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Pakistan Agriculture: Pakistan Rs50bn Agriculture Package; DAP players to benefit more; tractor sales to rise

• The Economic Coordination Committee (ECC) of the Cabinet yesterday approved a package of Rs50bn for the agriculture sector.
• It is part of the Rs100bn announced in the Prime Minister's corona pandemic relief package on equal basis for Small and Medium Enterprises (SMEs) and the Agriculture sector.
• The package includes a subsidy of Rs37bn to farmers on fertilizers in the form of Rs925/bag on DAP and Rs243/bag on Urea.
• The package would be implemented by the provinces with disbursement of amount through scratch card scheme, already being implemented by Punjab.
• It also includes a subsidy of Rs2.5bn on Sales Tax on locally-manufactured tractors for a period of one year.
• 8bn subsidy is for mark-up on loans and Rs2.3bn subsidy on cotton seeds.

Pak Fertilizers: DAP players key beneficiaries

• The subsidy on Urea and DAP is likely to reduce cost to the farmer to Rs1,397/bag and Rs2,400/bag, respectively (from Rs1,640/bag and Rs3,325/bag).
• The government aims to implement subsidy on DAP and Urea through scratch card scheme already being implemented by Punjab.
• The scheme implemented by Punjab asks farmers to register themselves, and send across scratch card number with National Identity Card number through SMS, after which they will receive a message from the department and they will get cash from any branchless banking service provider.
• We believe this mechanism suits the Pak Fertilizer companies as there will be no pile up of receivables from the government on their balance sheets.
• We believe the availability of subsidy on Urea and DAP, is likely to push up demand particularly of DAP – which is more price elastic.
• The price differential of DAP/Urea is likely to reduce to Rs1,228/bag from current Rs1,685/bag.
• Over the past year, farmers have been reluctant in the use of DAP due to higher price differential (see graph) between DAP and Urea as weak farmer economics also have taken its toll.
• Preference of DAP over Urea may offset any positive impact of subsidy on Urea sales, in our view.
• We highlight Fauji Fertilizer Bin Qasim as a major beneficiary, which is the sole manufacturer of DAP in Pakistan. With capacity constraints, we expect DAP importers like Fauji Fertilizer (FFC) and Engro Fertilizer (EFERT) to benefit from this package as well.
• Pakistan witnessed highest DAP sales of 2.4mn tons in 2017 compared to our 2020E estimate of 2.0mn tons. We believe, availability of DAP subsidy can potentially push DAP market up to 2.2mn tons in 2020E.
• We estimate this is likely to result in a potential earnings impact of ~Rs1.0/share for FFBL, ~Rs0.2/share for FFC and ~Rs0.3/share for EFERT.

Pak Tractors: Better farmer economics but Sales Tax refunds likely to pile up

• The subsidy of Rs2.5bn on Sales Tax on locally-manufactured tractors for a period of one year suggest removal of 5% Sales Tax on Tractors.
• However, we await SRO for greater details.
• We believe these developments have both positives and negatives for the Pak Tractor industry as removal/reduction in Sales Tax and better farmer liquidity amidst lower cost of fertilizer is likely to boost demand.
• We have already assumed unit sales growth of 43% YoY in FY21F for Millat Tractors (MTL), where we have largely incorporated improved farmer liquidity for the year. Please refer to our report titled ‘MTL: Improvement in farmers liquidity to drive volume growth - Initiating Coverage with a Buy’ dated  April 8, 2020.
• However, the removal/reduction in Sales Tax is also likely to increase Sales Tax refunds from the government due to input and output tax adjustments.
• The Pak Tractor industry has already been pleading the government for the release of these refunds.

OneLoad should be looked at from a valuation perspective and a growth story, instead of its impact on the bottomline.