Fauji Fertilizer Company Limited

The domestic fertilizer industry is dominated by 3 groups holding the majority market share. These include Fauji group, Fatima group and Engro Corporation. Fauji Fertilizer Company Limited is Pakistan's largest urea manufacturing company. The urea market is of an oligopolistic nature, where Engro and Fauji have more that 70 percent share of the market.
Fauji Fertilizer Company was a joint venture between Fauji Foundation and Haldor Topsoe A/S of Denmark. It was incorporated in 1978, as a private limited company, with its first urea plant commissioning in 1982 having an annual capacity of 570,000 tons.
Its subsidiaries are FFC Energy Limited and Fauji Fresh n Freeze Limited, and the associated companies include Fauji Fertilizer Bin Qasim Limited, Askari Bank Limited, Fauji Cement Company Limited and Pakistan Maroc Phosphore S.A., Morocco.
The company now operates three world scale urea plants, located in Rahim Yar Khan and Ghotki, having an aggregate capacity of over two million tons per annum. The initial share capital of the company was Rs 813.9 million, while the present share capital of the company stands above Rs 8.48 billion.
It is a public limited company with 44.35 percent shares in equity, held by Fauji Foundation. The company holds 49.88 percent stake in Fauji Fertilizer Bin Qasim Limited (FFBL), which is the country's only granular urea and DAP manufacturing complex located at Port Qasim, Karachi. FFC has a well-mapped network of 3 zones, 13 regions and 66 sales districts with over 3,700 dealers and 169 warehouses across Pakistan.
Gas is received from Mari gas fields; thus, it has not faced curtailments that plants on the Sui network have. In 2013-2014, due to restricted supply of gas, other manufacturing companies produced well below their capacities. However, FFC produced 2.4 million tons of urea against its installed capacity of 2.04 million tons. It sells an aggregate of around 3.4 million tons of fertilizer, including the fertilizer produced by FFBL, under the brand name 'Sona'. FFC, combined with FFBL, commands a market share of 48 percent in urea and 50 percent in DAP.
The company has consistently been placed in the Karachi Stock Exchange Top 25 Companies for over 20 years. Globally, FFC is a well-recognised member of the International Fertilizer Industry Association (IFA), Arab Fertilizer Association (AFA), and the United Nations Global Compact (UNGC), USA.
The pattern of shareholding table suggests that the highest numbers of shares are held by sponsors, followed by executives and directors. Delving deeper, one can see that Fauji Foundation and State Life Insurance Corporation holds more than 53 percent of the total shareholding.
Industry Performance CY15 Global fertilizer demand increased by one percent in 2015 from last year. High inventory levels and low demand led to low urea prices, resulting in market dormancy. Imports were low due to devaluation of Chinese Yuan against the US dollar, and the imposition of Value Added Tax on imports.
During the first half of 2015 the domestic demand and production levels remained strong. However due to market uncertainty and delay in implementation of the 'Kissan Package', the demand fell in the second half of 2015.
The urea production increased by 8 percent reaching 5,301,000 tons while the imports stood at 557,000 tons. However, urea off-take decreased by one percent due to lower sales in the second half of 2015. Due to this the industry carried 86 percent higher substantial inventory than last year.
The sales for DAP remained low due to the delay in the implementation of the Rs 500/bag subsidy announced by the government. The second half of 2015 witnessed an increase in the sales, when the subsidy was implemented in October
Financial Performance CY15 In 2015, sale of Sona Urea (Prilled) increased by two percent and the marketing of Sona Urea (Granular) on behalf of FFBL was 36 percent higher than the preceding year. Sale of imported DAP stood at 165,000 tons against 123,000 tons during last year. Combined urea market share of FFC and FFBL improved by over two percent over last year, whereas combined market share of DAP was one percent higher than the market share of 2014.
FFC MOP / SOP fertilizer sales stood at par with the sales during 2014. FFC also sold 1,058 tons of Zinc Sulphate and 240 tons of Sona Boron during the year. Second highest level ever of production was achieved during the year, with an output of 2,469 thousand tons operating at 121 percent of nameplate capacity.
FFC's sales have been improving consistently every year by an annual compound growth rate of 11 percent over the last 5 years, and went as high as Rs 84.83 billion in 2015. The cost of sales has been increasing due to an increase in the cost of raw material. As a result of which gross profit margins have come down from 62 percent in 2011 to 34 percent in 2015.
Effective cost control measure, in line with handling of incremental product volume and inflationary trends led to an upsurge in distribution cost since 2011. The gross and net profit margins have decreased over the past 5 years due the imposition of GIDC since 2012, gas curtailment and increase in gas tariffs.
Financial Performance 3QCY16 Adverse market conditions caused by weak farm economics and delayed implementation of subsidy on urea by the government, along with suppressed selling prices resulted in 15 percent lower sales revenue. However, the cost of sales remained the same, which resulted in a 29 percent decline in gross margin. The finance cost increased by 85 percent year-on-year, leading to a decrease in net profit margin.
Earnings per share decreased to Rs 5.90 from Rs 9.30 due to the levy of Super Tax, higher financing costs and lower dividend and investment income. Operational efficiencies with a capacity utilisation of 122 percent and better gas availability increased the Sona urea production by 3 percent compared to the same quarter CY14. The urea industry had been facing a 12 percent contraction, but the company's sales went down by only 6 percent.
Future outlook World demand for total fertilizer nutrients is expected to pick up pace and grow by 1.8 percent with demand for Nitrogen, Phosphate and Potash fertilizer categories forecasted to grow by 1.4 percent, 2.2 percent and 2.6 percent respectively
Low domestic urea prices, poor farm economics, high production cost, uncertain market condition and declining international prices are expected to pose challenges for the company's revenues and profitability in the future. Incremental levies and higher finance cost were one of the major reasons behind the suppressed margins for the company. Increase in feed gas prices and imposition of GIDC has increased the cost of raw material, hence the production is on the higher side.
However, the company's long term strategic investments are well positioned to generate sustained income streams as evidenced through the incremental dividend receipts from AKBL and FCCL besides the distributions from FFBL.

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Fauji Fertilizer Company Limited Financial Rratios
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                                                         2011      2012      2013      2014      2015
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Gross profit ratio                                %      62.2     48.47     46.36     38.29     34.05
Net profit to sales                               %     40.73     28.07     27.03     22.37     19.76
EBITDA margin to sales                            %     63.64     44.98     42.74     35.61     32.97
Operating leverage ratio                      Times      4.12     -0.17    -28.57      -1.1     -0.93
Return on equity (Profit after tax)               %     99.17     80.96     80.06     70.79     61.39
Return on equity (Profit before tax)              %    146.23    120.51    116.97    102.22     89.72
Return on capital employed                        %      88.6     70.38     68.41      64.5     38.81
Pre tax margin                                    %     60.06     41.78      39.5      32.3     28.88
Return on assets                                  %      40.5     34.38     29.69     20.98     20.92
Growth in EBTDA                                   %     96.27      -5.6     -4.18     -9.64     -5.64
Earning before interest, depreciation and   RS (mn)    35,141    33,430    31,832    28,929    27,972
Earnings growth                                   %    103.94     -7.26     -3.48     -9.75      7.73
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Source: Company accounts

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PATTERN OF SHAREHOLDING
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Categories of Shareholders     Percentage
                                   held %
                                    AS AT
                                 DECEMBER
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                                 31, 2015
NIT & ICP                               2
Banks, DFIs & NBFIs                     6
Isurance companies                     11
Modarabas & Mutuals Funds               1
Foreign Investors                       8
Chariatable Trust & Others             46
Others                                  2
Individuals                            23
Total                                 100
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Shareholders Holding Five percent
or more voting interest        Percentage
                                   held %
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Fauji Foundation                       44
State Life Insurance                    9
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