Fauji Fertilizer Bin Qasim Limited plant site is a modern granular urea and Di-Ammonium Phosphate (DAP) fertilisers manufacturing complex, built at a cost of US$468 million and located at Bin Qasim, Karachi and Head Office at Harley Street, Rawalpindi.
Initially named as FFC-Jordan Fertiliser Company (FJFC) with FFC (30%), FF (10%) and JPMC (10%) as main sponsors, the company was formally listed on the stock exchanges in May 1996 and its commercial production commenced from 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. It was renamed in 2003 as Fauji Fertiliser Bin Qasim Ltd. (FFBL), as the 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 i.e., by 2004 and declared 'maiden dividend' in 2004. It surpassed the profit of the year 2004 in first nine months of 2005, i.e., September 2005. The year 2005, so far has been the most profitable year of the company.
Fauji Fertiliser Bin Qasim Limited is a subsidiary of Fauji Fertiliser Company Limited catering to two of the unique products namely granular urea and DAP, having a total installed capacity of 1670mtpda and 1350mtpda respectively.
Thus, it enjoys a huge growth potential in both the segments. FFBL also uses the marketing and distribution network and brand name of "FFC Sona Urea" to sell its products. FFBL is the only fertiliser complex in Pakistan producing DAP fertiliser and granular urea thus making significant contribution towards agricultural growth of the country by meeting 31% demand of DAP and 13% of urea in domestic market.
In 2007, FFBL successfully completed ammonia plant BMR. In order to implement the same, plant operations remained suspended for nearly two months and for a month more owing to ammonia compressor couplings damage and reformer refractory failure. Since then ammonia plant has been running smoothly.
After successful completion of DAP plant revamp in Mar 2008, an ever highest production of 2,309 tonnes per day was achieved on Apr 26, 2008 which is 171% of plant name capacity of 1,350 tonnes per day. Plant however, operated at low load in the months of May and June due to variation in composition of acid being supplied. Production of ammonia at 226 thousand tonnes and Urea at 334 thousand tonnes is higher by 80% and 112% respectively, over the corresponding period, whereas DAP production at 150 thousand tonnes is about the same level.
FFBL, the sole DAP producer in the country, is the main beneficiary of elevated DAP prices. Any rise in DAP prices would likely to improve company's gross margins. FFBL's share in urea and DAP markets remained 13% and 23% respectively, during the period.
The company has 25% stake in the Pakistan Maroc Phosphore S.A (PMP) Company, which is a joint venture between OCP Group of Morocco and Fauji Group. OCP is one of largest producers of phosphoric acid in the world. The PMP project has been completed with budgeted cost of 2.03 billion Moroccan dirhams. PMP shall meet the total phosphoric acid requirements of FFBL. Sulphuric acid and phos acid production commenced on Mar 27, 2008 and April 04, 2008. Production of marketable phos acid i.e. 54% concentrated has also started on April 08, 2008. Since the commencement of commercial production, sulphuric acid and phos acid plants are operating satisfactorily and about 94 thousand tonnes of phos acid has been received at FFBL plant site.
The investment is likely to enhance FFBL's earnings in two ways: (1) expected dividend income from the PMP from next year, and (2) expected increase in FFBL's profitability from guaranteed long term supply of phosphoric acid for its DAP plant at comparatively lower rates than the international benchmark.
1st half results FY08
Company's total sales including Sona Urea (G) and imported product during the first half of current year were 359 thousand tonnes registering a growth of 145 percent against target. The sales during the period recorded 44 percent growth as compared to the same period last year (SPLY). Sona DAP sales during January-June 2008 were 37 thousand tonnes i.e., an achievement of 31% of the target.
FFBL reported gross profit of Rs 1,522 million for the first half 2008 which is 130% higher than Rs 661 million in the SPLY. The increase is mainly due to higher sales amount, which recorded a growth of 44 percent and stood at Rs 5,674 million as compared to Rs 3,940 million in the SPLY. Sales in the SPLY were lower mainly due to shutdown of plants for ammonia BMR activities. As a result of higher sales, gross profit margin increased by almost 60% i.e., from 16.78% to 26.8%. Similarly, profit after tax (PAT) increased by Rs 184 million i.e., from Rs 534 million to Rs 718 million, an increase of 34% over the SPLY. This translates into an EPS of Re 0.77 against Re 0.57 in the SPLY. However, in comparison with other industry players, FFBL's 34.6 percent growth in PAT was the lowest. This is mainly due to a 77 percent decline witnessed in DAP sales and substantial increase in urea sales.
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Recent Performance 1H-08 1H-07 Change
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Amount in '000
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Sales 5,674,354 3,940,330 44%
Cost of goods sold (4,152,771) (3,279,319) 27%
Gross profit 1,521,583 661,011 130%
Distribution Costs (702,725) (383,504) 83%
Administrative Expenses (99,962) (60,843) 64%
Operating Profit 718,896 216,664 232%
Financial Charges (580,519) (310,150) 87%
Profit before Taxation 1,045,762 810,887 29%
Profit after taxation 718,156 533,583 35%
Earnings Per Share 0.77 0.57 35%
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Sales increased by 44%, while the COGS increased by only 27%. Better gross margins were enjoyed by FFBL. However, distribution and administrative expenses increased in greater proportion than increase in sales due to rising inflation and rising fuel charges along with higher depreciation expenses. The financial charges showed a high rate of growth of 87%. PAT increased by 35% which is in line with the industry averages.
INDUSTRY OFFTAKE FOR 1H-FY'08:
Urea: The domestic off-take of Urea and Di-Ammonia Phosphate (DAP) fertilizer witnessed steep decline at the end of Khairf season. As per data released by the National Fertiliser Development Centre (NFDC), the urea off-take during first half (January-June) 2008 stood at 2.7 million tonnes, up by 32.6 percent as compared to 2 million tonnes in the SPLY. The net increase in urea prices is Rs 42 per bag during the period under review. Out of this, Rs 10 per bag were increased due to rise in fuel gas prices in January and the rest is attributed to the balanced supply demand and to meet the overall impact of inflation. This also includes the decrease of Rs 15 per bag in the month of June due to removal of GST by the GOP.
DAP: DAP sales continued to declining trend owing to its higher prices both in international and domestic markets. Rs 1,000 subsidy on per 50-kg DAP have provided no relief to the farmers as its prices are continuously rising in global markets, crossing Rs 3,000 per bag at domestic level registering a 100percent increase during the last six months. Now, this is the main factor, which has forced the farmers to revert back to urea, resulting in the higher percentage in urea off-take in the last six months. DAP sales, depicted a decrease of 69.6 percent as they declined to 141,000 tonnes in January-June, 2008 compared to 464,000 tonnes in the same period last year.
OPERATIONAL HIGHLIGHTS FY07:
During the year under review, FFBL achieved daily ammonia production of 1,575 million tonnes i.e., 124% on September 16, 2007. However, ammonia production at 362kt, was 19% below the production of year 2006 and 8% below the target.
Granular urea production at 488kt was 19% lower than last year and 12% below the target, whereas DAP production at 357kt was 21% lower than the last year, achieving 9% over the target. Urea inventory stood at 22kt, which was 12% lower compared to 25kt inventory of year 2006. Similarly, DAP inventory at 9kt was 125% higher as compared to 4kt closing inventory of December 2006.
Ammonia BMR project was implemented in two phases, Phase-I was executed in 2006 and Phase-II during March-May 2007 turnaround, involving 62 foreign vendor service men (VSM) from different countries at a cost of 48.5 million euros. Ammonia production capacity has increased to 123%.
DAP plant revamp was undertaken in 2007 wherein DAP plant capacity would be enhanced to 150% of its designed capacity. The company has recently completed its DAP revamp project, which has increased DAP plant capacity by 51.5% to 675ktpa from 446ktpa earlier. Feed gas subsidy as well as GOP compensation shall end in the year 2008. The effects of these events are being mitigated through the above mentioned capacity expansions.
The increased capacities will also cater to a certain extent, for the increased fertiliser requirement of the country. Amendment in the existing GSA, was signed by SSGC and FFBL, on December 15, 2007 after hectic efforts. As per revised agreement, required quantity of gas i.e., 85mmscfd has been secured up to year 2015, extendable for further 10 years.
PAKISTAN MAROC PHOSPHORE S.A., MOROCCO (PMP):
The project has entered the start up phase, to complete within 2030 million MAD (Moroccan Dirham) as budgeted. On commissioning, this project will ensure uninterrupted supply of phosphoric acid (core raw material) for DAP plant, coupled with enhanced earnings in the form of dividend. First off shore shipment of phosphoric acid is expected in March 2008, which will coincide with completion of FFBL's DAP plant de-bottlenecking already started from 10 December 2007.
FOUNDATION POWER COMPANY (DHARKI) LIMITED (FPCDL):
The project operations are likely to commence by 3rd quarter 2009. Investment in Fauji Cement Company Limited (FCCL) expansion project cement industry has witnessed exceptionally higher growth in local consumption as well as in exports during the year ended June 2008.
In order to benefit from the growing demand, plant's expansion is becoming lucrative option for the cement manufacturers. Given the advantages of growing demand for cement and the diversification, the company has decided to invest in this business. FFBL has invested an amount of Rs 300 million in this project to become a 2.8% ordinary shareholder, thereby adding to its earnings.
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 FY07. Further effect is going to persist in the next annual accounts as well owing to constant investment in BMRE, and expansion projects by the company.
As a nascent company in early 2000, FFBL suffered major losses. However, prudent strategies helped the company to emerge out of this deplorable condition, marking the relentless growth of the company from FY02 onwards. Further, the commencement of previously resumed DAP plant in 2003 increased the profit margins of the company by manifold.
FFBL sold 474kt of urea in addition to 19kt of the imported urea. During the year 2007, total urea sales of 493kt were 26% lower compared to 669kt sales for the year 2006, thereby achieving 77% of the sales target. Company's share of urea market remained at 10%. Sona DAP sales at 352kt were 26% lower compared to 473kt in the year 2006, thus meeting 110% of the sales target. DAP market share narrowed to 24.7% as compared to 31.1% in the last year.
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-FY07. Likewise, ROA and ROE have showed an increasing trend following recovery from accumulated losses and hovers around the industry average trend. 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 can be inferred from the graph, long term debt is the main financing source for FFBL, which depicted a declining trend till FY06 but again rose in FY07 on account of extensive BMR and expansion projects.
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 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 effected adversely and may divert from the near to stable trajectory to a depressing one.
In consequent of expansion and enhanced capacity utilization, 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 has been increasing depicting the company's efficiency in asset utilization as compared to the other players.
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 favorable after its recovery from the accumulated losses at the time of setup.
FUTURE OUTLOOK:
In the budget 2008-09, sales tax on fertilisers and pesticides has been withdrawn, and the subsidy on DAP has been increased from Rs 470 to Rs 1000. These decisions hint at a slight relief for the farmers, who are already reeling under the pressures of high cost of production.
Furthermore, an ambiguity on the issue of increase in DAP subsidy by GOP is affecting the off-take. The government, even though announced DAP subsidy of Rs 1,000 per bag in June 2008, has yet to finalise its implementation. As a consequence to low off-take, an adverse impact on upcoming Kharif crops such as rice and cotton cannot be ruled out. However, going forward, it is expected that the Government would take timely decisions on the issue of subsidy and its implementation along with announcement of wheat support price to ensure timely application of DAP by farmers and achieving the desired wheat production target in the upcoming Rabi season. As a result of low off-take, industry is witnessing a significantly high DAP inventory of around 493 thousand tonnes (123 thousand tonnes of FFBL), as compared to 188 thousand tonnes in the corresponding period. This includes DAP imported last year at prices even lower than $1,000/metric ton. However, the inventory along with FFBL expected production (Jul-Dec 2008) should cater for the country's requirement for remaining Kharif and upcoming Rabi season.
However, the difference between DAP and urea prices remain still high despite the subsidy which is badly affecting the DAP off-take. It is yet to be seen whether the subsidy will be adequate to rebound the DAP sales to the previous levels or not. The international prices are expected to remain high on back of food shortages, demand for alternate fuel and decision of China to ban exports. Pakistani prices remain one of the lowest in the region due to government's support for the agricultural sector.
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FAUJI FERTILIZER BIN QASIM LIMITED (FFBL)
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Income Statement ('000) Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
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Sales 3,964,326 5,166,515 11,462,410 14,254,764 14,707,288 12,242,888
Cost of goods sold -2,915,053 -4,002,866 -8,201,623 -9,692,236 -10,023,044 -7,420,310
Gross profit 1,049,273 1,163,649 3,260,787 4,562,528 4,684,244 4,822,578
Administration and General Expense 74,706 84,730 90,653 114,470 103,643 131,369
Selling and Distribution Expenses 523,570 580,286 931 ,066 I ,257,698 I ,420,401 1,068,629
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 1,199,998
Other Operating Income:
Compensation from the Govemment 1,000,000 700,000 700,000 700,000 700,000 600,000
Others 48,145 43,401 107,688 454,123 552,158 651,675
Operating Profit(EBIT) 1,490,292 1,222,064 2,933,070 4,174,737 4,169,284 4,874,255
Financial Charges 338,465 156,705 84,817 259,817 412,370 630,513
other expenses - - - - - 343,813
Profit before Taxation 1,151,827 1,065,359 2,848,253 3,914,920 3,756,914 3,899,929
Provision for Taxation 979,040 135,641 -1,017,161 -1,465,811 -1,312,056 -1,359,896
Net Profit after Taxation 2,130,867 929,718 1,831,092 2,449,109 2,444,858 2,540,033
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FINANCIAL_RATIOS
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PROFITABILITY Dec'02 Dec03 Dec 04 Dec05 Dec06 Dec07
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Gross Profit Margin 26.47% 22.52% 28.45% 32.01% 31.85% 39.39%
Profit margin 53.75% 18.00% 15.97% 17.18% 16.62% 20.75%
Return on Asset 11.37% 4.80% 8.34% 9.96% 8.83% 8.74%
Return on Common Equity 55.98% 15.48% 25.62% 31 .69% 28.64% 29.85%
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LIQUIDITY RATIODec'02 Dec'02 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
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Current Ratio 0.84 1.62 1.53 1.46 1.34 1.17
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ASSET MANAGEMENT Dec02 Dec'03 Dec04 Dec 05 Dec 06 Dec 07
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Inventory Turnover 54.09 46.37 24.27 40.41 39.11 54.53
Day Sales Outstanding (DSO) 58.57 27.34 13.54 2.91 5.66 7.17
Operating Cycle 112.66 73.71 37.81 43.31 44.77 61.70
Total Asset Turnover 0.21 0.27 0.52 0.58 0.53 0.42
Sales/Equity 1.04 0.86 1.60 1.84 1.72 1.44
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DEBT MANAGEMENT Dec 02 Dec'03 Dec'04 Dec'05 Dec 06 Dec 07
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Debt to Asset (%) 79.69 68.98 67.47 68.56 69.16 70.71
Debt/Equity 3.92 2.22 2.07 2.18 2.24 2.41
Times Interest Earned 4.40 7.80 34.58 16.07 10.11 7.73
Long Term Debt to Equity (%) 335.94 191.79 144.06 136.00 125.49 128.89
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MARKET VALUE Dec O2 Dec'03 Dec'04 Dec'05 Dec'06 Dec'07
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Earning per share 3.90 1.31 1.98 2.62 2.62 2.72
Dividend per share 0.00 0.00 1.00 2.00 1.25 1
Book value 4.70 6.60 7.65 8.27 9.14 9.11
Market prices(on Dec 30) 9.55 17.60 30.60 38.15 28.30 42.05
Price Earning Ratio (Times) 2.45 13.44 15.45 14.56 10.80 15.46
Number of shares issued 809,901 909,901 934,110 934,110 934,110 934,110
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