Karachi, July 05, 2022 (PPI-OT): Fertilizers: 2QCY22 Urea off-take to improve by 6% YoY
As per provisional data, Urea sales in Jun-2022 are expected to clock in at 721k tons, an increase of 4%/72% YoY/MoM. Whereas, DAP offtake for the month of June is expected to clock in at ~136k tons vs. 68k tons in SPLY depicting an increase of 99% YoY. For 2QCY22, Urea sales growth is expected to clock in at 6% YoY, while DAP sales are expected to increase by 13% YoY.
We believe the jump in sales during Jun-2022 is a result of pre-buying over anticipation of higher fertilizer prices. Owing to inflationary pressures and the recent amendment in finance bill according to which output tax on Fertilizers were made exempt, the industry increased Urea prices by Rs350/bag towards the end of Jun-2022.
Even with the recently levied additional one-time tax charge, we believe the incumbent government’s increased focus on improving agriculture yields and farmers’ income will help the sector stay in the limelight. We stick with our Overweight stance given the sector’s stable revenue stream and decent dividend yield in FFC and EFERT.
Jun-2022: Urea sales likely to increase by 4% YoY
As per provisional data, Urea sales in Jun-2022 are expected to clock in at 721k tons, up by 4% YoY. For the month of Jun-2022, Fauji Fertilizer (FFC) is expected to post Urea sales volume of 285k tons followed by Engro Fertilizer Ltd (EFERT)’s estimated off-take of 240k tons while Fauji Fertilizer Bin Qasim’s (FFBL) off-take is expected at 73k tons. Urea sales for the June quarter are expected to clock in at 1.6mn tons vs 1.5mn tons in SPLY, a 6% YoY increase. This would take the cumulative 1HCY22 offtake to 3.2mn tons, 11% higher compared to SPLY.
DAP sales likely to increase by 2x YoY in Jun-2022
DAP off-take for Jun-2022 is expected to clock in at ~136k tons vs. 68k tons in SPLY depicting a 99% YoY increase. FFBL, sole manufacturer of the product, is expected to post offtake of 106k tons during Jun-2022. EFERT and FFC on the other hand, are expected to post DAP sales volume of 12k tons and 8k tons during the same period, respectively. Offtake for the second quarter is expected to clock in at 326k tons, a rise of 13% YoY.
Urea prices increased during June
As per the amended Finance Bill 2022, output tax on Fertilizers has been made exempt making input tax a part of cost. Similarly, the spike in inflation in recent months has also increased manufacturing costs for the sector. In response to these, Fertilizer manufacturers increased Urea prices by Rs350/bag during the outgoing month taking the retail price to ~Rs2,200/bag (Granular @ Rs2,301/bag). We do not rule out further increase in prices in case of a hike in gas prices or move toward WACOG.
We highlight that Urea’s inventory has dropped compared to last month as with a production assumption of 510k tons for the month, Urea’s closing inventory for Jun-2022 is expected at ~256k tons. The import of 100k tons during the previous months had provided support but it has dropped again this month. With FFC (Goth Machhi) and EFERT’s (Enven) plants on a turnaround in July, the inventory number could drop further. Moreover, the gas leakage incident at FFC’s plant III at Mirpur Mathelo (Ghotki), followed by a closure of the same since Sunday (3rd July) night is expected to resume operations after necessary maintenance work.
Sustainable dividend yields on offer
Even with the additional one-time tax charge of 10% on the sector, we believe the incumbent government’s increased focus on improving agriculture yields and farmers’ income will help the sector stay in the limelight. We believe that in the event of any gas price increment, key factor will be the manufacturers’ ability to pass on cost pressures, given government’s recent pushback on urea prices. We stick to our Overweight stance on the Fertilizer sector given its stable revenue stream and decent dividend yield in FFC and EFERT.