Pakistan’s sole DAP fertilizer manufacturer, Fauji Fertilizer Bin Qasim (FFBL) seems to be reaping fruits of diversification, and some externalities. The full year 2020 financial results are out and FFBL has raked in Rs2.2 billion in after-tax profits, in stark contrast to a massive loss of Rs5.9 billion incurred in CY19. The profit story has many contributors, and it is difficult to single out one.

The operational performance was significantly improved from last year, as DAP off-take in 4Q CY20 alone soared by a massive 57 percent year-on-year. DAP primary margins have considerably increased year-on-year. DAP primary margins are believed to have increased by 15 percent year-on-year. Both DAP and urea off-take towards the tail-end of the year increased as there was increased demand witnessed after the the announcement of increase in wheat support price, complemented by the sizeable carryover inventory. Urea and DAP prices also stayed higher by 3-5 percent, contributing to the topline growth.

There was considerable decline in finance cost, as the much-reduced interest rates came into play, leading to an overall reduction in interest costs. FFBL’s diversification drive is also chipping in with the goods, as the other income from profitability share of associates has gone up noticeably. What made the biggest impact - and perhaps the reason why the full-year earnings beat the market consensus - was the remeasurement gain that FFBL decided to book on GIDC to the tune of Rs2.7 billion.

More clarity will emerge on this front shortly, whether this remains a one-off or will there be more such incurred in the coming months. The impairment charges more than doubled creating an additional impact of Rs2.5 billion to costs. Had it not been for the remeasurement gain on GIDC front, the profitability would have cut a sorry figure. Recall that the company makes provision for impairment on account of investment in FML, and input sales tax disallowance on sales to unregistered persons.

The fertilizer industry is in the courts concerning the GIDC August 2020 judgment. On operational front, DAP margins are expected to stay strong, as international demand and supply dynamics stay favorable. FFBL’s cashflow concerns should be eased in CY21 compared to past two years, on account of likely adjustment of subsidy receivables and sales tax payables. There is more diversification around the corner, as the company is considering stakes in Foundation Wind Energy.