Fauji Fertilizer Bin Qasim Limited Plantsite is a modern Granular Urea and Di-Ammonium Phosphate (DAP) fertilizers manufacturing complex, built at a cost of US $468 Million and located in Eastern Zone of Bin Qasim, Karachi, with Head Office 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 commercial production commenced in January 2000.
However, it continued to run in crises due to technical, financial and managerial reasons till 2001. 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, as such 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, demand for fertilizer 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 with no major expansion by any of the players. Lately, some players have carried out expansion plans.
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 1670mtpda 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.
Owing to strong inelastic demand for fertilizer, soaring unit price, better marketing and 104% capacity utilisation, sales of the company have been constantly rising. Currently, FFBL has a market share of 13% in urea and 32% in DAP. Nevertheless, demand-supply gap may give rise to fluctuations in sales price affecting the sales figure in future.
RECENT RESULTS: During the half year ended Jun'07, Ammonia plant BMR Phase II, spread over a period of two months, was executed successfully. However, after start-up two issues - ammonia compressor couplings damage and secondary reformer refractory failure - were encountered, resulting in a 27-day plant shutdown.
Consequently, production of Urea and DAP has been significantly below the same period of last year. Production of ammonia at 125 Kt was 35% lower than the output in the corresponding period of the last year. Similarly, production of Granular urea ie, 157 Kt and DAP ie, 151 Kt were lower by 39 % and 26% respectively.
During April-June 2007, Company's sales were reduced to Rs 906 million ie, 71% lower than the same period last year. The decrease in sales is mainly attributed to the shutdown of the plant for 85 days.
The profit after tax decreased to Rs 159 million, which was 78% lower than the profit of Rs 715 million, earned during the same period last year. Similarly, per share earnings of the Company dropped to Rs 0.17 vis-a-vis Rs 0.77, earned during the same period of the last year.
Owing to the above, Company's after tax profit for the half year stood at Rs 533 million, which was 46% lower than the profit earned during the same period of the last year. Other income excluding Government compensation increased from Rs 270 million to Rs 338 million, an increase of 25% due to effective treasury management. Per share earnings (EPS) of the Company for the period under review stood at Rs 0.57 comparing Rs 1.06 of the same period of the last year.
GoP compensation amounting Rs 700 million, net of GoP loan repayment of Rs 648 million pertaining to the year 2006 has been received during this period. However, for the year 2007, GoP compensation amounting Rs 600 million has been adjusted against agreed loan repayment of Rs 648 million and balance of Rs 48 million is payable to GoP.
Year 2008 will be the last year of GoP compensation; thereafter there will be an annual cash outflow of Rs 648 million in respect of GoP long-term loan payment up to 2017. During the half year, an amount of Rs 1.4 billion has been received from GoP as DAP subsidy, which relates to the third quarter of year 2006 as well as the first quarter of year 2007.
An amount of Rs 321 million is outstanding which represents claims lodged for the second quarter of year 2007, together with amount retained by GoP out of inventory claim of the year 2006 at Rs 68 million, which has subsequently been received in the month of July 2007. GoP has assured FFBL that the remaining amount of Rs 253 million will be released shortly.
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 1H'07. Further effect is going to persist in the next annual accounts as well.
As a nascent company in the early 2000, FFBL suffered major losses. However, prudent strategies helped the company emerge out of this deplorable condition, marking the relentless growth of the company from FY'02 onwards. Furthermore, commencement of the previously resumed DAP plant in 2003 increased the profit margins of the company by manifold.
During January-June 2007, 155 Kt of Sona urea (G) and 2 Kt of imported urea was sold which was 49% lower than 306 Kt sales of same period of year 2006. Sona DAP sales at 144 Kt were 6% lesser comparing 153 Kt sales in the same period of year 2006.
FFBL share in the DAP market is estimated at 35.1% for January-June 2007 against 42.5% of the corresponding period of the year 2006, as a result of lower production and therefore lesser availability of the product in the market.
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, 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 and FY06. Likewise, ROA and ROE have showed an increasing trend following recovery from accumulated losses and hover around the industry average trend.
The ratios however declined as a result of decrease in the net sales of FFBL consequently decreasing the net income by a larger amount. 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 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 a 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 affected 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, 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 have been increasing, depicting the company's efficiency in asset utilisation as compared to the other players. Operating cycle has however increased rapidly in the first half 2007 owing to a cessation of production of the fertilizer in the same period, thereby depressing sales and inventory.
On the back of demand-supply gap in the country, expansion projects and subsidized gas availability, higher urea and DAP prices, and recommencement 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 payout history until FY04. In the foreseeable future, however, 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 favourable after its recovery from the accumulated losses at the time of setup. PER ratio has decreased over the years and is greater than the industry average.
FUTURE OUTLOOK: Backed by a booming agriculture sector, better water availability, increased focus on corporate farming, credit facilities to farmers, higher support prices, and other reforms in the agriculture sector including pesticides, tractors and other equipments are likely to stimulate fertilizer demand in future. Moreover, expansion will spur growth in production and consequently total revenue. However, the bulk of DAP is imported, therefore, FFBL is subject to international price risk.
FY07 is facing a decline in production of fertilizer owing to untimely rains and decrease in fertilizer demand in expectations of a subsidy announcement by he government. As illustrated by the figure the decrease in production was more prominent in non-urea fertilizer owing to strong anticipation of subsidy by the GoP.
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FAUJI FERTILIZER BIN QASIM LIMITED (FFBL)
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Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Jun'07
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PROFITABILITY
Gross Profit Margin 26.47% 22.52% 28.45% 32.01% 31.85% 16.78%
Profit margin 53.75% 18.00% 15.97% 17.18% 16.62% 13.54%
Return on Asset 11.37% 4.80% 8.34% 9.96% 8.83% 1.96%
Return on Common Equity 55.98% 15.48% 25.62% 31.69% 28.64% 6.75%
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LIQUIDITY RATIO
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Current Ratio 0.84 1.62 1.53 1.46 1.34 1.03
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ASSET MANAGEMENT
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Inventory Turnover 54.09 46.37 24.27 40.41 39.11 203.28
Day Sales Outstanding (DSO) 58.57 27.34 13.54 2.91 5.66 12.65
Operating Cycle 112.66 73.71 37.81 43.31 44.77 215.93
Total Asset Turnover 0.21 0.27 0.52 0.58 0.53 0.14
Sales/Equity 1.04 0.86 1.60 1.84 1.72 0.50
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DEBT MANAGEMENT
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Debt to Asset (%) 79.69 68.98 67.47 68.56 69.16 70.98
Debt/Equity 3.92 2.22 2.07 2.18 2.24 2.45
Times Interest Earned 4.40 7.80 34.58 16.07 10.11 3.72
Long Term Debt to Equity (%) 335.94 191.79 144.06 136.00 125.49 127.97
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MARKET VALUE
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Earning per share 3.90 1.31 1.98 2.62 2.62 0.57
Dividend per share 0.00 0.00 1.00 2.00 1.25
Book value 4.70 6.60 7.65 8.27 8.07
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INCOME STATEMENT (Rs '000) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Jun'07
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Sales 3,964,326 5,166,515 11,462,410 14,254,764 14,707,288 3,940,330
Cost of goods sold -2,915,053 -4,002,866 -8,201,623 -9,692,236 -10,023,044 -3,279,319
Gross profit 1,049,273 1,163,649 3,260,787 4,562,528 4,684,244 661,011
Administration and General Expenses 74,706 84,730 90,653 114,470 103,643 383,504
Selling and Distribution Expenses 523,570 580,286 931,066 1,257,698 1,420,401 60,843
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 1,767,118 444,347
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Other Operating Income:
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Compensation from the Government 1,000,000 700,000 700,000 700,000 700,000 600,000
Others 48,145 43,401 107,688 454,123 552,158 337,976
Operating Profit (EBIT) 1,490,292 1,222,064 2,933,070 4,174,737 4,169,284 1,154,640
Financial Charges 338,465 156,705 84,817 259,817 412,370 310,150
Other expenses 33,603
Profit before Taxation 1,151,827 1,065,359 2,848,253 3,914,920 3,756,914 810,887
Provision for Taxation 979,040 135,641 -1,017,161 -1,465,811 -1,312,056 -277,304
Net Profit after Taxation 2,130,867 929,718 1,831,092 2,449,109 2,444,858 533,583
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