Fauji Fertiliser Bin Qasim Limited (PSX: FFBL) was established under the Companies Ordinance, 1984 (now Companies Act, 2017). It is a public limited company that manufactures, purchases, and markets fertilizers. It began its commercial production in 2000 and has a manufacturing plant at Eastern Zone, Port Qasim, Karachi. As of December 2020, it has a designed production capacity of 551,100 tons of Urea and 650,000 tons of DAP.
As at December 31, 2020, over 68 percent shares of the company are held by associated companies, undertakings and related parties. This category includes Fauji Fertiliser Company Limited that holds nearly 50 percent shares, followed by Fauji Foundation that holds over 18 percent shares. About 16 percent shares are with the local general public; close to 8 percent shares are held in banks, DFIs, and NBFIs. Some 4.5 percent are held under “others” whereas the remaining roughly 3 percent shares are with the rest of the shareholder categories.
Historical operational performance
Except for in CY16, Fauji Fertiliser Bin Qasim has mostly seen a growing topline consecutively until CY20. Profit margins dipped in CY19 before recovering again in CY20.
During CY17, revenue posted a growth of over 17 percent, clocking in at Rs 52.7 billion in value terms. The product’s end prices are controlled therefore profitability is affected. Moreover, sales in the industry are also impacted the cheap imports. During the year, the company suffered losses in the first half of the year, earned small profits in the third quarter; sales only picked up in the last quarter of CY17. Prices for fertilizer in the international market remained low whereas in domestic market it remained low due to “enforced fixation” by the government so that the farmers can afford it. Production cost, on the other hand, reduced to over 88 percent of revenue, down from over 97 percent. Therefore, gross margin improved to 11.4 percent. However, net margin was lower year on year, at 1.9 percent due to a notable reduction in other income from Rs 8.7 billion in CY16 to Rs 4.4 billion in CY17. Other income reduced due to a decreased government subsidy and the absence of one-off gain on sales of property that elevated other income last year.
Revenue growth in CY18 stood at 16.6 percent, whereas in value terms it grew to Rs 61.5 billion. Sona Urea sales registered a growth of 3 percent, while Sona DAP sales were lower by 17 percent year on year. This was due to the availability of cheaper imports that gave competition to the company. Production cost went further down during the year, at 86.7 percent, allowing gross margin to increase to 13.3 percent. Operating margin and net margin were more or less flat, improving only marginally as the decrease in distribution expenses was offset by the increase in other expenses.
Revenue growth in CY19 was relatively subdued at 8.7 percent. topline was recorded at Rs 66.8 billion for the year. Although the company achieved the highest production levels of DAP, due to external factors as stated by the company’s annual report for the year, DAP sales were not better, therefore the company carried over the highest ever inventory of 189 thousand tons. On the other hand, production cost increased to over 91 percent of revenue for the year, bringing gross margin down to 8.8 percent. This also trickled down to the operating margin. Moreover, finance expense escalated to over Rs 5.2 billion, consuming 7.8 percent of revenue due to higher working capital requirements as the company carried over a large inventory. In addition, there was also a delay in realization of subsidy and sales tax refund from the government. Thus, the company posted the highest loss of Rs 5.9 billion for the year.
In CY20, the company posted the highest growth of 24.5 percent, taking topline to over Rs 83 billion in value terms. This was attributed to an improvement in farm economics, which in turn was a result of a rise in international commodity prices and the government’s better support pricing. The company experienced the highest sales volumes for Sona DAP at 926 Kt’ Sona Urea sales also increased, by 10 percent year on year. Therefore, production cost made nearly 85 percent of revenue allowing gross margin to peak at over 15 percent. This also reflected in the operating margin, but net margin stood at 2.6 percent for the year which was better than last year due to the loss incurred in CY19, but not significantly higher than that in CY18. This was due to “impairment of equity investment in FML and FFL and a notably higher taxation.
Quarterly results and future outlook
The first quarter of CY21 saw revenue higher by 36 percent year on year as DAP prices increased in the international market, along with a demand for phosphatic fertilisers. With a marked improvement in revenue and other income and halving of finance expense in value terms, the company posted a profit for the first time in 1QCY21.
In 2QCY21, revenue was better by 11 percent year on year. With similar trend as the previous quarter, profitability was significantly better at 15.4 percent versus the loss in 2QCY20. In 3QCY21, revenue was again higher by nearly 53 percent. This raised gross margin, but bottomline was impacted by impairment of equity investment.
Revenue for 9MCY21 has exceeded the topline of CY19. With continued performance, support from government and better farm economics, the company can capitalize market conditions.