According to NFDC, Urea sales in Jul’22 witnessed the largest slump since Dec’21, down 26% YoY to c.463,000 tons, largely owed to i) Eid holidays, ii) monsoon season, and iii) plant breakdown of both FFC (Mirpur Mathelo) and EFERT (Enven).

The urea demand for 7MCY22 now stands at 3.7mn tons, against 3.5mn tons last year, where offtake of FATIMA and Fauji group rose 35%/4% YoY, while that of EFERT declined by 16% YoY. We remain Overweight on the sector owed to handsome payout and sustainable earnings. However, offtake is likely to remain depressed for the remainder of 3Q owing to ongoing floods.

Urea ex-factory prices increased by PKR350/bag to PKR2,155/bag in Jul’22, following measures imposed in the Budget FY23 (inflationary pressure, coupled inability to claim input tax claims). Also, dealer premium in the local market remained elevated during the month. 

Industry urea inventory level stood at c.205,000 tons in Jul’22, down from c.320,000 tons in Jul’21 and c.256,000 tons in the previous month. Owing to an expected slump in urea demand, as agricultural landscape continues to remain affected from floods, imported urea demand will likely be replenished once the inundated area is rehabilitated. To recall, the government had imported c.100,000 tons earlier in the year. We highlight, the existing budgetary allocation of PKR6.0bn will only be able to subsidize c.66ktons of urea imports and a mild fiscal slippage of PKR3.0bn will be seen during FY23.

DAP offtake declined to c.67,000 tons, down a sharp 65% YoY, owing to elevated surge in international DAP prices and PKR slippage. During the month, both FFC and FFBL increased prices to PKR14,800/bag, likely due to the surge in PKR devaluation. However, both companies reduced DAP prices to c.PKR13,800/bag (similar to EFERT’s DAP prices). Also, during the month, DAP inventory increased to c.374,000 tons from c.337,000 tons last month.

During the 2010 floods, Pakistan experienced a decline in urea demand to c.300k per month, c.40% lower than the average monthly run-rate of c.500k. This actually translated into a urea demand decline of 6% YoY in 2010 as the requirements were fulfilled post rehabilitation. We expect the same to be exhibited to a certain extent over the upcoming months, allowing us to remain constructive over the fertilizer space as a key defensive play.  

Going forward, fertilizer offtake is likely to decrease in the ongoing quarter owing to the recent floods, which continue to wreak havoc in the country, before rebounding in the last quarter and normalizing in CY23, in our view. Also, in light of increased gas demand by Europe for winters, a lot of global fertilizer manufacturers are halting production, which will likely increase the international urea prices.

Better gas availability will ensure elevated production levels for the industry, whereas potential further urea price hikes due to expected rise in gas prices, reinforce our liking for the sector. More specifically in the light of post-floods demand revival, as also seen historically. After incorporating an upcoming price hike of PKR350/bag, EFERT remains our top pick in the fertilizer space with a potential dividend yield of 22% and a TP of PKR 92/share.   

Courtesy – Intermarket Securities Limited.