Pakistan’s fertiliser sector is of key importance to the Nation’s food security and overall economic development. The sector continues to show resilience to economic headwinds with ever-increasing inflation and directions of the IMF to increase the gas cost (a key input in ammonia production, imperative for the production of urea, which remains a staple fertiliser) to curb the circular debt. In essence, the sector cannot pass on cost pressures since fertilisers form a key part of farmers’ economics, affecting crop production. With depleting gas reserves and more producers being shifted to dollar-linked prices, the sector remains at risk of losing the ability to supply cheap fertilisers.
However, the govt., continues to provide gas subsidies, which help keep costs low, but companies like AGL and FATIMA face the full brunt of higher gas costs, affecting margins. In the face of these pressures, the sector continues to pay healthy dividends (EFERT and FFC pay almost every quarter, with FATIMA usually paying at year-end). They continue to explore ways to supplement their income stream through diversification at the Group level or in the product portfolio.
Aug’23 numbers released by NFDC show a 3.3%/17.7% MoM/YoY increase in urea offtakes, whereas a massive 133.7%/911.4% MoM/YoY hike in DAP offtakes was seen, which we opine is owing to 1) higher demand of urea and DAP ahead of the Rabi sowing season and 2) due to an expectation of further price increases as has been seen especially with DAP where high global prices coupled with rampant exchange rate devaluation has pressured local prices. Avg. urea market prices have remained at ~PkR3.5k/bag after multiple price hikes in response to the imposition of FED on local sales and gas cost pressures for some players due to a depreciating PkR against the US$. On the other hand, DAP market prices remained above ~PkR10k/bag in response to rising global prices, plus a depreciation of PkR against the greenback.
Owing to our analysis as set out below, we remain bullish on the AKD fertiliser universe due to strong fundamentals, dividend-paying capacity and benefiting from direct and indirect subsidies since the sector is imperative for national food security.
Urea and DAP demand remains robust: Urea offtakes stood at 650k Tons (↑3.3%/17.7% MoM/YoY), whereas DAP offtakes registered an exponential growth of 133.7%/911.4% MoM/YoY standing at 263k Tons, of which FFBL took the major share at 197k Tons. However, on a cumulative basis for the 8MCY23, urea offtakes remained flattish YoY whereas DAP offtakes clocked a sizeable 32.5%YoY hike. We opine both commodities’ demand to have grown owing to the upcoming all-important wheat season, and inventory building on the expectations of further price increases.
The gas price hike on the cards: Although this matter has remained under discussion in regulatory circles for quite some time, the current announcement of a 50% gas price increase, in line with IMF demands, remains a threat to the industry which continues to receive heavily subsidized feed gas. However, the sector continues to pass on any inflationary pressures in selling prices, with FFC gaining the most through receiving all gas at concessionary rates as opposed to other players receiving a mix of gas at concessionary and dollarized prices, thereby hurting their pass-on ability to an extent.
FFC: During the current month, FFC registered an 18.6%/36.6% MoM/YoY increase in urea offtakes and a 19.3%/10x MoM/YoY increase in DAP offtakes. Cumulatively, a 5.6%/51.0% YoY/YoY was seen in urea/DAP offtakes respectively for the 8MCY23. Capacity utilization during the period remained at 126% in line with historic trends. FFC has the lowest urea price in the sector selling at an avg. range of PkR2.4k – 3.0k/bag giving it the highest market share of 36.5% for CY23 to date.
For these reasons, we prefer FFC as the best-performing company in the sector, assigning a Jun’24 SOTP TP of PkR134/sh (↑45.9% from last close), with a CY23/CY24 forward D/Y of 23.3%/31.5%.
Courtesy – AKD Research