Fauji Fertilizer Company Limited (PSX: FFC) is incorporated in Pakistan as a public limited company. The company is engaged in the manufacturing, purchasing, and marketing of fertilizers and chemicals. The company also undertakes investments in other fertilizer, chemicals, cement, food processing, energy generation, and banking operations.
Pattern of Shareholding
As of December 31, 2022, FFC has a total of 1,272.238 million shares outstanding which are held by 15,620 shareholders. Associated companies, undertaking, and related parties have the majority stake of 44.35 percent in FFC followed by the local general public holding 23.95 percent shares. Public sector companies and corporations account for 11.02 percent shares of FFC while Banks, DFIs, NBFIs, Insurance, Pension Funds, Takaful, and Modarabas collectively hold 8.32 percent shares. Around 3.85 percent of FFC’s shares are held by foreign companies. The remaining shares are held by other categories of shareholders.
Financial Performance (2019-23)
FFC’s topline which declined in 2019 and 2020 began to rise thereafter. Conversely, its bottom line slid once during the period under consideration i.e. in 2022. The company’s margins registered an unabated growth until 2020. In the subsequent year, gross margin continued its growth journey, however, operating and net margins eroded. In 2022, both gross and operating margin ticked up while net margin shrank owing to high finance costs. The company closed the recent calendar year on a robust note with visible growth in all its margins (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.
In 2019, FFC’s topline slid by 0.17 percent. Off-take of Sona urea and imported fertilizer dropped by 2 percent and 50 percent respectively in 2019 (see the graph of sales volume). This was on account of lower cultivable acreage, poor farm economics, and scarcity of water which resulted in 4 percent decline in the output of major crops. The government also imported 100,000 tons of urea during the year despite sufficient local production. This created a surplus in the market and created price wars. The company was able to cut down its cost by 3.77 percent in 2019. This resulted in 9.86 percent rise in FFC’s gross profit in 2019 with GP margin climbing up from 26.40 percent in 2018 to 29.06 percent in 2019. Distribution expense slid by 6.17 percent in 2019 due to lower DAP imports by FFC on account of Pak Rupee depreciation, high fuel prices and axle load restriction which had magnified the overall transportation cost. Other income improved by 14.45 percent in 2019 due to substantial rise in dividend income, income from associated companies as well as interest income on bank deposits. Higher profit related provisioning and impairment loss arising from Fauji Fresh & Freeze resulted in 9.52 percent higher other expense incurred by FFC in 2019. The company was able to boost its operating profit by 12.48 percent in 2019 with OP margin of 24.8 percent up from 22.01 percent in 2018. Finance cost mounted by 51.32 percent in 2019 on account of higher discount rate as well as higher borrowing requirements. Discontinuation of super tax during the year resulted in 8.3 percent lower tax expense incurred during the year. Consequently, its net profit enlarged by 18.51 percent in 2019 to clock in at Rs.17,110.49 million with EPS of Rs.13.45 versus EPS of Rs.11.35 in 2018. NP margin greatly rebounded from 13.63 percent in 2018 to 16.18 percent in 2019.
FFC’s net sales further shrank by 7.68 percent in 2020. Sales of Sona urea grew by 2 percent in 2020 while imported fertilizer sales remained intact at 253 KT. As the government suspended GIDC on gas during the year, FFC also reduced the selling prices of urea which resulted in a lower topline. The company was able to cut down its cost by 11.96 percent due to saving in fixed cost as well as reduction in GIDC. This enabled FFC to drive up its gross profit by 2.75 percent in 2020 with GP margin climbing up to 32.34 percent. Distribution expense plunged by 5.33 percent in 2020 due to lesser fuel prices and partial implementation of axle load regulations by the GoP. Other income slid by 10.59 percent in 2020 due to lower interest income from bank deposits due to lower discount rates. Lower scrap sales and no dividend from FCCL and FBBL also contributed in driving down other income in 2020. Other expense escalated by 14.28 percent in 2020 on account of increased provisioning for WWF and WPPF as well as higher R&D cost incurred during the year. All these factors culminated into 19.96 percent higher operating profit recorded by FFC in 2020 with OP margin amounting to 32.22 percent. Finance cost contracted by 24.37 percent in 2020 due to monetary easing. Net profit rebounded by 21.68 percent to clock in at Rs.20,819.46 million in 2020 with EPS of Rs.16.36 and NP margin of 21.32 percent – the highest among all the years under consideration.
In 2021, FFC topline multiplied by 11.26 percent which appears to be the result of revised selling prices as sales volumes of Sona Urea and imported fertilizers declined by 1 percent and 11 percent respectively in 2021. Prices of fertilizers in the international market recorded a massive rise due to production cuts, export restrictions imposed in several countries, and high energy and fuel prices which drove up freight expenses. Gross profit gain 23 percent strength in 2021 with GP margin rising up to 35.78 percent. One of the reasons for a better GP margin was the abolishment of GIDC. Higher freight expenses due to hiking fuel prices resulted in a 7.15 percent higher distribution expense incurred by FFC in 2021. The company also booked unwinding on res-measurement of GIDC along with ECL on subsidy receivable from the government which diluted its operating performance during the year. Elevated dividend income particularly from AKBL and interest income from its investment in mutual funds culminated into 23.17 percent taller other income recorded by FFC in 2021. Other expenses also magnified by 11.64 percent in 2021 as a result of R&D expenses and profit-related provisioning booked during the year. Due to elevated expenses and other losses, FFC’s operating profit posted a marginal 3.71 percent growth in 2021 with OP margin sliding down to 30.03 percent. Finance cost enhanced by 22.34 percent in 2021 due to a hike in discount rate and increased borrowings As a consequence, FFC’s net profit could post a paltry 5.17 percent rise in 2021 to clock in at Rs.21896.14 million with EPS of Rs.17.21 and NP margin of 20.15 percent.
2022 brought about a paltry 0.66 percent growth in the topline of FFC. During the year, the company sold 2 percent less Sona Urea than it did last year while imported fertilizer sales fell by a drastic 68 percent in 2022. Exorbitant prices of imported fertilizer due to supply chain disruptions, escalated global prices as well as Pak Rupee depreciation drove its demand down in 2022 and the company had to carry 78 KT of imported fertilizer to next year. The agriculture sector recorded a robust growth of 4.4 percent in 2022 versus last year’s growth of 3.5 percent. This was the result of higher yield, supportive government policies, and agricultural credit. However, in the latter half of the year, a devastating flood in the southern region of the country turned down the agriculture sector forecasts for 2023. Due to plant turnaround during the year as well as lower production, the company’s cost of sales also slipped by 0.65 percent in 2022, resulting in a 3 percent rise in gross profit with GP margin touching a new high of 36.62 percent. Distribution expense multiplied by 20.2 percent in 2022 which was the effect of higher inflation and soaring fuel prices. The company also booked other losses as the re-measurement of GIDC liability recorded in 2020 had to be reversed for the next four years. This coupled with ECL on subsidy receivable from the government translated into other losses of 2788.51 million in 2022. Other expenses also ticked up by 3.08 percent in 2022 on account of increased provisioning for WPPF. However, 82.37 percent higher other income made by FFC during the year compensated it reasonably. This growth was the consequence of gain on an investment in mutual funds as well as dividend income from associated companies, particularly FWEL-I, FWEL-II, and PMP. Operating profit mounted by 18.15 percent in 2022 with OP margin clocking in at 35.25 percent.112 percent year-on-year growth in the finance cost of FFC in 2022 came on the back of an exorbitantly high discount rate as well as superior working capital requirements. This pushed the bottom line down by 8.43 percent to clock in at Rs.20,049.51 million with EPS of Rs.15.76 and NP margin of 18.33 percent.
Recent Performance (2023)
During the year, FFC’s topline registered a handsome growth of 45.82 percent. The detailed financial statements are awaited to comment on the sales volume during the year, however, a 60.44 percent expansion in gross profit with GP margin reaching its optimum high value of 40.29 percent speaks volumes of the company’s ability to pass on the impact of 75 percent hike in gas prices to its consumers. The superior margin earned on imported fertilizer that was carried forward from last year might also have contributed to better gross profit registered by FFC in 2023. Distribution expense mounted by 25.49 percent in 2023 due to higher fuel prices as well as axle load requirements as the company’s primary transportation is done by road. During the year, the company recorded the highest loss allowance of 2900 million on subsidy receivable from the government which along with the unwinding of GIDC payable resulted in other losses magnifying by 45.61 percent. Other expenses surged by 78.92 percent in 2023. The main components of FFC’s other expenses are R&D expenses and profit-related provisioning. Other income spiraled by 18.38 percent in 2022 on account of higher interest and dividend income. All these factors translated into a 53.47 percent year-on-year rise in FFC’s operating profit in 2023 with its OP margin climbing up to 37.10 percent. Finance costs picked up by 15.52 percent in 2023. A higher effective tax rate of 45 percent due to a retrospective increase in super tax levy drove up tax expense by 75.07 percent in 2023. Net profit picked up by 48 percent year-on-year in 2023 to clock in at Rs.29,673.35 million with EPS of Rs.22.32 and NP margin of 18.61 percent.
Future Outlook
FFC is all set to kick off the phase of its Nodal Compression project which has a capacity outlay of over USD 100 million. The initial phase of the project has already been completed in which 20-25 km of pipeline has been built with the overall project expected to be completed by the end of CY24. This, along with the company’s plan for coal gasification, anticipated discoveries at Mari field and the resumption of the Pak-Iran gas pipeline will buttress gas supply. Moreover, improved farm economics and better yield will also benefit the fertilizer sector.
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