The demand for fertilizer in the country remained strong in unbeatable markets from agriculture; currently, it contributes ~22% to total GDP, and during the last 20 years, its contribution

remained at ~19%.. The government targets agriculture growth of 3.9% for FY23 mainly due to recovery in cotton and wheat production, ample availability of water, certified seeds, and agriculture credit facilities.

• The fertilizer demand would amplify due to the upcoming Rabi season. Moreover, the Agri package announced by the federal government includes agricultural loans, cash support, subsidy, and rea duction in electricity tariffs; tax exemption will support fertilizer demand. However, due to the non-availability of gas, winter could hamper the fertilizer production levels.

• Measures to promote agriculture production and uplift overall farmer incomes. These include exemption of sales tax on seeds and reduction of taxes on agricultural-related machinery. Moreover, the government allocated PKR15bn as a subsidy for the fertilizer plants. The government also allocated PKR6.0bn subsidy for imported urea.

• The government and the fertilizer companies reached an agreement to reduce urea price to Rs1850/bag, wherein the government would settle the industry is pending over PKR80bn and reduce their gas tariffs.

• The fertilizer manufacturers can pass on any incremental cost to consumers due to higher urea prices in the international market and strong demand. The government decides the urea prices after consultation with urea manufacturers. The higher prices in global markets encourage smuggling, but the government must take serious action to curb this.

Outlook:

At attractive levels with a strong dividend yield, we believe stable urea demand and the attractive payout would make this sector a safe play.

In the future, we expect urea offtake would hover around 6.0mn tons by the end of this year. Moreover, the government’s efforts and pro-farmer policies, such as better wheat and sugarcane pricing, would support farmers’ liquidity. We expect DAP prices in the international market to remain higher due to supply disruption. The strong cash flows generated by higher food prices and the government’s focus on securing food security are expected to keep agriculture in the limelight.

We remain positive in the fertilizer sector because strong dividend yield and stable earnings growth make it attractive at current levels. We prefer EFERT with target prices of PKR102/share, providing an upside of 15% and offering an attractive D/Y of 17%.

Courtesy – Spectrum Securities Limited