AKD Securities Limited Equity Research – Daily Report (27-07-2020)

Karachi, July 27, 2020 (PPI-OT): Urea offtake cross 1mn MT mark in Jun’20

As per the data released by NFDC, urea offtake for Jun’20 increased 4.9x/81% MoM/YoY to 1.16mn tons. The sequential increase in offtake was witnessed industry-wide, due to a combination of low base effect and pre-buying.

The farmers delayed purchases in the previous month in anticipation of subsidy. Meanwhile, disallowing 20% of expenses to industrial undertakings in case of sales to unregistered dealers (initially w.e.f Jul’20) led to pre-buying by the dealers (urea inventory down 63%MoM to 414K tons in Jun’20).

On cumulative basis, urea offtake declined 7%YoY to 2.6mn tons in 1HCY20, despite surreal pick-up in offtake in Jun’20, courtesy EFERT’s flattish urea offtake, in addition to inoperational LNG plants.

DAP offtake for Jun’20 clocked in at 175K tons, up 2.9x/26% MoM/YoY, where EFERT remained at the forefront. The cumulative offtake for 1HCY20 clocked in at 598K tons, flattish YoY. FFBL remained the only player posting a growth in DAP offtake (up 24% YoY in 1HCY20).

With LNG availability for next 3 months, we expect urea inventory to remain at or above 400K tons level. However, this may not be sufficient enough to constrict fertilizer players’ pass-on ability in case of any gas price hike (gas price increase delayed since Jan’20), in our view.

Low base effect and pre-buying lead to higher offtake: As per the data released by NFDC, urea offtake for Jun’20 increased 4.9x/81% MoM/YoY to 1.16mn tons. The sequential increase in offtake was witnessed industry-wide, due to low base effect, as the farmers delayed purchases in the previous month in anticipation of subsidy on urea and DAP. However, the GoP later decided to offer subsidies on DAP only, and that too in Rabi season. In addition to this, Budget’20 aimed at widening the tax bracket by disallowing 20% of the expenses to industrial undertakings in case of sales to unregistered dealers (initially w.e.f Jul’20), which also led to pre-buying in Jun’20. The GoP later decreased the rate of expenses disallowed to 10% and, delayed the implementation till Oct’20. On cumulative basis, urea offtake declined 7%YoY to 2.6mn tons in 1HCY20, despite a surreal Jun’20 in terms of offtake, courtesy EFERT’s flattish urea offtake, in addition to in-operational LNG plants. Higher offtake has led the urea inventory to decline 63% MoM to 414K tons as of Jun’20 end. With LNG availability for FatimaFert and Agritech during Aug-Oct’20 may keep the inventory at or above these levels, in our view.

DAP offtake on the rise: DAP offtake for Jun’20 clocked in at 175K tons, up 2.9x/26% MoM/ YoY, due to low base effect in May’20, where EFERT remained at the forefront. The cumulative offtake for 1HCY20 clocked in at 598K tons, flattish YoY. FFBL remained the only player posting a growth in DAP offtake (up 24% YoY in 1HCY20). On a cumulative basis, EFERT and FFC witnessed 39/51% YoY decline, respectively. The overall DAP inventory clocked in at 473K tons. FFBL forms 44% of the total DAP inventory, and will likely witness an uptick in offtakes post subsidy materialization. Moreover, lower oil prices may keep gas prices in check over FY21 (except for onetime gas price increase which has been delayed since Jan’20), which is another positive for the DAP producer.

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