The countrys largest urea manufacturer Fauji Fertiliser Company announced its nine-month financial results on Monday -- posting a massive 25 percent growth in net earnings on the back of ever improving urea off-take amid strengthening prices. In line with its past practices, the company maintained a high payout ratio giving away almost all, what it earned, to its shareholders.
FFC, which saw urea sales grow 8 percent year-on-year in the first eight months, has been benefiting from steady growth in urea off-take, primarily from improvement in farming economy and a huge price differential with imported urea. Luckily, the growers have acted wisely and silenced the fears of substitution effect as DAP off-take was on a record high during the period.
With the firms additional production capacity of 70,000 tons in operation at the start of CY09, it didn engage in urea imports, while also refraining from importing other fertilisers such as TSP and SOP given the negligible margin on imports and declining demand.
Urea prices jumped by an impressive 18 percent year-on-year - moving faster than the 8 percent increase in international prices in the same period. The pricing differential and FFCs premium pricing power helped it sustain the surge in urea prices. However, the last quarter did witness a decline in prices owing to a sharp fall in international prices, which explains the 6 percent slide in revenues for 3QCY09.
The bottom line got a huge boost from the other income primarily stemming through dividend receipts from its subsidiary company FFBL. A rather surprising increase in financial charges somewhat eroded the otherwise healthy bottom line, as the company had no short term loans on the books as on June 30, 2009.
It is hard to believe that any arrangement of long-terms loans would have been made, given that there are no plans of further revamping any plant site. This leaves one waiting for the detailed accounts to diagnose the nearly 90 percent surge in the third quarter financial charges.
Peeking into the future has never been a Herculean task when it comes to predicting FFCs fortunes. Things look in sound shape as the firm has no reason to fret over selling its produce, as urea shortage is here to stay in the foreseeable future, which also protects it from any abnormal trend in sales just in case the prices go over the top. There is every reason to believe that shareholders will keep milking the high dividends from this cash cow.
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FFC P&L
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RS (MN) 3QCY09 3QCY08 % CHG 9MCY09 9MCY08 % CHG
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Sales 8,837 9,354 -6% 25,736 23,379 10%
Cost of sales 4,926 5,519 -11% 14,207 13,426 6%
Gross profit 3,911 3,835 2% 11,528 9,953 16%
Gross margins 44% 41% 8% 45% 43% 5%
Finance cost 306 162 89% 826 392 111%
Other income 511 494 3% 2,076 1,172 77%
PAT 2,091 2,037 3% 6,639 5,324 25%
EPS (Rs) 3.08 3.00 3% 9.78 7.85 25%
DPS (Rs) 3.00 4.00 -25% 9.70 10.50 -8%
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Source: KSE announcement