Fertiliser sector benefits from strong DAP off-take

KARACHI: Profitability of the four listed fertiliser companies — Dawood Hercules (DAWH), Engro Chemical, Fauji Fertiliser (FFC) and Fauji Fertiliser Bin Qasim (FFBL) — for the last reporting season three-quarters ended Sept 30, 2009 stood at Rs 10 billion.

Analysts at Arif Habib Limited in their report on the sector observed: ‘Overall sector’s profitability has benefited from strong urea pricing power and resurgence in Di-Ammonium Phosphate (DAP) off-take.

The FFBL recorded the highest increase in profits (232 per cent) due to robust DAP sales which also reduced requirements for working capital financing, resulting in lower financial charges.’ The cumulative earnings of all companies, however, declined by 13 per cent year-on-year.

DAP sales in the nine months to Sept 30 stood at 1.1 million tons, which analyst Syed Muhammad Kamran at Atlas Capital termed ‘gargantuan ascent of 5.77 times compared to off-take achieved in the nine months of last year.’

He attributed the huge increase in sales to low DAP prices during 9MCY09 compared to the 9MCY08 coupled with lower base effect of DAP sales due to plant shutdown of FFBL in 1Q/CY08.’

Fertiliser sector watchers at another brokerage firm forecast DAP to close the current calendar year with sale of 1.6 million tons; the highest in four years: 2008 sales stood at 0.8 million tons; 2007: 1.4 million tons and 2006: 1.5 million tons.

Various reasons were cited by analysts for the robust demand in the latest nine months, which included improvement in farm income and sharp decrease in phos acid prices, which ensured significant improvement in the primary margins on DAP.

Key points of the fertiliser sector performance for the nine months to Sept 30, 2009 noted by analyst Shahbaz Ashraf at the Arif Habib Limited in his report released early this month included: (1) Increase in net sales by 53 per cent YOY, which was primarily on account of 15 per cent YOY jump in Urea off-take, phenomenal rise of 280 per cent in (DAP) volumes and increase in urea prices. Total Urea and DAP off-take for 9MCY09 period stood at 4.6 million and 1.1 million tons respectively posting a surge of 15 per cent and 28 per cent. Better urea sales was credited to timely import of 1.0 million tons by the Trading Corporation of Pakistan and significant rise in DAP off-take owing to lower prices and low base affect; (2) Average gross profit margin declined to 32 per cent from 38 per cent in the same period last year. This was primarily due to surge in fuel stock, feed stock prices and higher phosphate volumetric sales. Phosphate products have lower primary margins in contrast to urea. Most importantly feedstock subsidy for FFBL came to an end which swelled cost of sales consequently denting gross profit Margins; (3) Selling and distribution expenses went up by 33per cent YOY due to higher volumetric sale and rising freight charges; (4) Financial charges went down by 7 per cent YOY to Rs 3,968 million, mainly on account of lower finance cost recorded by FFBL on account of lower working capital requirement due to lower DAP inventory; (5) ‘Other income’ decreased by 23 per cent YOY. The reason for this was decline in income for associate companies of FFBL and DAWH. On the flip side ‘other income’ of FFC posted YOY increase of 77 per cent, on account of significant contribution from treasury income and (6) Impairment on available for sale investments was recorded at Rs2,599 million, mainly on account of decline in market value of equity investments held by DAWH.

Going forward analyst Shahbaz observed that given the robust demand outlook and favorable government policies, fertiliser sector may yield better results.

‘We anticipate total urea demand to be 6.2 million tons for CY2009 out of which 4.6 million tons has been witnessed in 9MCY2009. DAP off-take is expected to be 1.6-1.8 million tons for CY2009 on the back of improved farmers’ liquidity and stable price outlook,’ concludes the analyst.