The profitability for the big three fertiliser companies declined 54 per cent YoY in the second quarter of CY22 primarily due to higher tax charge and exchange loss on foreign payables. The one-time high tax charge of 10 per cent on CY21 earnings wiped out 50 per cent of the earnings this quarter and is not a recurring event.

Going forward, changes in the sector’s gas pricing is expected where in the event of an increase in gas costs or move towards Weighted Average Cost of Gas (WACOG), we do not rule out further price increases. The pricing power of fertiliser manufacturers to pass on the cost pressures, will be crucial.

Despite increasing fertiliser prices and stable off-take during the quarter, the three companies, including Fauji Fertiliser Company (FFC) Engro Fertiliser (EFERT) and Fauji Fertiliser Bin Qasim Limited (FFBL), reported a significant drop in the profits mainly due to the imposition of the super tax.

Recall that in the Federal Budget FY23, the sector was subject to a 10 per cent super tax on its CY21 income and a 4 per cent tax on income from CY22 onwards, resulting in a one-time higher tax charge in the second quarter of CY22.

The output tax on the fertiliser sector has been exempted, making the input tax a part of cost as per the Finance Act 2022. This will increase the manufacturing costs for the sector and will reflect in the financials from the third quarter of CY22 onwards.

The companies had already passed on the impact of the aforementioned by increasing urea prices during the outgoing month, taking retail price of urea to Rs2,200/bag (+Rs350/bag).

In the event of a rise in the gas prices or move towards WACOG to curtail gas circular debt, we do not rule out further price increases. The capacity of fertiliser manufacturers to pass on the cost pressures, will be crucial given the government’s pushback on urea prices the last time sector went for a price increase.

Even with the additional one-time tax charge, we believe that given expectations of a subsidy on phosphate fertilisers and the government’s increased focus on improving agricultural yields evident from the measures taken in the Federal Budget, will help the fertiliser sector stay in the limelight. The sector’s cash rich position directs at sustainable payouts for the future.