Equity Analysis /
Pakistan

Pakistan government approves support package for agriculture

  • The ECC has approved a PKR50bn package for the agriculture sector (part of the stimulus package against Covid-19)

  • With the subsidy of PKR37bn, fertilizer demand looks secured at 5.7mn tons (incorporated in our estimates)

  • Tractor sales have historically reacted very positively to GST cuts; however, this is a one-year reduction

Intermarket Securities
14 May 2020

The ECC has approved a PKR50bn package for the agriculture sector. This was included in the PKR100bn earmarked for SMEs and agriculture sector out of the PKR1.2tn relief package to counter the Covid-19 outbreak. Salient features of the package are given below.

Impact on fertilizer: Positive for demand

As mentioned in our recent report, we expected the government to announce a subsidy on fertilizers, which underpinned our Urea off-take assumption for CY 20 of 5.7mn tons (same as previous 5yr average). Since the subsidy will be given directly to farmers in the form of scratch cards (unlike the last time when the government subsidised fertilizer prices during CY 16-18) and the new subsidy will last for the Kharif season only, we do not expect it to affect the balance sheets of the fertilizer companies in our coverage. The cost reduction for farmers will be moderate given fertilizer comprises 10-15% of total costs. However, this can be complemented by lower transport costs as diesel prices have come off significantly (once transport fully resumes post-lockdown measures). Greater use of fertilizer, in combination with potential increases in support price of major crops by the government, will likely improve crop yields in FY 21, in our view. Hence, better farmer income would eventually also be beneficial for demand of cars (particularly for INDU), dairy companies (FCEPL, NESTLE), and tractors (MTL, AGTL), all else being the same, in our view. 

The subsidy will be positive for urea and DAP demand (already incorporated in our estimates). The consumption of the latter (phosphates) may improve, but FFBL will not see a significant increase in its demand (it already produces near full capacity). FFBL’s non-core losses also remains a key issue. As per channel checks, the announced subsidy will also apply to the alternatives of DAP and other fertilizers, that is NP and CAN respectively (both produced by FATIMA). Therefore, we think FATIMA’s sales will not be negatively affected. We prefer FFC in the space, which is shielded from the negative impact of GIDC cut and has a more reliable dividend yield, in our view. 

Impact on tractors: Expect a rebound in sales

The reduction in GST on tractors from 5% to 0% can be positive for tractor sales, which have declined by c40% yoy on average during FY19/20. The last time GST was reduced – from 10% to 5% in the FY17 Budget – tractor sales rose at a CAGR of c.50% over FY17-18, taking the industry over 90% capacity utilisation during FY 18. Note, however, that the subsidy may be in place for only one year, unlike the last time which was a permanent change. We also do not think that the subsidy will affect the retention prices of the two tractor producers – Millat Tractors (MTL) and Al Ghazi Tractors (AGTL). MTL has about 60% market share in the tractor market.