As per the data released by NFDC, Urea offtake for Aug'19 clocked in at 625k tons, up by 45%/34% yoy/mom. On a cumulative basis, Urea offtake increased by 9%yoy to 4.0mn tons for 8MFY19. The Urea offtake of EFERT, FFC and FFBL were down by 6%, 2%, 15%yoy respectively. Despite 9%yoy growth in urea sales during 8MCY19, the dilution in market share of the incumbent is on account of the increase of imports and LNG based production. To highlight, Agritech and FatimaFert cumulatively sold 448k tons of urea, coupled with imported sales of 104k tons, during 8MCY19. Urea inventory levels closed at 324K tons, down 2.3xyoy.
The production of urea for Aug'19 reached 569k tons, up 17%yoy, where LNG based plants added 75k tons. As per news report, these plants are expected to continue operations till Nov'19. Resultantly, urea production from these plants alone will contribute 770k tons during 11MCY19, in our view.
DAP offtake stood at 105k tons in Aug'19, up 33%yoy while down by 48%mom. On a cumulative basis, DAP offtake declined by 10%yoy to 953k tons in 8MCY19 mainly due to increase in prices amid PKR depreciation. The inventory levels stood at 418K tons, down 32%yoy where major chunk is held by FFBL with 233k tons. The major reason for the decline in demand has been the increase in DAP prices post PKR devaluation.
Fertilizer producers have lately increased urea prices by PKR200/bag to pass on the impact of hike in gas price (62%/31% increase in feed/fuel). Although gas prices increased in Jul'19, manufacturers held urea prices at PKR1,840/bag during Jul-Aug'19 amid potential resolution of GIDC as committed by the government. However, the longstanding case has now been taken to the Supreme Court after backlash from opposition parties. The key checkpoint for the sector is the outcome of the case; hearing of which is expected to start from 22 Oct 2019.
Until the outcome of SC hearing on the GIDC, we have a Market weight stance on the sector. For 3QCY19, the financial results of fertilizer companies are likely to be depressed as manufacturers absorbed the impact of gas price hike during Jul-Aug'19.
Risks: (i) Unfavorable verdict on GIDC case, (ii) inventory buildup, and (iii) low pricing power.