KARACHI: Fertilizer manufacturers in Pakistan posted cumulative rise of 41% in their earnings during 2018 due to increase in urea prices by around Rs300-330 per bag to Rs1,730 per bag.
Rise in urea prices was attributed to removal of Rs100 cash subsidy on urea and increase in gas prices from Oct 2018 by 30% and 50% in fuel and feed respectively that had impact of Rs130/bag. Adjusted for these cost/subsidy factors, remaining amount of around Rs100 per bag was retained by manufacturers to compensate inflationary cost pressure and to improve gross margins.
“As a result of increase in urea prices, gross margins of manufacturers surged to 30% during 2018 from 25% previous year,” Shankar Talreja at Topline Securities said.
Net sales of companies witnessed improvement of 23% to Rs328 billion despite flattish growth in urea volume and 4% decline in DAP offtake. “Rise in sales could be attributed to increase in urea and DAP prices by around 16% and 25% YoY respectively,” Talreja said.
Other operating expense increased by 55% due to exchange loss incurred by fertilizer manufacturing companies on foreign payables and increase in WPPF expense amid higher profitability. Other income was down 42% as cash subsidy of Rs100/bag was removed from May 2018.
Finance cost of the fertilizer sector was down 20% despite 400bps hike in policy rate during 2018. Lower finance cost could be attributed to decline in overall borrowings of the sector on back of improved cash flows from accrual of gas infrastructure development cess (GIDC) to the tune of Rs30 billion per annum (for sector).
Among companies, Engro Fertilizer (EFERT) posted highest profitability growth of 56% due to 14% increase in urea sales and around 16% increase in urea prices. Gross margins of the company improved to 32% (+2ppts) during 2018.
Fauji Fertilizer Bin Qasim (FFBL) profitability growth was around 43% on back of rise in GP margins by 2ppts and 17% growth in net sales as urea offtake and prices increased by 3% and 16% respectively. While, DAP offtake fell 17% during 2018. Other expenses of the company were 197% up due to exchange losses of Rs1.1 billion in 2018.
Fauji Fertilizer Company (FFC) posted growth of 35% in its profitability during 2018 due to increase in GP margins by 6.4ppts to 26% and decline in finance cost 33%.
Fatima Fertilizer’s profit was up 29% on back of 9ppts increase in GP margins and 33% decline in finance cost.
“Key risks to fertilizer industry’s profitability includes decline in international urea prices, slower than expected urea sales, poor crop season and unfavorable GIDC decision,” Topline Securities report said.[the_ad id=”31605″]