Fertiliser sector eyes high profit

Research house forecasts 104% YoY earnings boost, driven by rising prices of urea, DAP

LAHORE:

Fertiliser sector profits are poised to surge by Rs36 billion on a year-on-year basis, driven primarily by elevated retention prices of this crucial commodity. Topline Securities projects a 104% YoY increase in fertiliser earnings to Rs25 billion in the fourth quarter of the calendar year 2023. This surge is attributed to a spike in retention prices, leading to higher gross margins. However, on a quarter-on-quarter basis, earnings are anticipated to remain flat due to lower volumetric sales of Urea.

This boost is expected to elevate full-year 2023 after-tax earnings to Rs63 billion, up 63% YoY, propelled by higher gross profit amid increased prices and DAP sales.

The report further predicts an 8% YoY decline in urea sales and a 1.7 million tons QoQ drop in 4Q2023. However, DAP offtake is anticipated to increase by 24% YoY and 20% QoQ to 576,000 tonnes during the same period. This is likely to bring 2023 Urea and DAP sales to 6.64 million tonnes (up 0.4% YoY) and 1.57 million tonnes (up 31% YoY), respectively.

The average Urea MRP during 4Q2023 increased by 35% YoY and 9% QoQ to Rs3,349 per bag. Companies have passed on cost pressure to final consumers. Moreover, DAP prices have increased by 14% YoY and 16% QoQ to average around Rs12,491 per bag, in line with international prices and currency devaluation.

Recall that the government raised fertiliser gas prices to Rs580/mmbtu for feed and Rs1,580/mmbtu for fuel, effective from October 2023, the report added.

The gross margin of the sector is expected to increase by 8 percentage points to clock in at 28% in 4Q2023, compared to 20% in the same period of 2022. In full year 2023, the sector's gross margin is expected to reach 27%, compared to 26% in 2022.

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Finance costs of the sector during 4Q2023 are expected to decline by 45% YoY and 35% QoQ to Rs2.7 billion, primarily due to a decline in borrowings of the sector. The total debt of the sector reduced from Rs152 billion in December 2022 to Rs58 billion as of September 2023.

Looking at specific manufacturers, Topline Securities expects Fauji Fertiliser Company to post unconsolidated EPS of Rs8.2 (up 100% YoY) in 4Q2023. The increase in earnings is mainly due to a 4-percentage-point increase in gross margins to 36% in the same period, led by higher Urea prices and a 29% YoY decline in finance cost.

Along with the result, the company is expected to announce a cash dividend of Rs6/share, taking the 2023 dividend to Rs17.4/share.

For Engro Fertilisers (EFERT), expectations for consolidated EPS stand at Rs7.2 in 4Q2023, compared to EPS of Rs4.8 in the same period of 2022, up 51% YoY. The YoY jump in earnings is due to higher gross margins and lower financial charges. Gross margin is expected to improve by 6 percentage points to 28% in 4Q2023, compared to 23% in the same period of 2022, mainly due to an increase in Urea prices and the absence of repair charges recorded last year.

Along with the result, the company is expected to announce a cash dividend of Rs7/share, taking the 2023 dividend to Rs19.5/share. For Fauji Fertiliser Bin Qasim (FFBL), expectations are for an unconsolidated EPS of Rs3.8 in 4Q2023, a significant increase from the EPS of Rs0.5 in the same period of 2022.

Published in The Express Tribune, January 23^rd, 2024.

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