Earnings Report /
Pakistan

Engro Fertilizers: 1Q20 review – Lower offtake & prices dented earnings significantly; in line

  • EFERT posted 1Q20 NPAT of PKR571mn (EPS: PKR0.43), down 86%yoy, in line with our expected EPS of PKR0.45.

  • The deterioration in profitability was primarily due to steep decline in Urea offtake and a decrease in other income.

  • Govt’s decision to reduce GIDC has negatively impacted EFERT’s earnings and will continue in CY20 and later.

Intermarket Securities
20 April 2020

EFERT posted consolidated 1Q20 NPAT of PKR571mn (EPS: PKR0.43), down 86%yoy. The result was broadly in line with our expected EPS of PKR0.45. The deterioration in profitability was primarily due to (i) decrease in urea prices (down 2% yoy), (ii) steep decline in Urea offtake, and (iii) decrease in other income. The result announcement accompanied no cash dividend against our expectations of PKR0.4/sh.

1Q20 key result highlights

  • Net sales posted a decrease of 54%yoy to PKR10.8bn in 1Q, which was due to pre-buying in December and price premium of almost PKR220/bag over competitors’ price (late and partial reduction of price post GIDC decision). To highlight, EFERT’s Urea sales decreased by 61% yoy. Hence, the company’s market share depleted by 15ppt.
  • Gross profit margin increased by 2ppt yoy to 34% in 1Q, owing to a delay in pass-on impact of GIDC reduction by 99%.
  • Among other line items (i) other income declined by 74% yoy to PKR261mn, mainly on account of gain booked on disposal of Engro Eximp FZE in 1QCY19, (ii) Finance cost increased by 52% yoy to PKR361mn; such sharp increase was owing to higher interest rates and rising working capital (inventory buildup) financed by short-term debt, in our view.
  • EFERT booked an effective tax rate of 49% as compared to 27% in the same period last year. This was the residual amount owing to the partial reversal of deferred tax gain booked in CY18 on account of revised corporate tax rates.

The government’s decision to reduce GIDC for Fertilizer producers by 99% has negatively impacted EFERT’s earnings and will continue to impact in CY20 and later, in our view, as 65%-70% of production comes from the Enven plant, which is operating on concessionary rates. There is also the uncertainty related to the extension of the concessionary gas price arrangement post 2021. As such, we believe that the issue will limit upside in the stock price.