Summary Competition Commission of Pakistan imposed a hefty penalty of Rs8.6bn on two fertilizer companies.
ISLAMABAD APRIL 3 (ONLINE): The Competition Commission of Pakistan (CCP) under the notion of abuse of dominant position has imposed a hefty penalty of Rs8.6bn on the two leading fertilizer companies i.e. FFC and ENGRO.
Individually, FFC has been fined Rs5.5bn while Engro has been fined Rs3.1bn. Given the precedence of similar cases, we believe the two companies will knock the door of the court and thus, downplay immediate threat to cash flows. Given the precedence of Cement sector, we believe the affected parties will make appeal against the decision of the CCP.
The news flow is likely to exert pressure on FFC and Engro stock prices, but we maintain Buy stance on the stocks. We think they have strong case to defend themselves, and in worst case impact is minimal.
Engro fertilizers at the very end of 2010 raised the price of its urea by Rs190/bag to 1050/bag, citing gas curtailment as the reason for upward price revision. Fast forward to March 2011, the gov t imposed 17% sales tax on agricultural inputs.
This move further raised the price of urea by Rs170/bag taking it to Rs1220/bag. As the year (2011) progressed, gas supply from SNGPL kept deteriorating, forcing Engro Fertilizer to continuously revise its price upwards in order to offset the loss incurred due to gas curtailment on its new US$1.2bn plant.
FFC, which was largely immune to gas curtailment issues, decided to follow price increases done by Engro. This enabled the company to report record profit growth of 104% in 2011. Uniform pricing of urea, and use of market strength to do so alerted CCP to take action against the matter.
As per the Competition Act 2010, the affected parties (FFC and ENGRO) have 30 days to file an appeal before the Appellate Bench of the Commission that will consist of two or more members. If unsatisfied by the decision of the
Appellate Bench, the affected parties will have to file an appeal to the Competition Appellate Tribunal within 60 days of notice being served. If still unsatisfied, the Act allows the affected parties to file an Appeal in the Supreme Court within 60 days after the decision of the Competition Appellate Tribunal.
