Karachi, September 05, 2023 (PPI-OT): Fertilizers: Offtake expected to improve in Aug-2023

We expect Urea sales in Aug-2023 to clock in at 650k tons, up 18% YoY, taking 8MCY23 offtake up 3% YoY. Similarly, DAP offtake for Aug-2023 is expected to clock in at ~259k, depicting an improvement of 10x YoY on a low base driven by floods last year.

With production estimated at 575k tons, we expect the industry's closing inventory to clock in around 100k tons for Aug-2023.

Engro Fertilizer (EFERT) is expected to post Urea sales volumes of 231k tons (+32% YoY) during Aug-2023. Fauji Fertilizer Company (FFC) is likely to post 236k tons Urea sales, up 37%YoY due to low base effect.

Our long-term view on the sector remains positive with Overweight stance, given its stable revenue stream. Despite the increased tax, CY24E D/Y for FFC and EFERT stands at 23% and 24%, respectively.

Urea offtake shows improvement

We expect Urea sales during Aug-2023 to clock in at 650k tons, up 18% YoY. With production estimates at 575k tons, we expect the industry’s closing inventory to clock in around 100k tons for Aug-2023. Engro Fertilizers Ltd (EFERT) is expected to post decline compared to previous month despite resumption of operations of company’s base plant. On the other hand, Fauji Fertilizer Company (FFC) is likely to post a 37% YoY increase in sales, FFC provisional offtake also shows a MoM growth of 19% after having weak offtake in the previous month.

DAP offtakes for August increase 10x YoY

DAP off-take for Aug-2023 is expected at ~259k tons, 9.96x YoY. Fauji Fertilizer Bin Qasim Limited (FFBL), sole manufacturer of DAP, is expected to post offtake of 197k tons. FFC and EFERT on the other hand, are expected to post DAP sales volume of 15k tons and 32k tons during the same period, respectively.

Sector demonstrates pricing power

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. The industry faced increased taxes and duties in the budget, leading companies to raise their selling prices of varying quantums. Companies have also passed on the impact of rise in international DAP prices and rupee devaluation recently.

With the last gas price hike announced in Feb-2023 still lacking clarity for companies receiving gas from Mari field, we do not rule out the possibility of further upward adjustment in Urea prices to sustain current margins.

Long term stance stays intact

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 increased tax, CY24E D/Y for FFC and EFERT stands at 23% and 24%, respectively.