Elixir Securities Limited – Analyst Briefing

General Government & Politics

Karachi, August 11, 2016 (PPI-OT): EFERT 2Q2016 Analyst Briefing Takeaways

Engro Fertilizers Ltd (EFERT) held its 2Q2016 analyst briefing today. The key takeaways are as follows:

Company recorded lower urea offtake of 242kton (↓53%YoY) during 2Q, in line with overall industry that shrunk by 78% during the same period. The decline is primarily a consequence of weak farm economics coupled with price uncertainty emanating from anticipated materialization of announced subsidy on urea.

DAP offtake also plunged during 2Q, clocking in at 63ktons, down 76%YoY. However, on cumulative basis, 1H2016 offtake inched up by 2% to 122ktons on account of continued subsidy on phosphate fertilizer (PKR500/bag).

Despite strong production up-cycle throughout industry that witnessed ~22% growth during 2Q, company’s production declined by 12%YoY to 408kton on account of planned turnarounds.

Besides, the company continued production on both its plants due to normalized supply of gas from Mari Network. Management expects the supply of gas to continue going forward, while a formal gas allocation contract is still pending.

Moreover, management is making efforts to capitalize on lower interest rate scenario by re-pricing its long term debt. The positive impact is already seen in 1H2016 financials where finance cost is reduced by 34% YoY to ~1.6bn as opposed to 2.4bn in 1H2015.

Going forward, management expects fertilizer offtake to improve in 2H2016, mainly owing to subsidized prices of urea and DAP, making fertilizers affordable to end user and price competitive against imported fertilizer.

Apart from this, urea supply glut is likely to continue on the back of improved production levels with estimated 1mn tons of urea inventory in the system by year end. At 1H2016 end, urea inventory reached 1.65mn tons.