Karachi, August 03, 2023 (PPI-OT): Fertilizers: July-2023 offtake expected to improve

We expect Urea sales in Jul-2023 to clock in at 630k tons, up 36% YoY, taking 7MCY23 offtake up 1% YoY. Similarly, DAP offtake for Jul-2023 is expected to clock in at ~113k tons vs. 67k tons in SPLY depicting an improvement of 68% YoY. With production estimated at 600k tons, we expect the industry's closing inventory to clock in around 185k tons for Jul-2023.

Engro Fertilizer (EFERT) is expected to drive Urea segment volumes with 266k tons sales (+3x YoY) during Jul-2023. Fauji Fertilizer Company (FFC) is likely to post 199k tons Urea sales, up 35% YoY however, down 28% MoM due to a higher base.

Our long-term view on Fertilizer sector remains positive; keeping our Overweight stance intact, given its stable revenue stream. Despite the retrospective impact of Super Tax of 6 quarters charged in 2QCY23, FFC and EFERT offer D/Ys of 18% each.

Urea offtake shows improvement in Jul-2023

We expect Urea sales during Jul-2023 to clock in at 630k tons, up 36% YoY. With production estimates at 600k tons, we expect the industry’s closing inventory to clock in around 185k tons for Jul-2023. Engro Fertilizers Ltd (EFERT) is expected to post growth compared to previous months due to the resumption of operations of company’s base plant. On the other hand, Fauji Fertilizer Company (FFC) is likely to post a 35% YoY increase in sales, however, taking MoM growth to -28% after having strong offtake in the previous month.

DAP offtake also increases 68% YoY during the month

DAP off-take for Jul-2023 is expected at ~113k tons, 68% YoY. Fauji Fertilizer Bin Qasim Limited (FFBL), sole manufacturer of DAP, is expected to post offtake of 72k tons. FFC and EFERT on the other hand, are expected to post DAP sales volume of 13k tons and 26k tons during the same period, respectively.

Sector to manage anticipated escalation in input costs

The fertilizer sector has demonstrated its ability to promptly transfer the impact of duties and taxes, positioning it favourably to handle any potential future increases in input costs. In the recently passed Finance bill for FY24, the fertilizer sector attracted taxes and duties. Notably, a 5% Federal Excise Duty (FED) was imposed, estimated to impact around Rs125-150/ bag for Urea and approximately Rs470/bag for DAP. Another significant change was the removal of tax exemption for DAP, subjecting it to a 5% tax without allowance for differential claims.

In response to these incremental taxes and inflationary pressures, companies made upward adjustments to selling prices of varying quanta to pass on the impact of the cost pressures. With the previous gas price hike announced in Feb-2023 still lacking clarity for clients receiving gas from Mari field, the sector must prepare for possible pass-on adjustments where we believe the sector can effectively manage any future cost hikes and ensure sustained stability.

Long term positive stance intact but DY to take a hit this year

We reiterate our positive stance on the sector as it is anticipated to continue to broadly report a steady revenue stream in the future. Despite the Super tax imposition on previous 6 quarters (additional 6%) in 2QCY23, CY23E D/Ys for FFC and EFERT stand at 18%.