Fatima Fertilizer Company Limited

Fatima Fertilizer Company Limited (PSX: FATIMA) was incorporated in Pakistan in 2003 as a result of a joint venture between Fatima Group and Arif Habib Group with its head office located in Lahore. The company has three production plants situated at the strategic locations of Punjab i.e. Multan, Sheikhupura, and Sadiqabad. The company is engaged in manufacturing, buying, selling, importing, and exporting of chemicals and fertilizers. The fully integrated production facility of the company produces two intermediate products i.e. Ammonia and Nitric Acid and four final products i.e. Urea, Calcium Ammonium Nitrate (CAN), Nitro Phosphate (NP), and Nitrogen Phosphorous Potassium (NPK).

The company has a 56 MW captive power plant besides off-sites and utilities and is allocated 110MMCFD of gas from dedicated Mari Gas fields.

Pattern of Shareholding

As of December 2021, the company has 2100 million outstanding share capital which is held by 9166 diverse shareholders. Associated companies, undertakings, and related parties hold 42.66 percent of the company’s shares, making them the biggest shareholder of FATIMA. Directors and their spouses and minor children have a stake of around 29 percent in the company. Sponsors grab the next spot with a shareholding of 17.31 percent. This is followed by Banks, Development Financial Institutions, and Non-Banking financial institutions owning 2.7 percent of the company’s shares. The local general public has a stake of 2.45 percent in FATIMA. The rest is held by other categories of shareholders such as foreign public, foreign companies, NIT and ICP, Insurance companies, Modarbas and mutual funds, etc.

Historical Performance (2017-21)

The topline and bottomline of FATIMA haveby and large shown a steep upward trend except for 2020 when its topline nosedived by 5 percent year-on-year owing to Covid related protocols which hampered the routine business operations across various sectors of economy. However, even in 2020, the company managed to boast a healthy bottom line growth of 10 percent year-on-year culminating in an NP margin of 18.64 percent versus 16.10 percent in 2019.

Delving into the details shows that 2020 was the year when the company recorded a year-on-year volumetric sales growth of 1.8 percent to clock in at 1.87 million tons. This was the then-highest-ever recorded sales volume achieved by the company. The increase in sales volume came on the back of an enhanced production capacity during the year by acquiring the production and operating plant of its associated company Pakarab Fertilizer Limited. The 5 percent year-on-year drop in revenue in 2020 came on the back of low Urea prices as there was ample availability and delayed buying owing to Covid-related lockdowns. FATIMA recorded an impressive GP margin of 40.4 percent in 2020 up from 37.22 percent in 2019. Amidst higher production volume, the growth in GP was possible due to a subsidy on RNLG released by GoP to SNGPL. Finance cost remained in check owing to low discount rate during the year as there was sheer economic downturn. Other income also performed exceptionally well and grew by 66 percent year-on-year in 2020. Then the already booked provision for GIDC was reclassified during the year as forty equal monthly installments which gave a temporary gain to the company worth Rs. 877.51 million. This also played a considerable role in keeping the bottom line buoyant during 2020. The company also temporarily recognized a loss allowance on subsidy receivable from GoP worth Rs.360.44 million with high hopes of recovering it in the near future.

As against 2020 where the topline dropped yet the bottom line managed to post decent growth, 2019 shows a contrasting tale. In 2019, topline of FATIMA grew by 46 percent year-on-year coming on the back of a volumetric sales growth of 17.1 percent over 2018. Despite handsome sales growth, margins considerably shrank in 2019 and the bottom line posted a skimpy 1 percent year-on-year growth. The devil is in the details. GP margin contracted to 37.22 percent in 2019 vis-à-vis 50.03 percent in the previous year owing to rising input costs amidst high inflation, depreciation of the Pak Rupee, and operation of the Sheikhupura plant at high-cost RLNG. Then the finance cost gave another blow to the bottom line not only because of hike in discount rate during the year but also due to huge sum of money stuck with the GoP in the name of Sales Tax refund and Subsidies receivable. This created immense liquidity issues for the company which had to meet its capital funding requirements by borrowings from banks. Hence, finance costs grew by 106 percent in 2019. NP margin of FATIMA stood at 16.10 percent in 2019 as against 23.22 percent in the previous year.

2021 was the year when the company was able to boast the highest-ever sales volume of 2.68 million tons, a year-on-year rise of 43 percent, owing to an increased production capacity accomplished by the company in 2020. This coupled with a hefty rise in the prices of fertilizer products resulted in the record high topline growth of 58 percent year-on-year in 2021. The demand for fertilizers remained strong during the year owing to the highly favorable wheat support prices. GP margin took a dive in 2021 to clock in at 38.30 percent as against 40.4 percent in the previous year owing to an increase in phosphate prices, devaluation of the Pak Rupee, and end of concessionary period gas. Distribution and administrative expenses also grew considerably owing to the full-year operation of three production plants. The improved liquidity of the company allowed it to cut back on its short-term and long-term borrowings which put brakes on the finance cost. Other expenses, however, were magnified mainly on account of booking an impairment loss of its brand Bubber Sher during the year. Then other income from both financial and non-financial assets dropped during the year. Then loss allowance on subsidy receivable from GoP and unwinding of provision on GIDC also played a role in shrinking the net margin of the company. While the bottomline was able to bag a year-on-year growth of 39 percent, the downtick in NP margin from 18.6 percent in 2020 to 16.4 percent in 2021is what reflects the additional costs incurred during the year.

Recent Performance (9MCY22)

While the company had w33n striking volumetric sales growth until 2021, 2022 appears to be in contrast where the off-take dropped by 2.5 percent year-on-year to clock in at 1.87 million tons. This was the result of heavy rainfall and flash floods which swamped a large agricultural land and reduced the demand for fertilizer during 9MCY22. However, the topline still boasted a 29 percent year-on-year growth because of an increase in prices.

The surging cost owing to the end of the concessionary gas period of the Sadiqabad plant, high input cost, particularly of phosphatic fertilizer, high-interest rate, and Pak Rupee devaluation, kept the gross margin in check which dropped by around 200 bps during 9MCY22 to clock in at 41.63 percent in 9MCY22.

Selling and admin expenses grew on the back of high inflationary pressure while the hike in other expenses represents impairment loss relating to intangible assets and loss on remeasurement of financial assets. Finance costs grew marginally despite multiple hikes in discount rates during the year as the company’s short-term finances dropped due to its strong liquidity position. Then the imposition of a super tax added further fuel to the fire and boosted the effective tax rate to 62 percent. The bottomline contracted by 30 percent year-on-year in 9MCY22 with NP margin standing at 10 percent as against 18.36 percent during 9MCY21.

Future Outlook

While agricultural activity has slowly begun to resume after the destructive floods, high prices of fertilizers, high inflation, and drop in purchasing power of the farmers owing to the massive destruction of their wealth and property, the demand for the fertilizer sector remains dicey in the upcoming months which is usually the period of high demand owing to Rabi season. The government should provide subsidy to the farmers to ensure the application of fertilizers and to ascertain superior agricultural growth which otherwise would spell disaster on the agricultural exports of the foreign exchange starved country.

With the discontinuation of subsidized RLNG and the imposition of GIDC and super tax, the margins of the fertilizer companies are expected to remain tight, however, better off-take might provide some breather. That said the ongoing construction of pressure enhancement facilities at the Mari Gas field will reap long-term benefits for the fertilizer companies amidst depleting gas reserves in Pakistan.