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Pakistan Fertilizer: Companies Profits up 48% YoY during 2Q2019

 

• Pakistan Fertilizer Sector posted cumulative growth of 48% YoY in their earnings during 2Q2019 due to 1) increase in gross profit margin by 2% YoY, 2) lower selling & distribution cost by 13% YoY, and 3) increase in other operating income by 31% YoY. Urea sales of four major companies down by 9% YoY, whereas, overall sector volumes witnessed a growth of 3% YoY to 1.5mn tons in urea sales due to resumption in operation by Agritech and FatimaFert (~181k additional tons). DAP offtake of three companies (EFERT, FFBL and FFC) depicted growth of 23%, while overall sector witnessed a growth of 44% YoY to 457k tons.
• Our sample size includes four major listed companies namely Fauji fertilizer company (FFC), Engro Fertlizer Company (EFERT), Fatima Fertlizer Company (FATIMA), and Fauji Fertlizer Bin Qasim (FFBL). We have taken consolidated income statement  of EFERT and FATIMA, while for rest companies we have taken unconsolidated accounts to depict core fertilizer dynamics.
• Net sales of the sector witnessed growth of 35% YoY to Rs89.5bn, despite declining volumetric sales by 11% YoY to 1.5mn tons as urea and DAP prices jacked up by 23% YoY and 11% YoY, respectively.
• Gross margin of manufacturers surged to 31% during 2Q2019 from 29% last year due to better retention on urea. FFC outperformed its peers with margins accretion of 10ppts YoY owing to better retention price and decline in relatively lower margin DAP sales by 24% YoY during 2Q2019.
• Administrative expense increased by 26% YoY owing to inflationary pressure while selling and distribution cost was down by 13% YoY during 2Q2019 due to decline in volumetric sales.
• Other operating expense increased by 155% YoY due to exchange loss incurred by companies on foreign payables and increase in WPPF expense amid higher profitability, we believe.
• Other income increased by 31% YoY, where FFC outperformed its peers (adjusted for subsidy) followed by EFERT due to hefty cash & short term investment and one time gain on sale of land to EPCL, respectively.
• Finance cost depicted a growth of 142% YoY due to hike in policy rate and increase in borrowings of the sector.