Stupendous, marvellous and outstanding: Find more such adjectives and they all fit well with the Fauji Fertilizer Company (FFC). You would not find an investors portfolio that does not have a good chunk of FFC shares in it as the fertiliser giant continues to smash its previous earnings records quarter after quarter. The recently announced 9MCY11 financial results show that the earnings almost doubled over the same period of last year. Earnings growth for 3QCY11 looks even more stupendous as profits nearly tripled in comparison to 3QCY11. The story lies in the top line growth as urea prices for 9MCY11 have gone through the roof; rising 59 percent year on year-that depicts the strong revenue growth. But, what is most important is the mind blowing gross profit margins that FFC achieved during 9MCY11-as it rode on high product prices without a significant jolt in the raw material prices or a production loss. FFC has virtually been minting money on urea price increases, which have by and large resulted from acute gas shortage to a few players across the country. In order to keep their margins in tact and avoid financial losses from lower production, fertiliser firms, such as Engro, have no choice but to pass on the impact to the farmers. Given the nature of the fertiliser industry, even the unaffected players, such as Fauji, end up benefiting as the pricing power remains with the manufacturers. The gas supply situation at Sui network has remained dismal and it is not expected to significantly improve in the near future, which suggests more rounds of urea price increase and healthier profits for Fauji. But the argument here is that the windfall gains that one company is making without even suffering from the cause of the price increase have to be somehow checked. Steep discount to the international urea prices is the mantra that is often sung by the urea makers, but it has to be said that the fertiliser market is not a completely deregulated one, as it enjoys feedstock subsidy and on top of that the raw material price is at steep discount to international prices. A workable formula needs to be derived, ideally taking the stakeholders on board, to minimise the impact of urea price increase resulting from gas shortage. In an ideal world, the best solution would be to abolish the feedstock subsidy and equate the gas prices to the international market, and then set the market free. But it is not an ideal world, so a compromise has to be reached. Reportedly, FFC had agreed to share a chunk of its revenues that result from hike in urea prices to be used in minimising the impact of higher urea prices on farmers. Unfortunately, such a working was never hammered out completely. In the given scenario, for the farmers interests to be safeguarded, the manufacturers not affected as badly as others, should be made to contribute towards minimising the impact on farmers. Be that as it may, shareholders in FFC are not the ones complaining. Other than strong gross margins, the steady performance of FFBL has also contributed strongly to FFCs bottom line in the form of dividend income. Urea prices show no signs of receding anytime soon, and price reversals are least likely at this point, so do not be surprised if FFC posts another quarterly result where its corporate taxes equal the profits that made it a year ago.
================================================================== Fauji Fertilizer Company ================================================================== Rs (mn) 9MCY11 9MCY10 chg 3QC11 3QC10 chg ================================================================== Sales 38,532 28,505 35% 14,311 8,559 67% Cost of sales 16,539 15,788 5% 6,012 4,675 29% Gross profit 21,993 12,718 73% 8,299 3,884 114% Gross margin 57% 45% 28% 58% 45% 28% Other income 4,393 2,240 96% 1,511 716 111% Finance cost 603 838 -28% 131 344 -62% PAT 13,835 7,021 97% 5,646 1,920 194% EPS (Rs) 16.31 8.28 6.66 2.26 ==================================================================
Source: KSE notice
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