We estimate AHCML Fertilizer universe earnings to decline by 52% YoY in 2Q2022 mainly due to the imposition of super tax. Similarly, on QoQ basis earnings are expected to decline by 61%.

To recall, the Government of Pakistan through Federal Budget FY23 has imposed a super tax of 10% on CY21 earnings whereas 4% will be charged on CY22 earnings. This will largely dent earnings of the fertilizer sector despite higher sales and retention prices.

Urea sales are expected to increase by 7% YoY to 1.60mn tons in 2Q2022 amidst agronomic demand and a higher price gap between Urea & DAP. Whereas DAP sales are expected to increase by 13% YoY to 0.33mn tons due to pre-buying in anticipation of a further hike in DAP price.

On QoQ basis, Urea sales are expected to decrease by 2% and DAP sales are expected to increase by 31%. The significant increase in DAP sales is attributable to (1) seasonal factor, and (2) dealer/farmers inventory build-up in anticipation of further increase in DAP prices.

Average DAP prices have increased by 79% YoY in 2Q2022 to Rs9,805/bag as compared to Rs5,467/bag in 2Q2021 due to surge in international DAP prices. Ona sequential basis, local DAP prices have increased by 5% QoQ.

We maintain our Over-Weight stance on the Fertilizer sector. Our preferred play in the sector is Engro Fertilizer Limited (EFERT).

Courtesy – AHCML Research