Profits of listed fertilizer companies are likely to go up by 104 percent year-on-year (YoY) to Rs. 25 billion in Q4 2023, according to a report by Topline Securities.
“We expect Topline Fertilizer universe earnings to increase by 104 percent YoY to Rs25bn in 4Q2023, primarily due to a increase in retention prices which will lead to higher gross margins. However, on a QoQ basis, earnings are expected to remain flat due to lower volumetric sales of Urea,” it stated.
This will take the full year 2023 after-tax earnings to Rs. 63 billion, up 63 percent YoY led by higher gross profit amid higher prices and DAP sales.
Urea sales are expected to decline by 8 percent YoY and QoQ to 1.7 million tons in 4Q2023. However, DAP offtake is anticipated to increase by 24 percent YoY and 20 percent QoQ to 576,000 tons during 4Q2023. This is likely to take 2023 Urea and DAP sales to 6.64 million tons (+0.4 percent YoY) and 1.57 million tons (+31 percent YoY), respectively.
Average Urea MRP during 4Q2023 increased by 35 percent YoY and 9 percent QoQ to Rs. 3,349 per bag as companies have passed on cost pressure to final consumers. Moreover, DAP prices have also increased by 14 percent YoY and 16 percent QoQ to average at around Rs. 12,491 per bag which is in line with international prices and currency devaluation.
To recall, the government raised fertilizer gas prices to Rs. 580 per mmbtu for feed and Rs. 1,580 per mmbtu for fuel with effective from October 2023.
The gross margin of the sector is expected to increase by 8ppts to clock in at 28 percent in 4Q2023 versus 20 percent in 4Q2022. In the full year 2023, the sector’s gross margin is expected to clock in at 27 percent versus 26 percent in 2022.
The finance cost of the sector during 4Q2023 is expected to decline by 45 percent YoY and 35 percent QoQ to Rs. 2.7 billion primarily due to a decline in borrowings of the sector. To highlight, the total debt of the sector reduced from Rs. 152 billion in Dec-22 to Rs. 58 billion as of September 2023.
Fauji Fertilizer Company (FFC): The report expects FFC to post unconsolidated EPS of Rs. 8.2 (+100 percent YoY) in 4Q2023. The increase in earnings is mainly due to (1) a 4ppts increase in gross margins to 36 percent in 4Q2023 led by higher Urea prices and (2) a 29 percent YoY decline in finance cost.
On a QoQ basis, it sees earnings grow by 14 percent, despite a 10 percent QoQ decline in Urea sales and a 1 percent QoQ decline in DAP sales. This growth is attributed to higher Urea and DAP prices and the potential reversal of higher gas costs booked during the last quarter.
Along with the result, it expects the company to announce a cash dividend of Rs. 6 per share, taking the 2023 dividend to Rs. 17.4 per share.
Engro Fertilizers (EFERT): The report expects EFERT’s consolidated EPS at Rs. 7.2 in 4Q2023 compared to EPS of Rs. 4.8 in 4Q2022, up 51 percent YoY. The YoY jump in earnings is due to higher gross margins and lower financial charges. Gross Margin is expected to improve by 6ppts to 28 percent in 4Q2023 as compared to 23 percent in 4Q2022 mainly due to an increase in Urea prices and the absence of repair charges recorded last year.
On a sequential basis, the report expects earnings to increase by 1 percent QoQ, even with a 13 percent QoQ decline in Urea sales, thanks to higher Urea prices and a significant 42 percent QoQ reduction in finance cost. Along with the result, we expect the company to announce a cash dividend of Rs. 7 per share, taking the 2023 dividend to Rs. 19.5 per share.
Fauji Fertilizer Bin Qasim (FFBL): Topline sees FFBL report an unconsolidated EPS of Rs. 3.8 in 4Q2023, a significant increase from the EPS of Rs0.5 in 4Q2022. This improvement is primarily attributed to (1) a 10 percent rise in gross margins to 22 percent in 4Q2023,(2) a 45 percent YoY decline in finance cost, and (3) an absence of exchange losses due to the stability of the PKR against the US dollar.
On a QoQ basis, it expects earnings to decline by 8 percent, primarily due to a 34 percent QoQ decrease in DAP sales and lower other income amid the absence of dividend income in 4Q2023. The report does not anticipate FFBL announcing a cash dividend with the 4Q2023 result.
