AKD Quotidian about — Aug’13 Fertilizer Off take Update

Karachi, September 26, 2013 (PPI-OT): According to official statistics released by the National Fertilizer Development Centre (NFDC), urea off take for 8MCY13 has clocked in at 3.7mn tons, a growth of 7%YoY, while DAP off take during the same period has clocked in at 589k tons, a robust growth of 39%YoY.

According to AKD Securities among major players, urea off take for ENGRO has posted a significant growth of 66%YoY to 902k tons in 8MCY13 while off take of imported urea continued to decline, posting a decline of 34%YoY to 628k tons. Notaby, FFBL’s DAP off take during 8MCY13 was up by 1.9xYoY while FATIMA’s CAN and NP off takes also recorded sizable growth of 27%YoYand 41%YoY to 292k tons and 205k tons, respectively. In Aug’13, total urea off take recovered to 515k tons, an impressive 60%YoY growth, where robust production by ENGRO (165k tons) on the back of improved gas supply contributed to the growth.

Going forward, while gas tariff rationalization and specifics of the gas load management are still awaited, international fertilizer dynamics are also in the limelight as urea prices continue to decline while DAP margins may witness another uptick with a possible decline in phosacid contract price for 4QCY13. AKD Securities expects strong earnings growth across the sector during 2HCY13 where higher demand, improved gas supply and an uptick in DAP PMs underpin AKD Securities cases for ENGRO (TP: PkR191) and FFBL (TP: PkR51).

Fertilizer Off take

(000 tons)               8MCY13          YoY       Aug'13       YoY        MoM
Urea                      3,689           7%         515        60%        11%
DAP                        589           39%          84        58%         4%
                                  Company Wise Off take Urea
FFC                       1,586           8%         198        24%        -2%
FFBL                       172           -5%          34        54%        60%
ENGRO                      902           66%         162       107%        38%
FATIMA                     216            9%          37       155%        39%
NFML                       628          -34%          46        17%       -25%
FFBL                       347           96%          50       196%        24%
ENGRO                      136            4%          27       156%        -8%
                                        Other Products
FATIMA (CAN)               292           27%          34        12%         7%
FATIMA (NP)                205           41%          31        32%        17%

Source: NFDC, AKD Research

Aug’13 Review: Urea off take during Aug’13 clocked in at 515k tons, up by 60%YoY/11%MoM, leading to cumulative off take growth of 7%YoY to 3.7mn tons in 8MCY13. Total urea production during Aug’13 was up by a sizable 50%YoY to 471k tons (a 2-year high), where higher gas supply to ENGRO resulted in robust production of 165k tons for the company. FATIMA’s NP off take of 31k tons during Aug’13 resulted in cumulative

China Fertilizer Tariff Schedule

8MCY13 off take of 205k tons, a notable 41%YoY growth. FFBL’s DAP off take continued the uptrend, clocking in at 50k tons in Aug’13, leading to a 96%YoY growth in cumulative 8MCY13 off take to 347k tons. International dynamics: While a potential gas tariff rationalization will largely define the outlook for the industry, international pricing dynamics continue to remain in the limelight. In this regard, while international urea prices remain under pressure largely due to surplus Chinese supply and tempered input costs, industry sources largely predict a revival towards the end of CY13 when peak season taxation slabs are implemented in China.

On the other hand, a weakness in Indian phosphate demand is expected to pull down phosacid prices further, resulting in a further potential uptick in DAP margin for FFBL. To put thing in perspective, international DAP prices are at a three-year low (India has cut subsidy on DAP by 37% since CY10 while recent INR depreciation has further worsened farmer economics), while average local DAP price is up by 25% since CY10.

                                                 Season          Period     Taxation
Urea                                              Peak          Nov-Jun        110%
                                                 Off-Peak        Jul-Oct          2%
DAP                                               Peak         Oct-May         110%

                                                Off-Peak       Jun-Sep           5%

Source: Market Realist, Downstream data

Outlook and Investment Perspective: AKD Securities re-iterate a potential gas tariff rationalization for the fertilizer industry as the key risk going forward, where a reduced premium of just 14% of international urea price to local price limits pricing power for local players.

That said, budgetary constraints on part of the GoP and a deteriorating PkR/US$ parity softens the risk of higher urea imports and severe curtailment to the sector going forward. Among local players, AKD Securities sees improving cost dynamics for FFBL with a potential decline in phosacid contract price for 4QCY13 to lead to robust 2HCY13 earnings for the company.

In this regard, channel checks suggest a swift DAP inventory liquidation by FFBL during Sep’13 following a price cut during the month. Going forward, AKD Securities expects strong earnings growth across the sector during 2HCY13 where higher demand, improved gas supply and an uptick in DAP PMs underpin AKD Securities cases for ENGRO (TP: PkR191) and FFBL (TP: PkR51).

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