Urea Sales Likely to Rise by Massive 72%

Urea sales in June 2022 are expected to clock in at 721,000 tons, up by 72 percent month-on-month (MoM) and 4 percent year-on-year (YoY), whereas Diammonium Phosphate (DAP) offtake is expected to increase by 99 percent YoY to around 68,000 tons.

According to a report by JS Global, Fauji Fertilizer (FFC) is expected to post a urea sales volume of 285,000 tons for June, followed by Engro Fertilizer Limited’s (EFERT) with estimated offtake of 240,000 tons while Fauji Fertilizer Bin Qasim‘s (FFBL) offtake is expected at 73,000 tons.

Urea sales for the June quarter are expected to clock in at 1,600,000 tons versus 1,500,000 tons in SPLY, a 6 percent YoY increase. This would take the cumulative offtake for the first half of the calendar year 2022 to 3,200,000 tons, 11 percent higher compared to SPLY.

DAP

DAP offtake for June 2022 is expected to clock in at ~136,000 tons versus 68,000 tons in SPLY, depicting a 99 percent YoY increase. FFBL, the sole manufacturer of the product, is expected to post an offtake of 106,000 tons during June 2022.

EFERT and FFC are expected to post DAP sales volumes of 12,000 tons and 8,000 tons during the same period, respectively. Offtake for the second quarter is expected to clock in at 326,000 tons which translates into a rise of 13 percent YoY.

As per the amended Finance Bill 2022, output tax on fertilizers has been made exempt making input tax a part of the cost. Similarly, the spike in inflation in recent months has also increased manufacturing costs for the sector.

In response to these, fertilizer manufacturers increased urea prices by Rs. 350 per bag during the outgoing month, taking the retail price to ~Rs. 2,200/bag (granular at Rs. 2,301 per bag). The report does not rule out further increases in prices in case of a hike in gas prices or a move toward WACOG.

It highlights that urea’s inventory has dropped compared to last month as with a production assumption of 510,000 tons for the month, urea’s closing inventory for June 2022 is expected at ~256,000 tons. The import of 100,000 tons during the previous months had provided support but it has dropped again this month.

With FFC (Goth Machhi) and EFERT’s (Enven) plants on a turnaround in July, the inventory number could drop further. Moreover, the gas leakage incident at FFC’s plant III at Mirpur Mathelo (Ghotki), followed by a closure of the same since Sunday (3rd July) night is expected to resume operations after necessary maintenance work.

Dividend Yields on Offer

Even with the additional one-time tax charge of 10 percent on the sector, the report suggests that the incumbent government’s increased focus on improving agriculture yields and farmers’ income will help the sector stay in the limelight.

In the event of any gas price increment, a key factor will be the manufacturers’ ability to pass on cost pressures, given the government’s recent pushback on urea prices. We stick to our Overweight stance on the Fertilizer sector given its stable revenue stream and decent dividend yield in FFC and EFERT.



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