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Fertilizer firms have had a good year so far and off take numbers promise even more fortunate times ahead.
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Consolidated P&L
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Rs (mn) 2QCY09 2QCY08 % chg 1HCY09 1HCY08 % chg
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Sales 22,780 14,833 54% 42,603 28,523 49%
Cost of Sales 15,752 8,939 76% 29,090 17,501 66%
Gross profit 7,028 5,894 19% 13,512 11,022 23%
Gross margins (%) 31% 40% -22% 32% 39% -18%
Finance cost 917 752 22% 2,422 1,378 76%
Other income 336 876 -62% 1,915 1,875 2%
PAT 2,695 2,838 -5% 6,090 5,560 10%
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Source: Company reports
The countrys top three fertiliser companies saw revenues jump 49 percent in 1HCY09 - mainly due to a 21 percent hike in urea prices, whereas those engaged in DAP business took advantage of cooling prices which led to massive rise in DAP sales volume.
However, the industrys overall gross margins slid to its five-year low, hit mainly by its sales mix - highly tilted towards low-margin imported phosphate - which dampened the impact of higher urea margins.
Yet the picture isnt all that bad - in fact a blessing in disguise when one looks at the broader picture. Lower margins have resulted in an improvement in nitrogen-to-phosphate (Urea to DAP) ratio which declined nearly four times. This bodes well for agricultural growth in general and for the upcoming wheat crop season in particular.
The improvement in agricultural economy owing to better crop support prices has started to show its effect on crop yields, and, thus, soaring fertiliser usage as evident by 1HCY09 numbers. Rapidly improving N:P application ratio has been the healthiest signal of what could be the best year for the countrys agriculture yield and which can help us meet an otherwise optimistic target of 3.8 percent farming growth set earlier by the government.
Despite these changing trends, the industry leader Fauji Fertiliser Company (FFC) - being mainly a urea producer - took full advantage of ureas premium pricing by keeping a better sales mix which kept its margins stable. The other two players, however, had to face the brunt of sales mix containing higher concentration of phosphate fertiliser.
During the period, the sectors bottom line was eroded by higher financial costs, but an analysis shows that the companies are well positioned to absorb these charges in future, given the strong possibility of a significant decline in interest rates ahead.
Although, the industry - barring its leader (FFC) - will have to settle on slightly lower gross margins in the upcoming months; with numbers pointing towards healthier N:P ratio by December, the sector is likely to post a record breaking year in terms of revenues. The real game is on volumes now.
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