two companies belong to fertilizer sector, Engro Chemical Pakistan and
Fauji Fertilizer Company, have posted attractive financial results for
the year ending December 31, 2002. However, they may not be able to
further improve their profit in future mainly because of utilization of
installed capacity at optimum level. With the growing fertilizer demand
but hardly any addition in installed capacity, it is feared that the
country may once again become a net importer of urea.
Engro Chemical Pakistan (ECPL) achieved a record
production of 852,000 tonnes during the year 2002, an improvement over
previous best of 808,000 tonnes achieved in year 2000. It also managed
to improve its share in DAP sale from 13% to 27%, from 165,000 tonnes to
309,000 tonnes. As a result of higher production of NPK, sale of this
type of fertilizer increased from 24 tonnes to 64 tonnes.
All these factors contributed towards higher sales,
going up from Rs 8,220 million to Rs 10,893 million. Gross profit
improved from Rs 2,742 million to Rs 3,550 million. Enhanced competition
also led to higher sales and distribution expenses, going up from Rs
1,006 million to Rs 1233 million. Further impetus was provided by other
operating income amounting to Rs 10 million and reduction in financial
charges, coming down from Rs 198.6 million to Rs 231.4 million.
The benefit of higher profit before tax was offset by
increase in tax liability. It was due to the full year impact on expiry
of the 1993 tax holiday on the earning from expanded capacity and
provision of additional taxation on imported products. Provision for tax
went up from Rs 127 million for the year 2001 to Rs 802.6 million for
the year 2002. Therefore, profit before tax of Rs 1,836 million reduced
to Rs 1,133 million profit after tax. As a result of proposed 35% final
dividend total payout for the year 2002 came to 75 per cent, at the
level of previous year. In addition to this the Board of Directors also
approved to issue 10% bonus shares.
Fauji Fertilizer Company (FFC) despite posting lower
profit for the year improved its dividend payout as compared to previous
year. The total dividend payout for the year 2002 came to 90% as
compared to that of 85% for the previous year. The decline in profit can
be attributed to higher financial charges and lower other income due to
takeover of Saudi Pak Fertilizer (PSFL) and its merger with FFC,
effective from July 1, 2002.
FFC's decision to market urea produced at PSFL
facility under 'Sona' brand name and 2.4% increase in urea prices, in
early July, resulted in 40% growth in sales, going up from Rs 11,982
million to Rs 16,787 million. However, the increase in financial charges
and decrease in other income eroded the benefit of higher sales. The
reduction in other income can be attributed to injection of one billion
rupee into Fauji-Jordan Fertilizer Company (FJFC) and liquidation of
investment for the buyout of PSFL. The company also made fresh
borrowing, to the tune of Rs 8 billion, for the acquisition of PSFL. The
declining interest rates also reduced other income.
According to some analysts FFC enjoys a lot of upside
potential, through higher production of urea by improving capacity
utilization of PSFL facilities. Reportedly, there is a plan to merge
FJFC into FFC. This may help in reducing to management expenses but it
would have to carry the burden of closed DAP production facility of FJFC.
Revival of the DAP production plant remains a remote possibility. The
only available option seems to be sale of the plant. It is a difficult
decision and needs a lot of courage on the part of management. However,
sector experts say, "Sooner the management makes this decision
better it is for the company".
With the improved water availability fertilizer
demand in the country is expected to remain robust. It is evident from a
demand growth of 23% for urea and 36% for DAP YoY. However, the growing
concern is that local urea production will not be sufficient to meet the
enhanced demand. While the installed capacity is not being expanded due
to the GoP policy, demand and supply gap will have to be met through
import of urea.
The Fertilizer Policy announced in August 2001 failed
to create conducive environment for establishment of new 'grass root'
urea plants. While there was a need for supply of gas (feedstock) to
urea plant at discounted price, the GoP insisted on bringing the
feedstock price at the level of 'pipeline' quality gas. The GoP failed
to comprehend the fact that the feedstock being supplied from Mari gas
field was not of pipeline quality. If the feedstock is of inferior
quality it cannot be sold at the price of superior quality gas.
To maintain self-sufficiency in urea, the GoP must
review its Fertilizer Policy, particularly the issue of feedstock price,
to ensure investment for the establishment of more grass root plants.
The point to remember is that feedstock is not being sold at subsidized
price, it is sale of inferior quality gas at a discounted price. As such
DAP demand is being met through import and import of urea will require
additional foreign exchange. It is still not too late to mend.