Fatima Fertilizer Company Limited (PSX: FATIMA) was established in 2003 as a public limited company. It was made as a joint venture between Fatima Group and Arif Habib Group. The company manufactures, produces, buys, sells, imports and exports fertilizers and chemicals.
Shareholding pattern
As at December 31, 2019, 42 percent shares are with the associated companies within which Arif Habib Corporation Limited is a major shareholder. The directors, CEO, their spouses, and minor children hold close to 29 percent shares, of which Mr. Arif Habib is a key shareholder; about 16 percent with sponsors while the remaining 13 percent shares are with rest of the shareholder categories.
Historical operational performance
While the sales revenue for the most part has been increasing over the years, profitability seems to be falling gradually nearly halving in CY19, in comparison to that seen in CY11.
During CY16, sales revenue saw a nearly 12 percent incline in value terms, and a 28 percent increase in volumes. NP was a major contributor to the total revenue, at 44 percent, followed by Urea at 32 percent and CAN at 23 percent. The reason for a 28 percent rise in volumes translating to a 12 percent rise in overall revenue was the reduction in DAP prices in the international market, that affected NP price; prices of NP are pegged to DAP. Moreover, there was a reduction in sales tax rate from 17 percent to 5 percent, but for Urea only. This not only caused a reduction in Urea prices but also CAN price since the prices for latter are pegged to Urea. On the other hand, the increase in cost of production caused gross margin to reduce to 53 percent, the same effect also reflecting in net margin that stood at nearly 29 percent.
Sales growth rate was stable at 11 percent during CY17. This increase was on the back of a volumetric gain; there was a 34 percent volumetric gain in sales of Urea: 42 percent gain in CAN; CAN was also the largest contributor to the total sales pie, with sales of 538,522 tons; NP sales saw a fall by 5 percent. However, the gains in volume did not fully translate into sales revenue in rupee terms as prices were lower due to competition along with a reduction of Rs 56 per bag as Urea subsidy by the government. As other factors offset one another’s effect on the bottomline, net margin growth year-on-year was relatively flat at 28 percent.
There was a 36 percent growth in topline during CY18 while sales volume had actually declined by 3 percent, from 1,477,174 tons in CY17 to 1,432,450 tons in CY18. While sales for Urea had increased, CAN and NP saw a decline; this was due to shortage in supply arising from production plant. Despite this, NP was the largest contributor to the total revenue in value terms. However, the 36 percent higher topline did not translate into higher profitability owing to the cost of production making up nearly 50 percent of revenue- up from previous year’s almost 46 percent. The effect of this also trickled down to the bottomline with net margin dropping to 23 percent.
The company saw the highest revenue increase in CY19, by 46 percent. Volumetrically, there was a 17 percent incline, indicating that most of the increase in topline is a function of price. Urea prices were nearly 20 percent higher; this was largely due to gas price increase by the government. On the other hand, manufacturing facility for CAN remained shut due to gas supply issues. However, cost of production rose to nearly 63 percent of revenue that brought down gross margin to 37 percent for the year. This was a result of high input costs arising from high inflation and depreciating PKR. Although other income provided Rs 1 billion towards the bottomline, it was offset by the increases in finance expense owing to high interest rates, and tax expense. Thus, net margin was recorded at its lowest of 16 percent.
Quarterly results and future outlook
During 1QCY20, topline fell year on year by nearly 8 percent. This was partly due to higher availability of product from China affecting the global Urea prices. Moreover, the pandemic was also a major reason for a reduced offtake during the quarter. However, DAP registered a 12 percent incline in sales in the domestic market due to decreased prices. Cost of production as a percentage of revenue for the quarter was lower than that seen in the same period last year due to shut down of plant; the shutdown of plant was due to unavailability of gas. Thus, net margin was recorded at 17 percent.
There was a significant drop in topline during 2QCY20, both year on year and quarter on quarter. Apart from the effect of the pandemic, there was also a lot of uncertainty with regards to prices due to proposed direct subsidy by government in addition to the closure of the plant that affected Urea production. Cost of production was unusually low due to “subsidy released by Government of Pakistan to SNGPL against subsidized gas supply to Sheikhupura plant in 2019” along with no operations occurring at the said plant. Thus, profit margin was recorded at exorbitant levels for the quarter.
Among the three quarters of CY20, the third quarter saw the highest topline. It was also higher year on year. This was due to some recovery seen after the uncertainties related with the still ongoing pandemic. Most of this increase in revenue is associated with DAP sales as it saw a rise of 44 percent in its volumes. Year on year comparison shows that topline was 9 percent lower- due to the pandemic. Among the three quarters of CY20, 3QCY20 saw the highest cost of production and therefore the lowest net margin, while 9MCY20 compared with 9MCY19 shows improved profitability due to a lower cost of production at almost 54 percent.
With the onset of the second wave, the uncertainties related to Covid-19 are to return, but with government policies, the demand and price of fertilizers is expected to remain stable.