Fertiliser sector’s margins fall

KARACHI:

The performance of fertiliser companies suggests that higher costs had affected their gross margins in 2022.

Gross margins of major companies dropped mainly due to high input costs despite higher retention prices during 2022, JS Global fertiliser sector analyst Waqas Ghani Kukaswadia said in a report.

The sector got exemption from output tax on fertiliser, making input tax part of the cost as per Finance Act 2022.

It also increased manufacturing cost in the second half of calendar year 2022 (2HCY22), which the industry attempted to shrug off by increasing urea prices by around Rs350, taking it to Rs2,200 per bag post-budget, Kukaswadia added.

Market dynamics have impacted customers also. Currently, farmers are paying high rates of urea, which have jumped to Rs800 at controlled price and over Rs1,000 in open market, Concave Agri Services President Muhammad Ali Iqbal said.

Amid rising cost of raw material and natural gas together with smuggling of fertiliser to neighbouring countries, the companies have failed to address demand-side issues. This has also given a free hand to black market dealers, besides aggravating the farmers’ hardships, he said.

Agriculture Republic Co-founder Aamer Hayat Bhandara said the price of urea in February 2022 ranged between Rs1,800 and Rs1,980 per bag.

Fauji Fertiliser Company (FFC) reported unconsolidated earnings per share (EPS) of Rs4.09 for the fourth quarter of 2022, almost flat on a year-on-year basis. Cumulative EPS for the year was Rs15.76, down 8% YoY, Kukaswadia cited.

The company’s top-line for CY2022 came in at Rs109 billion while gross margins clocked in at 37% which were 0.8 percentage points higher than last year due to better retention prices.

Other income was higher due to increase in interest rates while dividend from wind power plants provided further support, he stated.

FFC announced a cash dividend of Rs3.15 per share along with 4QCY22 results, taking CY22 dividend payout to Rs12.13 per share.

“In calendar year 2022, there were external reasons for companies as well as internal reasons of their own which affected their margins,” Arif Habib Limited fertiliser sector analyst Muhammad Iqbal remarked.

Engro Fertilisers reported a profit of Rs4.80 per share during 4QCY22 compared to EPS of Rs4.62 in 4QCY21. The company showed a decrease of around 4 percentage points quarter-on-quarter (QoQ) in gross margins for 4QCY22, mainly due to lower sales, higher repair and maintenance charges and higher costs due to elevated gas rates, JS Global analyst said, adding that operational costs for Q4 came in higher mainly led by increased transportation costs.

According to the management, dwindling foreign currency reserves are expected to challenge operations due to restrictions on imports of chemicals, essential materials and other inputs required to manufacture urea, he explained.

Also, the gas pressure enhancement project requires a significant capital, therefore, the availability of reserves is crucial for timely completion of the project to avoid shortage that may affect production.

The quarter came in higher (+192% YoY) due to higher interest rates during the period, Kukaswadia said.

Result for 4QCY22 was higher than expectations mainly due to a tax reversal on the provision of 6% super tax applied on CY21 profits following a stay order of the Sindh High Court.

The management is of the view that since taxes cannot be applied retrospectively, 6% tax charged of the total 10% was discriminatory, the analyst added. It is worth mentioning that the company is subject to an annual 4% super tax.

Prices have risen exorbitantly in 2022, and have almost doubled other than urea, said Sindh Abadgar Board (SAB) Senior Vice President Mahmood Nawaz Shah. Urea prices rose to Rs2,300 in different phases.

Following recent floods, the uptake of fertiliser was slow, leading to a decline in margins, he said

Fauji Fertiliser Bin Qasim (FFBL) posted unconsolidated earnings of Rs2.3 billion (EPS Rs1.8) for CY22, down by 64% YoY, Kukaswadia said.

For 4QCY22, the company reported profitability of Rs615 million (EPS Rs0.48), down by 156% YoY. On a consolidated basis, FFBL recorded EPS of Rs5.92 for CY22, a 15% YoY decline.

Finance cost for the company increased by 120% YoY to Rs5.1 billion in tandem with rising interest rates, whereas other income fell due to lower-than-expected dividend income from subsidiaries.

Published in The Express Tribune, February 24^th, 2023.

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