Higher urea prices drive fertiliser sector profits up

Faseeh Mangi April 30, 2010

KARACHI: Higher urea prices help Fauji Fertiliser and Engro Fertiliser’s net profit go up for the quarter ended March 31 against the same period last year.

Fauji Fertiliser Company Limited posted below expectation earnings of Rs2.73 billion in the first quarter of 2010 against profits of Rs2.69 billion last year. The profit of Engro Fertiliser Limited rose to Rs773 million in the first quarter of the year. Urea prices have increased 12 per cent to Rs760 per bag yearon- year. Urea is widely used in fertilisers as a convenient source of nitrogen.

The price of urea increased because of the recent shortage of urea in the domestic market. The government’s gas load management plan is going to dent the profit of the fertiliser sector in the coming months, analysts predict. Fauji fertiliser company Sales of Fauji Fertiliser Company (FFC) increased by 15 per cent to Rs9.5 billion in the quarter ended March 31 against Rs8.3 billion recorded in the same period last year.

“Decline in gross margins of Fauji Fertiliser to 43 per cent reduced the impact of the revenue growth,” said JS Global Capital. The company’s distribution cost went up 19 per cent to Rs 903 million in the first quarter of 2010. Engro corporation Engro Corporation, parent company of Engro Fertiliser, posted a net profit of Rs1.9 billion in the first quarter of 2010 compared to Rs684 million posted in the same quarter last year.

Engro Fertiliser Limited and Engro Eximp, Engro subsidiaries, were the main drivers of the company’s earnings growth. The main reason for the increase in Engro Eximp’s (the trading arm of Engro) profit is that they imported Dap fertiliser and sold it in the local market at a higher price. The profit of Engro Eximp rose to Rs897 million.

Gas curtailment and its impact “Gas curtailment is highly likely to affect the fertiliser business,” said JS Global Capital analyst Bilal Qamar. As per the gas load management plan, the government suggests 15-20 per cent reduction in gas supply to the fertiliser sector for a period of two to three months. “If the gas supply is reduced by 20 per cent, Engro Fertiliser will take a 20 per cent hit in its production,” added the analyst. “Engro Fertiliser’s earnings will decline by 64 per cent to Rs3.9 per share in 2011.

Fauji Fertiliser Company and Fauji Fertiliser Bin Qasim Limited earnings on the other hand will witness a fall of 27 per cent and 31 per cent, respectively,” said JS Global Capital analyst. Fauji Fertiliser Bin Qasim earlier this month announced a sharp increase in net profit to Rs808 million as compared to Rs13 million in the same period last year.

Dawood Hercules still have not announced earnings for the quarter ended March 31. Domestic urea prices will increase Rs10-15 per bag for every month of gas supply curtailment, said KASB Direct analyst Farrah Marwat. Fertiliser producers are still in talks with the government to reach a consensus solution to the issue.