Engro Corporation will list its flagship fertiliser business by the end of the current month in order to repay its debt and fund capital expenditures.
In an investor presentation made by company executives on October 11, Engro Fertilizers unveiled its plans to price its Rs1.5 billion (targeted) initial public offering (IPO) by the end of the month.
The country’s major fertiliser manufacturing and marketing company will issue 75 million ordinary shares at a floor price of Rs20 per share. In addition, Engro Corporation, the holding company with a majority shareholding, will sell up to 30 million ordinary shares out of its existing stake at the strike price determined through the book-building mechanism.
Only institutional and large investors are allowed to take part in the book-building exercise, which precedes the IPO stage. In the IPO, general public buys shares at the strike price that is determined during the book-building mechanism.
Following the issue of shares in Lalpir Power earlier this year, Engro Fertilizers’ IPO is the first listing on the Karachi Stock Exchange in 2013.
According to Shajar Capital research analyst Abia Zaidi, company executives said about 56.25 million shares, or 75% of the issue size, will be offered at the book-building stage to institutional investors at a floor price of Rs20 per share using a Dutch auction method.
The Dutch auction method is structured in a way that the price of the offering is set after taking in all bids and determining the highest price at which the total offering can be sold.
The remaining 18.75 million ordinary shares, which constitute 25% of the issue size, will be offered to the general public at the strike price determined through the book-building mechanism.
The sale of up to 30 million ordinary shares by the holding company at the determined strike price will be in addition to the issue of 75 million ordinary shares.
Urea sales by Engro Fertilizers increased 66% in the first eight months of 2013 due to improved gas availability, which resulted in year-on-year increase of 131% in production for the company.
“Engro Corp’s plans of divesting its fertiliser business are likely to have positive implications for the parent company’s cash flows. At the offer price of Rs20 per share (75 million shares), gains reflected in Engro Corp’s standalone accounts will translate into an earnings enhancement of approximately Rs1.50 per share for Engro Corp shareholders,” Zaidi wrote in a research note issued to clients on Monday.
But gas availability issues have consistently affected cash flows of Engro Fertilizers in the past. While gas supply from Mari is likely to continue, timely availability of gas with regard to the company’s future arrangements remains crucial, says Zaidi.
“With the government having principally agreed to raise Rs105 billion (0.4% of GDP) as gas levy in its recent Letter of Intent (LoI) to the IMF, gas tariff rationalisation is likely on the cards in our view. Local fertiliser players, including Engro Fertilizers, are likely to face margin attritions in case full cost is not passed on to consumers,” she added.
Published in The Express Tribune, October 15th, 2013.