January 14, 2022 (MLN): The year 2021 remained comparatively fair for the fertilizer sector. All the credit goes to government concerns which tilted towards providing the cushion to the said sector in order to improve productivity. This will likely help major fertilizer manufacturing companies to enjoy an improved bottom line for CY21.
During 9MCY21, the companies reported strong profits i.e, Fauji Fertilizer Company Limited (FFC), Engro Fertilizer (EFERT), ENGRO and FATIMA posted a growth of 15% YoY, 30% YoY, 26% YoY and 47% YoY, respectively in 9MCY21. The remarkable turnaround in the profitability of fertilizer manufacturers is attributed to strong offtakes coupled with better pricing.
FFBL also witnessed a decent turnaround in its profitability, posting profit after tax of Rs6.1bn in 9MCY21 against the loss of Rs900 million in 9MCY20. The increase in profitability was mainly driven by an increase in DAP margins and lower finance costs as compared to the same period last year.
It is pertinent to mention that in the last couple of months urea offtake surged on the back of aggressive buying from dealers. Furthermore, market grapevine suggests that urea smuggling to Afghanistan has surged many folds due to trade restrictions and significant differences between international & local urea prices which also contributed towards higher offtake, a report by Insight Securities noted.
Ballooning import bill coupled with inflationary pressures has kept the equity market rangebound. Given the headwinds on the macro front, the fertilizer sector is well placed against economic uncertainty in the current scenario, it added.
Fertilizer manufacturers are in a sweet spot to pass on any cost side pressures due to subdued inventory levels and significant differences between international and local urea prices.
The earnings and payout ratio to remain stable for fertilizer players in 2022, supported by strong pass on capability coupled with strong farm economics on the back of an increase in support prices of wheat and sugarcane, Muhammad Shahroz, Equity Research Analyst at Insight Securities said.
Therefore, due to recent monetary tightening and headwinds on the economic front, it is expected that the fertilizer sector will remain on investors radar due to its superior earning quality and attractive dividend yield, he added.
The risk of increasing gas prices in this year is hovering however, the manufacturers are well placed to pass on any increase on the cost front due to significant discounts between international & local urea prices and lower inventory levels.
He also emphasized that strong administrative measures and strict price monitoring are necessary for the overall well-being of the country’s crop output.
Currently, urea availability is a major concern in retail markets as it is currently sold at a hefty premium over Dealer Transfer Price (DTP) despite the smooth production of fertilizer manufactures.
The government has allowed the import of 150,000 tons of urea from China in order to meet the demand and supply gap, which is expected to arrive in February 2022. As of now, the Urea inventory stood at 60,000 tons.
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