Floods continued to have its negative impact on the offtake of fertilizers during August’10, where Urea and DAP witnessed YoY decline of 49.6% and 75.5% respectively. This decline is primarily attributable to uncertainties regarding soil condition for the upcoming Rabi season. However, we believe that fertilizer offtake will recover during the remaining portion of the current calendar year on the back of 1) Canola sowing under the Canola Sowing Policy (which started in early September) and 2) improved soil quality for wheat sowing once Canola is harvested (we estimate full year Urea and DAP offtake at the level of 5.8mn tons (-10% YoY) and 1.2mn tons (-30% YoY) respectively). Furthermore, healthy prices and strong industry margins will result in reasonable profitability growth for the manufacturers during the fourth quarter. Hence, we maintain our positive stance on the sector, with accumulation in FFC and FFBL at current levels.
Uncertain soil conditions continue to restrict fertilizer offtake
Urea offtake plunged by 49.6% YoY to 302kT during August’10 (-7.6% YoY during 8MCY10). Similarly, DAP dispatches fell by 75.5% YoY to 50kT (-53.8% YoY during 8MCY10). Unlike last year where farmers collected a hefty amount of fertilizer during 3QCY10, uncertain soil condition for the upcoming season restricted them from accumulating their crop inputs, hence, resulting in lower offtake during August’10.
Offtake to pick-up significantly during the remaining portion of CY10
Despite another disappointing month, we continue to believe that fertilizer offtake (both Urea and DAP) will post significant growth during 4QCY10 with uncertainties regarding soil conditions tapering off. Simultaneously, Canola sowing policy, recently announced by the government, will encourage healthy usage of nitrogenous fertilizer (Urea). Moreover, sowing of Canola in flood affected areas is expected to improve the soil quality for the wheat sowing in Rabi season, which could lead to fast recovery of DAP offtake.
Demand recovery combined with strong margins to bode well for manufacturers
As a result of a strong demand recovery likely during the remaining portion of CY10, we expect cumulative Urea and DAP offtake to reach 5.8mn tons and 1.2mn tons respectively by the year end. Resultantly, given the strong industry margins, we believe the sector will enjoy reasonable earnings growth during the last quarter (CY10E EPS of FFC/FFBL estimated at PKR14.44 /PKR4.85) creating excitement in the share price of the scrip.
Investment Perspective – Time to take exposure in fertilizers!
We maintain our positive stance on the sector given our expectation of healthy demand recovery along with firm prices. We believe current market prices provides investors an opportunity to make healthy returns as strong estimated 4Q earnings will likely lead the sector to outperform the market. Hence, we recommend accumulation at these levels with our June’11 PT for FFC and FFBL of PKR123/share and PKR39/share respectively.
RGST rate to be on higher side: flood tax may be imposed on large property owners, says Hafeez
Dr Abdul Hafeez Shaikh hinted at imposition of flood tax on owners of large properties and those having large-scale lands not affected by floods to collect tax from those with capacity to pay. The Minister said that the base ‘reformed GST’ rate would remain at 15%. However, due to the flood needs, the rate could be kept higher for some time. If more revenue is needed for flood victims, the government would make an upward adjustment in the rate of sales tax. Ruling out the possibility of 10% income tax surcharge, Hafeez said that the figure of 10% for imposition of income tax surcharge is not correct. “The figure of income tax surcharge would be on the lower side, but it would not be definitely 10%. The income tax surcharge would not be applicable on income”, he added.
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