FFC was incorporated in 1978 as a private limited company. This was a joint venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark. The initial authorised capital of the company was 813.9 million rupees.
The present share capital of the company stands at Rs 3.0 billion. Additionally, FFC holds 50.88% stake in its subsidiary, Fauji Fertiliser Bin Qasim Limited (formerly FFC-Jordan Fertiliser Company Limited).
-- Through De-Bottle Necking (DBN) programme, the production capacity of the existing plant increased to 695,000 metric tonnes per year.
-- Production capacity was enhanced by establishing a second plant in 1993 with annual capacity of 635,000 metric tonnes of urea.
-- FFC participated as a major shareholder in a new DAP/urea manufacturing complex with participation of major international/national institutions. The new company Fauji Fertiliser Bin Qasim Limited commenced commercial production with effect from January 01, 2000. The facility is designed to produce 551,000 metric tonnes of urea and 445,500 metric tons of DAP.
-- In the year 2002, FFC acquired ex Pak Saudi Fertilisers Limited (PSFL) urea plant situated at Mirpur Mathelo, District Ghotki from National Fertiliser Corporation (NFC) through privatisation process of the government.
RECENT RESULTS 1H'08:
For the period ending H1'08, the urea industry grew by 33%, because of its increased demand due to very high DAP prices. Conversely, DAP off-take remained depressed by 65% due to high international prices. Urea showed an off-take of 2,693 thousand tonnes as compared to 2,032 thousand tonnes during the corresponding period of last year. The Trading Corporation of Pakistan imported 136 thousand tonnes to bridge the demand and supply gap, as the local industry was able to perform 7% higher in terms of production.
The costs, on the other hand, rose due to increase in gas prices by 5.5%, and further increase of 31% from 1 July'08 is expected to further push up the prices. Additionally, fuel price increases and inflation pushed up the distribution and administrative expenses.
FFCL recorded an increase of 40% in its sales on account of high volumes of urea coupled with higher prices of both urea and DAP. Retail prices of urea witnessed an increase of 26.8% to Rs 677 per bag in Jun'08 from Rs 534 per bag in the same month last year. DAP prices also maintained its upward journey and grew significantly by 179.4% to Rs 3,071 per bag in Jun'08 from Rs 1,099 per bag in Jun'07.
The sales increased by 40% to arrive at Rs 14,025 million in H1'08 vis-a-vis same period last year. The cost of sales witnessed an increase of 38.5%, on account of higher gas prices. Gross profit remained at 44%, an increase from GPM of 40% in H1'07. The gross margin improved due to higher realised prices of the stock in inventory as well as imported urea. PAT swelled by 37.8% to be Rs 3,286 million, with an EPS of Rs 6.66
In the period under review investment in Fauji Cement Company has been made, which is expected to yield dividend returns in the years to come.
PRODUCTION FY07:
In 2007, there was a significant urea carryover stock of 233 thousand tonnes, which was thrice the volume of opening inventory of 2006. Urea production for the year at 4,755 thousand tonnes declined by 1% against last year's production, while 55 thousand tonnes were imported initially despite an over supplied situation and low demand. Urea sales picked up in the third quarter of the year, recording highest ever urea off-take. An additional 150 thousand tonnes of urea imports have been arranged by the government for Rabi 2007-08 to bridge the demand-supply gap. The industry concluded the year with an aggregate off-take of 4,917 thousand tonnes. Total urea sales however, registered a drop of 6% as compared to off-take of 2006.
DAP - (Di Ammonium Phosphate):
Government announced farmer subsidy of Rs 250 per bag in September 2006, on phosphatic and potassic fertilisers, for promoting balanced fertiliser usage. The relief was enhanced to Rs 400/bag in March 2007 which was later increased to Rs 470/bag following the steep increase in international prices of DAP from US $250 fob per tonne at end December 2006 to US $620 fob per tonne toward year-end 2007.
Fertiliser demand has been increasing for the last few years and the trend is expected to continue in the future as well. As a result, fertiliser imports have also been increasing. Out of the total fertiliser consumption, urea accounts for the highest percentage. Urea supply has not been able to keep up with demand, resulting in shortages and subsequent imports. The FY06 saw an increase in urea off-take of only 1% whereas production increased by 2%. Excessive imports of the fertiliser, coupled with this low increase in demand resulted in an oversupply condition in the industry in FY06. This is illustrated in the graph.
Indigenous DAP production by FFCL's subsidiary, FFBL, was recorded at 357 thousand tonnes, which decreased by 21% as compared to 2006 due to FFBL DAP plant revamp shutdown while 1,200 thousand tonnes were imported by the industry to complement the total availability during the year, in addition to opening inventory of 119 thousand tonnes. DAP off-take of 1,424 thousand tonnes during 2007 registered a decline of 6%, equivalent with urea decline, and the industry carried 252 thousand tonnes of DAP at the close of 2007. The carryover stock is, however, anticipated to meet the requirements of Rabi 2007-08 season.
Although gross profit increased by 6% over the FY05, the gross profit margin registered a decline from 36.06% to 32.4% in FY06. However, the company managed to maintain its above average standing on gross profit margin and below average standing on net profit margin. The company was able to improve the gross margin from 37% in 2006 to 43% in 2007 due to considerably lower imported fertilisers' sales in 2007, where the margins are negligible.
Although, the gross profit increased by 6% over the FY05, the gross profit margin registered a decline from 36.06% to 32.4% in FY06. However, the company managed to maintain its above average standing on gross profit margin and remained below average on net profit margin.
This increase in sales revenue from urea can be attributed to higher urea prices in FY06, as shown in the graphs. The effect of higher prices was partially marred by a decline in urea production of the company. DAP prices declined in the last quarter of FY06 as a result of Rs 250 per bag government subsidy.
An increase of 15.5% in fuel price followed by a 9.94% increase in both fuel and feed price led to increasing cost of sales and resulted in a decline in gross and net profit margins. However the effect of the gas price increases was cushioned by the increase in revenues, improved productivity and plant efficiency.
Sona urea sales generated a record revenue of Rs 22.161 billion in FY07 which improved by 5% compared to last year's performance. Revenues from imported fertilisers, phosphates and urea, were recorded at Rs 5.47 billion and Rs 798 million respectively, registering declines of 14% and 68% owing to lower imports. This resulted in a net reduction of 5% in aggregate sales revenues in 2007 as compared to 2006.
The cost of sales was also lower by 10% at Rs 18.312 billion, mainly on account of lower imported fertilisers sales. The company was therefore, able to improve its gross margin to 36% with gross profitability of Rs 10.117 billion which improved by 4% compared to last year. The subsidy receivables from the government on import of DAP amounted to Rs 936 million as at the balance sheet date. The company paid Rs 2.42 billion for marketing of fertilisers all over the country. The distribution cost decreased by 12% compared to last year mainly due to lower imported fertiliser sales.
Other income grew by Rs 1.66 billion depicting an increase of 32% in 2007. The growth is attributable primarily to substantial increase in dividend income from FFBL, of Rs 1.31 billion as against Rs 832 million last year, in addition to returns from treasury operations. Financial cost was higher by Rs 195 million compared to last year mainly due to financial charges on long term loans for DBN of Plant III and long term working capital requirements of the company.
Net profit after tax was earned at a record Rs 5.361 billion, which improved by 16% over the last year's figure. Earnings per share of Rs 10.86 increased by Rs 1.47 per share as compared to 2006 while the price earnings ratio was recorded at 10.93%.
The ROA for FFCL has been lower than the industry average for the last five years. However it increased in FY07 owing to better profits. ROA also increased with the increasing profit margins but maintained its above average standing.
The company's liquidity position has been the weakest among the major players. The current ratio declined slightly during FY07 even as current liabilities declined. This change came about as a result of a decline in the company's short-term investments. Presently the current ratio is approximately 1 signifying enough liquidity for the company.
The inventory turnover of FFCL, which has historically remained below industry averages, increased in FY06 and FY07, as industry average increased further. This can be accounted for by the high growth in sales revenue. The level of closing inventory was also considerably higher than FY05, due to excessive imports by TCP during the FY06. However, Rs 250 per bag government subsidy on DAP boosted sales during the last quarter of FY06, leading to a closing inventory being 62% lower than last year. The DSO remained higher than average.
FFCL has maintained a higher than average total assets turnover. These measures of asset management improved further during the FY06, although capacity utilisation stayed constant at 119%. Hence the changes may be attributed to higher sales revenue from higher sales prices compared to previous years.
The company's debt to asset and long term debt to equity ratio has traditionally remained lower than industry averages. The debt to equity ratio also fell below average during FY06 but rose in FY'07. These figures reflect the company's lower leverage level. The FY06 saw a drastic decline in the TIE as well. This was the compounded result of a decline in profits and a 58.7% increase in financial costs largely due to an increase in short term borrowings. The declining trend persisted in FY07 as well. Much of it can be attributed to the rising interest rates and tight credit terms. Debt to equity however has shown a rising trend signifying increasing dependence of the company on debt rather than equity financing.
The EPS increased slightly for FFCL, although, the industry average suffered a decline. Despite this, the EPS remained below the industry average. The DPS for FY06 was the highest in the last five years. This growth in EPS and DPS came about despite a fall in the profit margins and an increase in the number of shares issued.
The first quarter of FY07 saw an increase in the prices of DAP and urea prices also registered a positive trend up to April. The urea off-take however declined because of excessive rainfall, which hampered the distribution on a countrywide basis. DAP off-take on the other hand, has been increasing, mainly as a result of the Rs 250 per bag government subsidy. As a result of these developments, FFCL enjoyed a nominal growth of 4.8% compared to the same period last year.
POST BUDGET OUTLOOK:
The budget for FY08 announced an increase in the subsidy on DAP. This is likely to increase demand for the fertiliser sector as farmers increase their usage of the product. In light of GDP growth's correlation with fertiliser consumption, higher GDP growth rate is expected to lead to higher fertiliser demand and consumption.
The rising prices in the market of urea, due to unrelenting price increases of DAP has added to the misery of the farmers. Unscrupulous market forces may be involved in hoarding of urea, to benefit from the situation. Government is planning to use the Saudi facility to import urea to ensure its timely availability by Kharif season.
The coming times bode well for the urea companies in terms of sustained and increasing demand, in a scenario where price increases exist to more than compensate for the increase in production costs.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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