AKD Quotidian about — Fertilizer Offtake: Soft patch continues in Aug’12

Karachi, September 26, 2012 (PPI-OT): As per data released by NFDC, fertilizer offtake remained subdued during Aug’12 where urea and DAP offtakes were recorded at 322k tons (-17%MoM) and 53k tons (-47%MoM), respectively.

According to AKD Securities, as a result, 8MCY12 urea and DAP offtakes stood at 3.46 million tons, down 7%YoY, and 423k tons, down 19%YoY, as unfavourable demand/supply dynamics dominated the period under review. Fertilizer demand was weak in Aug’12 amidst 1) seasonally low application and 2) anticipation of an regard, imported urea sales were lower by 67%MoM to just 39K tons, the lowest level recorded in CY12TD, as dealers remained sidelined on expectation of reduction in imported urea price to PkR1,450/bad from existing PkR1,600/bag. Aug’12 DAP offtake was recorded at just 53k tons, down 47%MoM and 30%YoY. Low demand environment has led to a recent DAP price cut of PkR100/bad to PkR3,550/bag so as to encourage offtake and liquidate inventories. That said, AKD Securities expects locally manufactured fertilizer offtake to remain dismal in Sep’12 as well, considering the partial arrival of 300k tons of imported urea and floods in Southern Punjab and Sindh. Although CY12F will be very tough for the sector, AKD Securities expects fertilizer offtake to pick up in 4QCY12 (seasonal uptick, particularly of DAP) while AKD Securities anticipates the return of greater pricing power in CY13F for local manufacturers. As such, AKD Securities retains AKD Securities’ liking for FATIMA (PkR36/share) and FFC (TP:PkR133/share), which provide upside of 51% and 20% respectively, while news flows regarding resolution of Enven gas supplies could keep ENGRO beeping on investor radars.

Patchy offtake continues: Disappointing numbers for urea continued in Aug’12 where offtake was recorded at 322k tons, down 42%YoY/17%MoM. FFC managed to sell 159k tons in Aug’12, down 9%MoM, even as it accounted for 49% of industry urea offtake. On a sequential basis, FFBL’s urea offtake improved by 19%MoM to 22k tons despite 12%MoM lower production at 20k tons. ENGRO managed to offload 78k tons, up 16%MoM with a 19%MoM increase in production. FATIMA urea offtake remained flattish at 14k tons in Aug’12, while urea production (15k tons, down 60% MOM) was hampered by an unplanned shut down at its ammonia plant. As for phosphates, FFBLs DAP offtake during Aug’12 was recorded at just 17k tons, down 66%MoM. The company’s DAP inventory has now increased to a massive 231k tons, which could lead to additional working capital financing needs during 3QCY12. That said, AKD Securities expects the situation to improve significantly in 4QCY12 where wheat sowing season will likely result in a drain-down of the company’s inventory. As far as unconventional products of FATIMA are concerned, CAN offtake picked up to 31k tons, up 101%MoM while NP offtake was recorded at average monthly production level of 23k tons, down 33%MoM from all time high of 35k tons in Jul’12.

Entering Sep’12, AKD Securities expects weak offtake patch on continue, with fertilizer sales expected to decline further before improving. Slowdown in offtake is expected on the back of lower fertilizer application, late monsoons and expectation of another price cut with the arrival of imported urea.

Investment Perspective: While risks in the short term manifest in the form of excessively low priced imported urea and slowdown in fertilizer offtake (depreciated farmers’ purchasing power and monsoon floods), long term fundamentals of the Fertilizer sector remain intact where AKD Securities’ top picks FATIMA and FF0 are trading at attracting CY13F P/Es of 5.5x and 6.5x, respectively, offering significant upside of 51% and 20% from current levels. News flows regarding resolution of Enven gas supplies could keep ENGRO beeping on investor radars.