Fertilizer:- FAUJI FERTILIZER BIN QASIM LIMITED - Analysis of Financial Statements Financial Year 2002-Financial Year 2007
Fauji Fertilizer Bin Qasim Limited plant site is a modern granular urea and Di-Ammonium Phosphate (DAP) fertilizers manufacturing complex, built at a cost of US $468 million and located in Bin Qasim, Karachi and its head office located at Harley Street, Rawalpindi.
Initially named as FFC-Jordan Fertilizer Company (FJFC) with FFC (30%), FF (10%) and JPMC (10%) as main sponsors, the company was formally listed on stock exchanges in May 1996 and started commercial production from January 2000. Till 2001, it was running in crises due to technical, financial and managerial reasons. DAP plant brought to suspension in 2001 due to accumulated loss of Rs 6.5 billion. It resumed production in September 2003 after a lapse of 2 years.
Renamed as Fauji Fertilizer Bin Qasim Ltd (FFBL) in 2003, the Jordan Phosphate Mines Co (JPMC) sold its entire equity in the company. Phosphoric acid supply agreement with Jordan also terminated accordingly. The company turned out to be profitable after 3 years ie, by 2004 and declared 'maiden dividend' in 2004. It surpassed the profit of the year 2004 in first nine months of year 2005, ie, September 2005. The year 2005, so far has been the most profitable year of the company.
The demand for fertilizer is directly associated with the growth in agriculture sector. Therefore, the fertilizer demand is also a function of changes in weather, economic conditions, water availability, and better support prices (for some of the crops).
Historically, the fertilizer industry faced a demand/supply gap, with demand exceeding the supply. Thus, the industry relies on import of fertilizer. This is because of more than 100% capacity utilisation and no major expansion by any of the players. Lately, some players have carried out expansion plans.
FERTILIZER OFF-TAKES (JAN'08):
According to the data released by the NFDC, total fertilizer off-take stood at 674k ton in Jan'08 reflecting a growth of 39.4% over 483k tons in Jan'07. However, total production of fertilizer products declined 17.9% to 406k tons in Jan'08 from 494k tons in the same month last year mainly due to shutdown of the FFBL plant for revamping purpose. During the month, total urea imports were 75k tons. Other imported supplies were 0.2k tons of DAP, 25k tons of MAP, 5k tons of SOP and 1k tons of MOP.
Urea off-take grew significantly by 59.6% to 583k tons in Jan'08 as against 365k tons in the same month last year whereas the total production of urea stood at 384k tons in Jan'08 as compared to 401k tons last year, a decline of 4.1%. Heavy rains during January significantly surged the off-takes of urea, which was to be applied to wheat crop as top dressing with irrigation water. DAP off take declined by 29.4% to 39k tons in Jan'08 from 55k tons in Jan'07mainly due to higher DAP prices whereas, due to FFBL's DAP plant shutdown, there was no production of DAP during the month of January.
Retail prices of urea witnessed an increase of 10% to Rs 593 per bag in January 2008 from Rs 539 per bag in January 2006. On the other hand, DAP prices continued upward journey and grew significantly by 95.0% to Rs 1,702.0 per bag in January 2008 from Rs 873.0 per bag in January 2007. The prices of DAP reached an all time high of Rs 4000 per bag in wake of rising international prices due to rising prices of phosphate and high demand. It is expected that DAP and urea prices will rise further as China planning to place export tariffs on its fertilizer export. In a tight supply and expanding demand scenario, the prices are expected to increase further.
==================================================================
Production & Offtake data 000'tons
==================================================================
Jan'08 Jan'07 Chg.(%)
------------------------------------------------------------------
Production Offtake Production Offtake Production Offtake
------------------------------------------------------------------
Urea 384 583 401 365 -4.1% 59.6%
DAP - 39 42 55 -100.0% -29.4%
NP 2 13 18 21 -88.8% -37.0%
SSP 8 8 12 6 -27.7% 19.7%
CAN 3 19 19 27 -85.1% -28.1%
NPK 8 6 3 3 217.6% 112.3%
Others - 6 - 6 0.0% 3.5%
Total 406 674 494 483 -17.9% 39.4%
==================================================================
Fauji Fertilizer Bin Qasim Limited is a subsidiary of Fauji Fertilizer Company Limited catering to two of the unique products namely granular urea and DAP, having a total installed capacity of 1670mtpd and 1350mtpd respectively. Thus, it enjoys a huge growth potential in both segments. FFBL also uses the marketing and distribution network and brand name of "FFC SONA UREA" to sell its products. FFBL is the only fertilizer complex in Pakistan producing DAP fertilizer and Granular Urea thus making significant contribution towards agricultural growth of the country by meeting 31% of the demand of DAP and 13% of Urea in domestic market.
In 2007, FFBL successfully completed ammonia plant BMR. In order to implement the same, plant operations remained suspended for nearly two months and for a month more owing to ammonia compressor couplings damage and reformer refractory failure. Since then ammonia plant has been running smoothly. DAP revamp also commenced with effect from December 10, 2007 after detailed engineering, which is expected to complete by end March 2008. Urea and DAP plants operated for 268 and 246 days respectively, which were lower than the last year, resulting in lesser production.
FFBL, the sole DAP producer in the country, is the main beneficiary of elevated DAP prices. Any rise in DAP prices would likely to improve company's gross margins.
Fertilizer industry - urea production, import and sales
Year 2007 started with 233 KT urea inventories, which was 224% higher than the opening inventory of year 2006. Higher opening inventory with marketing companies, imports of 55 KT by TCP, large carryover stocks with the dealers and its low consumption resulted into an over supplied situation of Urea during the period under review. For Rabi season in November, government also arranged 150 KT Urea imports from Saudi Arabia to ensure adequate supplies in the local market. The entire quantity of January 2007 imports and 50% of December imports were handed over to NFML and the balance quantity distributed among manufacturers for marketing. All urea manufacturers carried inventories throughout the year, which peaked at a high level of 810 KT in May 2007. It resulted into an immense competition among the companies, who offered lucrative incentives and discounts to increase sales and liquidate their stocks. All time high sales during quarter July-September improved the situation. However, sales for the year 2007 at 4,917 KT comparing 5,247 KT sales in the last year resulted in 6% decline.
Total urea production during the year was 4,755 KT, ie, 1% lower than 4,804 KT produced in year 2006. In January 2007, urea prices were increased by Rs 10 per bag by all marketing companies, though reduced by Rs 7 per bag during February 2007 due to 10% reduction in fuel gas price by GOP. Urea prices were increased by Rs 10 per bag in July 2007 and again by Rs 10 per bag in December 2007.
Fertilizer industry - DAP production, import and sales
DAP market at the beginning of the year 2007 showed a healthy trend, which was a continuation of the high demand situation of year 2006. DAP inventory at the commencement of the year was 119 KT, which was 59% lower comparing 292 KT inventory at start of the year 2006. Production during the year 2007 was 357 KT ie, 21% lower than 450KTduring year 2006.
Sales and availability of DAP are highly dependent on imports and international market prices. A dramatic rise in price from US $250 per ton to US $620 per ton was observed in the international DAP market during the year, which left no choice for importers but to increase the price of DAP in domestic market. Consequently, Government of Pakistan (GOP) improved the subsidy from Rs 250 per 50 Kg bag to Rs 470 per bag, in order to ensure availability of DAP at reasonable prices in the country. Despite the subsidy by the GOP, prices of DAP increased by around Rs 470 per bag during FY07.
Higher prices may have a negative impact on DAP use in the country during the year 2008. Regular imports of DAP by different parties and production by the FFBL plant maintained a balanced supply situation throughout the year. 1200 KT DAP was imported during the year. Sales during the year 2007 are estimated at 1,424 KT, depicting a decline of 6% against 1,508 KT sales of the last year. Inventory at the end of December 2007 is estimated at 251 KT, comparing 119 KT inventory at the end of year 2006. The existing inventory in the country is sufficient to meet the requirement of Rabi season 2007-08.
OPERATIONAL HIGHLIGHTS:
During the year under review, FFBL achieved daily ammonia production of 1,575 MT ie 124% on September 16, 2007. However, ammonia production at 362 KT was 19% below the production of the previous year 2006 and 8% below the target. Granular urea production at 488 KT was 19% lower than last year and 12% below the target, whereas DAP production at 357KT was 21% lower than the last year, achieving 9% over the target. Urea inventory stood at 22KT, which was 12% lower as compared to 25KT inventory of year 2006. Similarly, DAP inventory at 9KT was 125% higher as compared to 4KT closing inventory of December 2006.
Ammonia BMR project was implemented in two phases, Phase-I was executed in year 2006 and Phase-II during March-May 2007 turnaround, involving 62 foreign vendor service men (VSM) from different countries at a cost of 48.5 million euros. Ammonia production capacity has increased to 123%. DAP plant revamp was undertaken in 2007 wherein DAP plant capacity would be enhanced to 150% of its designed capacity. The company has recently completed its DAP revamp project, which has increased DAP plant capacity by 51.5% to 675ktpa from 446ktpa earlier. The plant has already started its test operations, which are likely to continue for 15 days after which the plant would likely to operate at 100% capacity utilisation rate. Feed gas subsidy as well as GOP compensation shall end in the year 2008. The effects of these events are being mitigated through the above mentioned capacity expansions. The increased capacities will also cater to a certain extent, for the increased fertilizer requirement of the country. Amendment to existing GSA was signed by SSGC and FFBL on December 15, 2007 after hectic efforts. As per revised agreement, required quantity of gas ie, 85mmscfd has been secured up to the year 2015, extendable for further 10 years.
The DAP sales and cost of sales, net of subsidy decreased by 16% and 26% respectively. It is mainly attributable to continuity of DAP subsidy mechanism for the entire year. Lesser production during the year has resulted in lower raw material consumption. Selling expenses also decreased by 25%. Other income includes GOP compensation, which has decreased from Rs 700 million in the year 2006 to Rs 600 million in 2007. Other income mainly through treasury operations increased from Rs 552 million to Rs 652 million.
PAKISTAN MAROC PHOSPHORE S.A, MOROCCO (PMP):
The Project has entered the start up phase, to complete within 2030 million MAD (Moroccan Dirham) as budgeted. On commissioning, this project will ensure uninterrupted supply of phosphoric acid (core raw material) for DAP plant, coupled with enhanced earnings in the form of dividend. First off shore shipment of phosphoric acid is expected in March 2008, which will coincide with completion of FFBL's DAP plant de-bottlenecking already started from 10 December 2007. FFBL has a stake of 25% in Pakistan Maroc Phosphore S.A (PMP) company, which is a joint venture between OCP Group of Morocco and Fauji Group. OCP is one of the largest producers of phosphoric acid in the world.
The PMP project is expected to commence phosphoric acid production by April 2008 and first shipment of phosphoric acid (core raw material for DAP) is expected in May 2008. The investment is likely to enhance FFBL's earnings in two ways: (1) expected dividend income from the PMP from next year, and (2) expected increase in FFBL's profitability from guaranteed long term supply of phosphoric acid for its DAP plant at comparatively lower rates than the international benchmark.
FOUNDATION POWER COMPANY (DHARKI) LIMITED (FPCDL):
The project operations are likely to commence by 3rd quarter 2009. Investment in Fauji Cement Company Limited (FCCL) expansion project cement industry has witnessed exceptionally higher growth in local consumption as well as in exports during the year ended June 2007. In order to benefit from the growing demand, plant's expansion is becoming lucrative option for the cement manufacturers. Given the advantages of growing demand of cement and the diversification, the company has decided to invest in this business. FFBL has invested an amount of Rs 300 million in this project to become a 2.8% ordinary shareholder, thereby adding to its earnings.
FFBL is quite liquid in terms of paying its short-term debt. Its current ratio is well above 1 and hovers around the industry average. However, due to the capacity expansion projects and Ammonia BMR (Balancing, Modernization, Revamping) project successive payment of long-term loan will follow in future. Consequently it will hit the current liabilities of the company, gradually depressing its liquidity position. The partial effect has been reflected in the decline of CR in FY07. Further effect is going to persist in the next annual accounts as well owing to constant investment in BMRE, and expansion projects by the company.
As a nascent company in early 2000, FFBL suffered major losses. However, prudent strategies helped the company to emerge out of this deplorable condition, marking the relentless growth of the company from FY02 onwards. Further, commencement of the previously resumed DAP plant in 2003 increased the profit margins of the company by manifold.
FFBL sold 474KT of urea in addition to 19KT of the imported urea. During the year 2007, total urea sales of 493KT were 26% lower comparing 669KT sales for the year 2006, thereby achieving 77% of the sales target. The company's share of urea market remained at 10%. Sona DAP sales at 352 KT were 26% lower comparing 473 KT in the year 2006, thus meeting 110% of the sales target. DAP market share narrowed to 24.7% as compared to 31.1% in the last year.
Increased fuel/feed gas prices, greater product transportation cost and overall inflation contributed towards rise in urea sales price, consequently keeping the company at advantage. On the other hand, the rise in international DAP (which is mainly imported) prices and freight prices required FFBL to increase the prices of DAP as well. Coupled with the pricing mechanism was cheap availability of natural gas at subsidized rates (till 2009). The combined effect is reflected in the company's soaring profit margins in FY05-FY07. Likewise, ROA and ROE showed an increasing trend following recovery from accumulated losses and hovers around the industry average trend. Increase in KIBOR rates and cost of production might hit the bottom-line and top-line respectively, mitigating any advantage of high per unit sales price.
Though FFBL has a very favourable debt paying ability, it is still worse than the industry. Once the entire long-term loan has been paid-off, the debt payment ratios will gradually increase to come at par with the industry. As can be inferred from the graph, long term debt is the main financing source for FFBL, which depicted a declining trend till FY06 but again rose in FY07 on account of extensive BMR and expansion projects.
As for the interest coverage ratio (TIE), the trend is worse than the preceding years. This may be attributed to the increasingly high finance cost, on account of tight monetary policy and further long-term loans acquired by the company. Once the GoP's compensation to FFBL expires, the company's debt management ratios are going to be effected adversely and may divert from the near to stable trajectory to a depressing one.
In consequent of expansion and enhanced capacity utilisation, inventory level (spares, raw materials, packing material etc) increased by a large amount consequently hitting the inventory turnover and operating cycle of the company. As evident from its DSO, the FFBL however has been efficient in converting its credit sales into cash.
As a result of striking growth in sales, asset turnover ratio and sales-to-equity ratio has been increasing depicting the company's efficiency in asset utilisation as compared to the other players.
On the back of demand/supply gap in the country, expansion projects and subsidized gas availability, higher urea and DAP prices, and re-commencement of DAP production, FFBL has enjoyed a historically increasing trend in its EPS.
Owing to poor performance in the initial years of its inception, FFBL has no dividend pay-out history until FY04. In foreseeable future, the company will be able to establish a strong dividend policy due to improved margins, though it would not be at par with the industry average trend. The book value share of the company is also favorable after its recovery from the accumulated losses at the time of setup.
==================================================================================================
FAUJI FERTILIZER BIN QASIM LIMITED (FFBL)
==================================================================================================
Income Statement ('000) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
==================================================================================================
Sales 3,964,326 5,166,515 11,462,410 14,254,764 14,707,288 12,242,888
Cost of goods sold -2,915,053 -4,002,866 -8,201,623 -9,692,236 -10,023,044-7,420,310
Gross profit 1,049,273 1,163,649 3,260,787 4,562,528 4,684,244 4,822,578
Administration and General Expense 74,706 84,730 90,653 114,470 103,643 131,369
Selling and Distribution Expenses 523,570 580,286 931,066 1,257,698 1,420,401 1,068,629
Other Operating Expenses 8,850 19,970 113,686 169,746 243,074
Total Operating Expenses 607,126 684,986 1,135,405 1,541,914 1,767,118 1,199,998
Other Operating Income:
Compensation from the Government 1,000,000 700,000 700,000 700,000 700,000 600,000
Others 48,145 43,401 107,688 454,123 552,158 651,675
Operating Profit(EBIT) 1,490,292 1,222,064 2,933,070 4,174,737 4,169,284 4,874,255
Financial Charges 338,465 156,705 84,817 259,817 412,370 630,513
other expenses 343,813
Profit before Taxation 1,151,827 1,065,359 2,848,253 3,914,920 3,756,914 3,899,929
Provision for Taxation 979,040 135,641 -1,017,161 -1,465,811 -1,312,056 -1,359,896
Net Profit after Taxation 2,130,867 929,718 1,831,092 2,449,109 2,444,858 2,540,033
--------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
--------------------------------------------------------------------------------------------------
PROFITABILITY Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
--------------------------------------------------------------------------------------------------
Gross Profit Margin 26.47% 22.52% 28.45% 32.01% 31.85% 39.39%
Profit margin 53.75% 18.00% 15.97% 17.18% 16.62% 20.75%
Return on Asset 11.37% 4.80% 8.34% 9.96% 8.83% 8.74%
Return on Common Equity 55.98% 15.48% 25.62% 31.69% 28.64% 29.85%
--------------------------------------------------------------------------------------------------
LIQUIDITY RATIO Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
--------------------------------------------------------------------------------------------------
Current Ratio 0.84 1.62 1.53 1.46 1.34 1.17
--------------------------------------------------------------------------------------------------
ASSET MANAGEMENT Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
--------------------------------------------------------------------------------------------------
Inventory Turnover 54.09 46.37 24.27 40.41 39.11 54.53
Day Sales Outstanding (DSO) 58.57 27.34 13.54 2.91 5.66 7.17
Operating Cycle 112.66 73.71 37.81 43.31 44.77 61.70
Total Asset Turnover 0.21 0.27 0.52 0.58 0.53 0.42
Sales/Equity 1.04 0.86 1.60 1.84 1.72 1.44
--------------------------------------------------------------------------------------------------
DEBT MANAGEMENT Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
--------------------------------------------------------------------------------------------------
Debt to Asset (%) 79.69 68.98 67.47 68.56 69.16 70.71
Debt/Equity 3.92 2.22 2.07 2.18 2.24 2.41
Times Interest Earned 4.40 7.80 34.58 16.07 10.11 7.73
Long Term Debt to Equity (%) 335.94 191.79 144.06 136.00 125.49 128.89
--------------------------------------------------------------------------------------------------
MARKET VALUE Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
--------------------------------------------------------------------------------------------------
Earning per share 3.90 1.31 1.98 2.62 2.62 2.72
Dividend per share 0.00 0.00 1.00 2.00 1.25 1
Book value 4.70 6.60 7.65 8.27 9.14 9.11
Market prices(on Dec 30) 9.55 17.60 30.60 38.15 28.30 42.05
Price Earning Ratio (Times) 2.45 13.44 15.45 14.56 10.80 15.46
Number of shares issued 809,901 909,901 934,110 934,110 934,110 934,110
==================================================================================================
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
Comments
Comments are closed.