Tough business: Fertiliser sector expected to post losses for first quarter of 2012
Analysts view stock price drops as an opportunity to buy shares in blue-chip firms on the cheap.
KARACHI:
A combination of gas supply issues, plant shutdowns, and cheaper imports have led to abysmal sales for nearly all of the major companies in the fertiliser sector, and most of them are expected to post losses in the first quarter of 2012, according to analysts.
A series of reports on the sector from virtually every investment bank in the country paints a rather bleak picture.
“All of the local fertiliser players except the Fauji Fertilizer Company will post losses in the first quarter of 2012,” wrote Farid Aliani, a research analyst at BMA Capital, in a note issued to clients last week. “And even FFC will see its earnings go down by 29% compared to the same quarter last year.”
While gas rationing is a major issue, a key reason appears to be the availability of cheap, imported urea. Aliani says that the recent increase in the price of imported urea – from Rs1,300 per 50-kilogramme bag to Rs1,600 per bag – does not seem to have helped the fertiliser companies. “Our estimates suggest that urea sales for the month of March 2012 for local fertiliser players have declined in the range of 50% to 90% year on year,” he said.
Other analysts have offered some further explanations for the decline. “A decline in grain and crop prices have also resulted in lower sales during the month of February,” said Sarfaraz Abid, a research analyst at Global Securities, in a report sent to clients.
There were several company-specific issues as well. Engro Corporation seems to have suffered largely due to the shutdown of its $1.1 billion new urea manufacturing unit at Daharki. While that plant is supposed to receive a supply of 100 million cubic feet of gas per day, on the back of a sovereign guarantee, the government has not been able to meet its contractual obligations to Engro.
The worst hit, however, seems to be Fauji Fertilizer Bin Qasim (FFBL), a subsidiary of the Fauji Foundation and an affiliate company of FFC. “Sales for FFBL are expected to drop 90% during the first quarter of 2012,” said Aliani.
The reason appears to be an annual maintenance cycle that seems to have taken an unusual toll. “Urea production at FFBL remained dry during the first two months of the year,” said Hasan Rana, a research analyst at Invest Capital Markets, in a note shared with clients. “The prolonged shutdown ended in the middle of March and production has now resumed.”
Not a reason to sell
Yet if investors are thinking of fleeing these stocks, analysts caution them to wait, and indeed to further accumulate shares in fertiliser manufacturers. Their reason: these are just temporary hick-ups that have lowered the prices of otherwise stellar companies, making them cheap and compelling buys.
For Fauji Fertilizer Bin Qasim, for instance, the key value proposition going forward appears to be lower prices of phosphoric acid and phosphorus rock, key ingredients in the production of the fertiliser diammonium phosphate (DAP). Raza at InvestCap says that the prices of the acid and the rock have gone down by 9% and 5% respectively over the past quarter, which should help DAP sales for FFBL, which has currently priced its DAP fertiliser at Rs3,900 per bag, about 5.4% above the price of imported DAP. Once that reduction is passed on to FFBL, the locally manufactured DAP may become more competitive compared to the imported variety.
Meanwhile, as the winter passes and temperatures drop across the country, the domestic sector will use less gas as people no longer use heaters for their homes. That, in turn, should make some more gas available for the urea manufacturers.
A combination of gas supply issues, plant shutdowns, and cheaper imports have led to abysmal sales for nearly all of the major companies in the fertiliser sector, and most of them are expected to post losses in the first quarter of 2012, according to analysts.
A series of reports on the sector from virtually every investment bank in the country paints a rather bleak picture.
“All of the local fertiliser players except the Fauji Fertilizer Company will post losses in the first quarter of 2012,” wrote Farid Aliani, a research analyst at BMA Capital, in a note issued to clients last week. “And even FFC will see its earnings go down by 29% compared to the same quarter last year.”
While gas rationing is a major issue, a key reason appears to be the availability of cheap, imported urea. Aliani says that the recent increase in the price of imported urea – from Rs1,300 per 50-kilogramme bag to Rs1,600 per bag – does not seem to have helped the fertiliser companies. “Our estimates suggest that urea sales for the month of March 2012 for local fertiliser players have declined in the range of 50% to 90% year on year,” he said.
Other analysts have offered some further explanations for the decline. “A decline in grain and crop prices have also resulted in lower sales during the month of February,” said Sarfaraz Abid, a research analyst at Global Securities, in a report sent to clients.
There were several company-specific issues as well. Engro Corporation seems to have suffered largely due to the shutdown of its $1.1 billion new urea manufacturing unit at Daharki. While that plant is supposed to receive a supply of 100 million cubic feet of gas per day, on the back of a sovereign guarantee, the government has not been able to meet its contractual obligations to Engro.
The worst hit, however, seems to be Fauji Fertilizer Bin Qasim (FFBL), a subsidiary of the Fauji Foundation and an affiliate company of FFC. “Sales for FFBL are expected to drop 90% during the first quarter of 2012,” said Aliani.
The reason appears to be an annual maintenance cycle that seems to have taken an unusual toll. “Urea production at FFBL remained dry during the first two months of the year,” said Hasan Rana, a research analyst at Invest Capital Markets, in a note shared with clients. “The prolonged shutdown ended in the middle of March and production has now resumed.”
Not a reason to sell
Yet if investors are thinking of fleeing these stocks, analysts caution them to wait, and indeed to further accumulate shares in fertiliser manufacturers. Their reason: these are just temporary hick-ups that have lowered the prices of otherwise stellar companies, making them cheap and compelling buys.
For Fauji Fertilizer Bin Qasim, for instance, the key value proposition going forward appears to be lower prices of phosphoric acid and phosphorus rock, key ingredients in the production of the fertiliser diammonium phosphate (DAP). Raza at InvestCap says that the prices of the acid and the rock have gone down by 9% and 5% respectively over the past quarter, which should help DAP sales for FFBL, which has currently priced its DAP fertiliser at Rs3,900 per bag, about 5.4% above the price of imported DAP. Once that reduction is passed on to FFBL, the locally manufactured DAP may become more competitive compared to the imported variety.
Meanwhile, as the winter passes and temperatures drop across the country, the domestic sector will use less gas as people no longer use heaters for their homes. That, in turn, should make some more gas available for the urea manufacturers.