Chemicals: DAWOOD HERCULES CHEMICALS LIMITED - Analysis of Financial Statements Financial Year 2002 - 2003 Q 2009

Dawood Hercules Chemicals Limited (DHL) is a public limited company. It was incorporated on 17th April 1968 as a joint venture between Dawood Group of Industries and Hercules Inc USA. At the time of its inception, it was the largest ammonia/urea plant in the country. DHL manufactures and markets urea under the brand name of 'Bubber Sher'.
Moreover, it also provides anhydrous ammonia for the manufacture of soda ash, fructose and other miscellaneous chemicals. The major customers in this regard are ICI Pakistan, Sitara Chemicals, Olympia Chemicals and Kamal International.
FERTILISER SECTOR
In the first quarter of FY09, market demand for urea stood at 1.5 million tons as against 1.4 million tons in the same period last year. This was mainly due to increase in cultivation area due to increase in support prices of wheat from Rs 625/40 kg to Rs 950/40 kg. The increase in urea demand was met by both domestic production and imports.
The domestic production in the first quarter, however, remained lower than the SPLY. As a result, urea imports rose from 125Kt to 375Kt in the first quarter of 2009. In the international market, urea prices showed an upward trend after a sharp decline in the last quarter of FY08. Average price of imported urea stands at Rs 1,210 ($281/ton) against the prevailing average domestic price of Rs 670 per bag.
The domestic industry continues to make important contribution to agricultural sector by keeping urea prices way below the international prices. The closing inventory for urea market stands at 38Kt in the first quarter of 2009 as compared to 71Kt in the SPLY. Fertiliser sector recorded a 24 percent net profit of Rs 13.7 million in FY08 as against Rs 11 billion in the same period last year.
In terms of earnings growth in percentage, Engro stood first with 34 percent growth in profit after tax, FFC recorded 22 percent, FFBL grew by 14 percent and DAWH's earnings declined by 70 percent. In terms of total sector's profitability, FFCL contributed the most with 39 percent share, followed by Engro with 25.3 percent, DAWH and FFBL with 18.3 percent and 17.3 percent share respectively. Fertiliser sector, in general, recorded 26 percent top line growth.
This was mainly due to rising fertiliser prices. Average urea price during the year stood at Rs 581 per bag as compared to Rs 486 per bag in the same period last year. Also, 9.5 percent rise in urea off-take was witnessed in FY08. Urea off-take for the fertiliser companies stood at 4.15 million tons in FY08 as compared to 3.8 million tons in the same period last year.
Sector's gross profit increased by 33 percent as compared to 31 percent in the same period last year. This growth was mainly supported by increase in urea prices in FY08. Net margins, on the other hand fell to 16.9 percent from 17.3 percent previously mainly due to 107 percent increase in financial charges. Financial charges, on the other hand, rose due to higher short-term borrowings and exchange losses incurred by FFBL and Engro.
Urea off-take in FY08 has reached 5.5 million tons depicting an increase of 12.5 percent. Whereas, the growth in DAP off-take declined by 45.3 percent in FY08. This was mainly due to volatility being observed in the urea prices internationally and a low amount of subsidy of Rs 470 per 50-kg bag provided on DAP. However, on account of depreciation of Pakistani rupee, the impact of lower international fertilizer prices has not been passed on to the domestic market.
RECENT RESULTS 2003 Q 2009
Countrywide off-take of urea for the 1st nine months of the year 2009 was 4.641 million tons as against 4.031 million tons depicting an improvement of 15% over the same period last year. Domestic production of 3.734 million tons of urea is almost same as compared to the corresponding period last year.
Import of 1.036 million tons of urea by the government as against 0.210 million tons last period has helped in reducing the gap between demand and local production. Inventory of urea in the country as of 30th September 2009 was approximately 0.196 million tons against 0.065 million tons a year before. During the period under review, the company sold 368,641mt of urea as against 384,090mt for the same period last year.
Through more efficient plant operations and capacity utilization of 112%, Dawood Hercules was able to produce 373,885mt of urea against 370,415mt for the same period last year. The company recorded a loss of Rs 1,026 million for the 1st nine months of the year 2009 as against a net profit of Rs 2,262 million for the same period last year.
The main reason for the loss is the charge of Rs 2,599 million to income statement of the company in pursuant to SRO 150(1) 2009, dated 13th February 2009 issued by the Securities and Exchange Commission of Pakistan, being 3/4 of the impairment loss in respect of equity shares of the SNGPL based on 30th September 2009 price.
The other reason is a decline of Rs 818 million in the share of income from associate. Distribution charges have also increased by 725%. Gross margin was 38% for the period under review as compared to 41% in FY08. The pressure on the margins is due to increased costs on feed gas.
Loss per share for the 1st nine months ended 30th September 2009, including the share of income from associate, stood at Rs 9.38 as compared to Earnings of Rs 20.68 per share for the same period last period. Investment in Engro has been increased through a rights issue. For this purpose short term finance has been arranged.
FINANCIAL PERFORMANCE (FINANCIAL YEAR 2003 - FINANCIAL YEAR-2008)
KEY FIGURES:
-- Total production increased by 12 percent to 497,940 million tons (2006 = 446.7Mt).
-- Total capacity utilization 112 percent.
-- Urea Sales up by 16 percent to 508,540 tons (2006 =437.73Mt).
-- Sales up by 29 percent to Rs 5,011 million (2006=Rs 3,882 million).
-- Operating profit up by 46 percent to Rs 1,572 million.
-- The company's investment portfolio comprises mainly of a 38 percent ownership of Engro Chemicals Pakistan Limited and 19 percent ownership in SNGPL.
In FY08, DAWH's urea production stood at 508,050 metric tons as against the capacity of 498 thousand metric tons. Also, during the year, plant shut down remained at 33.394 days on account of gas curtailment and maintenance. The capacity utilization for the year increased from 112 percent to 114 percent.
The year 2008 recorded sales of Rs 7,428 million as compared to Rs 5011 million for the year 2007 growing at 48 percent annually. Gross profit for the period under review stood at Rs 3,116 million as against Rs 1,862 million in 2007.
The operating profit showed a healthy increase of 73.5% for the year under review and climbed to Rs 2,726 million as compared to Rs 1,571 million of the year 2007. Financial charges on the other hand recorded a growth of 19 percent. The profit before tax and share from associate declined to Rs 2,334.5 million (2007: Rs 9,795 million). Profit after tax as a result, declined by 70 percent in FY08 and stood at Rs 3,062 million (FY07: 10,134 million).
Compared with the industry averages, company's gross profit margin has remained above the industry averages. Over the last six years, only in 2004, gross profit margin was marginally lower than the industry averages. In FY08, DAWH's GPM stood at 41.95 percent of sales as compared to industry average of 35.01 percent. This shows company's lower COGS as compared to other players.
Similarly, DAWH's Return on Assets has been higher than the industry averages. Over the last six years, DAWH has been able to maintain higher profitability relative to its assets as compared to overall industry. This shows that efficient management is at work to produce greater earnings from its assets as compared to other industry players.
Return on Equity (ROE) on the other hand has not been able to stay up to the industry averages. Over the last six years, company's ROE exceeded industry averages only in year 2007. In the fiscal year 2008, DAWH's return on equity remained lower than the industry average and stood at 17.62 percent. (Industry Average = 29.10 percent). This shows that company has been able to generate lower profitability from shareholder's invested wealth as compared to industry averages.
The company's current ratio declined from FY03 to FY06. This is mainly due to higher rate of growth witnessed in current liabilities as compared to current assets. In FY07, current liabilities decreased by 46 percent mainly due to 61 percent decline in short term running finance. This, showed a positive impact on the company's liquidity position such that current ratio jumped to 3.15 in FY07 (LY=1.28).
In FY08, liquidity position further improved which was supported by 55.3 percent decline in current assets as compared to 55.9 percent decline in current liabilities. Current assets have declined due to decline in stock in trade and short-term investments. Current liabilities have decreased due to a decline in short-term financing.
Compared with the industry averages, company's ability to pay short-term borrowings has remained better than the average industry in general. This shows that company is more capable to pay-off its debts. DAWH's inventory turnover has shown irregular trends over the last six years. In FY08, inventory turnover stood at 40.61 as compared to 64.04 in FY07. In comparison to industry trend, the company has been able to maintain lower inventory turnover.
DAWL has traditionally maintained a very low level of debtors. The FY08 also saw the lowest level of closing debtors over the period under review. This low level of debtors and against the higher sales revenue is reflected in the lowest DSO over the period. However, operating cycle has posted an increasing trend, racing upwards tremendously with a correspondence rise in the inventory turnover (days).
This decline in Total asset turnover ratio may then be attributed to an increase in total assets as a result of the BMR activities during the period. The sales to equity increased in FY08 on account of 8 percent decline in equity and 48 percent growth in sales as compared to last year. DAWH's debt to asset composition has also shown somewhat mixed trends.
It rose to its peak in 2006 when analysing the last six years' financials. However, in comparison with the industry averages, debt to equity of DAWH stood lower than the industry averages. In the FY06, DHL acquired a significant additional short-term financing resulting in an increased in the Debt to assets and Debt to equity.
The decrease in debt-to equity during 2007 was mainly due to higher capital gains realized on the sales on investment in associate amounting to Rs 8,669,697 million, improved profitability and higher sales volume resulting in significant increase in equity. In FY08, debt to asset ratio stood at 0.32 as compared to industry's 0.429.
During FY07, the company changed its approach to capital management by financing its activities through long-term financing rather than short-term financing arrangements. This is reflecting in the long-term to assets ratios of the FY07, which increased drastically due to long-term financing by issuing Islamic Sukuk Certificates worth Rs 6,500 million under diminishing Musharaka arrangements.
It was taken for the purchase of plant and machinery. During FY08, short-term financing declined by 97 percent. The Times Interest Earned for DAWH had been better than the industry averages. It continued to decline up to FY06 after which it has been increasing till FY08.
The FY07 witnessed an increase in its TIE mainly due to decline witnesses in the short term financing. Industry analysis shows that TIE has been decreasing from FY04 onwards. In FY08, Industry's TIE stood at 6.3 whereas DAWH's TIE stood at 3.02.
At the close of the financial year 2008, the company recorded an earning per share of Rs 28, with a price to earnings ratio of Rs 8.37 per share. The strong performance depicts the market confidence for the company. There was a significant gain in net worth during the year 2007 amounting to Rs 9,616 million which was a rise of 104% over the last year and therefore increased the per share book value from Rs 111.90 to Rs 227.95.
Company's earnings per share in comparison to industry averages, has been higher for the last six years. This is particularly significant and shows company's profitability position. Similarly, returns to stockholders, in terms of dividends per share, has been higher than the industry averages.
However, price to earnings ratio of the company and the industry overall has somewhat remained same over the last six years. In FY08, price to earnings ratio of the company stood at Rs 7.87 as compared to Rs 4.25 in the same period last year.
FUTURE OUTLOOK
The Grower and agricultural experts have requested the government to give subsidy on retail sale of fertiliser instead of giving it to fertilizer companies so that the farmers could get direct benefit from the subsidy system. They are of the view that the companies are getting benefits in terms of oil, gas supplies and GST, whereas they are not transferring the benefit to the masses and are not providing the fertilizer on subsidized rates.
Similarly, on the back on decent cotton and robust wheat crops, increased crop prices, a tight demand-supply situation and the existing 57 percent differential to international prices should enable urea manufacturers to post significant improvements in the FY09. Similarly, keeping in view the importance of fertilizer on agriculture in general, GST from fertilizer sector has been withdrawn.
Also given the urea shortage in the country combined with pricing power in the hands of the urea producers, urea manufacturing continues to remain a low risk business. To an extent where fall in prices of imported urea does not pose a threat as price of local urea is still at around 40 percent discount to prices of imported urea. DAP domestic prices, on the other hand, pose some challenges to the manufacturers and importers due to drastic fluctuations in primary margins carry some amount of risk.
As of 31st March, 2009 urea inventory stood at 40Kt which is way below the market demand. The government of Pakistan will have to ensure steady supply of fertilizers in the market through imports. In an important move, Dawood Hercules Company invested in Engro Chemicals Pakistan Limited. By virtue of its holdings in ECPL, DWHL shareholders are now entitled to 40 percent shares as Rights shares.
Government will continue to provide subsidy on fertilizer during current calendar year. However, some uncertainty exists for companies sitting on DAP inventory such as FFBL and Engro. These companies will have to mark down existing inventory of DAP when importers bring cheap DAP into the country. The decline in international fertilisers prices is attributed to slowdown in demand, decrease in fuel prices and fears of global recession.
Other factors include, falling food prices and resumption of fertiliser export from China, previously reduced owing to high export taxes. In addition, fall in fertilizer prices also reflected by the slowing global credit crunch that has slowed down the entire fertilizer supply chain.
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].