September 5, 2019 (MLN): The fertilizer sector has been hitting the headlines lately, for it has been embroiled in a number of issues, including the never-ending case of Gas Infrastructure Development Cess (GIDC).

Before jumping onto the deliberations of these issues, it would be worthwhile to shed some light on the financial performance of the major companies operating within this sector.

Fertilizer Sector is entirely dominated by mainly four companies, i.e. Engro Fertilizers (EFERT), Fauji Fertilizers (FFC), Fatima Fertilizers (FATIMA), and Fauji Fertilizers Bin Qasim (FFBL). Therefore, the analysis of the sector will be based on the consolidated financial statements of these companies, which is as follows;

Surprisingly, the Fertilizer Sector’s financial performance, as evident from the table above, was far better than what the market expected. It comes as a surprise because the financial performance of rest of the dominant sectors of the country depicted a very depressing picture, as most of the companies operating within those sectors clearly succumbed to the ongoing economic pressures.

As shown in the table above, the Profit before Tax (PBT) and the Profit after Tax (PAT) of the sector went up by 17.7% and 22.4% respectively. Going by the explanations given by Topline Securities, as well as our own understanding, the growth in profit was an obvious result of increase in revenue and drop in major expenses.

Speaking of revenue, the sector observed an 18.09% increase in net sales despite a decline in the volumetric sale of Urea by the companies mentioned above. However, the overall sale of Urea increase as Agritech and Fatima Fertilizers recommenced their operations. On the other hand, the sale of DAP by the companies in question increased by 23%. Likewise, the gross profits improved by 23.2% owing to better retention of urea by the stated companies.

The non-core expenses of the sector increased by 43.3% as the aforementioned companies incurred significant exchange losses on foreign payables, along with increase in workers’ participation profit funds.

Nevertheless, the non-core income increased by merely 3% due to various short-term investments made by the fertilizer companies. A major contribution to the growth of non-core income was EFERT, as it earned substantial one time gain on the sale of its land.

As anticipated, the finance costs reported a substantial increase of 86.6%, owing to a rise in the policy rate as well as borrowings made by the sector.

Fauji Fertilizers Limited

Company wise, FFC emerged as the clear winner as it reported PAT of Rs.8.6 billion (EPS: Rs. 6.77), signifying a remarkable increase of 87.5% over the earnings of same period in last year.

In its analyst briefing, the company informed that its performance was mainly driven by the increase in market share of DAP, increase in Urea prices as well as dividend from AKBL and PMP.

With regards to the industry dynamics, FFC informed that the current demand of fertilizers was not being met, and the alternative of imports was necessary. The company also revealed that it was planning to offload it’s DAP demand in the second half of CY19 to meet demand emanating from wheat cultivation.

Engro Fertilizers Limited

EFert reported PAT of Rs. 7.1 billion (EPS: Rs. 5.38) for the said period, exhibiting almost no change from the earnings reported in same period of last year. The revenue of the company improved by 23% on account of increase in Urea and DAP prices.

In its analyst briefing, the management informed that the limited growth in profitability was attributable to lower offtakes of Urea, and higher effective tax rate on the back of deferred tax adjustment.

Efert is in the initial learning phase of Seeds and Pesticides businesses and plans to further increase its footprints in the long-term.

Fatima Fertilizers Limited

FATIMA reported PAT of Rs. 7 billion (EPS: Rs 3.36) for the said period, exhibiting a growth if 23% as compared to the earnings of same period in last year. The upsurge in earnings came as a result of improved fertilizer prices, higher Nitro phosphate (NP) offtake and higher volumetric sales.

Fauji Fertlizers Bin Qasim

FFBL emerged as the black sheep within the sector, as it incurred losses of Rs. 3.5 billion (LPS: Rs. 2.95) during the stated period, mainly due to the improvement in Urea/Dap retention prices, tax reversal of Rs. 184.5 million and jump in finance cost by 89%.

For the larger part of six months ended on June 30, 2019, the performance of fertilizer sector was keenly in line with that of KSE-100 index. This implies that the sector plays a substantial role in driving the benchmark index.

Even though the sector demonstrated a much better financial performance than that of its peers, its performance on a standalone basis was not really cheer worthy, as visible from the graph above. The declining trend shows that the sector continued to snatch points from the benchmark index till mid of May, showed momentary progress, and then continued to rob off the index with more points.

The never-ending case of GIDC settlement:

The government had earlier issued an ordinance to further amend the GIDC Act, 2015, as per which, the fertilizer sector (including feed and fuel), captive power industry, KESC, GENCO and IPPS were to pay half of the outstanding cess levied or charged up to December 31, 2019.

However, the case of GIDC took an unforeseen U-turn when the Prime Minister, in the interest of “transparency and good governance”, decided to withdraw the Ordinance. The matter was then subsequently submitted to the Supreme Court for urgent hearing.

Prime Minister Khan also addressed the nation via the notice, informing that going to the Court carries a risk because the decision could go either way. This means that the government could get the whole amount or could lose it all and possibly forgo any prospect of future revenue collections under this head.

As per the report produced by Foundation Securities, the fertilizer companies might respond to this development by raising the prices of Urea, as they have already withheld increase in Urea prices owing to increase in higher gas prices, given commitment from government to reduce GIDC rates by the end of July.

Outlook:

It would be too soon to comment on the impact of the ordinance withdrawal on the fertilizer sector, given that the decision was taken just yesterday. However, the sector is expected to remain exposed to certain economic challenges such as decline in international urea prices, drop in urea sales and poor crop season.

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