Fertilizer: FFBL to end lengthy loss-making streak, while FFC, EFERT’s income to jack-up

October 15, 2020 (MLN): Fertilizer sector, which remained the recipient of COVID-19 outbreak given rising food security concerns, its profitability is expected to stay elevated in 3QCY20 mainly on the back of highest ever Urea and DAP offtake in 3Q, better DAP margins due to limited supply, reduction in GIDC and decline in finance cost due to lagged impact of cut in policy rate.

A report by Foundation Securities forecasts that offtakes of the sector are expected to remain uplifted, in particular, Urea offtake is likely to increase by 20% YoY to 1.7mn tons in 3QCY20 on account of probable increase in gas tariff and sowing season. It also highlighted that excluding the impact of Rs 400/bag GIDC reduction, the Urea prices increased by 7% YoY in 3QCY20.

Company wise,  Fauji Fertilizer Company (FFC),  which is the largest urea manufacturer, having market share of 43% is expected to witness higher profits on yearly basis during the period mentioned above, primarily on the back of increase in gross margins due to removal of GIDC and YoY decline in finance cost owing to recued debt level and fall in interest rate. However, lower Urea and DAP prices as well as decline in urea offtake (down by 4% YoY), are likely to drop company’s topline on yearly basis in 3QFY20. Meanwhile, the increase in DAP offtake during the period is expected to provide some cushion to fall in FFC’s topline.

Engro Fertilizer (EFERT), after posting a below market consensus earnings in 2QCY20 despite a significant 52% YoY uptick in urea offtake, is expected to see upsurge in net income both on quarterly and yearly basis in 3QCY20. The earnings are expected to lift owing to 35% and 89% YoY higher Urea and DAP offtake respectively. While the gross margin of the company is expected to shrink on yearly basis due to higher proportion of sales concentrated in lower margin products in the quarter under review, a report by Alfalah Securities cited.

Next up is Fauji Fertilizer Bin Qasim Limited (FFBL), which has been struggling on the profitability front due to its loss-making subsidiaries, is likely to end its lengthy loss-making streak in 3QCY20. The turnaround in profitability is expected on the back of 22% and 17% YoY increase in DAP and urea sales volume respectively and better DAP primary margins. Furthermore, as per BMA Capital, the expectations of dividend income from FPCL also expected to support company’s bottom-line. With the expected rise in net sales, the gross margins of the company also likely to expand.

To highlight, in an announcement at the PSX, FFBL announced to increase its authorised share capital from Rs 11 billion to Rs 15 billion through a rights issue which could be used to lower its balance sheet leverage which is already a concern.

Outlook:

Given the government’s efforts for food security as evident by continuous monitoring of locust outbreak and incentive package of Rs 50 billion for agriculture the sector is expected to perform better compared to other sectors. Moreover, highlights that payment of GIDC in 24 monthly installments along with likely adjustment of payable amount against Sales tax and subsidy receivables would ease cash flow concerns of EFERT and FFBL, said the report by Foundation Securities.

In addition to the above, better pricing for wheat and sugarcane crop would also provide additional support to farmer’s liquidity position, it further added.

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Posted on: 2020-10-15T16:53:00+05:00

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