AKD Quotidian about — Fertilizer Offtake May’12: Up by 22%MoM

Karachi, June 28, 2012 (PPI-OT): Fertilizer offtake remained subdued during May’12 where urea offtake registered at 377.5k tons, down by 20%YoY; however on a sequential basis urea off take was up by an encouraging 22%MoM.

According to AKD Securities, sharp reduction in prices by domestic manufacturers (PkR145/bag) improved price competitiveness versus imported urea, while expectations of price hikes in Jun’12 also kept demand humming at the dealer level. FFC, the largest urea manufacturer, sold 201.1k tons urea in May’12, up by 172%MoM, but still down by 3%YoY. Similarly, FFBL, was able to sell urea at 16M high of 51.9k tons, up by 19%YoY. Imported urea offtake was recorded at 47.5k tons, down by a significant 70%MoM, as a consequence of declining price gap between domestically manufactured and imported urea, which in May’12 stood at just PkR50/bag compared with previous level of ~PkR200/bag. Summing up 5MCYI2 from urea perspective, urea offtake was at a 5-yr low of 1.72mn tons, down by 21%YoY. On DAP front, sates for May’12 were down by a substantial 57% MoM to 26k tons, while the 5MCY12 sales stood at 173k tons, down significantly by 30%YoY. Water shortage, higher fertilizer prices in addition to weak farmer purchasing power have combined to reduce demand for fertilizers during 5MCY12, While Jun’12 offtake are likely to depict sequential improvement, fertilizer sales in CY12 (except for Jun’12) are expected to remain depressed due the factors mentioned above.

Fertilizer offtake May’12
(000 tons) 5MCY12 Y/Y May-12 MoM
Urea

1,720

-21.4%

377.5

22%

DAP

173

-30.4%

26.0

-57%

Company wise offtake

Urea

FFC

607

-39.7%

204.1

172%

FFBL

79

-62.1%

51.9

170%

ENGRO

174

-57.6%

64.2

114%

FATIMA

42

4.6%

1.5

25%

DAP

FFBL

68

-50.5%

17.0

-36%

ENGRO

39

-57.5%

4.0

-55%

Other products

FATIMA (CAN)

102

585.0%

27.7

-8%

FATIMA (NP)

57

nm

19.3

23%

Source: NFDC and AKD Research

Below AKD Securities has provided the company wise performance for the period under review:

FFC: FFC, along with FFBL, turned out to be the biggest beneficiary of urea price change where it sold 201.1k tons of urea in May’12, constituting -54% of market share compared with 4MCY12 average of 30%. However, cumulative sales for 5MCY12 were down by 40%YoY to 607k tons. Furthermore, the company has remained relatively active on the DAP front, selling 39k tons of DAP in 5MCY12 compared with a paltry 2k tons in the same period last year.

FFBL: Mimicking the industry trend, FFBL recorded a strong rebound in urea sales during May’12 with sequential sales up by 170%MoM to 52k tons. DAP offtake on the other hand has yet to gain traction, with sales down by 36% sequentially to 17k tons. In this regard, 5MCY12 sales were down by 51%YoY.

ENGRO: Urea sales for ENGRO were also relatively healthy during May’12, rising by 114%MoM, however cumulative 5MCY12 sales were down by 58% YoY to 174k tons. Moreover, despite the improvement in sales, ENGRO’s urea ending inventory as of end-May’12 stood at 252k tons, representing -3months of urea sales.

FATIMA: FATIMA was the laggard as far as urea sales are concerned with May’12 sales of just 1.5k tons. However, AKD Securities expects a strong rebound in Jun’12 off take numbers after attractive sales incentives being offered to dealers which is in addition to the dealer price arbitrage. NP sales have started gaining momentum with sequential off take up by 23%MoM to 19k tons, while CAN sales were slightly down by 8%MoM, where AKD Securities attributes the decline to lowering retail price differential between CAN and urea.

Outlook and Investment Perspective: 2QCY12 earnings of the fertilizer sector are expected to bounce back on robust urea sales. In this regard, AKD Securities expects bumper urea sales in Jun’12, on back of heavy dealer buying in anticipation of urea price hike post imposition of higher gas prices (GIDC) in Jul’12. On company wise basis, FATIMA is AKD Securities’ top pick, offering attractive upside of 64% to AKD Securities’ Target Price of PkR40/share. AKD Securities also retains AKD Securities’ liking for FEC (TP of PkR142, upside of 27%) which offers a CY12F dividend yield of 13.4%. AKD Securities has a Hold’ recommendation on FFBL (TP of PkR40, downside of 1%), where AKD Securities believes most of the positives are already priced in. While AKD Securities retains AKD Securities’ liking for ENGRO (TP of PkR147, upside of 42%), near term cash flow concerns given low urea off take and high leverage could result in relative near term underperformance in AKD Securities’ view.

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