In a rare series of events, Fauji Fertilizer Company (FFC), saw its profits fall owing to core business fundamentals. Although FFCs profits fell by eight percent year-on-year in 1HCY13, it is not a lost battle for the urea giant, as it still has enough muscle to flex in its core business.
The companys top line shed considerably in the second quarter due to the dual impact of lower volumetric sales and marginally reduced urea price. While slowdown in volumetric sales is not a new phenomenon for FFC, decline in urea prices certainly is. The inability to pass on the price to the end user, unlike yesteryears, signals how the local giant is losing grip over price control.
Hefty imports, low international price and heavy subsidy on imported urea all play against FFCs power to dictate the market price. The gross margins held firmly, staying higher than the industry average. FFC has long prided itself over the strength of its distribution network, but it seems the fault lines are beginning to emerge, as the distribution cost on common size basis jumped considerably from year ago levels.
Another dent to the bottom line came from FFBLs lower contribution in the form of dividend income. FFCs bottom-line has long been driven by healthy contributions from FFBL - something which might change going forward, given Fauji Groups ever increasing diversification plans and cash needs.
The cash flow position is still relatively strong, as the company announced a healthy cash dividend of Rs3.75/share. The year-to-date dividend stands at a healthy Rs7.25/share, in line with FFCs rich payout history.
With international urea prices expected to be on the lower side in the near future and an expected increase in feedstock gas price, the margins are all set to face significant pressure. FFC might find it difficult to pass on the entire impact of increased feedstock cost or gas curtailment in todays circumstances of stiff competition from low prices imported urea.
The profit margins are still superior when compared to any other business in Pakistan; it is just that the honeymoon period seems to be over, which is why Fauji Group is slowly going the Engro way - diversification.
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FAUJI FERTILIZER COMPANY
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Rs (mn) 2QCY13 Chg 1HCY13 Chg
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Sales 18,045 -27% 34,405 -5%
Cost of sales 9,502 -28% 18,093 -4%
Gross profit 8,543 -26% 16,312 -6%
Gross margin 47.30% 47.40%
Distribution cost 1,627 26% 2,922 11%
Other income 493 55% 1,994 -19%
PAT 4,586 -29% 9,496 -8%
EPS (Rs) 3.6 7.46
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Source: KSE notice
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