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Agriculture package to provide fresh impetus

The recently announced Rs309 billion agriculture package, with emphasis on improving crop yields, livestock development and import substitution can be termed a right step in the right direction. Reportedly, the share of Federal government will be Rs85 billion, Provincial governments will contribute Rs175 billion and share of farmers will be Rs50 billion. Even assuming a haircut, this could still imply double the agricultural spending than in last 9 years at an average. Out of the allocated funds, 7% is planned to be targeted towards increasing the average yield of wheat and sugarcane. The aforementioned developments, if materialized, could result in improved fertilizer offtake amid better demand and potential subsidies.

The agriculture development plan would likely entail higher financing target for agriculture sector. Likely beneficiary of higher disbursement of funds could be Islamic banks (IBs) considering potentially slower financing demand elsewhere (For IBs lending to farmers has increased in 11MFY19 as compared to the growth recorded by conventional banks). The successful implementation might also provide some respite to the dull infrastructure demand where cement and steel demand in rural Punjab will be a key beneficiary assuming the increased spending will result in improved purchasing power of farmers.

Despite the strategic importance of the agriculture sector (contributing about 18.5% of the total country’s output and employing 38.5% of the total labor force), tangible government support remained missing in the last decade or so. This led to subdued performance, sector growing by meager 2% annually. Recent policy announcement by the government is a right step in the right direction. The Rs309 billion agriculture package aims at improving crop yields, livestock development and import substitution through domestic product development. The reform package — if properly executed would have wide ranging long term positive effects on the economy, particularly the external sector. Pakistan presently imports US$4.65 billion worth of agriculture products annually. Substitution of the half of the agriculture imports would save US$2.33 billion worth of precious foreign exchange.

Out of the allocated funds, 7% is planned to be targeted towards increasing the average yield of wheat and sugarcane. To note, wheat and sugarcane cumulatively account for approximately 55% of fertilizer consumption, while also being crops with highest phosphate consumption as a percentage of total fertilizer. The aforementioned development if materializes could entail improved fertilizer offtake amid better demand and potential subsidies. While the urea demand has sustained over the last five years, DAP offtake witnessed a sharp 8%YoY decline in CY18.

 

The agriculture development plan would likely entail higher agricultural financing target, which in recent years has already been increased. This should assist financing growth of the banking sector, where analysts expect overall advance growth to be around 8%. Agriculture related financing enjoys nearly 8% share in over financing portfolio of the sector whereas banks mostly meet their respective targets, historically. Likely beneficiary of higher demand could be the Islamic Banks (MEBL enjoys 38.6% share amongst total agri financing of IBs) where the two-pronged impact bearing of absence of appropriate investment instruments in tandem with slower financing demand will impact fund deployment strategy.

The proposed increase in agriculture spending is likely to provide some respite to the dull infrastructure demand where cement and steel demand in rural Punjab will be a key beneficiary assuming the increased spending will result in improved purchasing power of farmers. Reportedly, farmer dynamics play a significant role in the demand dynamics of Steel and Cement in South Punjab with 50-60% of the demand dependent on this segment. In listed steel space, MUGHAL will be the prime beneficiary, already having significant share of girder demand in the region. As regards Cement, Punjab based players DGKC, MLCF and GWLC will be in a position to reap any potential benefits. Demand support from this segment can aid in averting some pressure off the prices where increased capacity has led to significant erosion in pricing power of local players (7.3 million tons cement capacity additions is expected during FY20). Moreover, auto sector can also have some share of the pie as INDU and MTL can look to capitalize on their clout in the segment.

Fertilizer offtake in June 2019

According to report by Topline Securities, urea offtake during June 2019 is expected to depict 3%YoY growth to 625,000 tons. The nominal increase in sales is due to the excessive purchasing by dealers/farmers in earlier months amid an expected hike in prices due to an upward revision in gas tariff effective 1st July 2019. Similarly, urea production during June 2019 is expected to post growth of 25%YoY due to the resumption of production by FatimaFert (FATIMA) and Agritech (AGL). Fauji Fertilizer (FFC) and Engro Fertilizer (EFERT) production is expected around 214,000 tons and 177,000 tons respectively, up 1% and 27% respectively. Aggregate closing inventory of the industry for June 2019 is estimated around 200,000 tons. Amongst the players, FFBL is likely to record the highest growth of 47%YoY in its urea offtake to 83,000 tons, followed by FFC at 263,000 tons, as against this EFERT is expected to post a decline of 29%YoY to 173,000 tons. Aggregate DAP offtake for June 2019 is likely to decline by 21%YoY to 150,000 tons. The largest decline of 65%YoY is expected for FFC to 23,000 tons, followed by EFERT by 53%YoY to 30,000 tons. However, FFBL is expected to witness an increase in DAP offtake, up by 58%YoY to 61,000 tons. The key risks to fertilizer sector include: 1) an un-favorable settlement of GIDC, 2) poor crop season and 3) increase in gas prices.

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