JS Securities Limited - JS Research (September 10, 2021)

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JS Securities Limited – JS Research (September 10, 2021)

September 10, 2021

Karachi, September 10, 2021 (PPI-OT): Fertilizers: Urea Offtake expected to increase by 12% YoY in Aug-2021

As per provisional data, Urea sales in Aug-2021 are expected to clock in at 643k tons, up 12% YoY. Urea production on the other hand is expected to be 516k tons for the month which will take urea’s closing inventory for Aug-2021 to ~193k tons.

DAP offtake for the month of August is expected to clock in at ~178k tons vs. 295k tons in SPLY depicting a dip of 40% YoY.

Urea prices in the local market increased by Rs50/bag last month (effective 1st August, 2021). Recent increase in crop prices and production make a strong case for higher fertilizer prices going forward.

Aug-2021: Urea sales may likely increase by 12% YoY

For the month of Aug-2021, Fauji Fertilizer (FFC) is expected to post Urea sales volume of 250k tons (including neem coated Urea) followed by Engro Fertilizer Ltd (EFERT)’s estimated offtake of 203k tons while Fauji Fertilizer Bin Qasim’s (FFBL) offtake is expected at 66k tons. Cumulative offtake for 8MCY21 is anticipated to be 4.2mn tons as compared to 3.8mn tons in the SPLY, reflecting a 9% YoY increment.

DAP sales likely to decline by 40% YoY during Aug-2021

DAP offtake for Aug-2021 is expected to clock in at ~178k tons vs. 295k tons in SPLY depicting a 40% YoY dip. This sequential decline in offtake is due to the high base effect from Aug-2020 when pre-buying by dealers was witnessed in anticipation of a post-budget-price-hike. DAP offtake for 8MCY21 will likely clock in at 973k tons vs 1,141k tons in 8MCY20, marking a 15% YoY drop.

Fauji Fertilizer Bin Qasim’s (FFBL), the sole manufacturer of the product, is expected to post offtake of 93k tons during Aug-2021. Engro Fertilizer (EFERT) and Fauji Fertilizer (FFC) are expected to post DAP sales volume of 14k tons and 2k tons during the same period, respectively.

Upward price revision cannot be ruled out

DAP prices in the local market increased by ~Rs600/bag in Aug-2021 and DAP primary margins now stand at a decent level of ~$195/ton. Urea prices on the other hand were increased only by Rs50/bag in the local market. We highlight that domestic urea price still stands at a significant discount of ~58% to international prices. Recent increase in crop prices and production also make a strong case for higher fertilizer prices, going forward. 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.