Fertilizer offtake during 1HCY12 remained sporadic where 4MCY12 urea offtake registered at a 5-yr low of 1.3mn tons (down by 22%YoY) while we reckon that sales picked up in May'12 and subsequently surged in Jun'12. In this regard, expected spike in urea offtake in Jun'12 doesn't necessarily reflect the demand from end-consumers (farmers), as we attribute this spike to dealers' reaction to anticipated price arbitrage on expected rise in urea price where local manufacturers increased urea price by PkR50/bag on Jun 16'12 and another PkR95/bag rise is expected in Jul'12. Lower 4MCY12 urea offtake was primarily caused by i) water shortages (rabbi crop water availability decreased by 15%YoY) and ii) farmers' weak purchasing power, where the surge in input prices (fertilizer, fuel etc) and low output prices, particularly cotton, have combined to weaken farmer purchasing power, which is expected to remain subdued going into 2HCY12. For CY12, we forecast urea offtake at 5.64mn tons (-4.7%YoY) while available urea and closing urea inventory are estimated at 6.25mn tons and 0.6mn tons, respectively. We expect fertilizer sector fortunes to improve going into CY13 as we expect lower urea imports (Pakistan possibly re-entering the IMF program, which is likely to lead to reduction in subsidies including subsidy on urea imports) as well as recovery in urea demand once soil conditions in Sindh normalize. .
Farmers' declining purchasing power: We reckon that farmers' capacity to purchase fertilizer has been significantly decreased, following the surge in fertilizer prices and significant fall in cotton prices (-32% YoY), the main farmer cash crop. Furthermore, delay of sugar cane payment by factories also restrained the liquidity of farmers. The table above contains a comparison of number of kgs per crop required to buy 1 kg of fertilizer (urea and DAP) during 10MFY12 over preceding period. Moreover, a comparison drawn at current retail fertilizer prices (unlikely to sustain at this level) with 10MFY11 is also provided. The nitrogen to phosphate (N/P) ratio (ideal between the 2.0x-2.5x range) has further increased during FY12F to 4.92x (+21%YoY), as surge in DAP prices (+27%YoY) has led to reduced offtake. Furthermore, impact of lower DAP application is already visible on the wheat crop, where yields for FY12 are down by 4%YoY to 2,714kg/ha.
Looking forward: Urea offtake is estimated to be 5.6mn tons during CY12 (down 4.7%YoY) with anticipated production of 4.7mn tons, imports of 1.5mn tons and closing inventory of 0.6mn tons. We expect fertilizer sector fortunes to improve going into CY13 as we expect lower urea imports (Pakistan possibly re-entering the IMF program, which is likely to lead to reduction in subsidies including subsidy on urea imports) and recovery in urea demand, once soil in conditions in Sindh normalize. .
Investment perspective: Within our Fertilizer universe, FATIMA remains our top pick (CY12P/E of 7.44x) with a Dec'12 target price of PkR40.2/share, implying 66% upside from current price. Once fertilizer offtake of local manufactured urea manufacturers will gain momentum in CY13F, FATIMA will be able to offload its CY12 inventory, ending with CY13F EPS of PkR6.8, and a forward P/E of 3.6x. Among other players, FFC is trading at an attractive dividend yield of 12.5% even under our worst case scenario (closing inventory of 500k tons and urea price of PkR1,795 per bag from Jul'12), calling for an Overweight stance on the scrip. Key downside risks to our call include i) significant decline in int'l urea prices and ii) regulatory risk particularly related to Competition Commission of Pakistan (CCP), where the CCP has issued show cause notices to fertilizer manufacturers over unprecedented urea price hikes during CY11, which the CCP deemed as unreasonable and unjustifiable.
No comments:
Post a Comment