Yet another disappointing month due to floods!

Floods continued to have its negative impact on the offtake of fertilizers during August’10, where Urea and DAP witnessed YoY decline of 49.6% and 75.5% respectively. This decline is primarily attributable to uncertainties regarding soil condition for the upcoming Rabi season. However, we believe that fertilizer offtake will recover during the remaining portion of the current calendar year on the back of 1) Canola sowing under the Canola Sowing Policy (which started in early September) and 2) improved soil quality for wheat sowing once Canola is harvested (we estimate full year Urea and DAP offtake at the level of 5.8mn tons (-10% YoY) and 1.2mn tons (-30% YoY) respectively). Furthermore, healthy prices and strong industry margins will result in reasonable profitability growth for the manufacturers during the fourth quarter. Hence, we maintain our positive stance on the sector, with accumulation in FFC and FFBL at current levels.

Uncertain soil conditions continue to restrict fertilizer offtake

Urea offtake plunged by 49.6% YoY to 302kT during August’10 (-7.6% YoY during 8MCY10). Similarly, DAP dispatches fell by 75.5% YoY to 50kT (-53.8% YoY during 8MCY10). Unlike last year where farmers collected a hefty amount of fertilizer during 3QCY10, uncertain soil condition for the upcoming season restricted them from accumulating their crop inputs, hence, resulting in lower offtake during August’10.

Offtake to pick-up significantly during the remaining portion of CY10

Despite another disappointing month, we continue to believe that fertilizer offtake (both Urea and DAP) will post significant growth during 4QCY10 with uncertainties regarding soil conditions tapering off. Simultaneously, Canola sowing policy, recently announced by the government, will encourage healthy usage of nitrogenous fertilizer (Urea). Moreover, sowing of Canola in flood affected areas is expected to improve the soil quality for the wheat sowing in Rabi season, which could lead to fast recovery of DAP offtake.

Demand recovery combined with strong margins to bode well for manufacturers

As a result of a strong demand recovery likely during the remaining portion of CY10, we expect cumulative Urea and DAP offtake to reach 5.8mn tons and 1.2mn tons respectively by the year end. Resultantly, given the strong industry margins, we believe the sector will enjoy reasonable earnings growth during the last quarter (CY10E EPS of FFC/FFBL estimated at PKR14.44 /PKR4.85) creating excitement in the share price of the scrip.

Investment Perspective – Time to take exposure in fertilizers!

We maintain our positive stance on the sector given our expectation of healthy demand recovery along with firm prices. We believe current market prices provides investors an opportunity to make healthy returns as strong estimated 4Q earnings will likely lead the sector to outperform the market. Hence, we recommend accumulation at these levels with our June’11 PT for FFC and FFBL of PKR123/share and PKR39/share respectively.

RGST rate to be on higher side: flood tax may be imposed on large property owners, says Hafeez

Dr Abdul Hafeez Shaikh hinted at imposition of flood tax on owners of large properties and those having large-scale lands not affected by floods to collect tax from those with capacity to pay. The Minister said that the base ‘reformed GST’ rate would remain at 15%. However, due to the flood needs, the rate could be kept higher for some time. If more revenue is needed for flood victims, the government would make an upward adjustment in the rate of sales tax. Ruling out the possibility of 10% income tax surcharge, Hafeez said that the figure of 10% for imposition of income tax surcharge is not correct. “The figure of income tax surcharge would be on the lower side, but it would not be definitely 10%. The income tax surcharge would not be applicable on income”, he added.

Analyst Certification:
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy:
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures:
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures:
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk

Contributed By