JS Securities Limited – Morning Briefing

Karachi, December 28, 2017 (PPI-OT): Fertilizers: Offtake declines YoY in Nov-17 but remains reasonable

National Fertilizer Development Company (NFDC) released fertilizer numbers for Nov-2017, wherein the offtake for the month clocked-in at 602k tons, a decline of 21% YoY but an increase of 60% MoM.

The decline in numbers on a YoY basis is mainly because of bumper sales witnessed in off-season months of Jun-2017 and Aug-2017.

With these readings, cumulative fertilizer sales during 11M2017 reached 5,175k tons vis-a-vis 4,598k tons in the corresponding period last year, reflecting an increase of ~13% YoY.

Amidst improving offtake and easing production levels due to shut down of three manufacturing plants, carry-over inventory during the month stood at a reasonable level of 506k tons vis-a-vis over 1mn tons witnessed at the start of the year.

DAP sales posted a similar pattern, declining by 21% YoY but increasing by 30% MoM to clock-in at 502k tons during Nov-2017. High base effect affected numbers here as well, given that average Nov sales during 2010- 2016 stands at ~363ktons, which actually implies above average sales.

We prefer Fauji Fertilizer (FFC, TP: Rs87) and Engro Fertilizers (EFERT, TP: Rs74) as our top picks in Pak Fertilizer space.

High base effect kicks in

National Fertilizer Development Company (NFDC) released fertilizer numbers for Nov-2017, wherein the offtake for the month clocked-in at 602k tons, a decline of 21% YoY but an increase of 60% MoM. We opine that the decline in numbers on a YoY basis is mainly because of bumper sales witnessed in off-season months of Jun-2017 and Aug-2017. Note also that Nov-2016 is a high base for current calculations as the month registered major gains from fertilizer subsidy announced in June-2016.

Historical analysis suggests that average Nov sales during 2010 to 2016 have remained at ~581k tons. This implies that sales numbers for Nov-2017 were actually impressive and 3.6% higher than the last six years average. Across the board decline was posted by all manufacturers except Fauji Fertilizer Bin Qasim (FFBL, up 15% YoY on enhanced urea capacity) and imported fertilizer sales by NFML (+60% YoY but overall quantum remains negligible at 9k tons). With these readings, cumulative fertilizer sales during 11M2017 reached 5,175k tons vis-à-vis 4,598k tons in the corresponding period last year, reflecting an increase of ~13% YoY.

Reduction in inventory levels is encouraging

Amidst improving offtake and easing production levels due to shut down of three manufacturing plants, carry-over inventory during the month stood at a reasonable level of 506k tons vis-a-vis over 1mn tons witnessed at the start of the year. To recall, three fertilizer plants (FatimaFert, Agritech and Pak Arab) with combined installed capacity of ~893k tons remain shut for the time being as expensive LNG or otherwise non-availability of gas has rendered plant operations infeasible. This has helped industry reduce inventory levels to benign levels.

Rising CAN offtake keeping FATIMA in the game

Shut down of recently acquired Dawood Hercules plant (now FatimaFert) has dented Fatima Fertilizer’s (FATIMA) urea offtake of late but rise in CAN offtake is keeping it in the game. During Nov-2017, NP and Urea sales declined by 15% YoY and 45% YoY to clock-in at 48k tons and 40k tons respectively. On the other hand, CAN sales have increased by 89% YoY to 38k tons. Overall during 11M2017, CAN sales have improved by 54% YoY to 460k tons whereas NP sales have declined by 4% YoY to 377k tons.

Similar trend in DAP sales

DAP sales posted a similar pattern, declining by 21% YoY but increasing by 30% MoM to clock-in at 502k tons. High base effect affected numbers here as well given that average Nov sales during 2010-2016 stands at ~363ktons, which actually implies above average sales. Fauji Fertilizer Bin Qasim’s (FFBL) locally manufactured DAP posted decline of 8% YoY to 194k tons and major importers such as Fauji Fertilizer Company (FFC) and Engro Fertilizers (EFERT) showed slowdown in sales. Overall during the month, FFBL retained the highest market share in the DAP segment (39%) followed by EFERT (24%) and FFC (13%). Cumulatively during 11M2017 however, DAP sales have risen by 9% YoY to clock- in at 2,228k tons with FFC’s imported DAP leading in terms of gains (+141% YoY improvement in offtake to sell 483k tons of DAP).

The industry closed the month with DAP inventory in-hand of 150k tons. It is worth highlighting that DAP import activity during the month remained slim with major players like FFC and EFERT remaining inactive in the import market. We attribute this to general volatility in DAP prices observed over the last two months and sufficient inventory levels to survive the month of Nov-2017.

Pak fertilizers shine amidst tumultuous market

We prefer Fauji Fertilizer (FFC, TP: Rs87) and Engro Fertilizers (EFERT, TP: Rs74) as our preferred picks in Pak Fertilizer space. Key risks to our investment thesis include (1) weak agronomics, (2) weaker than expected price levels and (3) larger than expected increase in gas prices.

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