Fertilizer Sector Preview: Improvement in fertilizer offtake likely to boost 4Q2020 earnings

January 13, 2021 (MLN): Fertilizer Sector is most likely to see another feather being added to its cap, as the earnings for the year ended December 31, 2020 are likely to grow by 34% as compared to the last year.

Similarly, for the quarter ended December 31, 2020, the earnings are expected to grow by 75% as compared to the same period of previous year but may decline by 12% as compared to the previous quarter.

According to a report by Topline Securities, most of this increase in earnings can be accredited to the performance of Fauji Fertilizer Bin Qasim, whose numbers if excluded from the above estimates, will result in a decline of 12% YoY and 17% QoQ.

The predictions have been based on the changes in the volume and prices of Fertilizer products. As per the report, the sale of Urea is likely to decline by 2% in 4Q2020 as compared to the previous year but increase by 18% as compared to the previous quarter. The price of Urea declined by 15% YoY during the quarter as fertilizer companies passed the benefit of reduction in GIDC on to the final consumers. However, as compared to the previous quarter, the prices have remained unchanged at Rs. 1,670 per bag.

Similarly, the sale of DAP during 4Q2020 is expected to increase by 1% as compared to the previous year and 14% as compared to the previous quarter. As a result of increase in the international price, the local prices of DAP also increased by 7% YoY and 13% QoQ to Rs. 3,969 per bag, the report added.

As mentioned earlier, Fauji Fertilizer Bin Qasim is likely to wear the victory crown in terms of posting the highest growth in earnings, as compared to the losses of Rs. 2.7 per share posted during 4Q2019. The turnaround in the company’s earnings is expected on the back of increase in DAP offtake, higher gross margins owing to increase in DAP prices, reduction in GIDC, and decrease in the finance costs for the period.

Fauji Fetilizer Company, too, is likely to see a growth in its earnings owing to increase in DAP offtake, higher gross margins, and lower finance cost. Increase in non-core income from higher cash balance might also contribute to the growth. The company is also likely to announce a final cash dividend of Rs. 3.7 per share, which will take the full year’s payout to Rs. 11.5 per share.

Finally, Engro Fertilizer is likely to see a decline in its quarterly earnings due to decrease in the sale of Urea and DAP by 15% YoY and 69% YoY, respectively. Apart from this, the absence of one-time impact of tax reversal which was recorded in 3Q2020 may also hit the financial results negatively. Despite this, the company may announce a final cash dividend of Rs. 2 per share, which will take its full-year payout to Rs. 11 per share.

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