Pakistan Fertilizer Sector Expects 16% Profit Decline in 1QCY25, FFC Outperforms

Pakistan’s fertilizer sector faces a steep 16% profit decline in 1QCY25, driven by a sharp collapse in product demand, according to AKD Research. Urea sales plummeted 40%, DAP crashed 48%, CAN dropped 21%, and NP fell 29% compared to last year, signaling weak market dynamics. The downturn stems from advance buying in December 2024, fueled by seasonal discounts and interest-free loans under the Punjab Kisan Scheme, alongside a delayed Kharif procurement cycle.

Despite improved gross margins due to the absence of costly imported urea, the revenue slump overwhelmed gains, with net profit after tax projected at PkR 25.97 billion, down from PkR 30.98 billion in 1QCY24.

Fauji Fertilizer Company (FFC) stands out, poised for a 46% earnings surge to PkR 15.3 billion (EPS: PkR 10.8), up from PkR 10.5 billion (EPS: PkR 7.4). Bolstered by a 5x increase in DAP offtakes post its FFBL merger and gross margins rising to 35.9% from 29.6%, FFC also sees 17% higher other income. However, finance costs may climb 35% to PkR 2 billion due to increased borrowings. An interim dividend of PkR 8.0 per share, up 63%, is expected.

In stark contrast, Engro Fertilizers (EFERT) faces a devastating 65% earnings drop to PkR 2.7 billion (EPS: PkR 2.1) from PkR 7.8 billion (EPS: PkR 5.8), with a 73% sequential plunge. Revenue is set to crash 60%, driven by a 58% urea sales decline and 71% DAP offtake fall. Despite gross margins improving to 29.3% from 23.3%, other income may plummet 85%, and finance costs could skyrocket eightfold due to higher working capital, inventory buildup, and capital expenditure for its Pressure Enhancement Facility. A dividend of PkR 2.0 per share, down 75%, is anticipated.

Fatima Fertilizer expects a modest 6% earnings decline to PkR 7.9 billion (EPS: PkR 3.8) from PkR 8.4 billion (EPS: PkR 4.0), but a 42% sequential drop signals challenges. Urea sales fell 10%, CAN dropped 21%, and NP declined 23%, leading to a 22% revenue fall. Gross margins shrank to 35.6% from 41.5%, reflecting lower contributions from its base plant with cheaper gas. No dividend is expected, following a prior PkR 4.3 per share payout.

Sector-wide, dividend payouts are projected to fall 20%, with FFC leading, EFERT lagging, and Fatima opting out. Despite the downturn, AKD Research maintains a ‘BUY’ rating on FFC (target: PkR 583), EFERT (PkR 242), Fatima (PkR 103), and ENGROH (PkR 301), citing a potential demand rebound. Gross margins rose to 34.4% from 28.9%, but revenue contracted from PkR 244.75 billion to PkR 144.18 billion, with COGS down 46% and finance costs up 46%. Net profits fell 32% sequentially.

Though the sector struggles, margin recovery and expected offtake improvement offer cautious optimism, with AKD’s ‘overweight’ stance signaling confidence in a medium-term recovery.