Wednesday, 9 October 2013

Engro Laya Rupya!

There seems to be some gaming at play as far the IPO of Engro Fertilizers is concerned. It appears that the stakeholders, that is government, banks and Engro, have all come to an agreement of sorts to supply Engro with some gas for some, so that it can generate some cash, pay of the banks, make some Urea, save government imports, and so on. So in the end, Banks bhi khush, Engro bhi khush, or government bhi khush.

Cash Coming In

Now, is probably the best time to hold an Engro Fertilizers IPO. Engro will have received 4 months of continuous gas supply from the shutdown Guddu Power plant, pouring money, sorry prills through the 300 meter high prill tower. For the quarter ended Sep 30th, 2013 Engro Fertilizers is going to get EPS of Rs 1.2, moreover, the EPS is going to increase in the last quarter, as full gas supply for the quarter takes effect making full year EPS around Rs. 4.2 . Let us just make it Rs. 4.

Assuming a multiple of 8, we can thus conservatively assume an IPO price of Rs. 32 per share. Further assuming the company wants to sell a stake of 10%, that is 122 million shares, that shall give the company around Rs. 4 billion in cash.

Some More ...

Engro Fertilizers made around Rs. 3 billion in operating cash flows during the first half of 2013. Assuming the gas supply continues as is, it will make somewhat more than Rs. 6 billion more by the end of the year. Add to that the Rs. 7.5 billion it had as of 30th June 2013, and the Rs. 4 billion it will raise through the IPO, and further adding some money earned on the cash deposits, the company will have round about Rs. 18 billion by the end of 2013. This amount takes care of any finance costs paid during the half, but excludes any principal repayments.

Now the company has around Rs. 7.5 billion in current portion of long term debt as of June 30th, 2013. Assuming it pays half of that by December, it will have Rs. 14.5 billion remaining in its kitty. This is a significant amount and could be used to pay of a large part of the company’s existing debt, that would still stand at Rs. 60 billion as at December 31st, 2013, thus the paying off could get it down to Rs. 45 billion. 

Such deleveraging could significantly boost investor confidence.

So will the Guddu Gas Stop before 6 months?

I don’t think so. Guddu is one of the most inefficient plants in the country and already ran at low capacity. Moreover, it is under expansion and it makes all the sense in the world for the government to divert its gas it to Engro for urea production. Clearly, that is the best use of the gas for now. I have read that Guddu is currently in expansion phase which will not be completed at least the next six-nine months. So I don’t expect that to speed up or anything especially given its a government plant! Any inputs to this are Welcome!

Foreign investors are selling Engro like hot cakes. Buyers anyone? 

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