AKD Quotidian about — May’13 Fertilizer off take update

Karachi, June 26, 2013 (PPI-OT): According to official statistics released by the National Fertilizer Development Centre (NFDC), urea and DAP off takes depict a strong growth of 24%YoY and 58%YoY in 5MCY13 to 2.lmn tons and 273k tons, respectively.

According to AKD Securities among major players, urea off take of ENGRO (+171%Y0Y to 471k tons), FATIMA (+161%V0Y to 110k tons) and FFC (+61%Y0Y to 978k tons) posted significant growth while imported urea accounted for just 9% of total market share during 5MCYI 3.

DAP off take of FFBL stood at 181k tons, up by 168%YoY, where the growth was led by higher gas availability as compared to last year along with improved demand. May’13 industry urea off take stood at 485k tons, where FFC (+19%YOY/+42%MOM to 242k tons) and ENGRO (+91%Y0Y/+146%M0M to l23ktons) recorded healthy sales.

Sequentially, urea and DAP off take both posted robust growth of 54%MoM to 485k tons and 80k tons, respectively in May’13 as a seasonal uptick was witnessed after subdued off takes in Apr’13. Going forward, AKD Securities expects the uptick to continue as cotton and rice cultivation picks up.

At current levels, ENGRO and FATIMA remain AKD Securities tops pick, in the sector with respective TP of PkR2O8/share and PkR37/share while FFC and FFBL both provide attractive CYI3F D/Y of 14.5%. AKD Securities highlights a possible upward revision in gas prices in Jul’13 and subsequent increase in urea prices to benefit FATIMA going forward.

Fertilizer Off take 5MCY13

(000 tons)    5MCY13   YoY  May13   MoM 
Urea           2,140   24%   485   54%
DAP              273   58%    80   54%
 Company Wise Off lake
        Urea
FFC              978   61%   242   42%
FFBL             105   33%    24  -23%
ENGRO            471  171%   123  146%
FATIMA           110  161%    30  301%
NFML             401  -46%    32   6%
         DAP
FFBL             181  168%    54   65%
ENGRO             46  -42%    13  140%
      Other Products
FATIMA (CAN)     182   78%    62   86%
FATIMA (NP)      116  106%    31  503%

5MCYI3 Review: Urea off take during 5MCY13 stood at 2.lmri tons, a growth of 24%YoY, led primarily by improved demand as a result of higher cultivation. Lower urea imports (down 75%YoY to 189k tons) resulted in improved market shares for local players, particularly ENGRO, which accounted for 22% of total olliake as compared to just 10% in SMCY12.

On a sequential basis, urea demand revived to 485k tons (+54%M0M) as Kharif cultivation picked up after subdued sales witnessed in Apr’13. Sequentially, DAP off lake in May’13 also revived to 80k tons (+54%MOM), where FFBLs sales were up by 65%MoM to 54k tons. AKD Securities expects demand side dynamics to remain favourable going forward into 3QCY13 where AKD Securities expects cotton and rice cultivation to drive sales.

Feedstock price revision expected: While no formal directive has been communicated, the government has stated its intention to rationalize gas prices in order to remove subsidy on feedstock gas. In this regard, if feedstock gas price for fertilizer manufacturers is brought at par with current fuel stock gas price (inclusive of GIDC), it would translate into a urea price hike of -PkR400/bag bringing retail urea price to `-PkR2,100/bag.

While such a sizable increase in urea price seems unlikely in the backdrop of low international prices (premium of international to local urea price has narrowed to just 7% as compared to a 10-year average premium of 63%), AKD Securities highlights any increase to benefit FATIMA, which has locked feedstock gas rates at US$O.67/mmbtu. In case of a complete pass through, AKD Securities estimates an annualized EPS iii pact of +32% for FATIMA across forecast horizon.

Investment Perspective: While demand dynamics are expected to remain favourable going forward for the industry, AKD Securities expects FATIMA and ENGRO to remain in the limelight as gas price revision is announced in Jul’13. At current levels, FATIMA provides an upside of 51% to AKD Securities TP of PkR37/share while ENGRO provides an upside of 70% to AKD Securities TP of PkR2OS/share.