Engro Fertilizer’s book building process was always expected to be oversubscribed quite heavily. And this is exactly what happened as investors flocked in to oversubscribe the shares on offer by nearly four times the intended issue of 56.25 million shares. Engro has been the investors’ darling for all the right reasons given its stature in Pakistan’s corporate world, so the oversubscription is understandable.
Engro’s book building process somewhat reveals the high level of investors’ confidence in the government and its policies. The strike price locked at the bookbinding is Rs28.5/share, significantly higher than the floor price of Rs20/share and the expectations of market participants ranged it between Rs25-26/share.
The market consensus valuation estimate for Engro Fertilizer is close to Rs29/share in the base case scenario, which assumes both plants running at 80-85 percent capacity. Recall that Engro along with other fertilizer manufacturers is in the process of finalising gas supply arrangements from non-linked low btu gas fields, for which purpose the IPO is being carried out.
It appears the investors have opted for the more optimistic picture of the best case scenario, where the consensus fair value is Rs38/share, a decent upside from the strike price of Rs28.5/share. The best case scenario assumes uninterrupted gas supply to both plants, with the Enven plant getting gas at the concessionary rate of $0.7/mmbtu. While Engro will definitely push to get this price, it appears highly unlikely given the current scheme of things.
There appear to be no takers for the worst case scenario amongst the investors’ community, in which case the company is valued at Rs15/share-–nearly half the offer price, should a 2012 like situation resurface. This too, has a low likelihood of happening as Engro seems very confident about having both its plants operational by next year. It is the feedstock gas price which will be a strong determinant whether the scrip moves along the lines of base case or best case.
From what meets the eye, the IPO of 18.75 million shares is likely to meet a similar fate of heavy oversubscription, given the bright mood investors are in right now.