Profitability expected to come remain under pressure


Aug 12 - 18, 2002

By this time the three urea manufacturing companies, controlling bulk of the market share have announced their half yearly results. There is an indication of improvement in urea offtake as well as hike in cost of goods sold mainly due to increase in cost of gas used as feedstock. The higher offtake has been despite continued shortage of irrigation water throughout the country and particularly in Sindh. During this period Fauji Fertilizer Company also acquired Pak Saudi Fertilizer Limited (PSFL), which will be merged into it. While production of DAP remained suspended at FFC-Jordan, production of NPK at Engro Chemical Pakistan, at Bin Qasim plant, achieved higher level of capacity utilization.

Fauji Fertilizer Company, enjoying the largest share of fertilizer market, registered 4.7 per cent increase in profit after tax during Jan-June period of year 2002. It also declared second interim dividend of 30 per cent making the total payout 55 per cent so far. The 22.7 per cent increase in sales may be attributed to higher sales volume and 3 per cent increase in urea prices since January this year. A 29 per cent increase in cost of goods sold decreased its gross margin. The decline in operating margins highlights the relatively difficult operating environment for the company. The 32 per cent decline in other income is due to enhanced lending to FFC-Jordan, the acquisition of PSFL and decline in its return on deposits. The mark-up costs of PSFL's merger did not reflect in half yearly results. However, financial charges are expected to increase significantly during the second half of this year.

Engro Chemical Pakistan's profit before tax for half year increased by 80 per cent at the back of 40 per cent increase in sales as compared to the corresponding period of last year. Profit amounted to Rs 471 million which was partly offset by Rs 57 million loss made by the NPK operation. The company announced 20 per cent interim dividend. While some analysts term this payout an indicator of the uncertainties shrouding the sector, they ignore two factors. These are: 1) historically, the company has been paying similar interim dividend and 2) followed the same despite improvement in bottom line. The over 40 per cent increase in sales may be attributed more to the lower sales during the corresponding period of last year. Contrary to Fauji Fertilizer, Engro's cost of goods sold increased at a rate less than the increase in sales, resulting in improvement in gross margin. A 21 per cent increase in tax rate to 31.5 per cent is due to expiry of the income tax exemption that the company has been enjoying on its expansion.

Dawood Hercules witnessed a substantial decline in sales during the first half of year 2002, from Rs 1,141 million to Rs 881 million. However, gross profit declined from Rs 286.5 million to Rs 260.5 million. As a result of selling, administrative and financial charges at more or less the level of last year and slight decline in other income, profit before tax was at Rs 318.9 million compared to that of Rs 359 million for the corresponding period of last year. The company also announced 55 per cent interim dividend, amounting to Rs 264.2 million.


It has become evident that after acquiring control of PSFL, Fauji Fertilizer will concentrate on attaining higher level of synergy and will not make any attempt to restart production of DAP at FFC-Jordan. The commencement of production of NPK type fertilizer by Engro at Bin Qasim has opened a new chapter in the eventful history of fertilizer industry of Pakistan.

It is also evident that no new grass-root urea will be established in near future. At the best efforts will be made to achieve higher production level through debottlenecking of the existing plants. It is mainly due to refusal of the GoP to continue supply of feedstock at discounted rate. At some stage it appeared that the GoP was not keen in increasing feedstock price by 5 per cent effective July 1, 2002. However, the increase has been announced finally.

There are two contradictory opinions about this increase. Some sector analysts say that the GoP has succumbed to the pressure of donors regarding sale of feedstock at discounted price. Whereas, some analysts believe that the industry, at its own, suggested to the GoP to increase feedstock price by 5 per cent. However, the rationale behind asking the GoP to increase feedstock price was, "Growers can absorb an increase in price which commensurate with the rate of inflation in the country". The industry has not given up its demand of supply of feedstock at discounted price.

It is necessary to reiterate this once again that the country needs at least three grass-root plants. The only hurdle is a firm commitment of the GoP regarding supply of feedstock for the new plants at discounted price. The GoP is not supplying feedstock at subsidized rate. It is supplying of low quality gas at a discounted price.