(FJFC): FAUJI FERTILIZER BIN QASIM LIMITED - Analysis of Financial Statements Financial Year 2003- Financial Year 2008

Fauji Fertilizer Bin Qasim Limited plant site is a modern granular urea and Di-Ammonium Phosphate (DAP) fertilizers manufacturing complex, built at a cost of US $468 million and located in eastern zone of Bin Qasim, Karachi, with Head Office at Harley Street, Rawalpindi. Initially named as FFC-Jordan Fertilizer Company (FJFC) with FFC (30%), FF (10%) and JPMC (10%) as main sponsors, the company was formally listed on the stock exchanges in May 1996 and commercial production commenced from January 2000.
However, it continued to run in crises due to technical, financial and managerial reasons up till 2001. DAP plant brought to suspension in 2001 due to accumulated loss of Rs 6.5 billion. It resumed production in September 2003, after a lapse of 2 years. It was renamed in 2003 as Fauji Fertilizer Bin Qasim Ltd. (FFBL), as the Jordan Phosphate Mines Co (JPMC) sold its entire equity in the company. Phosphoric acid supply agreement with Jordan also terminated accordingly.
The company turned out to be profitable after 3 years i.e., by 2004 and declared 'maiden dividend' in 2004. It surpassed the profit of the year 2004 in first nine months of 2005, i.e., September 2005. The year 2005, so far has been the most profitable year of the company. Fauji Fertilizer Bin Qasim Limited is a subsidiary of Fauji Fertilizer Company Limited catering to two of the unique products namely granular urea and DAP, having a total installed capacity of 1670mtpda and 1350mtpda respectively. Thus, it enjoys a huge growth potential in both the segments.
FFBL also uses the marketing and distribution network and brand name of "FFC Sona Urea" to sell its products. FFBL is the only fertilizer complex in Pakistan producing DAP fertilizer and granular urea thus making significant contribution towards agricultural growth of the country by meeting 31% demand of DAP and 13% of urea in domestic market. In 2007, FFBL successfully completed ammonia plant BMR. In order to implement the same, plant operations remained suspended for nearly two months and for a month more owing to ammonia compressor couplings damage and reformer refractory failure. Since then ammonia plant has been running smoothly.
After successful completion of DAP plant revamp in Mar 2008, an ever highest production of 2,309 tonnes per day was achieved on Apr 26, 2008 which is 171% of plant name capacity of 1,350 tonnes per day. Plant however, operated at low load in the months of May and June due to variation in composition of acid being supplied. Production of Ammonia at 226 thousand tonnes and Urea at 334 thousand tonnes is higher by 80% and 112% respectively, over the corresponding period, whereas DAP production at 150 thousand tones is about the same level. FFBL, the sole DAP producer in the country, is the main beneficiary of elevated DAP prices. Any rise in DAP prices would likely to improve company's gross margins.
FFBL has 25% stake in the Pakistan Maroc Phosphore S.A. (PMP) Company, which is a joint venture between OCP Group of Morocco and Fauji Group. OCP is one of largest producers of phosphoric acid in the world. The PMP Project has been completed with budgeted cost of 2.03billion Moroccan dirhams. PMP shall meet the total Phosphoric Acid requirements of FFBL. Sulphuric acid and Phos acid production commenced on Mar 27, 2008 and Apr 04, 2008. Production of marketable Phos acid i.e. 54% concentrated has also started on April 08, 2008.
Since the commencement of commercial production, Sulphuric acid and phosphoric acid plants are operating satisfactorily and about 94 thousand tones of Phosphoric acid has been received at FFBL plant site. The investment is likely to enhance FFBL's earnings in two ways: (I) expected dividend income from the PMP from next year, and (II) expected increase in FFBL's profitability from guaranteed long term supply of Phosphoric acid for its DAP plant at comparatively lower rates than the international benchmark.
RECENT RESULTS 3Q09
The demand of urea and DAP both has been strong in Pakistan in the said period due to lower DAP prices and strong sustained demand of urea from the agricultural sector. The industry urea sales were up by 15%. Government imported urea and sold it through its own network reducing the market share of all the urea producers. DAP sales registered an increase of 292% as its international prices have seen a favorable decline of nearly 30 to 40%. Moreover production domestically of DAP was also higher as the sole producer FFBL was shut down for BMR in 2008.
FFBL's share in urea and DAP market has been 9.5% and 49% respectively as against 13% and 23% in the previous year. Sales increased by nearly 200% to be 27 billion. Although gross profit increased by 124% to be Rs. 6364 million, the GP margin was lower at 24% from 31% due to lower DAP prices and ending of 10 years of subsidized feed gas. PAT was recorded at Rs. 1261 million with an EPS of Rs. 1.93. The improvement in the liquidity position also bodes well for the company.
Pakistan Maroc Phosphore S.A., Morocco (PMP), is actually a long-term and reliable source of phosphoric acid and eventual financial returns to the company in foreign currency. This is particularly significant because the company is diversifying its terms of suppliers and revenue generation sources. This investment is the first offshore direct investment by FFBL along with the reciprocal Moroccan investment in Pakistan. Although loss has been faced for the said period, it is expected that the situation would improve in the future.
FERTILIZER SECTOR
Fertilizer sector recorded a 24 percent net profit of Rs 13.7 million in FY08 versus Rs 11 billion in the same period last year. In terms of earnings growth in percentage terms, Engro stood first with 34 percent growth in profit after tax. FFC recorded 22 percent, FFBL earnings grew by 14 percent whereas DAWH's earnings declined by 70 percent. In terms of total sector's profitability, FFCL contributed the most with 39 percent share, followed by Engro with 25.3 percent, DAWH and FFBL with 18.3 percent and 17.3 percent respectively.
Fertilizer sector, in general, recorded 26 percent top line growth. This was mainly due to rising fertilizer prices. Average urea price during the year stood at Rs 581 per bag as compared to Rs 486 per bag in the same period last year. Also, 9.5 percent rise in urea off-take was witnessed in FY08. Urea off-take for the fertilizer companies stood at 4.15 million tons in FY08 as compared to 3.8 million tons in the same period last year.
Fertilizer sector's gross profit increased by 33 percent as compared to 31 percent in the same period last year. This growth was mainly supported by an increase in urea prices in FY08. Net margins, on the other hand fell to 16.9 percent from 17.3 percent previously mainly due to 107 percent increase in financial charges. Financial charges, on the other hand, rose due to higher short-term borrowings and exchange losses incurred by FFBL and Engro.
Urea off-take in FY08 has reached 5.5 million tons depicting an increase of 12.5 percent. Whereas, the growth in DAP off-take declined by 45.3 percent in FY08. This was mainly due to volatility being observed in the urea prices internationally and a low amount of subsidy of Rs 470 per 50-kg bag provided on DAP. However, on account of depreciation of Pakistani rupee, the impact of lower international fertilizer prices has not been passed on to the domestic market. In the DAP market, the prices of raw materials increased drastically, especially that of Sulphur and Phosphoric acid.
Moreover, throughout the year there existed an uncertainty within the DAP market from terms of government subsidy and international DAP pricing. Prices in the international market soared to extreme heights during 2008 touching an all time high of US$1,230 per ton. Despite increase in government subsidy from Rs 470 to Rs 2,200, the prices in the domestic markets were very high. This whole scenario resulted in lower DAP sales to a very low level in the domestic market.
FINANCIAL PERFORMANCE
During the year under review, FFBL achieved highest yearly ammonia production of 488,349 tons in the year, which was 35 percent higher than the last year's production. In March 2008, revamp of DAP plant was completed ahead of the scheduled time. This helped the company increase the daily production from 1,350 tons per day to 2,232 tons per day. Production of ammonia, Urea and DAP increased by 35 percent, 37 percent and 32 percent, respectively. Revamping issues and gas shortages were main reason due to which DAP productions was 16 percent lower than target.
The increased capacities will also cater, to a certain extent, for the increased fertilizer requirement of the country. Amendment in the existing GSA was signed by the SSGC and the FFBL on December 15, 2007 after hectic efforts. As per revised agreement, required quantity of gas i.e., 85 MMSCFD has been secured up to year 2015, extendable for further 10 years.
PAKISTAN MAROC PHOSPHORE S.A., MOROCCO
The project has entered the start up phase, to complete within 2030 million MAD (Moroccan dirham) as budgeted. On commissioning, this project will ensure uninterrupted supply of phosphoric acid (core raw material) for DAP plant, coupled with enhanced earnings in the form of dividend. First off shore shipment of phosphoric acid is expected in March 2008, which will coincide with completion of FFBL's DAP plant de-bottlenecking already started w.e.f. 10 December 2007.
FFBL is quite liquid in terms of paying its short-term debt. Its current ratio is well above 1 and hovers around the industry average. However, due to the capacity expansion projects and Ammonia BMR (Balancing, Modernization, and Revamping) project successive payment of long-term loan will follow in future. In FY08, FFBL's current ratio declined from 1.18 to 1.09. This is mainly due to greater percentage increase in current liabilities as compared to increase in current assets.
Current liabilities increased mainly due to 210 percent increase in short-term financing and 163 percent increase in trade and other payables. On the balance sheet side, stock in trade increased by 865 percent in FY08. Similarly, a hefty amount of sum is to be received from the GOP on account of DAP subsidy. Compared to industry averages, the company has been less liquid than the industry on average. Over the last six years, only in FY06, company's current ratio was higher than the industry average.
As a nascent company in early 2000, FFBL suffered major losses. However, prudent strategies helped the company to emerge out of this deplorable condition, marking the relentless growth of the company from FY02 onwards. Further, the commencement of previously resumed DAP plant in 2003 increased the profit margins of the company by manifold. FFBL's gross profit margin declined in FY08 and stood at 30.67 percent as compared to 39.39 percent last year.
This is mainly due to 119 percent growth in sales and only 71 percent growth in gross profit. Compared with industry averages, company's gross profit margin, over the last six years has shown mixed trends. In FY03, FY04 and FY08, it was lower than industry average. In FY05, FY06 and FY07, FFBL's gross margin was above the industry averages. ROA and ROE have showed an increasing trend following recovery from accumulated losses and hovers below the industry average trend in the last six years. Increase in KIBOR rates and cost of production might hit the bottom line and top line respectively, mitigating any advantage of high per unit sales price. This shows that company has been not able to generate average industry returns on its assets and invested equity.
Though the FFBL has a very favourable debt paying ability, and it is worse than the industry averages. D/E ratio has worsened from FY04 to FY08. Compared to the industry averages, D/E ratio has remained above the averages. In FY08, D/E ratio increased from 2.41 to 3.46. This is mainly due to mere 23.2 percent in equity as compared to 76.7 percent increase in total debt. Within the total debt, current liabilities showed significant growth of 176.5 percent, whereas non-current liabilities decreased by 8.9 percent. Therefore, it can be assumed that D/E ratio will decline in FY09 keeping current conditions in mind.
D/A ratio, on the other hand, stood more than the industry averages. Over the last six years, FFBL's D/A has increased from 67 percent in FY04 to 77 percent in FY08. This shows company's ability to generate more than average returns on its assets. As for the interest coverage ratio (TIE), the trend is worse than the preceding years. This may be attributed to the increasingly high finance cost, on account of tight monetary policy and further long-term loans acquired by the company.
Once the GoP's compensation to FFBL expires, the company's debt management ratios are going to be effected adversely and may divert from the near to stable trajectory to a depressing one. However, compared with the industry TIE, trend has been somewhat better than average. In consequent of expansion and enhanced capacity utilization, inventory level (spares, raw materials, packing material etc) increased by a large amount consequently hitting the inventory turnover and operating cycle of the company. As evident from its DSO, FFBL, however, has been efficient in converting its credit sales into cash. Compared to industry averages, FFBL's inventory turnover and DSO has been more than the industry averages.
As a result of striking growth in sales, asset turnover ratio and sales-to-equity ratio has been increasing and also more than the industry average depicting the company's efficiency in asset utilization as compared to the other players. On the back of demand-supply gap in the country, expansion projects and subsidized gas availability, higher urea and DAP prices, and re-commencement of DAP production, FFBL has enjoyed a historically increasing trend in its EPS over the last six years. However, compared with the industry earnings per share, FFBL's earnings per share are way lower than the average.
Owing to poor performance in the initial years of its inception, FFBL has no dividend payout history until FY04. In the foreseeable future, however, the company will be able to establish a strong dividend policy due to improved margins, though it would not be at par with the industry average trend. In FY08, FFBL paid dividend of 2.25 per share. P/E ratio has shown increasing trend till FY07 and was above the industry average. However, P/E ratio in FY08 declined from 15.46 to 4.16. This was way lower than the industry average of 8.37 in FY08.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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