Engro Fertilizers Limited (EFERT) announced its result for 1QCY20 where the company reported a Profit After Tax of PKR 571mn (EPS: PKR 0.43) compared to PKR 6,361mn (EPS: PKR 4.76) in the previous quarter, translating into a decline of 91% on QoQ. The result was slightly below our expectations.
The company recorded net sales worth PKR 10.79bn compared to PKR 43.61 in the previous quarter translating into a decline of 75%. Reduction in volumetric sales was the primary reason for the lower net sales as urea offtake declined by 61% YoY while DAP sales declined by 62% YoY.
Cost of sales also witnessed a dip of 75% on account of removal of GIDC which kept the gross margins largely intact at the 34% vs. 33% in the previous quarter.
Finance cost clocked in at PKR 1,212mn registering a steep increase of 84% on QoQ and 52% on YoY. Elevated finance cost and lower other income due to high base kept net margins under pressure which deteriorated to 5% against 15% in the previous quarter.
The company also held its analyst briefing yesterday where the management shed light on the strategy going forward. Following are the key highlights from the corporate briefing:
Volumetric decline witnessed during the quarter was attributable to higher urea price levels of EFERT within the industry on account of a lower quantum of price reduction post the removal of GIDC. This price parity within the industry subdued the company’s off-take, causing its urea sales to fall down 61% YoY to 160kt and its market share to shrink to 16% during 1QCY20.
The company expects industry sales to hover near its historical average level of 5.8mn MT during CY20 and believes it has the capacity to produce 2.0mn MT. DAP sales declined to 34kT during 1QCY20 causing its market share to fall down to 15%.
The management remains uncertain about the expiry of its concessionary gas with estimates hovering between CY21 and CY24, citing ambiguity regarding the commencement timeline of the concessionary gas. With the decrease in urea prices, EFERT’s profitability is likely to remain under pressure therefore, we main out HOLD stance on the stock. (BMA Research).