Fertiliser: FAUJI FERTILIZER BIN QASIM LIMITED - Analysis of Financial Statements - Financial Year 2009 - Financial Year 2010
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 pick-up in the cultivation of wheat (Rabi crop sown in October); better soil fertility and government assistance have created ample opportunities for our victimized 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 Rs 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 to the consumers.
Overview of category-wise performance:
The nine months from January-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 timeframes. 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-month 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. The graphs below depict the discussion above:
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 analysed 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 percentage 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.
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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 1.60 1.12
Sales/Equity 2.31 2.77
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DEBT MANAGEMENT
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Debt to Asset Ratio(%) 72.9% 67.6%
Debt to Equity Ratio 2.69 2.09
Times Interest Earned 5.98 2.61
Longterm Debt to Equity (%) 80.8% 91.8%
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PROFITABILITY (%)
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Gross Profit Margin 30.1% 23.6%
Net Profit Margin on Sales 13.2% 6.7%
Return on Assets 8.2% 6.0%
Return on Equity 30.5% 18.5%
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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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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].