Agritech Limited

Agritech Limited (PSX: AGL) was incorporated in Pakistan in 1959 as Pak-American Fertilizers Limited. The company is engaged in the production and sale of urea and granulated single super phosphate fertilizer. The company’s products are sold under the brand name “Tara” in the fertilizer market.

Pattern of Shareholding

As of December 31, 2023, the company has a total of 392.430 million shares outstanding which are held by 2276 shareholders. Associated companies, undertakings, and related parties have the majority stake of 34.6 percent in AGL followed by joint stock companies holding 24.52 percent shares of the company. Banks, DFIs, and NBFIs account for 20.37 percent shares while the local general public holds 16.28 percent shares of AGL. The remaining shares are held by other categories of shareholders.

Historical Performance (2019-23)

Except for a drop in 2020, AGL’s topline has been posting staggering growth in all the years under consideration. Despite that, the company is unable to post a net profit in any of the years except 2023. In fact, in 2018 and 2020, the company was not even able to post a gross profit. AGL’s gross and operating margins which came out of the negative zone in 2019 fell back to the same ditch in 2020. The margins took an upward flight thereafter. Conversely, AGL’s net margin stayed in the negative zone until 2022. The detailed performance review of each of the years under consideration is given below.

In 2019, AGL’s topline boasted a tremendous 168.55 percent year-on-year growth. The growth was an industry-wide phenomenon due to robust returns on major crops which increased the purchasing power of farmers. The fertilizer production across the industry also grew by 10 percent during the year due to a better gas supply. During 2019, AGL produced 338 KT of Urea which is 2.5 times of the production volume achieved by the company in 2018. The sales volume also grew from 101KT in 2018 to 320KT in 2019, registering a 2.16 times growth. The cost of sales also grew by 117.43 percent due to a steep rise in the prices of raw and packing materials as well as fuel and power. Yet, AGL was able to post a gross profit of Rs.1573.07 million in 2019 as against a gross loss of Rs.342.34 million in 2018. GP ratio for 2019 stood at 12.9 percent. High freight charges pushed the distribution cost up by 208.45 percent in 2019. Administrative expenses grew by 34 percent in 2019 which largely signifies a market-induced rise in salaries and wages, traveling and conveyance as well as utility charges. Other expenses nosedived by around 99.57 percent during 2019 due to lesser provisions against doubtful receivables. Conversely, other income multiplied by over 43 times in 2019 due to the reversal of Late payment surcharge (LPS) and present value adjustment of GIDC in 2019. This greatly buttressed the operating results of AGL in 2019 and the company posted an operating profit of Rs.2329.41 million in 2019 as against an operating loss of Rs.1057.09 million in 2018. OP margin for 2019 hovered around 19 percent. However, the joy appeared to be momentary as a 27.8 percent year-on-year hike in finance cost didn’t allow the impressive operating performance to cascade down, resulting in a net loss of Rs.652.78 million in 2019, down 80.48 percent year-on-year. Loss per share stood at Rs.1.66 in 2019 as against loss per share of Rs.8.52 in 2018. It is to be noted that AGL had a huge debt-to-equity ratio of 66 percent as of December 31, 2019, hence finance cost stood at 27 percent of its topline in 2019.

In 2020, AGL’s topline slid by 53 percent year-on-year. While COVID-related lockdowns had a significant negative impact on urea off-take in 2020, another significant phenomenon that produced an industry-wide decline in urea off-take in 2020 was market price distortion as the government abolished GIDC for the fertilizer sector that resulted in price cuts by various producers. Moreover, the cotton crop immensely declined in 2020, affecting farmers spending patterns. AGL sold 139 KT of Urea in 2020 which is around 57 percent lower than the last year’s volumes. As the plant remained operational for only 123 days in 2020, the cost of sales plunged by 35 percent year-on-year in 2020. However, low volume and reduced price resulted in a gross loss of Rs.1172.72 million in 2020. Lesser off-take also meant lesser freight charges which pushed distribution expenses down by 57.61 percent year-on-year in 2020. Administrative expenses inched up by 9.11 percent on account of higher legal and professional charges. Other expenses and other income didn’t prove to be favorable during the year. Other expenses grew by 249.29 percent on account of higher provisioning against doubtful advances. Other income dwindled by 88.44 percent year-on-year in 2020 as the PV adjustment of GIDC and reversal of LPS were no longer available in 2020. AGL posted an operating loss of Rs.1541.38 million in 2020. Finance cost ticked down by 11 percent year-on-year and stood at 52 percent of the topline. This was due to the low discount rate. The debt-to-equity ratio of AGL mounted to 76 percent as AGL’s equity was declining on the back of higher accumulated losses. Net loss surged by 558.25 percent to clock in at Rs.4296.90 million in 2020 with a loss per share of Rs.10.95.

In 2021, the topline of AGL again recovered and posted year-on-year growth of 77.22 percent. An increase in the support price of wheat crops resulted in strong urea demand. Moreover, the introduction of hybrid seed varieties of rice and maize that had higher urea requirements per acre also resulted in a boost in urea sales across the industry. This coupled with uninterrupted gas supply also facilitated the fertilizer sector to operate at an optimum level and meet the growing demand. AGL sold 230 KT of urea in 2021 which was 65 percent higher than the last year’s sales volume. Higher prices of raw and packaging materials as well as greater capacity utilization of 206 days resulted in the cost of sales growing by 41 percent year-on-year in 2021. Yet, AGL was able to post a gross profit of Rs.409.52 million in 2021 with a GP margin of 4.1 percent. Distribution cost ascended by 58.47 percent year-on-year in 2021 on account of higher freight charges. Administrative expenses magnified by 14.35 percent on the back of inflation which particularly pushed up the salaries and wages expenses. IT consultancy charges as well as legal & professional fees also surged in 2021. Other expenses shrank by 91.61 percent during 2021 as no provision against doubtful receivables was booked during the year. Other income also plummeted by 44.83 percent in 2021 due to fewer liabilities written back as well as lesser profit on the P&L bank balance. AGL posted an operating loss of Rs.212.48 million in 2021 which was 86 percent lower than last year’s figure. Finance cost ticked down by 4.75 percent year-on-year in 2021 and stood at 28 percent of AGL’s topline due to the low discount rate. Debt-to-equity ratio further climbed to its highest level of 85 percent in 2021 due to loss accumulation which ate up AGL’s equity. Net loss of Rs.2681.24 recorded by AGL in 2021 was 37.6 percent less than the net loss posted in 2021. AGL’s loss per share stood at Rs.6.83 in 2021.

The top line continued its growth journey with a 71.23 percent escalation in 2022. This was on the back of better farm economics that boosted industry-wide sales to an unprecedented level of 6616 KT in 2022. AGL touted 2022 as the best year since 2010 due to better gas supply which enabled it to operate for the longest period of 351 days. The company was able to sell 351 KT urea in 2022, 53 percent higher than in 2021. Cost of sales inclined by 56.58 percent year-on-year in 2022, yet gross profit mounted by 418 percent in 2022 with a GP margin of 12.3 percent. Higher sales volume resulted in an 81.32 percent surge in distribution expenses in 2022. An increase in the advertisement budget was also one of the factors which pushed the distribution expense up. The administrative expense also grew by 29.96 percent due to higher salaries, traveling and conveyance expenses, utilities as well as fee and subscription charges. Other expenses enlarged by around 82 times due to loss on the disposal of property, plant, and equipment. Other income didn’t post any significant rise during 2022. After two successive years, AGL posted an operating profit of Rs.1068.99 million in 2022 with an OP margin of 6.2 percent. A radical increase of 52.74 percent in AGL’s finance cost was on the back of a record-high discount rate coupled with increased borrowings, resulting in a net loss of Rs.2953.33 million in 2022 with a loss per share of Rs.7.53. In 2022, the debt-to-equity ratio slid to 64 percent as equity grew on account of surplus on the revaluation of property, plant, and equipment.

In 2023, AGL posted a 28.19 percent year-on-year rise in its net sales. During the year, the company operated with 277 days of gas supply versus 351 days in 2022 and produced 292k tons of urea, resulting in capacity utilization of 67.44 percent. AGL sold 287k tons of urea in 2023, down 18.23 percent year-on-year. Conversely, the sales volume of phosphate fertilizer increased to 80k tons in 2023 versus 54k tons in 2022. This greatly contributed to the profitability of the company in 2023. Gross profit improved by 107.32 percent in 2023 with GP margin attaining its highest level of 19.8 percent. Higher gas prices and inflationary pressure were absorbed by favorable changes in the prices of fertilizer products. Distribution expense posted a nominal rise of 5.28 percent in 2023 due to increased petroleum prices which pushed up the freight charges. Administrative expenses mounted by 34.44 percent in 2023 on account of an exorbitant hike in payroll expenses as the company expanded its workforce from 959 employees in 2022 to 979 employees in 2023. Legal & professional charges also drove up administrative expenses in 2023. 68.88 percent higher other expenses in 2023 was the consequence of higher provisioning for WWF and loss incurred on the disposal of property, plant & equipment in 2023. Higher other expense was conveniently offset by 588.53 percent higher other income recorded by AGL in 2023. This was primarily driven by hefty profit on short-term investments coupled with gain on settlement of short-term loans and accrued markup. All these factors translated into 249.67 percent higher operating profit in 2023 with an OP margin of 16.9 percent. Finance costs escalated by 42.3 percent in 2023 due to the unprecedented level of discount rate. The dent-to-equity ratio stayed at 64 percent in 2023. AGL also booked a gain amounting to Rs.3207.11 million on the restructuring of a loan in 2023. This one-off gain converted loss before taxation and restructuring gain into a net profit of Rs.1085.79 million in 2023. EPS stood at Rs.1.31 in 2023 while NP margin clocked in at 4.9 percent in 2023.

Recent Performance (1QCY24)

AGL registered a staggering 998.98 percent rise in its topline in 1QCY24. During the period, urea production in Pakistan saw a tremendous improvement due to the uninterrupted supply of gas on the SNGPL network. Better wheat economics and wheat sowing area resulted in a 13 percent rise in the industry-wide urea off-take to clock in at 1827 tons. During 1QCY24, AGL produced 98k tons of urea, up 1533.33 times year-on-year. Capacity utilization stood at 90.74 percent in 1QCY24. The entire produce of 98k tons was sold during the quarter versus the sales volume of 5k tons achieved in 1QCY23. AGL also sold 13.56 k tons of imported urea in 1QFY24 allocated by National Fertilizer Marketing Limited (NFML). Phosphate offtake also increased by 12 percent during 1QCY24 to clock in 177 k tons. Due to better farmer demand and improved prices, the company was able to record a gross profit of Rs.1633.53 million in 1QCY24 versus a gross loss of Rs.551.28 million in 1QCY23. GP margin clocked in at 17.7 percent in 1QCY24. Higher off-take resulted in 757.44 percent higher distribution expense during the period under consideration. Administrative expenses also surged by 32.7 percent during 1QCY24 due to inflationary pressure. AGL recorded an 8602.82 percent rebound in its other income in 1QCY24. While detailed financial statements are not yet available to make a firm remark regarding hefty other income, they may be backed by higher profit on investment and gain on restructuring of loans. AGL posted an operating profit of Rs.1602.91 million in 1QCY24 versus an operating loss of Rs.700.42 million during the same period last year. OP margin stood at 17.3 percent in 1QCY24. Finance costs surged by 30.69 percent in 1QCY24 due to a higher discount rate. Higher finance costs pushed AGL’s bottom line into the negative zone in 1QCY24. Net loss stood at Rs.172.69 million in 1QCY24, down 90.97 percent year-on-year. Loss per share stood at Rs.0.44 in 1QCY24 versus a loss per share of Rs.4.87 in 1QCY23.

Future Outlook

The demand outlook for the urea sector looks promising on the back of better farm economics and higher returns to the farmers on all the major crops. Conversion to hybrid seed varieties will also provide growth impetus to the urea demand. Industry insiders highlight that the urea demand may exceed the available capacity of the sector in the coming times. Excess demand can be met by an additional supply of gas to the plants operating at less than their installed capacity. Imports can also be an alternative to meet the rising demand. The demand for phosphate which witnessed significant recovery in 2023 is likely to continue in the ongoing year. AGL should also focus on restructuring its loan to curb the financial strain and improve its liquidity and financial performance.