JS Securities Limited - JS Research.

Karachi -- October 27, 2022 (PPI-OT)

Fertilizers: 3Q profits jump over normalized taxes, margins take a dip

Profitability for fertilizer companies under our coverage increased by 3.5x in 3QCY22 on a sequential basis, primarily due to absence of the one-time high tax charge of 10% on CY21 earnings in the previous quarter which had wiped out 50% of the quarter earnings.

We saw a sequential decline in gross level performance of almost all fertilizer companies due to cost side pressures despite higher retention prices for the period.

We believe that opportunity cost due to lost demand in 4QCY22 will keep stock prices in check during the short term. The extended plant turnarounds would further reduce production, impacting CY22 D/Y. We however maintain our Overweight stance on the Fertilizer sector as the sector's cash rich position directs at sustainable pay-outs for the future. The sector offers a CY23 D/Y of ~16%.

Companies witness a QoQ jump in earnings

JS Fertilizer Universe posted an increase in 3QCY22 earnings on a sequential basis over one-time 10% Super tax charge in the previous quarter. Recall that in the Federal Budget FY23, the sector was subject to a 10% Super Tax on its CY21 income and a 4% tax on income from CY22 onward, resulting in a one-time higher tax charge in 2QCY22.

On the gross level, however, the sector witnesses a decline due to cost side pressures despite higher retention prices during the period. The sector also witnessed exemption of output tax on Fertilizers, making input tax a part of cost as per the Finance Act 2022. This increased manufacturing costs during 3QCY22, which was passed on by increasing Urea prices during the previous quarter taking retail price of Urea to ~Rs2,200/bag (+Rs350/bag).

Fauji Fertilizer Company (FFC) reported unconsolidated earnings of Rs4.12/share for 3QCY22, an increase of 56% on a QoQ basis. The result was broadly consistent with industry projections. The company's top-line for 3QCY22 came in at Rs 24.5bn, while gross margins came in at 39% which were slightly lower than last quarter due to lower volumetric sales and higher repair charge. Other income was higher over increase in interest rates while dividend from wind power plants provided further support. FFC also announced an interim cash dividend of Rs 3.18/share along with the 3QCY22 results taking 9MCY22 dividend pay-out to Rs 8.98/share.

Engro Fertilizers Limited (EFERT) reported a profit of Rs3.13/share during 3QCY22 vis-AA -vis...