Equity Analysis /

Pakistan Fertilizers: Sales declining, inventory piling up

    Intermarket Securities
    26 December 2019

    Urea sales continue declining trend in Nov'19; inventory has risen to alarming levels

    As per the NFDC data, Urea offtake for Nov'19 clocked in at 381k tons, 2.2x mom and declined 23% yoy. On a cumulative basis, Urea offtake decreased by 4.3%yoy to 4.88mn tons for 11MFY19. The Urea offtake of EFERT, FFC and FFBL were down by 9%, 38%, 33%yoy respectively leading to market share attrition of about 11% yoy. Despite 4.3%yoy decline in urea sales during 11MCY19, the dilution in market share of the incumbents is due to increase of imports and LNG based production. To highlight, Agritech and FatimaFert cumulatively sold 572k tons of urea, coupled with imported sales of 169k tons, during 11MCY19.

    Urea inventory levels closed at 1.04mn tons in November, up 3.25x yoy. It is the highest level since May'17 (1.7mn tons then). The reason behind the surge in inventory is high Urea prices, which is dissuading dealers from piling up inventory. Dealers have had decent inventory levels until November and they are presently selling at a price of PKR1,940/bag to sub dealers and at PKR1,990/bag to farmers. To compare, manufacturers' ex-factory price is PKR2,003/bag.

    DAP offtake stood at 404k tons in Nov'19, up 53%/49% yoy/mom. On a cumulative basis, DAP offtake declined by 20%yoy to 1.64mn tons in 11MCY19 mainly due to price increases amid PKR depreciation. The inventory levels stood at 555k tons, up 5%yoy where major portion is held by FFBL, FFC and EFERT.

    OGRA has recommended the government to increase gas prices for fertilizer sector by 136% for feed gas and 32% for fuel. If the proposed gas prices are implemented, we estimate producers will have to increase Urea price by around PKR600/bag to about PKR2,600/bag. However, we think such increase in Urea prices is not probable, because international prices presently stand at around US$240/ton (which translates to local price of PKR2,200-2,250/bag). The latter have declined by 15% in the past six months. Hence, GoP can reduce the industry's pricing power by allowing imports, in our view. Therefore, it is very unlikely that manufacturers can pass on the whole impact amid depressed international Urea prices and elevated inventory level, in our view.

    We are Neutral on the sector, where higher gas prices is a risk (especially for non-concessionary gas producers) but a GIDC resolution will be mitigate this risk factor, in our view.