October-10 Fertilizer Offtake: Spotlight remains on DAP (+170% YoY)!

DAP offtake up 170% YoY; Urea sales stable: During the month of October, in line with our expectation, offtake of DAP jumped 170% YoY to 371k tons, primarily on the back of accumulation for the ongoing Rabi sowing season. However, Urea sales remained stable at the level of 427k tons.

10MCY10 – DAP & Urea sales down 15% YoY & 9% YoY respectively: During the 10-month period, both Urea and DAP witnessed a decline to 4,618k tons (-9% YoY) and 1,047k tons (-15% YoY) respectively. The suppressed demand was mainly due to devastation of the recent floods.

Positive stance – FFBL to benefit the most! We anticipate full year CY10 Urea and DAP offtake at the level of 5.9mn tons (-9% YoY) and 1.5mn tons (-13% YoY) respectively, implying 4Q Urea/DAP offtake of 1,689k tons/ 798k tons correspondingly down 8%/ up 34% YoY. Consequently, we anticipate FFBL to be the main beneficiary during 4Q.

170% YoY jump in DAP offtake during Oct’10

October witnessed significant DAP offtake, up 170% YoY to 371k tons during the month, as farmers stepped up purchases for the Rabi season. However, for Urea, offtake remained stable at the level of 427k tons. During the 10-month period, both Urea’s and DAP’s cumulative sales registered negative growth of 9% YoY to 4,618k tons and 15% YoY to 1,047k tons respectively, primarily attributable to lower sales in anticipation of poor soil condition post flood during the previous months.

Massive recovery in DAP offtake during 4Q to bode well for FFBL

With wheat sowing season already started in Oct-Nov, overall fertilizer dispatches (both Urea and DAP) will likely post significant growth during 4QCY10 and with uncertainties regarding soil conditions gradually tapering off. We expect 4QCY10 Urea and DAP sales at 1,580k tons/ 670k tons respectively, taking CY10 offtake to 5,770k tons/ 1,345k tons, down 11%/ 20% on YoY basis. Moreover, we believe FFBL will be the main beneficiary during 4Q, being the sole manufacturer of DAP, given its phenomenal demand recovery.

Positive stance on the sector

Combined with strong demand of DAP, healthy primary margins hovering around USD200-225/ton will lead to healthy earnings growth during the last quarter for FFBL (4QCY10 EPS of FFBL estimated at PKR1.71). Moreover, with FFBL share price gaining momentum, FFC will also bear fruits with its holding of 50.9% in the scrip (4QCY10 EPS of FFC estimated at PKR4.09). Hence, we recommend accumulation at current levels with our June’11 PT for FFC and FFBL at PKR123/share and PKR39/share respectively.

Economic & Political News

FBR notifies cut in turnover tax for refineries, OMCs

The Federal Board of Revenue notified reduction in turnover tax from 1% to 0.5% for refineries and Oil Marketing Companies (OMCs). Asrar Raouf FBR Member Direct Tax Policy and official spokesman said the notification on reduction in the rate of turnover tax has been signed following clearance from the Law and Justice Division. The FBR has also allowed 80% rebate on payment of turnover tax by pharmaceutical distributors, distributors of fast moving consumer goods and distributors of fertilisers. This is subject to the condition that the annual sales of the said categories of taxpayers should be over PKR1bn.
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.
Disclaimer

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. 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