What’s behind EFERT’s slump this quarter?

This quarter, Engro Fertilizer Limited (EFERT) faced a challenging period, with several factors contributing to its lackluster performance. The company’s consolidated profit after tax for 2QCY24 clocked in at PKR 1.7 billion, delivering an EPS of PKR 1.25. 

While this marks an improvement from the PKR 1.1 billion (EPS: PKR 0.79) SPLY, it still fell short of expectations. So, what went wrong? 

The Revenue Rollercoaster

EFERT’s revenue for the quarter stood at PKR 39.4 billion, a sharp decline of 47% QoQ. 

This significant drop was primarily due to lower offtakes, exacerbated by a 58-day shutdown at the company’s EnVen plant.

It seems like EFERT was caught between a rock and a hard place, with lower sales volume directly impacting the company’s topline.

Gross Margins Take a Hit

The company’s gross margins also took a nosedive, dropping to 18% from 30% in the same quarter last year and 23% in the previous quarter. 

This dip can be attributed to lower fixed cost absorption, likely because of reduced production during the plant shutdown. 

EFERT struggled to keep its costs in check, resulting in thinner margins.

Financial Charges: A Heavy Burden

Another thorn in EFERT’s side was the significant increase in financial charges, which surged by 74% year-on-year (YoY) and a staggering 7.6 times QoQ. 

The rise in short-term debt contributed to these increased costs, putting additional strain on the company’s bottom line.

The Imported Urea Dilemma

In 1QCY24, EFERT sold its entire stock of imported urea, with the additional cost amortized on a pro-rata basis. 

However, in 2QCY24, the management decided to record the complete unamortized portion of PKR 5.3 billion, impacting the company’s financials for the quarter. 

This decision led to a restatement of the 1QCY24 EPS from PKR 8.08 to PKR 5.81.

Taxation and Dividends

The effective tax rate for the quarter remained relatively stable at around 35%, compared to 36% in the preceding quarter. 

On a positive note, the company announced a cash dividend of PKR 3.0 per share, taking the total for the first half of CY24 to PKR 11.0 per share.

EFERT’s quarterly struggles stem from a perfect storm of lower revenue, thinner margins, increased financial charges, and the impact of amortizing imported urea costs.