November-10 Fertilizer Numbers: Good things still happening!

November proved to be the month of Urea: During the month of November, Urea offtake registered an increase of 76% YoY to 879k tons on the back of healthy demand for Wheat sowing. DAP on the other hand, declined by 36% YoY to 180k tons as major stock had been accumulated during September and October (627k tons).

11MCY10 – DAP/Urea sales down 19%/1.2% YoY: During the 11-month period, both Urea and DAP witnessed a decline, with total offtake standing at 5,497k tons (-1.2% YoY) and 1,227k tons (-19% YoY) respectively. CY10 sales would comfortably meet our target of 5.8mn tons Urea offtake (-10% YoY) and 1.4mn tons DAP (-20% YoY).

Engro ups Urea price by PKR190/bag to compensate gas curtailment: In response to the recent decision regarding the curtailment of gas, Engro increased its Urea price by PKR190/bag to offset the losses. In case of FFC, it will be the major beneficiary in this scenario with a net positive impact of PKR1.57/share (gets its entire gas from Mari) followed by Engro with a marginally positive impact of PKR0.04/share (old plant gets gas from Mari while new plant will get it from Sui).

We reiterate our positive stance on the sector: Revising our numbers and incorporating the impact of the recent gas curtailment we maintain our ‘Hold’ stance on FFC and FFBL. We have rolled forward our PT to December-11. FFC/FFBL offers an upside potential of 7%/3% to our December-11 PT of PKR132/PKR39.

Urea up 76% YoY during Nov’10

76% YoY jump in Urea offtake is primarily attributable to start of the Wheat sowing season. Being major producers of Urea, both FFC and Engro benefited, registering 126% YoY and 76% YoY rise in offtake respectively. Superior growth for FFC compared to Engro resulted from FFC’s strong presence in the Punjab region as significant portion of Urea demand during November comes from this region. Compared to Urea, DAP offtake numbers were fairly disappointing as Rabi season’s sowing is over.  Overall we maintain our model assumptions for annual Urea and DAP offtake for both FFC and Engro, as we had already incorporated the growth in Urea offtake in our forecasts.

Increase in Urea Prices was pre- anticipated

In response to 1) 45 days closure and 20% curtailment of gas for all fertilizer plants getting their supply from Sui network and 2) 12% curtailment of gas for plants getting gas from Mari gas field, Engro increased its Urea price by PKR190/bag to offset the losses. We anticipate only a marginal improvement in bottom line of PKR0.04/share for Engro. In case of FFC, we estimate PKR1.57/share upside in CY11 EPS, after adjusting for losses from gas curtailment (including an efficiency loss of 2mmbtu/ton). Losses for FFC are limited since it gets its entire gas from Mari (In case of Engro, the old plant gets gas from Mari while new plant will get it from Sui).

Positive stance on the sector

Revising our estimates and incorporating the impact of the recent gas curtailment we maintain our ‘Hold’ stance on FFC and FFBL. We have rolled forward our PT to December-11. FFC/FFBL offers an upside potential of 7%/3% to our December-11 PT of PKR132/PKR39.

Economic & Political News

SBA extended by nine months

Pakistan’s request to the IMF to extend the Stand-By Arrangement (SBA) by nine months, stands approved, it is reliably learnt. The Board members will now receive a detailed briefing from the Fund staff on Pakistan’s performance under the Stand-By Arrangement on January.
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