Historic second highest monthly offtake of fertilizers in Pakistan during Jun’20

Provisional fertilizer offtake for the month of Jun’20 indicates that urea sales witnessed a massive surge of 83% YoY to 1,175k tons while this figure is also up by 390% MoM. Uptick on a monthly basis was owed to seasonality factor along with reopening of economy during the month. In particular, FFC and FFBL’s cumulative urea offtake recorded a massive increase of 76% YoY to 610k tons in Jun’20 whereas MoM surge arrived at 361%. Similarly, EFERT’s urea offtake underwent a growth of 187% YoY and 391% MoM to 504k tons in Jun’20. Whereas FATIMA’s sales escalated by a stunning 16x MoM in Jun’20 to 52k tons albeit, witnessed a downturn of 43% YoY. On the other hand, no offtake was recorded under NFML. On a cumulative basis, urea offtake posted a decline of 7% YoY during 1HCY20. Pertinently, company-wise data reveals that the Fauji group (FFC and FFBL) outperformed peers with 8% YoY increase in urea offtake during 1HCY20.

Growth in DAP offtake noted at 88% MoM in Jun’20

DAP sales depicted a 28% YoY decline while remaining strong on a MoM basis (+88%) to 115k tons during Jun’20. Meanwhile during 1HCY20 DAP sales exhibited a decline of 17% YoY to clock-in at 538k tons. On a company specific note, DAP offtake of FFC and FFBL arrived at 67k tons in Jun’20, translating into a YoY cut of 20% / MoM increase of 128%. Correspondingly, EFERT’s DAP sales registered a growth of 13% YoY and 216% MoM in Jun’20 to 34k tons.

Inventory position

By the end of Jun’20, closing inventory of urea with local producers stood at 400k tons as compared to 1.1mn tons a month back. On the other hand, tally for DAP suggested an inventory position of 466k tons in the same period.

Outlook and Recommendation

As inventory levels have dropped to 400k tons vis-à-vis 1.1mn tons a month back and demand appears strong in the upcoming Rabi season, with an estimated offtake of urea at 6.0mn tons in 2020, we view production (excluding two RLNG based fertilizer manufacturers) to arrive at 5.5mn tons. Last year, the government operated two fertilizer plants on RLNG to bridge the shortfall of urea with the country’s urea production clocking-in at 6.2mn tons, highest ever in the history. Having said that, the government should operate both the fertilizer plants for the remaining months of CY20 to bridge the expected shortfall of 0.5mn tons of urea in 2020, so as to save FX reserves as well as to ensure efficient distribution of urea and maintain adequate buffer stock in the country.

Our top pick remains FFC and ENGRO with a Dec’20 target price of PKR 130/share and PKR 384/share, offering a total return of 17% and 29%, respectively. (AHL Research)

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