Fatima Fertilizer Company Limited

Fatima Fertilizer Company Limited (PSX: FATIMA) was incorporated in Pakistan in 2003 as a result of the joint venture between Fatima Group and Arif Habib Group. The company has three production plants situated at Multan, Sheikhupura and Sadiqabad. The company is engaged in the 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).

Pattern of Shareholding

As of December 31, 2023, FATIMA has a total of 2100 million shares outstanding which are held by 9,650 shareholders. Associated companies, undertakings, and related parties have a majority stake of 43.16 percent in the company. Directors, CEO, their spouses, and minor children hold around 31 percent of the company’s shares. Sponsors grab the next spot with a shareholding of 15.19 percent in FATIMA followed by the local general public holding 2.4 percent shares of FATIMA. Banks, DFIs, and NBFIs account for 1.62 percent of the company’s shares while foreign companies hold 1 percent of shares. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

The top line of FATIMA followed an upward trend over the period under consideration except for a drop in 2020. Conversely, its bottom line mounted until 2021 followed by a decline in 2022. In 2023, FATIMA’s bottom line considerably recovered. The company’s margins drastically fell in 2019 followed by a rebound in 2020. For the next two years, the margins rode a downhill journey whereas in 2023, gross margin continued to dip while operating and net margins ticked up. The detailed performance review of the period under consideration is given below.

In 2019, FATIMA’s topline registered 46.10 percent year-on-year growth. This came on the back of a 17.14 percent year-on-year rise in sales volume which clocked in at 1.834 million tons (see the graph of sales volume & net sales). This was due to an increase in the sales of both manufactured and imported DAP during the year. In 2019, Urea made the greatest contribution to the overall sales mix and net revenue of FATIMA, followed by NP, CAN, and DAP. Besides stronger volumes, sales prices were also higher in 2019 due to the upward revision in gas prices. The surge in input cost coupled with Pak Rupee depreciation as well as the operation of the Sheikhupura plant on RLNG resulted in 83.57 percent year-on-year escalation in FATIMA’s cost of sales. Gross profit improved by 8.68 percent year-on-year in 2019, however, GP margin radically fell from 50.03 percent in 2018 to 37.22 percent in 2019. There was a marginal 3.13 percent year-on-year increase in distribution cost in 2019 mainly on account of higher transportation and freight charges. Induction of human resources which took the tally to 2389 resulted in higher payroll expenses incurred during the year. Moreover, higher transportation, legal and professional charges, depreciation, and aircraft operating expenses pushed up the administrative expenses by 19.93 percent in 2019. Other expenses slid by 13.33 percent year-on-year in 2019 as there was no loss on re-measurement of investment classified as FVTPL. Furthermore, the net exchange loss incurred by FATIMA in 2019 was lower when compared to 2018. Other income greatly buttressed the operating profit as it rose by 80.69 percent year-on-year in 2019. This was mainly on account of profit on loans to related parties. Operating profit mounted by 12.74 percent year-on-year in 2019, however, OP margin fell from 36.18 percent in 2018 to 27.92 percent in 2019. Finance cost magnified by 106.31 percent in 2019 due to higher discount rates as well as increased working capital requirements as millions of dollars of FATIMA were stuck with the GoP in the form of sales tax refund and subsidies receivable. Consequently, net profit ticked up by a marginal 1.31 percent year-on-year in 2019 to clock in at Rs.12,069.68 million with EPS of Rs.5.75 versus EPS of Rs.5.67 posted in 2018. NP margin slumped from 23.22 percent in 2018 to 16.10 percent in 2019.

2020 was the year when the company recorded volumetric sales growth of 1.8 percent. Dispatches clocked in at 1.87 million tons in 2020. The increase in sales volume came on the back of enhanced production capacity which was the result of the acquisition of the production and operating plant of its associated company Pakarab Fertilizer Limited. Despite higher dispatches, a 4.93 percent year-on-year drop in net revenue in 2020 came on the back of lower NP and DAP prices as well as 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. 3 percent year-on-year growth in gross profit in absolute terms and a higher GP margin was possible due to subsidy on RNLG released by GoP. Moreover, the company’s Sheikhupura plant remained idle for 8 months due to the unavailability of gas. Selling expenses inched up by 2.39 percent year-on-year in 2020 on account of higher transportation & freight charges. Administrative expenses spiraled by 21.22 percent in 2020 on account of higher payroll expenses as the human resource tally reached 2502 in 2020. Higher profit-related provisioning and exchange loss drove other expenses up by 13.31 percent year-on-year in 2020. However, it was counterbalanced by 66.10 percent year-on-year growth in other income on the back of profit on loan to related parties and gain on re-measurement of investment classified as FVTPL. Operating profit ticked up by 3.53 percent year-on-year in 2020 with OP margin clocking in at 30.4 percent. Early settlement of outstanding GST refunds improved the liquidity position of the company which led to lower borrowings during the year. This coupled with a discount rate cut culminated into a 7.75 percent year-on-year dip in finance costs in 2020. Reclassification of already booked provision for GIDC in forty-eight equal installments on the order of the Supreme Court of Pakistan resulted in a temporary gain of Rs.877.51 million in 2020. FATIMA also temporarily recognized a loss allowance of Rs.360.24 million on the re-measurement of subsidy receivable from GoP in 2020 with high hopes of recovering it in the near future. As a consequence, net profit registered a reasonable 9.98 percent year-on-year growth in 2020 to clock in at Rs.13274.69 million with EPS of Rs.6.32 and NP margin of 18.63 percent.

2021 was the year when the company was able to boast the highest-ever sales volume of 2.68 million tons, up 43.39 percent year-on-year. This was on the back of increased production capacity accomplished by the company in 2020. This coupled with a hefty rise in the prices of fertilizer products resulted in a record-high topline growth of 57.84 percent year-on-year in 2021. The demand for fertilizers remained strong during the year primarily owing to the highly favorable wheat support price which encouraged farmers to increase the usage of nitrogenous fertilizers. Gross profit multiplied by 49.63 percent year-on-year in 2021, however, GP margin took a dive to clock in at 38.30 percent owing to an increase in phosphate prices, depreciation of Pak Rupee, volatile freight market, and end of concessionary period gas. Distribution and administrative expenses also grew considerably owing to the full-year operation of three production plants and robust volumes. Other expenses were magnified by 178.80 percent in 2021 mainly on account of booking an impairment loss of its brand Bubber Sher during the year. Other income dropped by 33.14 percent as monetary easing during the year squeezed the profit on loans to related parties. Besides, there was no gain on re-measurement of investment classified as FVTPL. Loss allowance on subsidy receivable from GoP and unwinding of provision on GIDC also played a role in diluting the net margin of the company. The bottom line was able to post year-on-year growth of 39.17 percent in 2021 to clock in at Rs.18,474.27 million with EPS of Rs.8.8 and NP margin of 16.42 percent.

In 2022, FATIMA’s topline grew by 41.17 percent year-on-year. This came on the back of 1.46 percent growth in the company’s sales volume which clocked in at 2.716 million tons in 2022. Moreover, the prices of all the products staggeringly increased during the year on account of the global commodity super cycle. Inflation, Pak Rupee depreciation, towering commodity prices in the international market, and the full-year impact of an increase in gas prices translated into a 53.21 percent surge in cost of sales in 2022. Gross profit improved by 21.76 percent year-on-year in 2022, however, GP margin fell to its 6-year lowest level of 33 percent. Distribution and administrative expenses recorded a steep hike of 58.66 percent and 52.94 percent respectively in 2022. The main growth drivers were high sales volume, fuel price hikes, inflationary impact, and an increase in the number of employees to 3724. Exchange loss, impairment against advances, and loss on re-measurement of investments classified as FVTPL drove other expenses up by 36.86 percent year-on-year in 2022. Higher discount rates pushed up profit on loans to related parties as well as profit on investments and saving deposits. This coupled with a gain on disposal of stores and spares resulted in a 72.62 percent increase in other income in 2022. Operating profit built up by 11.43 percent year-on-year in 2022, however, OP margin fell to 21.52 percent. Finance cost spiked by 64.62 percent year-on-year in 2022 which was the consequence of a higher discount rate coupled with a massive rise in both short-term and long-term borrowings. FATIMA recorded 15.29 percent lesser unwinding of provision for GIDC in 2022. Loss allowance on subsidies receivable from GoP ticked up by 4.53 percent in 2022. In 2022, FATIMA recorded a share of loss worth Rs.68.41 million from associate its company [Fatima Agri Sales and Services Private Limited]. Then retrospective imposition of super tax also played its due role, resulting in a 22.58 percent thinner bottom line worth Rs.14,301.98 million in 2022. EPS slipped to Rs.6.81 in 2022. NP margin also stood at its lowest level of 9 percent in 2022.

FATIMA registered year-on-year topline growth of 46.57 percent in 2023. This was on account of 5.52 percent higher sales volume which clocked in at 2.866 million tons in 2023. Higher dispatches were the result of robust demand for NP as the country’s agriculture sector showed signs of recovery after the devastating floods of 2022. The inclusion of full-year operations of the Multan plant also buttressed the results of the company in 2023. During the year, NP contributed 48 percent to the overall sales revenue of FATIMA followed by UREA [23 percent] and CAN [18 percent]. The cost of sales soared by 50.79 percent year-on-year on account of Pak Rupee depreciation, sky-rocketing inflation, and higher fuel costs. Furthermore, the reduction in gas subsidies released by GoP also inflated FATIMA’s cost of sales. This squeezed its GP margin to 31.11 percent in 2023, while there was a 38 percent year-on-year rise in gross profit in absolute terms. Distribution and administrative expenses escalated by 30.27 percent and 37.40 percent respectively on account of an increase in operational activity and greater volumes. Implementation of axle load regulations and elevated fuel prices also pushed up operating expenses in 2023. Other expenses rose by 19.10 percent in 2023 on account of brand amortization, exchange loss, and increased provisioning for WWF and WPPF. Other income strengthened by 248.33 percent in 2023 due to increased profit on investment and saving accounts, gain on re-measurement of investments classified as FVTPL, and mark-up on credit sale of fertilizers. Operating profit improved by 56.36 percent in 2023 with OP margin climbing up to 22.96 percent. Finance costs mounted by 40.48 percent year-on-year in 2023 primarily due to a higher discount rate. This was despite the fact that the company considerably reduced its outstanding borrowings during the period. The unwinding of provision for GIDC slid by 29.31 percent in 2023. Conversely, FATIMA booked a 620.54 percent higher loss allowance on subsidy receivable from the Government of Pakistan in 2023. FATIMA’s net profit stood at Rs.22399.40 million in 2023, up 56.62 percent year-on-year. This translated into EPS of Rs.10.67 and NP margin of 9.62 percent in 2023.

Recent Performance [9MFY24]

During 9MFY24, FATIMA registered a thin topline growth of 5.89 percent. Sales volume dropped from 2.095 million tons in 9MFY23 to 1.684 million tons in 9MFY24. This was on account of poor farm economics due to the wheat crisis and lower cotton production on account of heavy rainfall and heat waves. Cost of sales dropped by 5.625 percent in 9MFY24 as higher input cost was greatly offset by the release of the remaining balance of subsidy on RLNG which is supplied to the Sheikhupura plant. This resulted in a 26.48 percent higher gross profit in 9MFY24 with a GP margin of 37.77 percent versus a GP margin of 31.63 percent recorded during the same period last year. Inflationary pressure and axle load requirements resulted in 20.42 percent higher distribution expense and 38.64 percent higher administrative expense in 9MFY24. Higher profit-related provisioning resulted in 70.79 percent higher other expenses in 9MFY24. However, it was greatly offset by 155.81 percent higher other income recorded during the period on the back of higher return on investments. FATIMA recorded a 29 percent improvement in its operating profit in 9MFY24 with OP margin clocking in at 26 percent versus OP margin of 21.4 percent recorded in 9MFY23. Finance costs dropped by 36.23 percent in 9MFY24 due to better cash flow management and efficient utilization of borrowing lines. Unwinding of provision for GIDC plummeted by 69 percent during the period. Moreover, the company booked a 216.86 percent greater loss allowance on subsidies receivable from the government. The effective tax rate dropped from 58 percent in 9MFY23 to 45 percent during the current period owing to the retrospective application of super tax in the previous period. FATIMA posted a 79 percent higher net profit in 9MFY24 to the tune of Rs.22636.06 million with EPS of Rs.10.78 and an NP margin of 13.41 percent. This was against the EPS of Rs.6.02 and NP margin of 7.93 percent posted during 9MFY23.

Future Outlook

The initiatives launched by the government of Pakistan to increase the area under cultivation and per acre yield are paramount for the fertilizer industry. The massive increase in the import of agricultural machinery during the ongoing year is a good omen for the agriculture sector and bears witness to increased awareness of modern agricultural practices. This in turn is a good sign for the fertilizer industry. Lower discount rates and inflation may also support the agricultural and fertilizer industries. The key risks for FATIMA are insufficient gas supplies to its Sheikhupura plant and the inability to pass on the impact of the Mari gas price hike.

Recently, the company has also announced its intent to demerger with Pak Arab Fertilizers. Under the scheme, the company will transfer its Multan operations to Pak Arab Fertilizers.