FFC – stellar profits

The country’s biggest urea manufacturer, Fauji Fertilizer Company (FFC), had a stellar 1HCY19. The leading fertilizer player announced its financial results for 1HcY19, accompanied with an interim dividend of Rs2.85/share, taking the year-to-date dividend to Rs5.35/share. For 2QCY19, the after tax profits more than doubled year-on-year to over Rs5 billion – supplementing the strong bottomline growth in 1QCY19.

The farmers have not exactly set the urea application scene on fire of late, with marginal growth reported in overall urea off-take. FFC managed a fatter topline, mostly on the back of higher product prices, as the volumes shrunk marginally, owing to a longer than usual maintenance shutdown in the 1QCY19. Urea prices in 1HCY19 averaged 17 percent higher year-on-year to Rs1827 per bag, inclusive of subsidy impact.

Prices in international market have largely remained flattish in the past twelve months in dollar terms. Even a sizeable jump in domestic urea prices has not really narrowed the gap between domestic and international urea price, still offering a breather of over 5 percent. The sharp rupee depreciation has played in favour of domestic pricing game, as the threat of imports at cheap prices has subsided.

In terms of gross profits, the price increase was chiefly responsible for a massive improvement of nearly 10 percentage points over 1HCY18 to 32 percent in 1HFY19. Comparatively lower volume handling may have contributed to a decline in distribution costs, but when accounted for inflation, and rise in fuel prices, the check on distribution cost is indeed of greater significance to the bigger picture.

The downside of higher interest rates was visible in form of higher finance costs. The company had sizeable relievable at the end of 1QCY19, in lieu of subsidy clearance, hampering the liquidity. It remains to be seen whether there has been an improvement on that front in the second quarter. Other income is only slightly down, owing mostly to the discontinuation of subsidy. Minus the subsidy element, the treasury and dividend income seem to have contributed higher than last time around to the bottomline.

The recent increase in feedstock and fuel gas prices effective from July 2019, will surely test the pricing power of the industry yet again. Although, the cushion in terms of differential with international price is still there, but it may not be very smooth passing on the entire impact to the end user – and some hit may have to be taken on gross margins. That said, FFC seems well poised to hit much improved profits by the end of the year.