The Bell about – Fertilizers: Investment case improves on likely stable urea prices – Elixir Securities Limited
Karachi, March 26, 2013 (PPI-OT): Urea prices to sustain in CY13: Elixir Securities Limited expects urea prices to sustain at current levels (PKR1,670/bag) during CY13 and do not foresee possibility of the price cut on account of 1) lower imports, 2) higher crop prices and 3) allocation of expensive gas to SNGPL based fertilizer plants.
According to Elixir Securities Limited has discussed these factors in today’s research note.
Imports to be minimal during the year: Unlike CY12, Elixir Securities Limited expects government would not import urea in large quantities during CY13. Imported urea sales were more than 22% of total urea sold during CY12. Higher imports during CY12 were aimed at keeping urea prices low to support farmers and cherish voters for elections of 2013. Elixir Securities Limited believes this shall not continue in CY13 and contribution of imports in overall urea sales would decline.
Higher crop prices to support off take; less needs for discounts: Fertilizer manufacturers realized lower urea prices during 4QCY12 as they gave discounts to encourage urea sales. Weak market / administered crop prices amid higher urea prices significantly hurt urea demand in CY12. Cotton prices have recently started rising while GoP has increased wheat support price by 14%.
Expensive gas to SNGPL based plants further supports the case: Gas price under gas sales agreements (GSAs) of SNGPL based fertilizer plants with EandP companies would likely equal well head prices of EandP companies and would be significantly higher than the existing feedstock price of USD3.3/mmbtu. Cost of gas from KPD field, which comprise 60% of the total allocated gas is expected to be USD5/mmbtu. With this expensive gas supplied to SNGPL based plants; the case of urea price decline becomes weaker.
Upgrade stance on sector to Overweight; prefer ENGRO and FATIMA: Besides short term urea price stability, Elixir Securities Limited now’s expect much smaller eventual urea price reductions, if any, after full materialization of 202 mmcfd of gas supply to SNGPL based plants by mid 2014. Elixir Securities Limited expects fertilizer manufacturers to sustain current EBITDA margins. Reduction in risk of urea price decline makes the investment theme attractive for fertilizer sector. Elixir Securities Limited thus upgrade Elixir Securities Limited stances on the sector to Overweight. Elixir Securities Limited prefer ENGRO and FATIMA at current levels as they offer total returns of 40% and 46% respectively.
Imports to be minimal during CY13
Unlike CY12, Elixir Securities Limited expects government would not import urea in large quantities this year. Imported urea sales were more than 22% of total urea sold during CY12. Higher imports during CY12 were aimed at keeping urea prices low to support farmers and cherish voters for elections of 2013. Elixir Securities Limited believes this shall not continue in CY13 and imports shall not be a significant part of overall sales. Interim government setup would likely continue for the most of Kharif sowing period (Apr-June). This shall keep urea imports by government under check. Furthermore, government will likely go to IMF by Jun-13 and thus will have to curtail subsidies related to power and fertilizer.
Higher crop prices to support off take; less needs for discounts
Fertilizer manufacturers realized lower urea prices during the last quarter of 2012 as they offered discounts to encourage urea sales. Off take was still 12% lower on YoY basis during CY12 mainly attributable to higher urea prices and lower crop prices. Elixir Securities Limited expect s urea sales shall rebound during CY13 as cotton prices have started rising (up 8% CYTD) and the government have increased wheat (key urea consuming crop) support prices by 14% during CY13TD.
Expensive gas to SNGPL based plants further supports the case
According to the gas sales agreements signed between SNGPL based fertilizer plants and EandP companies, the EandPs will sell gas directly to fertilizer plants and SNGPL will act as gas carrier. The gas price under this agreement would likely equal well head prices respective fields. Price of gas from KPD field, which comprise 60% of the total gas allocation, is expected to be USD5/MMBTU which is ~USD2/mmbtu higher than the pricing of feedstock gas supplied to Mari and SSGC based fertilizer manufacturers. With such an expensive pricing for gas supplied to SNGPL based plants; the case of reduction in urea prices becomes weaker.