• EFERT’s earnings dipped by 38% YoY to PKR 4,457mn during 1HCY20 primarily due to lower sales, which fell by ~5% YoY to 847kT (a market share of 32%). EFERT’s off-take during the period was primarily suppressed due to the pricing discrepancy between its product and the industry. Onwards, the company expects the situation to normalize, with anticipation of its market share rising to 37%.
  • When discussing the impact of the recent locust swarm, the company believes its effect on fertilizer demand hasn’t been as severe so far. The company, however, believes the upcoming swarm may have a material impact on potential demand.
  • EFERT’s results during 2QCY20 saw a notable 725% QoQ increase in other expenses to PKR 1,222mn. The reason for the increase was that the company recorded a sales tax provision emanating from sales to unregistered dealers. The company believes urea dealers are unwilling to get ‘sales tax’ registered due to low margins for the commodity. EFERT is actively working with the government to rectify the anomaly, in which dealer margins (~PKR 30-40/bag) are lower than the tax to be collected. In case of a non-resolution, the company will likely be compelled to raise its urea prices as early as Aug20.
  • EFERT has mentioned that the company still has PKR 6.5 subsidy receivables on its books.
  • The company is building a case against utilization of imported RLNG for domestic sale of urea. EFERT has analyzed that demand for urea may fall to 5.5mn MT during CY20, implying that urea supply based on indigenous gas (~5.8mn MT) may be sufficient for the domestic market. The company, in turn, suggests utilizing imported RLNG for exporting urea as it would potentially yield a net benefit of USD 458mn via export receipts and additional tax revenues for the central government.

Please find attached the detailed note.

Regards,
KASB Research