Pakistan’s biggest urea manufacturer, Fauji Fertilizer Company (FFC), despite a number of hardships and challenges, had a stellar 9MCY19. The company’s pretax profits jumped considerably year-on-year, even though the latest quarter earnings were a bit on the lower side, mainly stemming from the fact that the industry had not passé don the impact of increased cost of feedstock gas. The financial result was accompanied with an interim cash dividend of rs2.2/share – taking the year-to-date dividend to Rs7.55/share – ensuring that FFC continues its legacy of high payouts.

In terms of topline, the growth was very moderate, as the farmers did not exactly set the off-take scene on fire during the period. In fact, FFC witnessed its urea sales drop by 4.5 percent year-on-year to 1.77 million tons from 1.85 million tons, in the same period last year. The topline growth was driven by increase in product selling price.

The latest quarter was a happening one for the industry, as the feedstock and fuel gas prices were increased massively, by 31 and 62 percent, respectively, with the start of the quarter. This translated into an impact of almost Rs210 per urea bag, which is a pass through item, under usual circumstances. But the government had requested the fertilizer sector not to pass on the impact, in return to a commitment for a corresponding decrease in GIDC rate.

How the GIDC case unfolded is well documented – and it did not see the light of the day. So the price increase was delayed by two months – which took the primary margins down for FFC and others. The gross profit margins for 3QCY19, were resultantly down by almost 550 basis points, year-on-year.

The downside of higher interest rates was visible in form of higher finance costs. The company had sizeable relievable, in lieu of subsidy clearance, hampering the liquidity. That said, the contribution from dividend income, and most importantly, income from investments, more than compensated for the increase in finance cost. The investment income due to effective fund management was recorded at highest ever Rs3.37 billion. FFC could expect, decent contributions in form of dividend income going forward, from the likes of FFBL and AKBL.

The company foresees increased transportation cost, as the new axle load regulations were in place. But that has reportedly been delayed for another year, which should help FFC consolidate on the efficiencies it has gained. It must be noted that FFC made huge strides in terms of distribution cost efficiency – taking it down to 7.99 percent as percentage of sales, as against 9.5 percent in the corresponding period last year.