In Focus: Budget Showdown over Fertilizer Sector (13062008)

Stance: Strong Positive
The Govt. intentions to give incentives to agriculture sector in budget has claimed a prudent response in fertilizer sector as Govt. has taken responsible measures to encourage the use of DAP fertilizer by doubling its subsidy which is essential for agriculture growth. On the other hand Govt. has also increase the volume of agriculture loans by Rs30 billion, which will provide extra liquidity to the farmer in this Kharif season and making sure the timely availability of agriculture inputs prudent to the agriculture growth for prosperous economy.
Urea- Apart from exemption of sales-tax over consumers to encourage the fertilizer usage, no such supporting steps were taken in budget to assist the urea segment. However sales shift due to substitution affect of Phosphate and Potash fertilizer in previous 6 months have already kept this segment on hike as over an all increase 106 percent in sales was already witnessed in 4M08, despite of the fact that the prices had also increased by 11 percent during same period.
DAP- In this budget, increase of DAP subsidy to Rs1000/- bag has once again turn on the demand drivers for the product which were made silent after a robust increase in prices in previous 4M08. Steps taken in this course evidently show the government intentions to support this fertilizer segment which is essential to re-enhance the productivity of soil and to support the agriculture growth for the coming periods.
Outlook on Fertilizer Scrips
FFBL- We maintain a strong positive stance for FFBL as the company holds 45 percent market share of DAP in domestic fertilizer industry. Expected increase in DAP sales in line of recent government intervention will further fuel in the cash inflows due to higher volume of sales. However the company has recently increased its DAP production capacity by 50 percent which will enable it to efficiently cater any extra demand initiated due to price paradigm shift.
FFC- We continue to maintain our positive stance for FFC as the company is parent stake holder of FFBL, any incentive from FFBL will incur good response in earnings of the company. While other Govt. incentive of sale tax exemption and agriculture loan will increase the demand of fertilizer and indirectly give FFC fresh liquidity to record in their sales book, being the market leader in terms of sale volumes.
ENGRO- As Engro is the second market leader in terms of fertilizer sales in domestic markets along with market leaders in imported DAP and locally produced micro nutrients fertilizer, the incentive provided in budget will also assist the revenues of Engro due to which we also maintain positive stance for this scrip.