Industry

New fertilizer policy to end gas subsidy, deregulate sector

Karachi, July 30, 2022: A new fertilizer policy is on the cards which would pave way for a transition towards the weighted average cost of gas mechanism to curtail gas circular debt.

It has been learnt that the new policy will not provide gas subsidy to the sector and the industry would have a uniform gas rate.

It is also being proposed to effectively deregulate the fertilizer industry so that any increase in gas prices can be passed on by the industry.

According to the proposed policy, the industry would also be able to export any excess fertilizer in the future.

It is worth adding here that domestic Urea prices are at c. 80% discount to the international Urea prices.

Meanwhile, Engro Fertilzer posted a loss of Rs98 million (LPS of Rs 0.07) during 2QCY22 vis-à-vis PAT of Rs4.7bn (EPS of Rs3.57) in 2QCY21.

The company showed a slight increase of 1ppt QoQ at the gross margin level in 2QCY22, mainly due to better retention prices. Finance cost for the quarter came in higher due to higher interest rates.

The management of the company said that the company booked higher other expenses owing to exchange loss on DAP shipments to the tune of Rs 700 million.

Higher tax charge was however the biggest culprit, which had three components,

  • 10% super tax on last year’s income
  • 4% incremental tax on the earnings for 1HCY22
  • Charge related to deferred tax due to 4% increase in future tax rates (Rs1.6bn).

The Board did not announce any dividend for this quarter but management expects that the company’s long-term dividend policy of distributing most of its profits will continue going forward.

Production loss and higher costs expected in 3QCY22

The management shared that the company’s flagship Enven plant, which had faced a breakdown in June, resulted in loss of production of around 111k tons.

The plant has now resumed production. It is expected that 3QCY22 financial results will likely show a higher repair and maintenance charge because of the incident.

The management shared that it has also planned a BMR on it Base plant which has a capacity to produce c. 975k tons of Urea per annum.

The overhaul will take around 2 months during which the plant will be offline. This measure will help the company improve gas efficiencies.

To recall, output tax on Fertilizers has been made exempt making input tax a part of cost as per the Finance Act 2022. This will increase manufacturing costs for the sector and will reflect in financials 3QCY22 onwards. Company has already passed on the impact of the aforementioned by increasing Urea prices during the outgoing month taking retail price of Urea to Rs2,200/bag (+Rs350/bag).

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