Aug-11: Low base and higher gas availability leads to fertilizer offtake growth

Urea offtake gathers steam while DAP remains strong: Aug-11 Urea offtake increased by 84% YoY, which was mainly due to low base effect and higher gas flows to fertilizer plants coupled with prompt imports during the month. 8MCY11 cumulative Urea offtake declined 4% YoY to 3.7mn tons. However, DAP dispatches witnessed an increase of 53% YoY to 77k tons during Aug-11 – taking 8MCY11 sales to 522k tons, up 24% YoY – primarily due to low base effect and on the back of early inventory pile up for the upcoming Rabi season.

Demand recovery combined with vigorous margins to lift earnings growth: We expect cumulative Urea and DAP offtake to reach 6.2mn tons and 1.4mn tons in CY11 (up 2% YoY and 8% YoY respectively). Strong DAP price displacing the increase in Phosacid’s price will lead to primary margin settling above USD250/ton during CY11.

Investment perspective: Our Jun-12 PT for FFC, FFBL and FATIMA stand at PKR178, PKR51 and PKR26 respectively. We have a BUY stance on FFC and FATIMA while we maintain a hold call on FFBL.

Urea offtake gathers steam while DAP remains strong

Urea sales halted its downward trajectory witnessed during the last 7 months, and subsequently posted 84% YoY growth in dispatches during Aug-11, which proliferated from low base effect and higher availability of urea during the month. Higher urea availability during the month emanated from prompt imports of urea (up 58% MoM) coupled with increased gas flows to fertilizer plants. However, urea offtake during 8MCY11 was down 4% YoY to 3.9mn tons owing to lower imports along with production losses caused by gas curtailment during 1HCY11. DAP dispatches continued its upward momentum during August(up 53% YoY) owing to low base effect of CY11. The devastating floods of CY10 had caused severe damages to the crops and stimulated unpredictability amongst farmers regarding soil fertility. Low base paralleled with inventory pile up during April-July, for the current year’s Rabi season caused 8MCY11 dispatches to rise by 24% YoY to 0.52mn tons. Albeit, DAP dispatches decelerated on MoM basis during August (down 42%), it was primarily due to seasonality taking its toll coupled with farmers shifting down gears on inventory building for the Rabi season.

Demand recovery combined with vigorous margins to lift earnings growth

As a result of a strong demand recovery likely during the remainder portion of CY11, we expect cumulative Urea and DAP offtake to reach 6.2mn tons and 1.4mn tons by the year end, up 2% YoY and 8% YoY respectively. Strong DAP price displacing the increase in Phosacid’s price will lead to primary margin settling above USD250/ton during CY11. With Urea shortage likely to prevail in country due to gas curtailment/ shutdowns during the winter season, urea prices will likely remain firm and hence continue filtering down to EBITDA margin expansion. Resultantly, given the strong industry margins, we believe the sector will enjoy stellar earnings growth during 2HFY11 (CY11E EPS of FFC/FFBL estimated at PKR19.77/PKR9.63, up 52% YoY and 38% YoY respectively)

Economic & Political News

FBR surpasses target by PKR15.4bn in 1QFY12

Despite devastating floods in Sindh, and the prevailing slowdown in the country, the Federal Board of Revenue (FBR) has managed to surpass the tax collection target of PKR320bn by collecting PKR335.4bn in 1QFY12. Sources added that the FBR is committed to meet the budgetary revenue collection target of PKR1,952bn during 2011-2012.

India announces support to EU duty waiver for Pakistan: bilateral trade to be raised to USD6bn in 3years

India has announced support for Pakistan’s EU waiver package bid in World Trade Organisation (WTO). Ministers of both the countries agreed to jointly work to more than double bilateral trade within 3years, from current levels of USD2.7bn/annum to about USD6bn.

ADB to scale up infrastructure development funds to USD1bn

The Asian Development Bank (ADB) wants to enhance its funding for infrastructure development projects in Pakistan to USD1bn/year. Currently ADB’s funding was averaging at USD600 to USD700mn.
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