Urea sales in December 2021 may fall 32% YoY

The fertiliser manufacturers’ stable revenue stream and margins keep the sector favourite in the market. The firm earnings bode well with the sector’s cash rich position for sustainable payouts, making their dividend yields attractive at the current levels.

The DAP manufacturer, Fauji Fertilizer Bin Qasim (FFBL), is in a sweet spot. The DAP prices in the local market have already increased Rs700 to Rs800/bag in December 2021, accordingly the DAP’s primary margins now stand at a decent level of $345/tonne.

However, the urea prices have been the same since August 2021 (and are 80 per cent discount to international prices) when it had last been increased by Rs50/bag in the local market.

With the better demand-supply situation, urea pricing power would be comparatively more beneficial for the Fauji Fertilizer Company (FFC) and any increase in the prices will contribute positively to the earnings and dividends for the company.

Gas price increment has been long overdue and with the recent International Monetary Fund (IMF) demand to hike the gas and electricity tariffs, we believe an increase of 15 per cent to 20 per cent in the near-term is now likely. We are of the view that in the event of a gas price increase the local urea players can easily pass on the negative impact of any hike and may also increase the prices over and above the cost push as we believe the fertiliser manufacturers have enough room to do so.

As per the provisional data, urea sales in December 2021 are expected to clock-in at 598k tonnes, down 32 per cent YoY. The urea production; however, is expected to register at 558k tonnes for the month, which will take the urea’s closing inventory for December 2021 to 58k tonnes.

The urea closing inventory at CY21 is expected to close at 58k tonnes, lowest since CY08 when the closing stock touched 34k tonnes.

For December 2021, Fauji Fertilizer Company (FFC) is expected to post urea sales volume of 232k tonnes; followed by Engro Fertilizer Limited’s estimated off-take of 190k tonnes, while Fauji Fertilizer Bin Qasim‘s (FFBL) off-take is expected at 31k tonnes.

The cumulative off-take for CY21 is anticipated at 6.3 million tonnes, reflecting a 5 per cent increment.

The DAP off-take for December 2021 is expected to clock-in at 117k tonnes, compared with 205k tonnes in the same period last year, depicting a 43 per cent decrease.

The DAP off-take for CY21 is likely to clock-in at 1.9 million tonnes, marking a 13 per cent drop. FFBL, sole manufacturer of the product, is expected to post the off-take of 77k tonnes during December 2021.

Engro Fertilizer and Fauji Fertilizer Company are expected to post a meagre DAP sales volume of 5k tonnes and 10k tonnes during the same period, respectively.

Muhammad Waqas Ghani is AVP Research at JS Global Capital. Ghani aspires to become a valuable contributor to the global financial industry and corporate world in general. He believes finance is a fascinating discipline dealing with money, markets and valuation and is relevant to all aspects of business.

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