Despite a troubled third quarter, Fauji Fertilizer Bin Qasim surprised the market yesterday with its nine-month profits. The company said its bottomline grew by 62 percent year-on-year beating consensus estimates by 7~8 percent. The surprise was mainly because not many had expected FFBL to reap profits from its joint venture in Morocco as primary margins for Phosacid were expected to be on the lower side.
Sales volumes during the nine-month period remained weak as the company witnessed its lowest ever volume (with the exception of crisis-ridden 2008) during the first eight months of CY10. However, it is safe to assume that DAP sales kicked off a bit during September, mainly in anticipation of increased prices going forward due to the RGST. Actual numbers for September are yet to be made public.
What came to the rescue of the free falling volumetric sales were skyrocketing DAP prices that checked the fall in revenue to just 18 percent, which could have been much worse in the absence of a 26 percent increase in the price of DAP.
The gross margins, naturally, improved to 30 percent from 25 percent in the year-ago period. But the bigger picture does not seem exceptionally bright if one focuses solely on the third quarterly results. Although gross margins in the quarter ended September dipped very slightly, it provides enough clue as to how margins might dip in the near future.
Bear in mind, DAP prices during the first two months of the third quarter were 36 percent higher year-on-year. Then what explains the dip in gross margins, especially when feedstock prices for the quarter remained at previous years level?
The answer lies in the huge inventories piling up at the warehouses. Farmers reluctance to buy DAP has resulted in over half a million tons of stockpile, which jacked up inventory costs to nearly Rs7 billion, an increase of 18 times year-on-year.
This huge inventory stoked financial charges which more-than-doubled during the period, as the company faced the situation of negative cash flows and had to arrange short-term financing for its working capital requirements. The operating cash flows went in the red to the tune of Rs7 billion, down from positive operating cash flows of Rs21 billion generated a year ago.
Farmers buying pattern in the remaining Rabi season will determine the fate of FFBL in the near term; some argue that DAP sales are less likely to kick off as higher fertility of the crop land resulting from the floods will reduce the need of applying the phosphate nutrient. If that is the case, then the huge ending-inventory cost will shatter gross margins substantially come the final quarter - a fall that may not be offset even by higher other income from the Morocco joint venture.
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FFBL P&L
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Rs (mn) 9MCY10 9MCY09 % chg 3QCY10 3QCY09 % chg
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Revenue 22,201 27,024 -18% 10,282 12,026 -15%
Cost of sales 15,619 20,639 -24% 7,437 8,591 -13%
Gross profit 6,583 6,385 3% 2,845 3,435 -17%
Gross margins 30% 24% 25% 28% 29% -3%
Finance cost 720 1,188 -39% 388 190 104%
Other income 663 612 8% 199 200 0%
Profit/(Loss) on JV 158 (600) na 129 (283) na
PAT 2,931 1,805 62% 1,209 1,307 -7%
EPS (Rs) 3.14 1.93 1.29 1.40
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Source: KSE notice
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