FFC: Profits down as margins dip

Once upon a time, Pakistans fertilizer players were considered too big to fail. They have not exactly failed yet, but their profits have surely seen a fast coming back to planet earth. From the E&P-esque gross margins as high as 60 percent, to an earthly 25 percent, is some fall. Pakistans largest urea manufacturer, Fauji Fertilizer Company (FFC) announced its CY16 financial results yesterday where profits dipped 30 percent year-on-year. Dividends though, continue to be healthy, as the payout ratio remains north of 80 percent, with a final cash dividend of Rs2.75/share.

FFC produced slightly more 2.52 million tons of urea in CY16, operating at 123 percent of designed capacity. The sales also remained strong at 2.4 million tons, 0.8 percent higher year-on-year. But the topline slid 14 percent year-on-year, as the average urea prices during the year went down by 15 percent year-on-year, from Rs1913/bag last year to Rs1614/bag.

Recall that the pricing power of fertilizer players, which went unnoticed for years, has been sternly tested in the last couple of years. Something had to give, as international urea prices, for a long period during the year, stayed below local prices, compelling local players to sell at discounted rates, limiting their ability to pass on the cost increase.

Although, the feedstock prices were revised downwards, the GIDC imposition for most of the first half meant squeezed primary margins. The gross margins for FFC now stand at a more fathomable 25 percent.

Other income contribution continues to lend support to bottomline, as the well diversified FFC portfolio means more divide inform contribution from the likes of FFBL, Fauji Energy, Askari Bank amongst others. Moreover, the accounting treatment of subsidy on sale of urea and DAP also means higher other income. But that was not enough to make up for the contribution margin lost at the top.

Urea off-take has picked up of late, and FFC and peers are in no danger of not being able to sell the inventories. Luckily, urea prices in the international prices have started to move up, creating more room to clear inventories via exports. That said, government has of late been using its levers to keep a lid of sorts on prices, and can ask the industry to contribute more towards urea subsidy.

FFC, meanwhile, continues to look into alternative avenues of investment. The two major fertilizer players are now very well diversified, realising the no-growth story in the sector. The profits will keep coming, and the bulk would probably be coming from non-core income.