AKD Securities Limited — CY14 Fertilizer Review

Karachi, January 27, 2015 (PPI-OT): Fertilizer numbers for Dec’14 have recently been released by NFDC. In line with AKD Securities Limited’s expectations, CY14 urea sales fell from 5.89mn MT in CY13 to 5.63mn MT in CY14, down 4%YoY. Imported urea sales went down by 29%YoY as production from the local players particularly EFERT increased by 17% to 1.82mn tons.

The decline in fertilizer sales is attributable to weak farm incomes on the back of depressed commodity prices coupled with persistently high urea prices as manufacturers passed on the GIDC impact (average urea retail prices up 5%YoY). On the other hand, CY14 DAP sales increased marginally by 2%YoY from 1.625mn tons in CY13 to 1.655mn tons in CY14. With no major volumetric growth in CY15 and weak pricing power, AKD Securities Limited maintains AKD Securities Limited’s Market weight stance on the sector. At current levels, AKD Securities Limited continues to prefer FATIMA (TP:PkR40/sh) and EFERT (TP: PkR85/sh) while FFC can be considered as a pure dividend play (CY15F D/Y:11.3%).

Decreasing farm income hurting fertilizer sales: During the period under review, AKD Securities Limited sees total urea sales sliding by 4%YoY to 5.63mn tons, while at the same time locally manufactured urea off take was realized at 4.87mn tons, up 1%YoY. Furthermore, 5%YoY increase in urea prices on the back of passing on the incremental GIDC impact at a time when global commodity prices are going through a downward cycle also negatively affected farmers’ propensity for urea consumption.

However, on a MoM basis, following its historic trend, urea sales picked up in December, posting 40%MoM improvement as wheat sowing season supported higher demand. Going forward, AKD Securities Limited expects urea demand to remain robust in Jan’15 owing to requirement of urea for the second dressing on the wheat crop. On the flip side, total DAP sales increased by mere 2%YoY during CY14 to 1.65mn tons vs. 1.62mn tons in the same period last year.

Relative stability in the DAP sales was witnessed on the back of 8% increase in the wheat support prices coupled with 6%YoY decrease in average DAP prices for the period under review. On a sequential basis, however, total DAP off take came off sharply by 42%YoY in Dec’14. Going forward, with most of the sowing of wheat already completed, demand for DAP is likely to cool off in the upcoming months.

Company-wise breakup: Urea market share for FFC/EFERT/FATIMA in CY14 was recorded at 42%/32%/7%, respectively, where EFERT (up 4ppt) remained the major gainer along with FATIMA (up 1ppt). In Dec’14, FFC sold 209k tons (-8%YoY/+5% MoM), EFERT sold 183k tons (+7%YoY/+9%MoM) and FATIMA sold 48k tons (+15%YoY/+28%MoM) of urea. The month under review remained dull for DAP off take where imported DAP sales fell by 45%MoM to 149k tons, along with FFBL which sold just 71k tons of DAP (down 34%MoM). With most of the sowing of wheat already completed, demand for DAP likely cooled off.

Outlook and investment perspective: With little respite in sight for global commodity prices, AKD Securities Limited believes the country’s urea demand in CY15 is likely to fall between 5.5mn-5.7mn tons. This coupled with the sector’s ability to produce 5+mn tons of urea per annum will help to discourage exuberant levels of urea imports, which were last seen during CY09.

However, with farmer economics already going through a down cycle it will be a tough task for fertilizer manufacturers to fully pass on any sharp increase in cost owing to gas tariff rationalization and historical low discount between domestic and int’l urea prices. In this regard, AKD Securities Limited a Markets Weight stance on the fertilizer sector where AKD Securities Limited flags EFERT (Dec’15 TP: PkR85/share) and FATIMA (Dec’15 TP: PkR40/share) as AKD Securities Limited’s preferred plays. At the same time, AKD Securities Limited points to FFC (CY15F D/Y:11.3%) as a pure dividend play in a low interest rate environment.

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