LAHORE - Pakistan’s fertilizer manufacturers’ profitability surged 67 percent annually to Rs8.3b in 2Q2018, primarily due to higher GP margins of 29 percent in 2Q2018, up by 7ppts coupled with increase in revenue by 15 percent to Rs66b. The profitability analysis is based on sample of 4 largest listed companies, namely Fauji Fertilizer (FFC), Engro Fertilizer (EFERT), Fatima Fertilizer (FATIMA) and Fauji Fertilizer Bin Qasim (FFBL), which make above 90 percent of the fertilizer production in Pakistan.

Net sales of fertilizer companies depicted improvement due to 1) increase in urea prices by 8 percent YoY, and 2) increase in DAP sales and prices by 14 percent YoY and 20 percent YoY respectively. On the other hand, urea sales volume went down by 19 percent YoY during 2Q2018 which was primarily due to high base effect of 2Q2017, wherein 1.06mn tons were sold alone in Jun 2017 in anticipation of cut down in cash subsidy.

Gross margins of the industry improved to 29 percent, up by 7ppts YoY due to higher retention prices coupled with minimal discounts amidst tight supply. To recall, during 2Q2017 fertilizer manufacturers offered heavy discounts to sell their stock in market as NFML was offloading its old stock of urea at discounted rate of Rs1300/bag, that forced manufacturers to offer discounts. Selling and distribution cost of the industry is down by 3 percent YoY due to lower handling cost amid normalized inventory level.

Other operating expense increased by 61 percent YoY due to exchange losses incurred by companies on foreign exchange payables and foreign loans. While, other income fell 40 percent YoY as cash subsidy was reduced to Rs100/bag on urea vs. Rs156/bag in 2Q2017 coupled with its recognition till May 07, 2018. Further replacement of cash subsidy on DAP with reduced sales tax is also a reason behind lower other income.

Finance cost fell substantially by 32 percent YoY to Rs1.6b due to improved working capital of the manufacturers amid availability of cash flows from GIDC accruals.Effective tax rate during 2Q2018 remained at 37 percent vs 40 percent last year, as EFERT recorded tax reversals of Rs1bn (another Rs1b would be recorded in 2H2018) on account of lower projected tax rates in forecasted years (from 30 percent to 25 percent till FY23).

Among players, Fatima outperformed its peers in terms of urea sales by witnessing volumetric growth of 22 percent YoY to 158k tons, while EFERT and FFC saw decline of 10 percent and 8 percent respectively. On DAP side, EFERT outperformed peers by posting growth of 106 percent YoY in its volumes at 120k tons, followed by FFC 81 percent YoY. Whereas, FFBL’s volume were down by 27 percent YoY to 66k tons.

On profitability side, Fatima and FFC showed robust performance with 182 percent YoY and 51 percent YoY growth in their bottom-line due to 31ppts YoY and 5ppts YoY respectively rise in their GP margins. Similarly, EFERT posted growth of 32 percent YoY in its profit due to decline in finance cost 42 percent YoY and lower effective tax rate of 33 percent in 2Q2018 vs. 41 percent in SPLY.

Compared to last quarter (1Q2018), profitability of fertilizer companies remained nearly flat as decline in GP margins by 2ppts QoQ were better compensated by increase in revenues by 9.3 percent YoY and decline in admin & other opex by 16 percent and 3 percent respectively.