Karachi: Earnings estimates for Pakistan's fertilizer sector have been revised upward by an average of 13% for the years 2026 to 2028, reflecting improved urea retention prices and stronger agricultural activity. This revision has prompted an upgrade in the sector's rating from Market Weight to Overweight, signaling a positive outlook for key players like Fauji Fertilizer Company (FFC) and Engro Fertilizers Limited (EFERT).

According to JS Global, the revision in earnings is largely driven by higher urea retention prices, as manufacturers have rolled back previous discounts. The sector is expected to benefit from improved urea offtakes, with industry sales projected to increase by 3% year-on-year to 6.9 million tons by 2026, bolstered by robust domestic demand and improved crop prices. Additionally, DAP sales are also forecasted to grow by 3% annually.

The sector has seen price revisions, including the first urea price hike in two years. Manufacturers have increased the maximum retail price of urea by Rs100 per bag. Specific companies like FFC have further raised prices by Rs125 per bag. While there is potential for further price hikes, no additional increases are factored into current projections.

On the production front, consistent gas supply to fertilizer producers is anticipated to continue, despite recent production losses. The global energy supply disruptions, exacerbated by geopolitical tensions, have led to a recovery in international DAP prices, presenting a favorable pricing environment.

Fauji Fertilizer Company has seen its earnings estimates revised upward by 5% for the forecast period, driven by higher urea offtakes and improved DAP economics. The company's projected urea sales volumes for 2026 have increased to 3.1 million tons. Meanwhile, Engro Fertilizers Limited's earnings have been revised upward by 23%, with urea sales volumes for 2026 and 2027 adjusted to approximately 2.3 million tons each, supported by a stable gas supply.

FFC and EFERT have been upgraded to "BUY" ratings, with target prices set for June 2027. FFC's target price is Rs664 per share, offering a 28.9% total upside including an 8.6% dividend yield. EFERT's target price is Rs239 per share, with a 30.5% upside including a 12.5% dividend yield.