The market is anticipating a possible settlement of GIDC issue entailing reduction in GIDC liability of fertilizer players by ~50%, talks have been initiated by government to resolve the long standing issue. In return, fertilizer players may agree to settle outstanding GIDC liability towards the government. However the negotiations have not been finalized yet. We believe that recent hike of PKR110/ bag of urea instead of PKR210/bag has been agreed by fertilizer player in anticipation of GIDC settlement. The upsurge in urea prices are mainly backed by increase in gas prices of feed and fuel by PKR115 and PKR241 respectively.

To recall, GIDC was levied on in 2011 on industrial users- including fertilizer manufacturers- with the purpose of collecting proceeds for infrastructure development for Iran-Pakistan gas Pipeline and TAPI project. If GIDC development materializes, then FFC would be the main beneficiary with one time gain of PKR 42.87/share followed by EFERT, 22.61/share and FFBL, PKR 14.34/share

If this happens, it may lead to: (i) The government reporting a settlement as against its GIDC receivable; and (ii) Fertilizer companies, especially FFC and FFBL turning out to be the major beneficiary due to complete reliance on non-concessionary gas, leaving EFERT and FATIMA in a disadvantageous position with negative impact. The challenge for FFC and EFERT could stem from their weak cash flows which could restrict their ability to pay out future cash dividend following one time GIDC settlement. (Courtesy – AHCML | Research)