Pakistan Fertilizer – Sales update for April 2020: Lockdown affects off-take; rising inventory level is concerning

As per NFDC data, Urea offtake during April 2020 clocked in at 242k tons, down 17% mom and 20% yoy. On a cumulative basis, total Urea offtake fell 23% yoy to 1.27mn tons in 4MCY20. During the period, Urea offtake of FFBL and EFERT were down by 36% and 41% yoy respectively; in case of FFC, they were up 34% yoy. The cumulative market share of these producers has increased by 6ppt yoy to 83% in 4MCY19 from 77% in the same period last year.

The 23% yoy decline in Urea sales in 4M is attributed partly to pre-buying by dealers in December 2019 and to the Covid-19 related lockdown, which briefly halted sales in March and April both. Even though the government quickly eased conditions for fertilizer producers and dealers, Urea sales remained soft due to the delay in start of Kharif season (sowing in April to May).

Industry Urea inventory level has increased by 2.5x yoy and 45% mom to reach c.860k at the end of April. Lower demand due to pre-buying in December, delay in crop cultivation and the lockdown have together led to the elevated inventory level. Moreover, significantly lower LNG prices will create room for RLNG based fertilizer plants to operate with little subsidy provision by the government, in our view. We expect Urea inventory to rise to alarming levels (beyond 1.0mn tons, for the first time since November 2019), thereby shrinking the market share of the incumbents. In the context of recent reduction in Urea prices enforced by the government, the aforementioned risk casts dark clouds over most of the sector, in our view.

DAP offtake clocked in at 151k tons in April 2020, up 75% yoy and 90% mom. On a cumulative basis, DAP offtake increased by 31% yoy to 361k tons in 4MCY20, because of low base-effect and lower prices. The inventory levels stood at 417k tons by end-April, lesser than 620k tons at the end of April 2019. Major portion of the DAP inventory was held by FFC, FFBL, EFERT and FatimaFert

In the near term, fertilizer demand will likely remain softer than usual due to the Covid-19 lockdown, but we expect total Urea sales in CY20 to clock in at 5.7mn tons, propelled by the PKR37bn direct farmer subsidy announced by the government on nitrogen and phosphate products. However, this will be less than 6.2mn tons offtake last year (stretched by the pre-buying in December).

We have a Market weight stance on the sector, where high dividend yields for some of the stocks (risks to earnings notwithstanding) remains the anchor point for investment amid low interest rates, in our view. We prefer FFC in the space. (Intermarket Securities Limited.)

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