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AKD Quotidian about — Fertilizer Numbers: Potential for higher imports in 2Q?

Karachi, February 28, 2014 (PPI-OT): As per the latest numbers released by the National Fertilizer Development Centre (NFDC), total urea off take In the first month of CYI4 (Jan) stood at 6192k tons, an increase of 19.7%YoY.

According to AKD Securities, the growth was led primarily by higher sales of EFERT following availability of feed gas to both urea plants as well as higher sales of imported urea within the country. At the same time, DAP volumes within the country fell by 49.4%YoY to 270k tons following end of Rabi sowing season as well as high carryover inventory at the dealer level.

In terms of urea market share, NFML continued to lead the way with a share of 358% in Jan’14 closely followed by FFC and EFERT with market shares of 31.2% and 28.2%, respectively. With respect to DAP market share, FFBL continued to lead with a share of 45.8% while EFERT accounted for 22.1% of total Jan14 sales.

While initial estimates pointed towards comfortable urea inventory level for IHCYI4 following provision of gas to both of EFERT’s urea plants, recent revelations pertaining to reversion of Guddu gas to the power plant earlier than expected could potentially lead to higher urea Imports during the year, particularly in the Kharif season.

AKD Securities portend imports of about 700k-800k tons urea in 2QCYi4 given demand of about 1.4mn-1.Gmn tons coupled with domestic production at just 930k-950k tons (assuming EFERT operates one plant) in 2QCYI4. At current levels, FATIMA remains AKD Securities’ top pick in the sector with a TP of PkR35.1/share.

Urea up 19.7%YoY; DAP down 49.4%YoY: Urea demand withki the country increased by 1 9.7%YoY to stand at 619.2k tons. The increase was fuelled by higher demand accounted through higher production by EFERT (174.3k tons) following provision of feedstock gas to both plants as well as higher imported urea within the country (NFML Sales: 221.8k tons).

On a MoM basis, urea sales were down 8.1% following a cyclical downturn as Rabi sowing season draws to a close. Contrary to urea, DAP sales were down 49.4%YoY/84.4%MoM to 27.0k tons following i) low production from FFBL following closure of its plant due to gas availability, ii) seasonality reasons with Rabi sowing season nearing end in January and iii) high available inventory at the dealer level. In this regard, NFDC estimates 125k tons inventory at end Jan’14.

Outlook and Investment Perspective: While initial estimates pointed towards comfortable urea inventory level for the first half of the year following expected provision of gas to both of EFERT’s plants till end 1 HCY1 3, recent revelation regarding termination of Guddu gas to EFERT potentially by Mar’14 end may lead to higher than expected urea imports during the year, particularly 20CY14.

NFDC estimates total urea ending inventory at 336k tons by end Mar14 where, given historical demand of between 1.4mn- t6mn tons in 20 coupled with estimated production at about 930k-950k tons during the quarter (assuming EFERT operates one plant), AKD Securities believes imports of about 700k-800k tons are likely to materialize in 20CY14.

At current levels, given risks pertaining to the industry in terms of product price as well as input availability, AKD Securities’ top pick within the sectors remains FATIMA given its stable feedstock gas supply (at subsidized rates) as well as product diversification. Trading at CY14 PIE of 5.7x, the scrip offers an upside of 21.8% to ourTP of 35.1/share – BUY!

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