Fauji Fertilizer Bin Qasim Limited

Fauji Fertilizer Bin Qasim Limited (PSX: FFBL) was incorporated in Pakistan as a public limited company. The company is engaged in the manufacturing, purchasing and marketing of fertilizers. The company has investments in diverse fields such as food and dairy products, power generation, financial services and chemicals.

Pattern of Shareholding

As of December 31, 2022, FFBL has a total of 1291.253 million shares outstanding which are held by 14,165 shareholders. Fauji Fertilizer Company Limited is the major shareholder of FFBL holding 49.88 percent of its shares. This is followed by Fauji Foundation having a stake of 18.29 percent in the company. Local General Public accounts for 14.01 percent of the outstanding shares of FFBL. Around 8.76 percent of FFBL’s shares are held by Banks, DFIs and NBFIs and 3.94 percent by Joint stock companies, charitable trusts, cooperative societies etc. Insurance companies hold 3.14 percent shares of FFBL while Modarabas and Mutual funds hold 1.70 percent shares. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

FFBL’s topline has been growing since 2018 with the magnitude of growth augmenting with each passing year. The bottomline and margins worsened in 2019 and the company also posted net loss during the year. In 2020 and 2021, FFBL’s bottomline and margins took an upward flight but slumped in 2022. The detailed performance review of each of the years under consideration is given below.

In 2019, FFBL’s topline grew by 9 percent year-on-year. During the year, the company produced 508 Kt of Urea as against 562 Kt in 2018, signifying a 10 percent drop; however, the entire quantity produced was successfully sold during the year. DAP production stood at 831 Kt which was then the highest ever production achieved by the company but the company could only sell 687 Kt of DAP during the year due to heavy imports which created overflow in the market hence creating intense competition. Cost of sales inched up by 14 percent year-on-year on account of increased cost of phosphoric acid as Pak Rupee steeply depreciated in 2019. Moreover, increase in feed and fuel gas tariff, continuation of GIDC levy and inflationary pressure did the trick. This translated into a 28 percent year-on-year fall in the gross profit of FFBL with GP declining from 13.3 percent in 2018 to 8.8 percent in 2019. Distribution expense grew by 18 percent year-on-year in 2019 which was the result of implementation of axle weight regime in the 2QCY19 which greatly reduced the consignment weight on the trucks and pushed the freight cost as well as warehousing expense during 2019. Administrative expense went down by 8 percent year-on-year in 2019 due to lower payroll expense as the number of employees reduced from 2954 in 2018 to 2253 in 2019. Other expense also provided some respite as it tapered off by 49 percent year-on-year in 2019 due to lesser exchange loss compared to 2018. Other income grew by 37 percent year-on-year as the company earned higher profits on bank accounts and mark-up on subordinated loans due to higher prevailing discount rate in 2019. Moreover, hefty dividend income also played its part in boosting the other income in 2019. However, operating profit lost its footing and nosedived by 29 percent year-on-year in 2019 with OP margin shrinking from 6.6 percent in 2018 to 4.3 percent in 2019. Late receipt of subsidy and sales tax refund from the government as well as unsold inventory of DAP created liquidity crunch for the company in 2019 which led to higher working capital related borrowings from banks. Due to elevated discount rate, finance cost massively grew by 134 percent year-on-year in 2019. Debt to equity ratio rose from 60 percent in 2018 to 73 percent in 2019. To make things worse, FFBL also incurred an impairment loss of Rs.1520 million on its equity investment in Fauji Foods Limited (FFL) and Fauji Meat Limited (FML). All the downbeat factors pushed FFBL’s bottomline into red zone in 2019. The company reported a net loss of Rs.5920.75 million in 2019 versus a net profit of Rs.1436.53 million in 2018. This resulted in a loss per share of Rs.5.72 in 2019 versus an EPS of Rs.1.54 in 2018.

FFBL’s topline further grew by 25 percent year-on-year in 2019. The company produced 559 Kt of Urea in 2020, 10 percent higher than the last year’s production volume, while DAP production stood at 740 Kt which was 11 percent lower than last year due to carried forward inventory from last year. FFBL utilized the available gas for DAP to produce more Urea in 2020. The company sold the entire 559 Kt of Urea produced in 2020, resulting in 10 percent higher sales volume. DAP sales also grew by 35 percent year-on-year to clock in at 926 Kt in 2020. The improved sales volume was the result of superior performance of agriculture sector in 2020 which grew by 2.7 percent during the year as wheat and rice output significantly grew on account of higher area dedicated to these crops. Water availability also increased during the year. The agriculture sector largely remained protected from the harsh affects of COVID-19 as the crops were harvested before the supply chain disruptions kicked in. Cost of sales grew by 16 percent year-on-year in 2020, however due to better prices and sales volume; gross profit tremendously grew by 114 percent in 2020, translating into a GP margin of 15.1 percent. Distribution expense slid by 1 percent despite higher sales volume due to lower product transportation charges as well as sales promotion and advertisement charges incurred during the year. Administrative expense also slumped by 12 percent year-on-year due to lower payroll expense as the number of employees further went down to 1904 in 2020. Other expense tapered off by 51 percent year-on-year in 2020 while other income grew by 19 percent year-on-year. Operating profit swelled up by 283 percent year-on-year in 2020, resulting in a GP margin of 13.1 percent. Increased cash generation during the year due to better sales volume resulted in a lower utilization of working capital lines in 2020. This resulted in a 15 percent year-on-year drop in finance cost with debt-to-equity ratio of 61 percent in 2020. On the gloomy note, the impairment loss of equity investment in FFL and FML magnified by 169 percent year-on-year in 2020 as their businesses were greatly affected by the slowdown of economy. While this diluted the bottomline growth but still the company was able to post net profit of Rs.2192.44 million in 2020 as against the net loss in the previous year. NP margin stood at 2.6 percent in 2020 while EPS clocked in at Rs. 2.12.

FFBL’s topline grew by 33 percent year-on-year in 2021. While DAP production grew by 7 percent year-on-year to clock in at 790 Kt in 2020,urea production inched down by 10 percent to clock in at 501 Kt due to 10 percent reduction in natural gas supplies. Agricultural sector boasted an encouraging 3 percent growth in 2021 on the back of high yield of important crops such as wheat, cotton, sugarcane, rice and maize. High demand of urea and DAP as well as high international prices of Urea and DAP resulted in upward price revisions in the local market as well. Cost of sales posted a 25 percent year-on-year hike due to increase in the prices of phosphoric acid throughout the year. Gross profit improved by 76 percent year-on-year in 2021 with GP margin climbing up to 20.1 percent. Distribution expense grew by 7 percent year-on-year in 2021 due to fuel price hike. Administrative expense posted an increase of 27 percent year-on-year on account of high payroll expense owing to market induced rise in salaries and wages in 2021. Other expense posted a momentous rise of 720 percent year-on-year in 2021 due to hefty exchange loss coupled with increased provisioning against WWF and WPPF. Other income grew by 76 percent year-on-year in 2021 as the company made gain on sale of its equity investment in Foundation Wind Energy- I Limited and Foundation Wind Energy - II Limited besides earning interest income on short-term investments. Operating profit grew by 97 percent year-on-year in 2021 with OP margin moving up to 19.4 percent. Finance cost dropped by 47 percent year-on-year in 2021 on account of low discount rate coupled with reduced borrowing requirements during the year. Debt-to-equity ratio further rationalized to 51 percent in 2021. FFBL also booked unwinding cost on GIDC payable in 2021 as it recorded temporary gain in the previous year which was reconsidered after the judgment of Supreme Court of Pakistan. Allowance for expected credit losses also massively grew during 2021 to clock in at Rs.4254.30 million. This was on account of subordinated loan given to FML and subsidy receivable from the government. Impairment loss on equity investments in FML and FFL declined by 48 percent year-on-year in 2021. Despite huge unwinding cost and allowance for ECL, the bottomline grew by 192 percent to clock in at Rs.6390.96 million in 2021 with an NP margin of 5.8 percent – the highest among all the years under consideration. EPS also posted in highest value of Rs.4.96 in 2021.

In 2022, FFBL’s topline grew by an even greater magnitude of 44 percent year-on-year in 2022. The company’s DAP sales nosedived by 16 percent year-on-year in 2022 to clock in at 661 Kt due to farmers’ affordability issues as the prices of DAP highly increased during the year and the announcement of Kissan package and wheat support price was delayed. As the company produced 848 Kt DAP in 2022, lower demand resulted in huge inventory carried forward. Conversely, the company produced 524 Kt of Urea in 2021, up by 4 percent year-on-year and the company sold 523 Kt. The increased demand of Urea was due to high prices of DAP and government subsidization of nitrogenous fertilizer. FFBL’s gross profit grew by 17 percent year-on-year in 2021, however, GP margin thinned down to 16.2 percent as a result of changes in sales tax laws after which input sales tax became the part of FFBL’s cost of production from July, 2022. As opposed to this, input sales tax was exempted on DAP imports. Distribution expense grew by 26 percent year-on-year in 2022 due to 38 percent rise in fuel prices during the year. Administrative expenses shrank by 15 percent year-on-year in 2022 due to low payroll expense. Other expense magnified by 204 percent year-on-year in 2022 due to unfavorable movement in exchange rate. Other income ticked down by 30 percent year-on-year in 2022 due to one-off gain on the sale of equity investment earned in 2021. Operating profit decreased by 26 percent year-on-year in 2022 with OP margin thinning down to 10 percent. Finance cost ballooned by 120 percent year-on-year in 2022 on account of higher discount rate as well as increased long-term and short-term borrowings due to slow sales and excessive ending inventory. Unwinding cost on GIDC payable, allowance for ECL and impairment loss on equity investment considerably reduced in 2022 yet couldn’t save the bottomline from shrinking by 64 percent year-on-year in 2022 to clock in at Rs.2327.92 million with an NP margin of 1.5 percent. EPS also climbed down to Rs.1.8 in 2022.

Recent Performance (1QCY23)

FFBL’s topline grew by 27 percent year-on-year in 1QCY23. During the quarter, the company produced 52 Kt of DAP and 89 Kt of Urea which was 77 percent and 26 percent lesser respectively when compared to the production volume of the same period last year. The sales volume of DAP grew by 11 percent year-on-year in 1QCY23 to clock in at 127 Kt which included the inventory carried forward from the previous year. Urea sales, however, posted a decline of 5 percent year-on-year to clock in at 88 Kt in 1QCY23.

The drop in the production volume during 1QCY23 was due to the fact that the company received no gas from SSGC for 36 days due to gas curtailment on account of winter load management. The extended plant shutdown and the turnaround costs coupled with input sales tax becoming the cost of production resulted in a 58 percent drop in the gross profit with GP margin sliding down to 7.1 percent in 1QCY23 from 21.7 percent during the same period last year. Distribution and administrative expense tumbled by 59 percent and 23 percent respectively in 1QCY23. Other expense shrank by 100 percent year-on-year in 1QCY23 due to lesser provisioning for WWF and WPPF while other income inched down by 19 percent during 1QCY23 due to lesser income from subsidiaries and lesser profit on bank balances and deposits. Despite contained operational and other expenses, operating profit thinned down by 47 percent year-on-year in 1QCY23 with OP margin clocking in at 6.9 percent versus 16.9 percent during the same period last year. Finance cost multiplied by a massive 253 percent year-on-year in 1QCY23 due to exorbitant discount rate. As if this wasn’t enough to jolt the bottomline, the company incurred a hefty exchange loss of Rs.4619.83 million in 1QCY23 which was 717 percent higher when compared to 1QCY22. This was due to the overdue payment for the import of the basic raw material, phosphoric acid.

Finance cost and exchange loss were big enough to push FFBL’s bottomline into net loss despite reasonable growth in the sales revenue during the quarter. FFBL posted a net loss of Rs.5429.21 million in 1QCY23 as against the net profit of Rs.1626.86 million during the same period last year. This translated into a loss per share of Rs.4.20 in 1QCY23.

Future Outlook

Going forward, the unavailability of gas will continue to remain a challenge for FFBL creating operational issues for the company and increasing its cost as the plant will have to shift the self generated power which requires expensive fuel. Moreover, the recently imposed 5 percent FED and the removal of tax exemption for DAP will also result in increased prices of Urea and DAP. This will create affordability issues for the farmer community in the absence of any incentive scheme introduced by the government.