October 22, 2020 (MLN): Engro Fertilizer Limited (EFERT) on Wednesday conducted its conference call to deliberate upon the latest financial performance and the key drivers behind, along with its future endeavors.

To highlight, the company had reported 9% YoY increase in net profits to Rs 11.49 billion for the nine months period ended on September 2020, compared to the profits of Rs 10.5 billion earned in the corresponding period last year. This earnings per share of the company also grew by the same proportion to clock in at Rs 8.61 against Rs 7.87 reported last year.

Sharing their insight on the latest performance, the management of EFERT attributed increase in 9MCY20 profitability to increase in UREA offtake given 17% YoY higher production and 10% YoY higher offtake of phosphate products due to anticipation of further price hike in upcoming months.

Meanwhile, it is important to note that during the period, the fertilizer sector witnessed 4.3%YoY decline urea sales mainly due to locust attack, Covid-19 related disruption and better farm economy. Inspite of 4.3%YoY decline in total fertilizer offtakes, the company’s Urea sales recorded at 1.45 mln tons, depicting a jump of 9% YoY mainly on the back of higher production by the company and constricted supply of DAP in the market due to limited imports at lower rates. To note, due to better availability of gas supply, the company produced record level of 1.69 mln tons (up by 17% YoY) of urea during 9MCY20.

In addition to the above, the decline in urea prices post covid-19 has also improved EFERT’s offtake during the period mentioned above. This takes company’s market share to 35% from 31%, the management said.

According to the report by Foundation Securities, management has disclosed that current international prices for DAP stands at US$357/ton while product is available in limited supply due to lower production by the China amid outbreak of COVID-19. In domestic market management expects DAP prices to remain on higher side due to increase in landed cost of imported DAP and strong farmer economics.

On demand front, management expects UREA demand to be around 6.0mn tons in CY20. Company feels production of UREA by base players would be sufficient to meet domestic demand, it added.

As per Taurus Securities the management also highlighted that EFERT over the years has been able to grow the market of other fertilizer variants i.e. the potash segment grew at a compound average growth (CAGR) of 53% YoY in last two year. Similarly, EFERT’s pesticide business has grown 1.5x YoY in the said period.

On concessionary gas GIDC payable, management disclosed that EFERT has filed a case against payment of GIDC in High Court and obtained the stay order in this regard. The total GIDC payable of EFERT is around Rs 20 billion. Furthermore, the company is yet to receive subsidy claims worth Rs 6.5 billion from the Government, which was expected to be resolved with the GIDC settlement.

On the tax front, management stated that the income tax disallowance and sales tax still remain an issue with industry, as the dealer with Rs 100 million and more turnover has to withhold 4%-4.5% of sales value, while the dealer margin is around 2-3%, which creates a disparity in pricing of fertilizers.

They also updated that, talks are ongoing with FBR regarding sales tax issue, if it remains unresolved, cost pass through may be considered or if resolved company can reverse the accrued provision in the coming quarters, a report by Topline Securities said.

 While shedding some light on EFERT’s fleet business, the management said that it is doing well and so far, the company has added 195 trucks into its fleet and intended to grow business on larger scale. Presently the revenue is not enough to be a driver of growth in topline for the company. The main purpose of the business is to protect crops from wastage, which occur due to temperature fluctuation and delay in delivery to the market, another report by Intermarket Securities highlighted.

With regards to payouts and earnings which were impressive during the 3QCY20, the management is of the view that similar to 3QCY20, the earnings will remain healthy in 4QCY20 on the back of good offtake of Urea, DAP and other products. In addition to this, management has also steered that they will continue to pay high payouts but only in the absence of new projects. Since the company is actively working on new projects, however, GIDC payment in next 24 months will hurt company’s liquidity position and can impact the timeline of new investment, they added.

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