Urea inventory remained flat MoM mostly due to lower production

Urea inventory remained flat MoM mostly due to lower production: As per Fertilizer monthly data released by NFDC, total fertilizer off-take for January 2017 showed improvement of 21% on year on year basis but halved as compared to Dec-16 sales on conclusion of Rabi sowing season for most crops. Urea volumetric sales for Jan-16 increased by 19% YoY to 406k MT however, it halved as compared to previous month. Slowed down urea off-take coupled with restricted production (down 17% MoM) kept urea inventory almost flat from last month at 1,035k MT. FFC emerged as the urea market leader with 38% market share, taking over EFERT’s position. DAP off-take for Jan-17 mained restricted to 61k MT (down 20% YoY and 61% MoM) with FFBL capturing market share from imported DAP. Going forward, permission to export 0.3m MT of urea until Apr-16 may help in normalizing urea inventory levels and sustain urea bag price around current level of PKR 1,377.

Permission to export urea would fare well for the industry
We expect that probable exports of 0.3m MT on first-come-first-serve basis until Apr-16 would likely aid in urea inventory normalization. That said, major price increase for the commodity from the current level of PKR 1,377 is not expected before the upcoming budget when the GoP may lift upper cap of PKR 1,400/bag. Moreover, recent news re- ports highlight a probability that GoP will announce a farmer subsidy in FY18 Budget as well.

Urea production remained low in Jan-17
Despite better gas prospects for the fertilizer industry, production during Jan-17 declined by 17% MoM and 9% YoY. As per FFBL’s management, the company did not produce any urea and manufactured lower quantity of DAP in the month due to planned plant turn- around in addition to some gas shortage. Moreover, Agritech Limited (AGL) did not contribute any urea for a second consecutive month as gas supply remained suspended to the company. FATIMA also curtailed production on its Shiekhupura plant which runs on expensive LNG.

Top picks within the sector are EFERT and FFBL
Our top picks in the Fertilizer Sector are EFERT (upside of 28% from the last closing price with target price of PKR 87.1) and FFBL (upside of 21% with TP of PKR 65.5). We have a December 2017 target price of PKR 41.5 on FATIMA and a target price of PKR 116.6 on FFC, and a Neutral stance on both the stocks.

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