High urea prices, lower finance cost to stimulate profitability of fertilizers in 2QCY21

July 27, 2021 (MLN): Fertilizer sector which is considered as one of the flourishing sectors, continuously posting good numbers despite witnessing challenging times amid pandemic.

Given its remarkable growth mainly owing to the government policies in the favor to boost agriculture sector, the segment is likely to witness notable surge in the profits for the quarter ended July 31, 2021.

Going by the projections put forth by different research houses, the net profit is expected to hover between 30%-47% YoY. The average estimate is likely to stand at 37.5% YoY for the 2QCY21.

The significant increase on profitability may attributable to the better DAP margins given constrained supply in international markets, nearly 5% YoY increase in Urea prices, decline in finance cost on the back of interest rate cut, and notable tick in other income amid strong cash position owing to advances from customers and dividend receipts.

According to a report by Insight securities, urea offtake for 2QCY21 is expected to clock in at around1.5mn tons vs. 1.6mn tons in SPLY, down by 9% YoY. The decrease in urea offtake is attributable to record sales in June’20 which was 1.1mn tons. DAP offtake for the quarter is expected to come at 0.31mn tons vs 0.38mn tons in SPLY. Decline in DAP offtake is possibly due to higher sales in Jun’20 in anticipation of increase in DAP prices. International DAP price has witnessed significant increase since Jun’20. Similarly, local DAP prices have increased by almost 60% during the same period.

Given the scenario, it is expected that Fauji Fertilizer Bin Qasim (FFBL) to post significant jump in its profitability. Moreover, despite lower urea offtake, Fauji Fertilizer Company (FFC) and Engro Fertilizer (EFERT) are expected to post decent profits amid improved urea prices and reduced financial charges.

As per projections made by Intermarket Securities, FFC is expected to post earnings of Rs4.6bn with earning per share (EPS) Rs 3.61 down by 6% yoy. The decline in profitability is mainly because of a 19% yoy drop in Urea sales to c.560,000 tons in 2QCY21, and lower other income,
primarily due to the absence of dividends from invested companies. Gross margins of the company are expected to increase by 3ppt to 35% amid better Urea prices and higher DAP margins.

It is anticipated that company would announce an interim cash dividend of Rs3 per share in
2QFY21.

With regards to EFERT, the report noted that the company will likely record profit worth Rs5bn with EPS Rs3.81, up by 31% YoY. Despite the decline in Urea by 17% and DAP offtake by 44% on yearly basis, higher prices of both fertilizers, increase in volumes of other fertilizer products, and expected decline in finance cost will increase the profitability of the company. Additionally, gross margins will surge by about 4ppt YoY to around 39%.Given this, EFERT will likely announce an interim cash dividend of Rs3.75 per share.

Anticipating the earning for 2QCY21 for FFBL, the report underlined that the unconsolidated net profit after tax would reach Rs2.2bn with EPS of Rs1.67 as compared with a net loss of Rs1.2bn in 2QFY20. The core profitability of FFBL is likely to jump significantly in 2Q due to massive increase in international DAP primary margins and local prices, and lower finance costs which will likely to fall by 52% YoY. On a
consolidated basis, earnings are likely to improve due to higher volumes and margins of Fauji Foods Ltd (FFL), and new export contract of meat will curtail losses of Fauji Meat Ltd (FML).

 For Fatima Fertilizer (FATIMA), the report projected net profit of Rs4.5bn with EPS 2.14, down by 4% YoY. This is mainly due to the reversal of one-offs booked, which led to lower COGS in 2QFY20. The gross margins are expected to clock in at 44% in 2QFY21 owing to the higher NP and CAN prices.

To recall, cost of sales in SPLY were lower due to one-off release of subsidy by GoP to SNGPL for subsidized gas supply to Sheikhupura Plant during the period. As a result, gross margins are expected to drop to 41% during the period under review, highlighted by Noor Huda Shaikh, Research Analyst at BMA Capital.

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Posted on: 2021-07-27T15:39:00+05:00

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