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Pakistan Fertilizer: Companies Profits up 41% YoY during 2018

 

• Fertilizer manufacturers in Pakistan posted cumulative rise of 41% YoY in their earnings during 2018 due to increase in urea prices by around Rs300-330 per bag to Rs1,730 per bag. Rise in urea prices was attributed to removal of Rs100 cash subsidy on urea and increase in gas prices from Oct 2018 by 30% and 50% in Fuel and Feed respectively, that had impact of Rs130/bag. Adjusted for these cost/subsidy factors, remaining amount of around Rs100 per bag was retained by manufacturers to compensate inflationary cost pressure and to improve gross margins.
• As a result of increase in urea prices, gross margins of manufacturers surged to 30% during 2018 from 25% last year.
• Net sales of  companies witnessed improvement of 23% YoY to Rs328bn despite flattish growth in urea volume YoY and 4% YoY decline in DAP offtake. Rise in sales could be attributed to increase in urea and DAP prices by around 16% and 25% YoY respectively.
• Other operating expense increased by 55% YoY due to exchange loss incurred by companies on foreign payables and increase in WPPF expense amid higher profitability.  Other income was down 42% YoY as cash subsidy of Rs100/bag was removed from May 2018.
• Finance cost of the sector was down 20% YoY despite 400bps hike in policy rate during 2018. Lower finance cost could be attributed to decline in overall borrowings of sector on back of improved cash flows from accrual of GIDC to the tune of Rs30bn per annum (for sector).
• Among Companies, Engro Fertilizer (EFERT) posted highest profitability growth of 56% YoY due to 14% YoY increase in urea sales and around 16% increase in urea prices. Further, effective tax rate of company was also lower at 28% vs. 33% in 2017 as company availed tax rebates of Rs2bn due to reduction in future corporate tax rates. Gross margins of the company improved to 32% (+2ppts) during 2018.
• FFBL profitability growth was around 43% YoY on back of rise in GP margins by 2ppts YoY and 17% YoY growth in net sales as urea offtake and prices increased by 3% and 16% YoY respectively. While, DAP offtake fell 17% YoY during 2018. Other expenses of the company were 197% YoY up due to exchange losses of Rs1.1bn in 2018.
• FFC posted growth of 35% YoY in its profitability during 2018 due to increase in GP margins by 6.4ppts YoY to 26% and decline in finance cost 33% YoY. FATIMA Fertilizer’s profit was up 29% YoY on back of 9ppts YoY increase in GP margins and 33% YoY decline in finance cost.
• Outlook: Expectations pertaining to resolution of GIDC are doing rounds since Economic Reform Package. However, as per our channel checks, development related to this may be seen in upcoming Federal Budget. We maintain our market weight stance on fertilizer sector with HOLD call on EFERT, FFC and FFBL. While, we have BUY call on ENGRO.
• Key risks to fertilizer industry’s profitability/valuation includes, 1) decline in international urea prices, 2) slower than expected urea sales, 3) poor crop season and 4) unfavorable GIDC decision.