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Topline Flash Note: Engro Fertilizers Limited (EFERT): Analyst briefing takeaways

• In 1H2020, Engro Fertilizers (EFERT) produced 1,136k tons of Urea and expects production to clock in at 2,214k tons in full year 2020.
• The management expects demand for Urea to be around 5.8mn tons in 2020 based on Agronomics.
• Locust has so far had no significant impact so Urea demand, but if a second wave of locust attack comes, there may be impact on sales.
• In the past, natural calamities have resulted in 5% reduction in Urea sales. So the same 5% reduction in Urea demand to 5.5mn tons in 2020 cannot be ruled out.
• Based on indigenous gas-based production only, management expects industry to have 600k tons excess inventory of Urea by the end of 2020. As per the management, RLNG plants are not operating currently. If they are allowed to operate for three months, they can further add 200k tons to Urea inventory.
• The company has presented a case for Urea exports to the government by utilizing excess RLNG capacity at spot rate purchase. As per the management, export of surplus Urea can potentially generate US$384mn along with the income tax revenue of US$74mn, taking total benefit to US$458mn.
• There are no plans for a plant turnaround this year, however in 2021 the company may schedule a plant turnaround. In that case, the excess inventory from 2020 will be sold in 2021 during the turnaround period.  
• In 2Q2020, company has charged provision for sales tax input adjustment in Other Expenses. Talks are ongoing with the government to resolve the issue. If the matter remains unresolved, the company will look to increase Urea prices to pass on the impact.
• To highlight, as per the law, customers with turnover of Rs100mn+ become withholding agent and have to withhold 4-4.5% of sales while dealer margins are in the range of 2-3%.

The company has clear dividend policy and will continue with high payouts in the future. However, if any new business opportunity arises, they might retain some portion of dividend based on size of the project and required cash flows.