Engro Fertilizer profit down 2.5pc

Karachi, August 8, 2019:  Engro Fertilizer (EFERT) posted earnings of Rs3.2 billion (EPS Rs2.38) down 2.5 percent YoY mainly on the back of higher other operating expenses and finance cost. On a cumulative basis during 1HCY19 earning remained flat at Rs7.18 billion (EPS: Rs5.38).

According to Topline, consolidated gross margins of the company increased by 2.3 points YoY to 31.5 percent in 2Q2019 owing to high retention prices on urea and lower proportion of DAP sales.

Despite the reduction in volumetric sales by 8-9 percent YoY, the company achieved 18 percent YoY growth in revenues on the back of price hike in Urea.

Other Income recorded at Rs1.4 billion compared to Rs509 million in 2QCY18 on account of sale of certain assets, as per our channel check. We await management clarity on this front.

Effective tax rate of the company clocked in at 48 percent (vs. 33 percent in SPLY) in consolidated business and 34 percent in core urea business (vs. 29 percent in SPLY) during 2Q2019 owing to partial reversal of  tax credit which the company utilized in previous quarters (close to Rs2bn) amid decline in future tax rates by Govt., we believe.

Financial charges increased by 237 percent YoY to Rs1.2 billion on the pretext of increase in the policy rate and borrowings.

The company also announced first interim cash dividend of Rs5/share in 2Q2019.

We flag, 1) PKR depreciation, 2) regulatory control on fertilizer industry, 3) poor crop season and 4) unfavorable decision related to GIDC as key risks to our earnings/valuation forecast.