaranteed offtake (last 5 year average urea demand: 5.5mn tons), 2) commodity support prices, 3) water availability, 4) fertilizer prices, and 5) growing population. Exhibit: Fertilizer usage vs Production of important Crops Fertilizer usage %age of total 60.0% 50.0% 40.0% 30.0% 20.0% Cotton* Wheat 10.0% Sugarcane Rice Maize 0.0% - 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 Exhibit: Production Index of Important Crops Base Crops FY-12 FY-13 FY-14 Wheat Maize Rice Sugarcane Cotton Source: PBS, AHL Research *Production is in thousand bales of 375 lbs. each Source: PBS, AHL Research (Production 000 tons) Cultivatable area Cultivatable area is a major aspect in determining fertilizer demand. Higher area would lead to growth in the fertilizer offtake and eventually result in higher crop production. Despite the damage caused by the major floods back in CY10 coupled with less destructive minor floods in subsequent years, cultivable area was able to grow by a modest 10 year CAGR of 0.5%. Likewise, urea offtake increased by 10-year CAGR of 2% for the same period. Resultantly, cumulative wheat and cotton production jumped by a CAGR of 2.9% and 2.4% respectively in the last 10 years. Exhibit: Total Cultivated Area (mn hectares) FY-10 FY-14 Punjab Sindh KPK Balochistan Total Source: PBS, AHL Research Exhibit: Area of Important Crops Exhibit: Production of Important Crops ('000 hectares) FY-12 FY-13 FY-14 CAGR ( 000 tones) FY-12 FY-13 FY-14 CAGR Wheat 8,650 8,660 9, % Wheat 23,473 24,211 25, % Maize 1,087 1,060 1, % Maize 4,338 4,220 4, % Rice 2,571 2,309 2, % Rice 6,160 5,536 6, % Sugarcane 1,058 1,129 1, % Sugarcane 58,397 63,750 67, % Cotton 2,835 2,879 2, % Cotton* 13,595 13,031 12, % Source: PBS, AHL Research Source: PBS, AHL Research *Production is in thousand bales of 375 lbs. each Fertilizer offtake and total cropped area reached its peak in CY09 at 6.2mn tons and 23.8mn hectares, respectively. Given that the country has faced less severe floodrelated catastrophes in recent years, the total cultivatable area and fertilizer offtake is expected to grow going forward. Fertilizer Sector Page 13

14 Exhibit: Crop-wise usage of Fertilizers & Production Growth (000 nutrient ton) FY12 FY13 FY14 %age of total Production CAGR over FY12 to FY14 Wheat 1,930 1,811 2, % Cotton , % Sugarcane % Rice % Maize % Others Total 3,861 3,622 4,089 Source: PBS, AHL Research Definite offtake Urea demand in Pakistan during the last 5-years averaged at 5.5mn tons with the installed urea capacity of 6.4mn tons (operational capacity of 5.1mn tons excl. Pakarab, DH fertilizer and Agritech). This trend shows guaranteed offtake as the local manufacturers managed to offload all of their inventories during CY14. Furthermore the wide demand supply gap is catered through urea import of ~1mn ton by the government to ensure any shortfall of the commodity in the market. Exhibit: Province-wise Consumption of Fertilizers (000 nutrient ton) FY12 FY13 FY14 CAGR Nitrogen Punjab 2,181 1,988 2, % Sindh % KPK % Balochistan % Total 3,207 2,854 3, % Phosphate Punjab % Sindh % KPK % Balochistan % Total % Source: PBS, AHL Research Crop Support prices to play a vital role Traditionally, support prices for commodities have played a vital role in boosting fertilizer offtake. As an agrarian country, the government always tends to support farmers through every possible mode including higher support prices. The gov t is offering support prices for various crops including Wheat, Cotton and Sugarcane. Support prices are directly proportional to the fertilizer offtake. We have witnessed an upward trend in wheat support price since FY11. At present, wheat support price stands at PKR 1,300/40kg, depicting a 5-year CAGR of 8.2%, while Sugarcane support prices grew at a 5-year CAGR of 9.6%. Additionally, cotton support prices now have of PKR 3,000/40kg in FY15. Exhibit: Support/Procurement Prices of Agricultural Commodities (PKR/40kg) FY-11 FY-12 FY-13 FY-14 FY-15 CAGR Wheat 950 1,050 1,200 1,200 1, % Sugarcane* % Cotton Seed (Phutti)** ,000 nm Source: PBS, AHL Research, *Average **B-557, 149-F, NIAB-78 Fertilizer Sector Page 14

15 Supply constraints depleting gas reserves Pakistan was endowed with rich natural gas reserves but the increasing demand and insufficient exploration activities in the past have resulted in a restriction on the availability. Currently, the country is facing seasonal outages typically during the winter season with annual gas shortfall of ~2,000mmcfd. The situation may aggravate in the future as the country s energy requirements and industrial growth potential will require a much higher utilization of gas resources. In this case, the fertilizer sector, which already consumes 17% of total gas, has limited potential to induce further investors. Declining gas supply trend Severe gas curtailment has been observed since CY10TD and the gas consumption of fertilizer sector from SSGC and SNGP network has declined by 38% and 63% respectively whereas MARI gas field consumption delivered 5 year average growth of 24%. Cumulatively however, gas consumption by the fertilizer sector dropped 2% YoY on average since CY10. Exhibit: Gas Supply for Fertilizer Sector Mari Gas Field SSGCL SNGPL (MMCFt) 250, , , ,000 50,000 - FY-07 FY-08 FY-09 FY-10 FY-11 FY-12 FY-13 Source: Energy Year Book, AHL Research FY-14 Exhibit: Gas Consumption by Sectors Fertilizer (Fuelstock) 4% Power 29% Fertilizer (Feedstock) 13% Domestic 22% Cement 0.04% Transport (CNG) 7% Gen.Industries 21% Pakistan Steel Mills 1% Commercial 3% Fertilizer Sector Page 15

16 Gas prices Upward trajectory continues Feed-stock gas is the basic raw material for making fertilizer particularly urea. Initially with the low consumption of gas in the fertilizer sector amid lower installed capacity, gas prices were lower compared with other sectors, industries and international gas prices. However, with the imposition of Gas Infrastructure Development Cess (GIDC) and incremental capacities coupled with depleting reserve of gas, the feed and fuel stock prices surged at a 5-year CAGR of 49% and 15%, respectively. Fertilizer manufacturers easily managed to pass on this gas prices impact as urea prices increased at a 5-year CAGR of 22%. This showed the ability of the manufactures to easily pass on the impact of gas price increase to end consumers. However, with the current scenario of soft int l commodity prices along with the imported urea available at only 2% premium, the companies are struggling to maintain their margins. Exhibit: Gas and Fertilizer Prices Exhibit: Historical Urea and DAP Prices PKR/mmbtu Feed stock Fuel stock GIDC (PKR/bag) 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Urea DAP CY-00 CY-01 CY-02 CY-03 CY-04 CY-05 CY-06 CY-07 CY-08 CY-09 CY-10 CY-11 CY-12 CY-13 CY-14 CY-15TD Source: NFDC, AHL Research Fertilizer Sector Page 16

17 Imported urea a major threat? The country is facing the problem of imported urea which ultimately affects the import bill and consequently the government incurs a high cost. However with the downward trajectory of int l prices of urea which dropped 25% YoY during CY15TD to USD 250/ton, the cost of int l imports has relatively decreased. The problem of imported urea is posing a minor challenge to the domestic market because the discount to the int l prices has shrunk to 2%. Manufacturer s stance on this is quite clear that any cost push inflation would lead them to increase end consumer prices. To make matters worse, there are plants which use gas inefficiently leading to shortages and, hence, an increase in fertilizer prices in peak seasons results in reduced product offtake. Exhibit: Local and International Urea Comparison Exhibit: Local and International DAP Comparison (PKR/bag) 3,500 3,000 2,500 2,000 1,500 1, International Local Avg. Discount (RHS) 80% 70% 60% 50% 40% 30% 20% 10% 0% (PKR/bag) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 International Local Avg. Premium (RHS) 40% 20% 0% -20% -40% -60% -80% CY-08 CY-09 CY-10 CY-11 CY-12 CY-13 CY-14 CY-15TD CY-08 CY-09 CY-10 CY-11 CY-12 CY-13 CY-14 CY-15TD Source: Bloomberg, NFDC, AHL Research Fertilizer Sector Page 17

18 Outlook of fertilizer sector Macro outlook For the Pakistani economy to flourish, it is vital for agricultural yields to go up which is only possible through the consumption of fertilizers in the right quantity at the right time. Given the current situation, the importance of fertilizers cannot be overlooked since it has a direct impact on the growth, output and economic activity of the agriculture sector. Hence, the gov t is making continuous efforts to tackle gas shortage issues through new exploration projects. At this point in time, gas shortage and import threat continue to pose a major challenge to the entire sector. Sector forecasts We expect the sector s urea offtake to grow by 2% YoY in CY15. Our assumption with respect to growth in urea offtake stems from: 1) increase in Wheat Support Price to PKR 1300/40kg, 2) low interest rates enabling farmers to secure cheap agri-loans, and 3) better demand due to increased cultivatable area with improving yields amid favorable weather conditions compared to the last year. Furthermore, the clarity with respect to local urea prices would help the companies to offload their piled up inventories in the current year. Exhibit: Urea Production and Offtake Exhibit: DAP Production and Offtake (mn tons) A 2010A Production Offtake Offtake / Production (RHS) 2011A 2012A 2013A 2014A 2015E 140% 130% 120% 110% 100% 90% 80% (mn tons) A 2010A Local Production Imported Total Offtake (RHS) 2011A 2012A 2013A 2014A 2015E Source: NFDC, AHL Research Exhibit: Fertilizer offtake CY14 Exhibit: Fertilizer offtake 9MCY15 DH Fertilizer 1% Agritech 1% FATIMA 7% Pak Arab 0% ENGRO 33% NFML 12% FFC 43% FFBL 4% ENGRO 33% FATIMA 7% FFC 41% DH Fertilizer 1% NFML 13% Agritech 1% Pak Arab 0% FFBL 3% Source: NFDC, AHL Research Fertilizer Sector Page 18

19 Key risks Gas unavailability The key risk remains the unavailability of gas to the fertilizer plants, especially on the SNGPL network. In this regard, the materialization of the long-term plan and its timings are very crucial for the plants operating on this network. Price reduction Pricing risk prevails, as the gov t may pressurize the manufacturers to cut urea prices due to lower int l urea prices. Albeit, we believe the probability of this is low. Imported urea Imported urea could be a threat to local manufacturers if traded at lower prices compared to local urea. Political risk / GoP priority Political instability coupled with government s stance and how it prioritizes gas allocation to the fertilizer sector would bring clarity in the future for the fertilizer sector. Fertilizer Sector Page 19

20 Crop Seasons Pakistan has two crop seasons; Kharif being the first sowing season from April-Jun; harvested during October-December. Main Kharif crops include rice, sugarcane, cotton, and maize. Rabi, the second sowing season begins October-December; harvested in April-May. Major Rabi crops include wheat, gram, lentil, tobacco, rapeseed, barley and mustard. With two crop seasons, the fertilizer offtake with respect to products also registers significant difference due to variations in fertilizer needs by each crop which eventually affects the demand situation. When talking about demand scenario, as stated earlier, Pakistan is an agri-based economy and for a healthy crop yield farmers need optimal amounts of fertilizer to enhance crops growth. Resultantly, the overall domestic demand generated is higher than local fertilizer production which stimulates extensive need for importing fertilizer products like urea, and DAP etc. W heat KHARI F RABI May Ju ne Ju ly Au g S ep Oct No v Dec Jan Feb Mar Apr Cotto n Rice S ugar Cane Maize Patato Chillies S owin g Growing Harvesting Fertilizer Sector Page 20

21 Engro Corporation Limited Fertilizer Sector Diversification strategy paying off through deep valuations; Strong BUY We reiterate our strong Buy stance on Engro Corporation Limited (ENGRO) with our SoTP based Jun-16 price objective of PKR 433.5/share implying an upside potential of 48% from current levels. On a consolidated basis, we expect the company to post 5- year profitability CAGR of 26%. The expected growth is primarily driven from 1) EFERT where we assume recurring concessionary gas would be available for full year along with synergies from DAP trading business, 2) Foods business (EFOODS) which is expected to be back on track with increasing volumes and stable margins, 3) Power business which is likely to remain stable amid secure gas supply, and 4) Future power projects of ~USD 2bn including Sindh Engro Coal Mining Company (SECMC) mining project amounting USD 800mn and Engro Powergen Thar Power Limited mine-mouth 660MW coal power plant amounting USD 1,200mn. The stock s recent underperformance of 4.1% (last 30 trading days) was attributable to news regarding diversion of gas from EFERT. We believe that the market has overplayed the news and feel that the stock still offers attractive valuations. The stock is currently trading at P/E of 8.8x along with the dividend yield of 6%. Exhibit: Key Financials EPS PKR DPS PKR P/E x P/B x Dividend Yield % Engro Fertilizer Limited Ambiguity regarding Guddu gas supply remained a major hindrance while evaluating the investment case for EFERT. However according to our analysis even the worst case scenario portrays a relatively better picture than assumed by most, as we expect the company to post PAT of PKR 13,671 (EPS: PKR 10.27) despite of gas diversion from Guddu. We value the company using FCFF and our target price works out to be PKR /share. Engro Foods Limited The company was back on track in the current year since the revival of volumes and margins catered by UHT segment amid lower int l powder milk prices. Our Jun-16 target price for EFOODS works out to be PKR 150/share using FCFF. Engro Powergen Qadirpur Limited Being operating on permeated gas, the company is well positioned to secure its supply. We believe stable cash flows ahead, our TP works out to be PKR 35/share. Engro Eximp Agri Product Pvt Limited ENGRO has purchased the entire share capital of Engro Exim Agri-products Limited (EEAP, subsidiary of EXIMP) making it a direct subsidiary of ENGRO. EEAP is engaged in procurement, processing & sale of Basmati rice & owns the largest integrated rice processing plant in the country. The restructuring of the company is ongoing and it recently booked impairment on its rice processing plant. Engro Vopak Terminal Limited We expect stable cash flows ahead from storage business due to historical stable operations subject to long term contracts with LOTCHEM, Akzonobel and others. We value the company using DDM model and our target price is PKR 3.0/share based on ENGRO s stake. Recommendation Target Price Current Price Upside (% ) BUY Shares (mn) 524 Free float (% ) 50.0 Market Cap. (PKR mn) Market Cap. (USD mn) Indices - MSCI FM, KSE100 Index Major Shareholders - Patek (Pvt) Ltd & Dawood Hercules Relative Performance Return % Avg. Volume (000) High Price - PKR Low Price - PKR Price Performance 220% 190% 160% 130% 100% 70% Nov-14 Dec-14 Source: Bloomberg Analyst: Tahir Abbas Jan-15 Feb-15 Mar-15 D: UAN: , Ext: 248 F: ENGRO E: tahir.abbas@arifhabibltd.com ENGRO PA 1,476 3M 6M 12M , , , Apr-15 May-15 Jun-15 Jul-15 Aug-15 KSE ,464 Sep-15 Oct-15 Nov-15 Fertilizer Sector Page 21

22 Elengy Terminal Pakistan Limited Elengy Terminal Pakistan Limited, won the GOP s tender for Fast Track LNG back in Nov Accordingly, Engro setup a re-gasification facility and will handle LNG on tolling basis for 15 years. We value the company using FCFF and our target price is PKR 7.4/share on ENGRO s paid up capital. Cracking the Value pie The flagship business (EFERT) is expected to provide major value to ENGRO, contributing 50% to our SoTP based target price. We view that even in the case of gas diversion in CY16 the investment case is expected to remain intact amid higher utilization of EnVen and concessionary gas flows. Furthermore, the DAP trading business is also expected to contribute in EFERT s earnings going forward. EFOODS is the second major contributor in our ENGRO valuation adding 44% to the total value, we believe higher consumer spending in conjunction with revival of volumes and margins would unleash new horizons for the fast growing food business. Engro Powergen (via Engro Powergen Qadirpur Limited) contributes 3% to our valuations. Future power projects of ~USD 2bn which includes Sindh Engro Coal Mining Company (SECMC) mining project amounting USD 800mn and Engro Powergen Thar Power Limited mine-mouth 330MW x 2 coal power plant amounting USD 1200mn. As per initial estimates we believe Engro Powengen Thar Power Limited will contribute PKR 46.23/share to our target price of ENGRO assuming 65% stake of Engro Powengen, 30.65% RoE and 75:25 debt to equity ratio, while upside from SECMC mining project will be PKR 8.14/share assuming 22% stake of Engro Powergen, 27% RoE and 75:25 debt to equity ratio. However due to lack of information amid pre financial closure phase of the projects, we have not included the impact in our valuations. Engro Corporation Engro Foods (87%) Engro Eximp Agriproducts Private Limited (100%) Engro Fertilizers (79%) Elengy Terminal Pakistan Ltd. (80%) Engro Powergen (100%) Engro Polymer and Chemicals Limited (56%) Engro VoPak terminal Limited (50%) Engro Eximp Private Limited (100%) Engro Powergen Qadirpur Limited (69%) Sindh Engro Coal Minig Company Limited (22%) Thar Power Comapany Limited (65%) Engro Eximp FZE (100%) Exhibit: Sum of the Parts Valuation (SOTP) Company PV of Cash flows Stake Adjusted TP* Engro Fertilizer 144,610 79% 113, Engro Foods 114,179 87% 99, Engro Eximp Agri Products % Engro Powergen** 10,689 69% 7, Engro Vopak 3,179 50% 1, Engro Elengy Terminal 4,841 80% 3, Total 278, , Source: AHL Research *Target prices on ENGRO's paid up capital, **Engro Powergen own 69% of Engro Powergen Qadirpur Fertilizer Sector Page 22

23 Focus Charts Exhibit: Upbeat GMs amid recovering sales Exhibit: Net margins and PAT both tilt upwards (PKR bn) Net Sales Gross Margins (RHS) (%) (PKR bn) PAT Net Margins (RHS) (%) Exhibit: Gross and Net Margins continue Exhibit: Sales and Net Margins (%) Gross Margins Net Margins (PKR bn) Sales Net Margins (RHS) (%) Exhibit: Deleveraging leading to lower risk Exhibit: Lower debt plus falling interest rates leading to lower interest costs (PKR bn) Equity 57.2 Debt to Equity (RHS) (x) (PKR bn) Interest Expense Debt to Equity (RHS) (x) Fertilizer Sector Page 23

24 Engro Fertilizer Limited Stable prices plus subsidized costs cultivating upside potential; BUY Fertilizer Sector EFERT has two fully integrated fertilizer plants having nameplate capacity of producing 2.275mn tons of urea (base plant: 0.975mn tons and EnVen: 1.3mn tons). Both of the company s plants are located in Sindh. The company is expected to remain a major contributor to ENGRO s profitability by contributing 74% in (ENGRO EPS impact: PKR 21.34) and 71% in (ENGRO EPS impact: PKR 20.56) respectively. Exhibit: Key Financials EPS PKR DPS PKR P/E x P/B x Dividend Yield % Guddu gas availability to remain a concern Guddu gas is expected to be diverted from EFERT in Dec-15 as stated in the GSA signed between the company and the Gov t. Bridging the average power shortfall of 6,000MW as gov t priority, there is a high chance for the diversion. However, further delay of 3-6 months cannot be ruled out amid technical issues in Guddu 747 MW (249 MW x 3) power plant. Our channel checks suggest that it would be delayed for another 3 months. Clarity is yet to emerge on the same as further extension has not been finalized. It is important to mention here that Guddu gas diversion has been delayed twice in the past due to the same issue. Assuming complete diversion of Guddu gas, we expect the EnVen plant to operate at 103% with all the available gas. Resultantly we expect the company to post PAT of PKR 13,671 (EPS: PKR 10.27) in. Our sensitivity analysis indicates one month s availability of Guddu gas having a positive earnings impact of PKR 0.23/share. Being on a conservative side we have assumed diversion and that only EnVen is operational in. GP margins to hover around 54%, PAT to grow at a 5 year CAGR of 13% Concessionary gas flows would fully be magnified in CY16 amid availability for full year. GM are expected to clock in at a CY15-19 average of 54%. Similarly, company s profitability is expected to post 5-year CAGR of an impressive 13% going forward. Product pricing to remain stable As far as product pricing is concerned, the industry is expected to maintain urea prices at current levels. We derive our assumption with the manufacturer s stance that urea prices reversal is only possible if gov t will revert gas tariff (both feed and fuel stock) to old level. Furthermore, the demand-supply gap of urea, is expected to remain ~1mn tons as observed from regular imports being made by the gov t. Synergies from Engro Eximp Subsequent to the purchase of Engro Eximp the DAP trading arm by EFERT, the company is expected to import 450k tons of DAP annually leading towards improvement in annualized after tax earnings by PKR 1,585 (EPS: PKR 1.20). Important to mention here is that annual demand for DAP in Pakistan is around 1.6mn out of which FFBL is expected to cater 0.7mn while remaining pie is for EFERT and other private importers. Key Risks 1) Intervention by gov t in setting up prices for the fertilizer sector, 2) Substantial reduction in Int l urea prices (highly unlikely), 3) Increased GIDC, and 4) Margin attrition in DAP trading business. Recommendation Target Price Current Price Upside (% ) BUY Shares (mn) 1,331 Free float (% ) 25.0 Market Cap. (PKR mn) Market Cap. (USD mn) Indices - KSE100 Index Major Shareholders - Engro Corporation Relative Performance Return % Avg. Volume (000) High Price - PKR Low Price - PKR Price Performance 190% 160% 130% 100% 70% Nov-14 Dec-14 Source: Bloomberg Analyst: Tahir Abbas Jan-15 Feb-15 Mar-15 D: UAN: , Ext: 248 F: EFERT E: tahir.abbas@arifhabibltd.com EFERT PA 1,075 3M 6M 12M , , , Apr-15 May-15 Jun-15 Jul-15 Aug-15 KSE ,812 Sep-15 Oct-15 Nov-15 Fertilizer Sector Page 24

25 Focus Charts Fertilizer Sector Exhibit: Net Sales & Total Volume (PKR bn) Net Sales Total Volume (RHS) (K tons) 2,000 1,800 1,600 1,400 1,200 Exhibit: Production & Utilization (K tons) Capacity Production Utilization 2,600 2,200 1,800 1,400 1, % 80% 75% 70% 65% 60% 55% 50% Exhibit: Higher earnings going forward (PKR) 18.0 EPS Exhibit: Higher profitability coupled with better margins (PKR bn) PAT Net Margins (RHS) (%) Exhibit: Rising Gross, EBITDA and Net margins (%) Gross Margins EBITDA Margins Net Margins Exhibit: Higher gross margins amid new plant (PKR bn) Sales Gross Margins (%) Exhibit: Deleveraging leading to lower risk Exhibit: Lower finance costs amid receding interest rates and lower debt (PKR bn) Equity Debt to Equity (RHS) (x) (PKR bn) Interest Expense Debt to Equity (RHS) (x) Fertilizer Sector Page 25

26 Financials Exhibit: Income Statement (PKR mn) Net Sales 50,129 61,425 61,089 45,274 56,966 Gross Profit 22,121 22,603 30,516 27,340 31,913 Gross Margins % EBITDA 18,610 18,161 26,510 24,319 28,188 EBITDA Margins % Operating Profit 18,302 18,520 27,179 24,773 28,783 Other Income 1,151 2,449 2,138 1,585 1,994 Financial Charges 9,918 6,625 5,350 4,960 4,413 Profit after Tax 5,497 8,208 14,188 13,671 17,059 Net Margins % EPS PKR DPS PKR Exhibit: Balance Sheet (PKR mn) Shareholders' Equity 25,069 34,478 40,613 44,968 52,710 Non Current Liabilities Long Term Loan 52,896 36,091 22,591 18,072 13,554 Total Non Current Liabilities 62,186 41,437 27,937 23,419 18,901 Current Liabilities Trade and Other Payables 18,012 24,472 8,735 5,124 7,158 Total Current Liabilities 22,673 35,556 25,407 12,814 14,848 Total Liabilities and Equity 109, ,472 93,957 81,200 86,459 Assets Non Current Assets 79,563 75,175 71,172 68,125 65,558 Current Assets 30,366 36,297 22,785 13,075 20,901 Total Assets 109, ,472 93,957 81,200 86,459 Exhibit: Ratio Analysis ROE % ROA % Coverage Ratio x Debt to Equity x Debt to Assets x Dividend Yield % P/E x P/B x Fertilizer Sector Page 26

27 Engro Foods Limited Volumetric growth in dairy products to push profitability upwards The foods business is mainly engaged in manufacturing and selling of dairy and juice products along with penetration in ice cream segment and also owns a dairy farm. After suffering from turbulent year back in CY13 amid supply chain issues, the company is all set to contribute 18% and 25% into earnings of ENGRO in and followed by 44% contribution to ENGRO s target price. Exhibit: Key Financials EPS PKR P/E x P/B x We expect the company to post profit after tax (PAT) of PKR 3,541mn (EPS: PKR 4.62) in CY15 significantly up 3.9x YoY. The major driver behind this growth is revival of volumes in low end UHT milk segment (Tarang and Omung) coupled with expected price increase in dairy products going forward. Exhibit: 04-year Average EFOODS PA Recommendation HOLD Target Price Current Price Upside (% ) (4.3) Shares (mn) 767 Free float (% ) 15.0 Market Cap. (PKR mn) 119,834 Market Cap. (USD mn) 1,152 Indices - KSE100 Index Major Shareholders - Engro Corporation Limited 15.0% 10.0% 5.0% 5.8% 8.8% 11.2% Relative Performance Return % Avg. Volume (000) High Price - PKR 3M 6M 12M % Food Inflation Fresh Milk Powder Milk Low Price - PKR Source: PBS, AHL Research Price Performance Dairy & beverages segment The dairy products include UHT milk, powder milk, cream and juices. We expect the dairy volume to grow at a 5-year CAGR of 6% and is expected to contribute 91% to the total revenues and profitability. 190% 160% 130% EFOODS KSE100 Ice cream segment The company s Omore brand is country s 2 nd largest ice cream brand. Furthermore, the ice cream segment posted LAT of PKR 293mn CY14. However, in CY15 the segment posted profitability of PKR 101mn in 9MCY15. Going forward we view that the volumes are expected to grow at a 5-year CAGR of 3% along with revenue to grow at 4%. 100% 70% Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Farm segment The segment posted PAT of PKR 15mn in 9MCY15 as compared to LAT of PKR 34mn in the SPLY. The revival is mainly on account of increase in herd size along with some improvement in the yields. We expect the segment to post PAT of PKR 18mn and PKR 30mn in and respectively. Key Risk and Outlook 1) Unexpected increase in int l powder milk prices, 2) Higher fuel cost, 3) Lower consumer spending, and 4) Volume slowdown in dairy segment. Going forward the company is expected to maintain its focus on leading brands like Olpers, Tarang, Omung and Omore along with aggressive advertising and marketing techniques to maintain its market share. Source: Bloomberg Analyst: Tahir Abbas D: UAN: , Ext: 248 F: E: tahir.abbas@arifhabibltd.com Fertilizer Sector Page 27

28 Focus Charts Fertilizer Sector Exhibit: Rising sales, albeit at a slower pace Exhibit: Expecting higher earnings ahead (PKR bn) Net Sales Growth (RHS) (%) (5.0) 30.0 (10.0) (PKR) EPS Exhibit: Rising PAT and Net Margins Exhibit: Gross and Net Margins (PKR bn) PAT Net Margins (RHS) (%) (%) Gross Margins Net Margins Exhibit: Higher margins amid rising sales Exhibit: Declining interest expense (PKR bn) Sales Gross Margins (%) (PKR bn) Interest Expense Debt to Equity (RHS) (x) Exhibit: Sales Contribution CY14 Exhibit: PAT Contribution CY14 (PKR mn) Dairy & Beverages, 90.6% Others, 0.9% Ice Cream, 6.6% Dairy Farm, 1.7% Business Development, 0.2% Dairy & Beverages, 1,710 Others, (280) Ice Cream, (293) Dairy Farm, (31) Business Development, (238) Fertilizer Sector Page 28