Karachi, February 03, 2022 (PPI-OT): Fertilizers: Lowest inventory levels since CY08
As per provisional data, Urea sales in Jan-2022 are expected to clock in at 599k tons, down 8% YoY. DAP offtake for the month of January is expected to clock in at ~117k tons vs. 82k tons in SPLY depicting an increase of 42% YoY.
We have an Overweight stance on the Fertilizer sector due to its stable revenue stream and margins. We believe that the sector has enough pricing potential and the current inventory situation for Urea, which is expected to touch an all-time low since CY08, adds weight to our view.
Firm earnings bode well for the sector coupled with its cash rich position for sustainable pay-outs. The sector offers a decent dividend yield of 12%.
Jan-2022: Urea sales may likely decrease by 8% YoY
As per provisional data, Urea sales in Jan-2022 are expected to clock in at 599k tons, down 8% YoY. Urea production on the other hand is expected to register at c.565k tons for the month which will take urea’s closing inventory for Jan-2022 to ~37k tons.
For the month of Jan-2022, Fauji Fertilizer (FFC) is expected to post Urea sales volume of 226k tons followed by Engro Fertilizer Ltd (EFERT)’s estimated off-take of 209k tons while Fauji Fertilizer Bin Qasim’s (FFBL) off-take is expected at 34k tons.
DAP sales likely to increase by 42% YoY during Jan-2022
DAP off-take for Jan-2022 is expected to clock in at ~117k tons vs. 82k tons in SPLY depicting a 42% YoY increase.
Primary reason for growth in DAP off-take for the month is the higher offtake for FFBL due to provision of gas by SSGC which wasn’t available in January last year. FFBL, sole manufacturer of the product, is expected to post offtake of 62k tons during Jan-2022. EFERT and FFC are expected to post a meagre DAP sales volume of 6k tons and 23k tons during the same period, respectively.
Strong case for higher Urea prices
DAP prices in the local market increased by ~Rs700-800/bag in Dec-2021 alone, consequently DAP primary margins now stand at a decent level of ~US$350/ton compared to 10-yr avg of ~US$200/ton. Urea prices on the other hand have been the same since Aug-2021 (80% discount to int’l prices) when they were increased by Rs50/bag in the local market. In light of the demand-supply situation, urea pricing power is solid for the sector where any increase in prices will contribute positively to earnings and dividends of the companies. We highlight, Urea closing inventory for Jan-2022 is expected at ~37k tons, lowest since CY08 when closing stock touched at ~34k tons.
Sustainable yields on offer
The fertilizer manufacturers’ stable revenue stream and margins keep our stance Overweight on the sector. The firm earnings bode well with the sector’s cash rich position for sustainable pay-outs, making their dividend yields attractive at current levels. Similarly, we also like the DAP manufacturer (FFBL) due to its being able to consistently pass on input cost hikes in prices.