Karachi, January 06, 2022 (PPI-OT): Fertilizers: Pricing landscape for Urea gets further attractive
We have an Overweight stance on the Fertilizer sector due to its stable revenue stream and margins. The current inventory situation for Urea, expected to touch an all-time low since CY08, adds weight to our view.
We are bullish on the DAP manufacturer (FFBL) as well due to its being able to consistently pass on input cost hikes in prices. So far, DAP prices in the local market have increased by ~Rs700-800/bag last month.
As per provisional data, Urea sales in Dec-2021 are expected to clock in at 598k tons, down 32% YoY. DAP offtake for the month of December is expected to clock in at ~117k tons vs. 205k tons in SPLY depicting a decrease of 44% YoY.
Strong and consistent yields on offer
The fertilizer manufacturers’ stable revenue stream and margins keep our stance Overweight on 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 are bullish on the DAP manufacturer (FFBL) as well due to its being able to consistently pass on input cost hikes in prices.
Upward price revision cannot be ruled out
DAP prices in the local market have already increased by ~Rs700-800/bag in Dec-2021 accordingly DAP primary margins now stand at a decent level of ~US$345/ton. Urea prices on the other hand have been the same since Aug-2021 (and are 80% discount to int’l prices) when it had last been increased by Rs50/bag in the local market. With better demand-supply situation, urea pricing power would be comparatively more beneficial for FFC and any increase in prices will contribute positively to earnings and dividends for the company. We highlight, Urea closing inventory at CY21 is expected to close at ~58k tons, lowest since CY08 when closing stock touched at ~34k tons.
Input cost increase on the cards
Gas price increment has been long overdue and with the recent IMF demand to hike the gas and electricity prices, we believe an increase of 15-20% in the near term is now likely. We are of the view that in the event of a gas price increase local urea players can easily pass on the negative impact of any hike and may also increase prices over and above the cost push as we believe the fertilizer manufacturers have enough room to do so. Please refer to our report from last month regarding the impact on different fertilizer companies in the event of a gas price hike (Fertilizers – Finger on the trigger: http://jsgcl.com/misc/Fertilizers_14DEC21.pdf)
Dec-2021: Urea sales may likely decrease by 32% YoY
As per provisional data, Urea sales in Dec-2021 are expected to clock in at 598k tons, down 32% YoY. Urea production on the other hand is expected to register at c.558k tons for the month which will take urea’s closing inventory for Dec-2021 to ~58k tons.
For the month of Dec-2021, Fauji Fertilizer (FFC) is expected to post Urea sales volume of 232k tons followed by Engro Fertilizer Ltd (EFERT)’s estimated off-take of 190k tons while Fauji Fertilizer Bin Qasim’s (FFBL) off-take is expected at 31k tons. Cumulative off-take for CY21 is anticipated to total to 6.3mn tons, reflecting a 5% YoY increment.
DAP sales likely to decline by 43% YoY during Dec-2021
DAP off-take for Dec-2021 is expected to clock in at ~117k tons vs. 205k tons in SPLY depicting a 43% YoY decrease. DAP off-take for CY21 will likely clock in at 1.9mn tons, marking a 13% YoY drop. FFBL, sole manufacturer of the product, is expected to post offtake of 77k tons during Dec-2021. EFERT and FFC are expected to post a meagre DAP sales volume of 5k tons and 10k tons during the same period, respectively.