It is ironic that Engro Corporations share price at the bourse fell to its lower lock on Monday - just a day after Engro Enven was restored full gas supply of 80 mmcfd yet again. The 5 percent fall in share price is Engros largest slump in a day since January 2010 and the share price now is at its lowest for ten months.
Recall that Engro was once the blue-eyed stock of the market for its highly diverse business segments and its above-the-cut corporate image. But rarely has it lived up to the market expectations, if one traces down the target price calls by the analyst community and the corresponding share price behaviour.
At the start of CY10, the consensus June 2010 target price was tipped at Rs270/share by June end. The market price by the end of June 2010 was anything but close; it stood at Rs173.8/share. Yet, the market remained bullish and tipped a revised target price of RS275/share for December 2010 - only to see it woefully short at Rs193.8/share when the year ended.
Not that deviation from target price is an unseen phenomenon - but deviations as big as these generally require a tweak in equity estimates and valuations. Yet no love was lost between Engro and the analysts community, as earlier this year they again set its target price for June 2011 at Rs260/share. Needless to say, it won be achieved and is likely to meet the same fate which the previous calls met.
What then caused the share price to fall so drastically one may ask? The predictable answer which the market pundits came up with was foreign selling, which caused panic. But foreigners, by and large do keep a track of events, and gas shortage is certainly an issue that bothers the shareholders more and more with every day that passes by.
Engros management is not yet convinced if the newly restored gas supply of 80 mmcfd will last long, which is why they are yet to agree on a definitive formula as regards the Commercial Operations Date (COD). Experts believe that a continuous supply for at least a month needs to be assured, for Engro to achieve the COD for its 1.3 million tons new urea plant.
With energy shortage growing steeper by the clock, the government would want to ensure maximum gas supply to the IPPs and when Pak Arabs fertiliser unit overcomes its technical problems - the fate of the newly restored gas supply to Engro might again become dicey.
As diverse as Engro has become, fertiliser business remains core to its profitability, and any risks in this regard would certainly create enough doubts in the investors mind for the confidence to be restored. A highly leveraged balance sheet needs the new plant to run soon so the costs can be kept in check.
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