FAUJI FERTILIZER BIN QASIM LIMITED - Analysis of Financial Statement Financial Year '05-3Q Financial Year 2010
Fauji Fertilizer Bin Qasim Limited is a public limited company, and its stocks are traded at the Karachi, Lahore and Islamabad stock exchanges.
The company is in the business of manufacturing, purchasing and marketing of fertilizers, including investments in fertilizer raw material manufacturing operations. It commenced the commercial production in 2000 and is a subsidiary of Fauji Fertilizer Company with a shareholding of 50.88%. The DAP plant has a capacity of 600,000 tonnes whereas the Urea plant has a capacity of 551,100 tonnes. During FY09 the production of Urea was 627,079 tonnes and that of DAP was 540,096 tonnes.
The company has a share of 10% in the urea market and a share of 40% in the DAP market which makes it the market leader. The graph below shows the share of different players in the market of DAP and Urea.
Recent results (3Q10)
Industry overview: The fertilizer sector remains a crucial support to the Pakistani economy, both in terms of its direct contribution as a facilitator to agriculture (22% of GDP) and its indirect assistance to other strategic sectors of the economy. The government policies in the form of support prices for crops and natural gas subsidies continue to favourably back the fertilizer companies and ensure that their margins remain healthy.
However certain developments in the economic scenario have posed severe question marks on the future of this industry. Estimates highlight that the agricultural output in FY11 will contract by an overall 1.7% as a result of the approximate 15-20% crop damage caused by the recent floods. The subsequent displacement of agricultural labor will potentially hurt the fertilizer off take in each of our provinces. Punjab which constitutes approximately 70% of the total demand experienced a comparatively lesser blow in fertilizer off take as major markets for fertilizer in this area were not affected by floods. On the other hand the areas in Sindh that contribute 22% of fertilizer demand experienced a blow in off take due to floods. Moreover, estimates also cite that the urea and Dap off take have declined by 11% and 13% respectively from the originally forecasted levels for CY10. Such unfortunate circumstances have already translated into a 44% YOY fall in demand of fertilizers during July-August 2010.
The only hope for the companies now is the projected pickup in the cultivation of wheat (Rabi crop sown in Oct); better soil fertility and government assistance have created ample opportunities for our victimised farmers to aim for a bumper crop. Given the soil erosion caused by the flooding there is an enhanced willingness to use fertilizers which will consequently translate into demand expansion for manufacturers (especially FFBL's DAP). The domino impact that creation of such motivations will have on the recovery of our flood affected agricultural sector will be substantial and it is expected that a consequent bumper Kharif crop will help agriculture growth to rebound sharply to 4.4-5% in FY12.
Subsidies on feed stock gas bulk continue to support the fertilizer sector; The current feed stock price of PRs 102/mmbtu (US $1.2/mmbtu) is at significant 86% discount to Ukrainian net natural gas price of US$8.6/mmbtu, while it is also at a 73% discount to the fuel stock gas price of Rs 389/mmbtu (US$4.5/mmbtu). However, gas curtailment as proposed by the government to tackle the energy crisis looms as a grave threat to the industry's performance. The proposed curtailment has been extended till October considering the supply concerns that remain evident. However, on average the curtailment has been lower than the 12-20% announced initially. The overall impact of the policy remains uncertain and severely contingent upon the ability of these companies to pass the high costs onto the consumers.
The nine months from Jan-September 2010 have seen great turmoil in the relative product category wise performance of the industry. Overall, the industry registered an increase of 3% in Urea production as compared to the relevant period of 2009, however, the sales decreased by 10% for the same periods. FFBL exhibited a contrasting pattern with production falling by 11% and sales contracting by 15% for these time frames. The consequences of such patterns were seen on the urea market shares, whereby FFBL's share declined from 9.5% to 8.9%.
The DAP market exhibited a pattern not very different from that above. Overall the production grew by 27% in the industry while sales fell by 42%. However, FFBL's performance in this category was not similar to that of urea. While sales fell by 40% over the nine monthly performance of 2010 vs 2009, production of DAP actually expanded by 26%. Despite the fall in sales, FFBL's share of the DAP market grew from 46.8% to 48.1% in 2010.
Financial performance
In comparison to the industry averages, FFBL registered a poorer performance on accounts of major profitability and investment indicators. Where the sales of the fertilizer sector fell by 11%, the company experienced a dip of 18% in the three quarters ended 30 September 2010. Similarly, while the average ability to absorb the rising costs of inputs brought the industry GP margin to 40% and 26% respectively, FFBL lagged behind on both accounts with 30% GP margin and 13% NP percentage. For investors the company exhibited less than average attractive position whereby its book value per share stood at 10.3 as opposed to 23.59 and a price to book value ratio that was half the industry average. However, the debt to equity ratio for FFBL is marginally lower than that of the sector as is the Beta, implying that the stock is less sensitive on average.
A comparison of the profitability position over the nine months ended 30th September 2010 and 30th September 2009 reveals that the GP percentage and NP percentage have both increased. This peculiar change in the context of the depressing scenario analyzed above can be explained in terms of the various profit components. A synthesis of the decline in overall sales figure reveals that the quantity sold of both DAP and Urea declined by 40% and 15% respectively perhaps as a result of the 16% and 30% increases in the prices of the product categories. Such a change was accompanied by a decline in the proportion of cost of sales in the sales figure, despite the 45% rise in the raw material costs. ROA has registered an increase despite the 5 million rise in the value of assets, indicating that the sales growth% has surpassed the rate of asset accumulation. Similarly, ROE increased phenomenally perhaps as a result of the decrease of Rs 468 million in financial charges and an Rs 808 million increase in other income, in addition to the improvement in operating profitability.
The liquidity position of FFBL has worsened over the year, principally perhaps as a result of the increase in the DAP inventory. However, the trade debts have also registered a rise of 15% over the period. A cautious examination of the asset management ratio helps give us insight into the causes of such decline in liquidity. The company has adopted a very liberal working capital strategy where debtor days have increased 15 times from 4days to 76 days. Also the inventory turnover has increased 5 times, correspondingly increasing the operating cycle to 192 days. This is a highly troublesome position; however this might be a part of the company's strategy to boost sales in times of financial upheaval.
As far as the firm's debt position is concerned the debt to equity ratio increased from 68% to 73%. The debt as a percentage of equity has also registered an increase of 29%, however, as mentioned earlier the finance costs have declined. This is adequately exhibited in the increase of TIE from 2.6 to 5.98. However, the gearing position has improved as reflected in the decline of long-term debt to equity percentage from 92% to 81%.
For investors the market ratios of FFBL present an attractive picture; the EPS registered in 2009 for the same period was 1.93, however, in 2010 it increased to 3.14. The market price increased reflecting this change to 27.79 as opposed to 22 in 2009.
Future outlook
The future performance of the fertilizer sector in general and of FFBL in particular stands at the disposal of a variety of demand and policy based factors. While the rising trend of commodity prices strengthens the optimistic citations being made by companies regarding the volume of demand in the coming period, the threat of gas curtailment looms large. It is only a matter of time when the mix of government policies regarding support prices and subsidies to farmers on the one hand and the gas load shedding plans at the other will clear the haze that surrounds the future of the fertilizer industry at present.
The table below presents a snapshot of the financial position of FFBL:
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Ratios Sept 30'10 Sep 30'09
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LIQUIDITY
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Current Ratio 1.02 1.16
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ASSET MANAGEMENT
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Inventory Turnover 115.83 23.48
Days Sales Outstanding 75.86 3.96
Operating Cycle 191.69 27.44
Total Asset Turnover 1.6 1.12
Sales/Equity 2.31 2.77
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DEBT MANAGEMENT
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Debt to Asset Ratio(%) 72.90% 67.60%
Debt to Equity Ratio 2.69 2.09
Times Interest Earned 5.98 2.61
Longterm Debt to Equity (%) 80.80% 91.80%
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PROFITABILITY (%)
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Gross Profit Margin 30.10% 23.60%
Net Profit Margin on Sales 13.20% 6.70%
Return on Assets 8.20% 6.00%
Return on Equity 30.50% 18.50%
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MARKET VALUE
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Earnings Per share 3.14 1.93
Market Price 27.79 22.07
Book Value 0.015 0.015
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Industry analysis
The global recession affected all sectors of the world, including the agricultural sector. However the affect on agriculture and fertilizer market seems over and it has started expanding again. During 2009 unfavorable weather conditions persisted in some of the major agricultural regions. These include poor south west monsoon in India, persistent drought in Argentina, wet spring and autumn in US and dry conditions in the Black Sea area. The global recession lowered the use of nitrogen in the industrial sectors of the world which in turn increased the supply of Urea and other nitrogenous products for agriculture. Due to the disequilibrium in the demand and supply - the prices of urea and DAP dropped in the international market.
The urea industry of Pakistan had achieved a growth of 18% in 2009. It grew from levels of 5.5 million tons in 2008 to 6.5 million tons in 2009. The production of urea increased from 4.9 million tons in 2008 to 5 million tons in 2009 showing a growth of 1%. In 2009 GoP distributed urea through National Fertilizer Corporation. There was an increase in demand of urea in the local market due to better availability, timely announcement of the support prices and the cultivation of the Bt cotton.
However due to lack of proper infrastructure and dealer network, there were shortages in the country (although there was sufficient imported quantity of Urea available). The locally produced branded urea sold at a premium over the company suggested price during the year.
The DAP market in the country registered a growth of 128% in sales to levels of 1.8 million tons. Since the prices were low in the international market high quantities of DAP were imported in the country. Imports in 2009 stood 0.98 million tons as compared to 0.35 million tons in 2008.
High DAP sales were recorded in the domestic market due to lower prices, application of DAP in lower quantities in 2008 and anticipation of recovery of DAP prices in international market. Private DAP importers also continued importing DAP and due to large stocks they continuously offloaded stocks they had to dealers at attractive prices and also with credit facilities.
Financial performance (FY05-09)
FFBL had sales of 627 thousand tons of Urea in FY09; the entire production of Sona Urea was sold. It had sales on 709 thousand tonnes of DAP which were the highest ever annual sales by the company for DAP. Also, in FY09 highest ever daily shipment of 7105 metric tons ex-FFBL was made on October 28, 2009; which consisted of 3440 metric tons of Sona Urea and 3665 metric tons of Sona DAP.
In FY09 FFBL's profitability was on record levels, the sales revenue stood at Rs 36.7 billion growing by 37% over the FY08 levels. The reason for this improvement in Sales was mainly due to improved DAP sales volume. DAP sales accounted for 76% of the total revenue whereas Urea's share was 24% in total revenues in FY09. Their shares were 70% and 30% in FY08. The gross profit of the company in FY09 stood at Rs 9.7 billion with a margin of 26.3% as compared to that of 30.67% in FY08.This was mainly due to the completion of gas feed subsidy in year 2008. The decline in FFBL's performance in FY08 was cited to the inability to meet the DAP sales target due to the significant upsurge in phosphoric acid prices, substantial devaluation of Pak Rupee against other currencies, delay in receipt of DAP subsidy claim from GoP and very high interest rates over much needed short term borrowings.
The total asset turnover of FFBL has shown tremendous growth and has grown from 0.57 in FY08 to 1.01 in FY09. This jump can be seen from the fact that the revenues of the company have shown a tremendous growth last year. They grew from the levels of Rs 26,821 million in FY08 to Rs 36,725 million in FY09. Also the revenues showed improved in FY08, they improved from Rs 12,243 million in FY07. Thus the growing revenues have been a major source for increasing total asset turnover. The total assets of the company declined from Rs 46,772 million in FY08 to Rs 36,225 million in FY09. The fixed assets of the company stood at Rs 18,279 million in FY08 as compared to 17,781 million in FY09. Thus the increase in revenue accompanied by the decline in fixed assets increased the fixed asset turnover of the company to 2.36 times in FY09 as compared to 1.69 times in FY08 and 0.74 in FY07. Within fixed assets decline was seen in property, plant and equipment and long term investments. Decline was seen in the value of the investment in joint venture Pakistan Maroc Phosphate S.A, Morocco. Cost of this investment is Moroccan Dirhams 200,000 thousand which represents 25% interest in Pakistan Maroc Phosphore S.A Morocco (PMP), a joint venture between the Company, Fauji Foundation, Fauji Fertilizer Company Limited and Office Cherifien Des Phosphates, Morocco. The principal activity of PMP is to manufacture and market phosphoric acid, fertilizer and other related products in Morocco and abroad. The return on Assets of the company has also shown increase in FY09. It increased to 10.45% in FY09 as compared to 5.37% in FY08. Te reason for this has been the tremendous growth in profit after tax of the company. They grew from Rs 2900 million in FY08 to Rs 3784 million in FY09.
The major decline has been seen in the current assets of the company which declined from a level of Rs 28,493 million in FY08 to 18,448 million in FY09. The decline was seen in balances due from GoP on account of DAP subsidy which decreased from Rs 12,440 million in FY08 to nil in FY09. This subsidy represented the DAP subsidy from the GoP in accordance with the Ministry of Food Agriculture and Livestock (MINFAL) notification No 7-1/2006 Fert dated 29th September 2006. Another major decline was seen in the stock in trade which declined from Rs 5,677 million in FY08 to Rs 1,227 million in FY09. The change was seen in the finished goods inventory which declined from Rs 5,583 in FY08 to 171 in FY09. Even advances by the company saw a major growth; they grew from Rs 55 million in FY08 to Rs 94 million in FY09. These advances were given to the advances to suppliers and contractors. Also, the short term investments by FFBL grew from nil in FY08 to 4.4 million in FY09 which represented loans and receivables at amortized cost. These are the term deposits with banks and financial institutions. The current liabilities of the company have also shown a major decline in FY09. They declined from Rs 26219 million in FY08 to 16747 million in FY09. Major jump was seen in the levels of short term borrowings which declined from Rs 18257 million in FY08 to 7730 million in FY09. With in the short term borrowings decline was seen in Finance against Trade Receipts which declined from RS 9939 million in FY08 to nil in FY09. The liquidity position of FFBL has remained consistent over the last three years. It stood at a level of 1.34 times in FY07 and moved to 1.10 times in FY09. But this has also shown a major decline from the FY05 level of 1.46 times. Similar has been the trend related with quick ratio it stood at 0.97 times in FY07 and moved to 0.92 times in FY09. However this has declined from 1.21 in FY05.
The debt equity ratio of the company has remained almost constant. The debt equity ratio was 49:51 in FY08, which has moved to 50:50 in FY09. The liabilities of the company both current and non current have shown a remarkable decline in FY09. In non current liabilities decline was seen in the long term financing which declined from Rs 625 million in FY08 to Rs 208 million in FY09. Also the long-term Murabaha declined from Rs 58 million in FY08 to Rs 19 million in FY09. Long-term loans declined from Rs 5186 million in FY08 to Rs 4537 million in FY09. The long-term loan amount represents the GoP loan amortizing to Rs 9723 million which is repayable in equal installments in 16 years.
The EPS of the company had remained almost consistent from FY05 to FY08. Nevertheless it grew to Rs 4.05 in FY09 from Rs 2.62 in FY 05. This jump can be attributed to the increasing income of the company. The earnings growth in FY09 was 30.5% in FY09 as compared to 14.16% in FY08. The dividend per share for FFBL is Rs 2.25 for FY09 which is the same as that of FY08. This brings the payout ratio to 98.73% as compared to 91.91% in FY08. This payout has been the highest in the last 5 years. The P/E ratio of the company has seen fluctuations. The P/E ratio declined in FY08 to 4.16 from 15.46 in FY07. However the ratio has improved in FY09 to 6.45. This has been because of the extraordinary low price of the stock in FY08. It declined from Rs 42.05 per share in FY07 to Rs 12.9 in FY08. The price recovered to Rs 26.13 per share during FY09. The graph below indicates the company's stock price has been moving in the same direction as that of the KSE 100 index for last 1 year.
Future outlook
FFBL plans to invest up to Rs 5 billion in four power projects. One of the projects is an independent 125 MW power generation company which is in the development phase with an estimated project cost of USD 180 million and is likely to commence operations in 2012. Investment in three Wind Power Projects of 50 MW with a cost of USD 135 million is also under consideration. These projects are likely to commence operations by 2012-13.
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Financial Ratios 2005 2006 2007 2008 2009
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Gross Profit Margin % 32.01 31.85 39.39 30.67 26.32
After Tax Margin % 15.97 16.62 20.75 10.81 10.3
Net Sales (PKR Million) 14,255 14,707 12,243 26,821 36,725
Total Asset Turnover- Times 0.58 0.53 0.42 0.57 1.01
Fixed Asset Turnover- Times 0.98 0.99 0.74 1.69 2.36
Return on Total Assets % 8.11 7.19 7.4 5.37 10.45
Inventory Turnover- Days 24 33 34 61 47
Current Ratio 1.46 1.34 1.17 1.09 1.1
Quick Ratio 1.21 1.15 0.97 0.82 0.92
EPS 2.62 2.62 2.72 3.1 4.05
DPS 0.5 1.25 1 2.25 2.25
P/E Ratio Times 14.56 10.81 15.46 4.16 6.35
Market Price/ Share 38.25 28.3 42.05 12.9 26.13
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].