Fauji Fertilizer Company - ‘Hold’ recommended Written as on October 9, 2009
• Better urea prices still to bring charm in 4QCY09
• Growth in urea attributed to higher imports being bagged by NFML
• Limited upside but attractive on dividend; 'Hold' recommended
In today’s Value Seeker, we provide an update on Fauji Fertilizer Company while we have rolled over our TP to Jun-10 at Rs108/sh.
Better urea prices to bring charm in 4QCY09
Prices were raised by the manufacturers to Rs730/bag (+Rs30/bag) by the end of 3Q09 due to higher feed gas price fixed for 2HCY09 (+7.6% YoY). While higher gas prices are expected to suppress gross margin to some extent during 3Q09 (expected to be down by 4pps), the company will be able to restore gross margin during 4Q09 as the impact of gas price was later passed on. Despite this assertion, the company may not be able to fully reap the benefit of higher incremental urea demand that is expected to prevail during upcoming Rabi season, since additional demand is already targeted to be met by 600k imports.
Growth in urea attributed to higher imports being bagged by NFML
While industry urea offtake yielded growth of 15% YoY during 8MCY09, much of this growth is attributable to the higher import of urea which is currently being marketed solely by NFML, a subsidiary of NFC. While NFML's role had been restricted ever since NFC's manufacturing units were privatized (post CY06), the trend reversed during last Rabi season on the back of fresh urea demand amidst better wheat support prices, calling for a need to import higher amount of urea given limited domestic supply. As a result, NFML's market share in urea improved from 2% in Rabi FY08 to 19% in Rabi FY09. Moreover, its share as of Aug09 improved further to 25% while FFC's urea (prilled) share was diluted to 36% from Aug08's 47%. Concurrently, FFC's offtake registered growth of only 4% YoY during 8MCY09 as major share was taken up by imports.
Limited upside but attractive on dividend yield; 'Hold' recommended
FFC's topline is expected to post a growth of 7% YoY during 2HCY09 amidst nominal rise in offtake coupled with better urea prices. Yet, gross margin would be dampened a little in 3QCY09 due to lagged shift of gas price-hike, the impact of which could be evident on QoQ basis. Nevertheless, bottomline is expected to post a growth of 24% YoY in CY09 in the wake of better profitability as compared to last year. We have rolled over our to Jun-10 with new TP of Rs108/sh. While the upside at current level is limited at 4%, whereas the scrip is a good bet in terms of dividend yield of 11%, thereby, we recommend 'Hold' on the scrip.