Fertilizer manufacturers have agreed to fix retail Urea price at Rs1,850/bag against commitment from the government to settle the industry’s Rs80bn outstanding sales tax and subsidy receivable in the coming Budget FY23 and also reduce gas tariffs for Engro Fertilizers on Petroleum Policy (PP12) gas.
This implies Rs69/bag reduction in retail price for Fauji Fertilizer Company (FFC), Fauji Fertilizer Bin Qasim (FFBL), and Fatima Fertilizer Company (FATIMA), while Engro Fertilizers (EFERT) will see retail price drop by Rs169/bag from their previous Urea prices of Rs1,919-2,019/bag.
However, it is unlikely that the price fixation will continue for longer time as manufacturers may increase prices going forward citing inflationary impact of higher transportation cost, we believe. We also anticipate that any increase in natural gas prices across the board will be fully passed on by manufacturers.
As per notification under S.R.O No.607(I)2022 by Ministry of Industries & Production, it had been proposed to fix Urea prices at Rs1,768/bag from previous price of Rs1,919-2,019 per bag. However, concerned producers, dealers or importers were given an opportunity to provide justification on the recent price increase.
With slight reduction in Urea prices, we estimate that the EPS impact for 2022 on EFERT would be Rs2.4/share (15%) followed by FFC of Rs1.1/share (7%), and FFBL of Rs0.24/share (5%). However, if the government timely releases sales tax and subsidy receivable of close to Rs17bn and reduces PP12 gas prices to Rs302/mmbtu (from Rs1,080/mmbtu or US$5.4/MMBTU), we estimate minimal impact of Rs0.2/share (1%) on EFERT’s earnings.
We continue to have a ‘Overweight’ stance on Fertilizer sector with FFC and EFERT as our preferred picks.
Courtesy- Topline Securities