Fertiliser sector’s profitability up 10 percent in January-June

KARACHI: Fertiliser makers’ profitability rose 10 percent year-on-year (YoY) to Rs10.6 billion in the first half (January-June) of 2017 as financing cost dropped eight percent during the period, an analyst said on Thursday.  

Analyst Adnan Sami Sheikh at Topline Securities said sales of four key fertiliser companies, representing 90 percent of the industry’s production, surged 27 percent YoY to Rs97 billion in 1H2017. Lower prices, however, reduced gross margins to 24 percent from 28 percent during the period.

Engro Fertilizer (EFERT) posted the highest 47 percent growth in profit at Rs4.1 billion in January-June as the company outperformed other players. Fauji Fertilizer Bin Qasim (FFBL) witnessed a 57 percent reduction in profitability, while Fauji Fertilizer Company’s (FFC) profit fell 22 percent in half year. Fertiliser sector’s profit rose 12 percent YoY to Rs4.94 billion in the quarter of 2017, while its profitability fell 12 percent quarter-on-quarter (QoQ) in April-June. “Sales were up 33 percent YoY to Rs57.5 billion during 2Q2017 on the back of a low base effect as 2Q2016 sales were depressed in anticipation of Rs156/bag cash subsidy from the government,” Sheikh said. “During 2Q2017, sales were amplified as the government notified Rs56/bag reduction of cash subsidy to Rs100/bag from July 17.”

He said urea sales also surged 74 percent to 1.8 million tonnes in the April-June quarter, the highest ever in a three-month period. “Aggressive competition led to heavy discounts to push their products amidst an over-supplied market, while higher diammonium phosphate imports also added to costs. Gross margins contracted to 22 percent to from 26 percent.”

Sheikh said selling and distribution costs surged 52 percent YoY to Rs6.2 billion due to higher tonnage of freight along with warehousing of ‘bloated inventories’. Other income rose 51 percent YoY to Rs6.1 billion in the quarter under review as higher sales on government subsidy scheme were slightly offset by lower dividend receipts and interest income. Fertiliser companies booked subsidy in their other income head. Finance cost was down 12 percent YoY to Rs2.4 billion on the back of lower interest rates, loan repayments and re-pricing in April-June.  EFERT showed profitability growth of 264 percent YoY in 2QCY17 due to low base of last year due to depressed volumetric sales, while the remaining companies posted declines.