Fatima Fertilizer Company Limited

Fatima Fertilizer Company Limited (PSX: FATIMA) was incorporated in Pakistan in 2003 as a result of 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, 2022, FATIMA has a total of 2100 million shares outstanding which are held by 9,407 shareholders. Associated companies, undertakings and related parties have the highest stake of 42.66 percent in the company. Directors and their spouse and minor children hold around 32.44 percent of the company’s shares. Sponsors grab the next spot with a shareholding of 13.75 percent in FATIMA followed by Banks, DFIs and NBFIs holding 2.7 percent of the company’s shares. Local general public accounts for 2.12 percent shares of FATIMA. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

The topline of FATIMA has boasted an upward trend except for 2020. Its bottomline kept mounting until 2021 and then tumbled in 2022. The company’s margins which posted tremendous growth in 2018 drastically fell in 2019. In 2020, the margins reasonably recovered only to ride back on its downhill journey thereafter. The detailed performance review of each of the years under consideration is given below.

In 2019, FATIMA’s topline registered 46 percent year-on-year growth. This came on the back of 17.4 percent year-on-year rise to clock in at 1.834 million tons (see the graph of sales volume & net sales). This was due to increase in the sales of both own 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 (see the graph of sales mix). Besides stronger volumes, sales price was also higher in 2019 on account of upward revision in gas prices. Surge in input cost coupled with Pak Rupee depreciation as well as operation of Sheikhupura plant at RLNG resulted in 84 percent year-on-year escalation in FATIMA’s cost of sales. Gross profit improved by 9 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 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 expense incurred during the year. Moreover, higher transportation, legal and professional charges, depreciation and aircraft operating expense pushed up the administrative expense by 20 percent in 2019. Other expense slid by 13 percent year-on-year in 2019 as there was no loss on re-measurement of investment classified as FVTPL. Furthermore, 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 81 percent year-on-year in 2019 mainly on account of profit on loan to related parties. Operating profit mounted by 13 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 percent in 2019 due to higher discount rate 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 percent year-on-year in 2019 to clock in at Rs.12,069.68 million with EPS of Rs.5.75 versus Rs.5.67 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 a year-on-year volumetric sales growth of 1.8 percent to clock in at 1.87 million tons. The increase in sales volume came on the back of an enhanced production capacity during the year by acquiring the production and operating plant of its associated company Pakarab Fertilizer Limited. Despite higher dispatches, 5 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 and a higher GP margin was possible due to subsidy on RNLG released by GoP. Moreover, company’s Sheikhupura plant remained idle for8 months due to unavailability of gas. Selling expense inched up by 2 percent year-on-year in 2020 on account of higher transportation & freight charges. Administrative expense spiraled by 21 percent on account of higher payroll expense as the human resource tally reached to 2502 in 2020. Higher profit related provisioning and exchange loss drove other expense up by 13 percent year-on-year in 2020. However, it was counterbalanced by 66 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 4 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 discount rate cut culminated into 8 percent year-on-year dip in finance cost 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 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 10 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 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 the record high topline growth of 58 percent year-on-year in 2021. The demand of fertilizers remained strong during the year primarily owing to highly favorable wheat support price which encouraged farmers to increase the usage of nitrogenous fertilizers. Gross profit multiplied by 50 percent year-on-year in 2021, however, GP margin took a dive to clock in at 38.30 percent owing to increase in phosphate prices, devaluation of Pak Rupee, volatile freight market and end of concessionary period gas. Distribution and administrative expenses also grew considerably owing to full-year operation of three production plants and robust volumes. Other expense magnified by 179 percent in 2021 mainly on account of booking an impairment loss of its brand Bubber Sher during the year. Other income dropped by 33 percent during the year as monetary easing during the year squeezed the profit on loan to related parties. Besides, there was no gain on re-measurement of investment classified as FVTPL. Then 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 bottomline was able to post year-on-year growth of 39 percent in 2021 to clock in at Rs.18,474.27 million with EPS of Rs.8.8 and NP margin of 16.4 percent.

In 2022, FATIMA’s topline grew by 35 percent year-on-year. This came on the back of 2.17 percent growth in the company’s sales volume which clocked in at 2.735 million tons in 2022. Moreover, the prices of all the products staggeringly increased during the year on account of global commodity super cycle. Inflation, Pak Rupee depreciation, towering commodity prices in the international market and full-year impact of increase in gas prices translated into 44 percent surge in cost of sales in 2022. Gross profit improved by 21 percent year-on-year in 2022, however, GP margin fell to its 6-year lowest level of 34.12 percent. Distribution and administrative expense recorded a steep hike of 57 percent and 51 percent respectively in 2022. The main growth drivers were high sales volume, fuel price hike, inflationary impact and 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 expense up by 35 percent year-on-year in 2022. Higher discount rate pushed up profit on loan to related parties as well as profit on investments and saving deposits. This coupled with gain on disposal of stores and spares resulted in 99 percent increase in other income in 2022. Operating profit built up by 11 percent year-on-year in 2022, however, OP margin fell to 22.44 percent. Finance cost spiked by 46 percent year-on-year in 2022 which was the consequence of higher discount rate coupled with a massive rise in both short-term and long-term borrowings. FATIMA recorded 25 percent lesser unwinding of provision for GIDC in 2022. Loss allowance on subsidies receivable from GoP remained intact at Rs.109.72 million in 2022. Then retrospective imposition of super tax also played its due role, resulting in 23 percent thinner bottomline worth Rs.14,139.15 million in 2022. EPS slipped to Rs.6.73 while NP margin also stood at its lowest level of 9.3 percent.

Recent Performance (9MCY23)

FATIMA registered year-on-year topline growth of 60 percent during 9MCY23 to clock in at 2.095 million tons. This came on the back of 16 percent rise in the company’s dispatches during the period which was the result of robust demand of NP while there was low availability of Urea during the period. Elevated fertilizer prices also played a pivotal role in driving up the topline during the period.

Cost of sales soared by 88 percent year-on-year on account of Pak Rupee depreciation, sky-rocketing inflation and higher fuel cost. Furthermore, reduction in gas subsidy released by GoP also inflated FATIMA’s cost of sales in 9MCY23. This squeezed its GP margin from 41.7 percent in 9MCY22 to 31.63 percent in 9MCY23, while there was 21 percent year-on-year rise in gross profit during the period.

Distribution and administrative expenses escalated by 56 percent and 24 percent respectively on account of an increase in operational activity and greater volumes. Other expense rose by 8 percent year-on-year in 9MCY23 which might be due to depreciating value of Pak Rupee during the period, resulting in exchange loss. It appears that higher discount rate enlarged profit on loans to related parties as well return on investment and saving accounts, validating 100 percent rise in other income during 9MCY23. Operating profit improved by 21 percent year-on-year in 9MCY23, however, OP margin marched down from 28.38 percent in 9MCY22 to 21.4 percent in 9MCY23.

Finance cost further diluted FATIMA’s bottomline and margins as it mounted by 76 percent year-on-year in 9MCY23 primarily due to higher discount rate. This was despite the fact that the company considerably reduced its outstanding borrowings during the period. Imposition of super tax culminated into effective tax rate of 58 percent in 9MCY23. This greatly diluted bottomline growth to 23 percent year-on-year in 9MCY23. FATIMA’s net profit stood at Rs.12,646.82 million in 9MCY23 with EPS of Rs. 6.02 versus Rs.4.88 during the same period last year. NP margin slid from 10.29 percent in 9MCY22 to 7.93 percent in 9MCY23.

Future Outlook

Green Pakistan Initiative launched by the government of Pakistan to increase the area under cultivation and per acre yield will bode well for the fertilizer industry. Moreover, improved farm economics and consistent gas supply as promised by the government will also pave way for optimum capacity utilization by FATIMA. However, high cost of production due to inflationary pressure and withdrawal of subsidy as well as higher discount rate may put margins under pressure.