Equity Analysis /

Pakistan Fertilizers: Offtake eliminates inventory risk, but will moderate sales

    Intermarket Securities
    24 January 2020

    As per NFDC data, Urea offtake for December 2019 clocked in at 1.35mn tons, increasing by 3.5x mom and 89% yoy. On a cumulative basis, Urea offtake increased by 7%yoy to 6.45mn tons during CY 19. The Urea offtake of EFERT, FFC and FFBL were up by 3.6x, 4.1x, 5.1x yoy in December, respectively. However, their cumulative market share has declined by 8ppts to 79% in CY 19 from 87% in CY 18. Despite the 7% yoy increase in Urea sales during CY 19, the dilution in market share of the incumbents is due to the increase of imports and LNG based production. To highlight, Agritech and FatimaFert cumulatively sold 725k tons of Urea, while 179k tons was imported, during CY19.

    DAP offtake stood at 193k tons in December 2019, up 2% yoy but down 52% mom. On a cumulative basis, DAP offtake declined by 14% yoy to 1.93mn tons in CY19 mainly due to price increases amid PKR depreciation. The inventory levels stand at 493k tons, same as last year where the major portion was held by FFBL, FFC and EFERT.

    The last two months of CY 19 were a bumpy ride for fertilizer producers. Following an alarming buildup of Urea inventory to 1mn tons by November 2019, producers offloaded the inventory in December 2019, as dealers bought large volumes in anticipation of higher Urea prices in future amid hefty gas-tariff increase (proposed by OGRA). However, in the coming two to three months, we expect offtake to be low amid huge stock held by the dealers. Moreover, producers have maximized their profitability by offloading expensive inventory, where the nearly full elimination of GIDC by the government will force the producers to decrease Urea prices by PKR 400/bag and dealers will have to bear the cost of this steep decline.

    After OGRA’s recommendation, the Petroleum Division has forwarded an amended summary to the ECC, in which they proposed to increase fuel gas prices to PKR1,672/mmbtu from PKR1,021/mmbtu for all fertilizer plants. If the ECC approves, the per-bag impact on Urea would be ~PKR170/bag. A resultant pass-on will be positive for FFBL, neutral for FFC and negative for EFERT and FATIMA, as the latter would bear about PKR230/bag lower Urea retention prices (in the context of GIDC discontinuation).

    We have an Underweight stance on the sector, where higher gas prices is a risk (especially for concessionary gas-based producers) and the industry’s pricing power will remain constrained given the government’s attention on the same, in our view.