FAUJI FERTILIZER BIN-QASIM LIMITED (FFBL)

MULAZIM ALI KHOKHAR,
RESEARCH ANALYST, PAGE

Mar 10 - 16, 2008

INTRODUCTION

Fauji Fertilizer Bin Qasim Limited is a public limited company incorporated in Pakistan under the Companies Ordinance, 1984, and its shares are quoted on the Karachi, Lahore and Islamabad stock exchanges in Pakistan. The Company is domiciled in Rawalpindi, Pakistan and commenced her commercial production effective January 1, 2000. The principal objective of the company is manufacturing, purchasing and marketing of fertilizers including investment in fertilizer raw material manufacturing operations.

The Company is a subsidiary of Fauji Fertilizer Company Limited (the holding company) with shareholding of 50.88%. The company owns the total assets worth Rs.29bn with share capital of Rs.9.34bn (934mn outstanding shares). Out of the total shareholdings individuals' holding is only 10% while investment, insurance and financial institutions holding amount to 8% approximately.

OPERATIONAL PERFORMANCE

Company's YoY net sales have declined by 16.76% to Rs.12.24bn, while her net sales variance stands at -33% with Urea Qty variance of -20% and DAP Qty variance at -26%.

The company's unit sales of Urea and DAP declined by 176KT and 121KT (i.e. 26% and 25.58% decline) respectively. Her sales decline is due to increasing competition in the Urea and DAP markets (which is discussed in detail in the Market Competitive Analysis section).

Even in this declining sales scenario the company has managed to achieve higher gross, operating and net profit margins, increasing by 7.54%, 10% and 4.12% respectively. Her gross profits stand at Rs.4.8bn, while operating and net profits at Rs.4.68bn and Rs.2.54bn.

This growth has been possible as it has managed the costs of production and operating expenses very effectively. Her Cost of Goods Sold (COGS) declined to 61% of net sales (a 21% decline) as compared to 82% of net sales last year, while her operating expenses have marked almost 300 basis points' decline from 12.44% to 9.8% net sales. As a result of decreasing costs and expenses her growth prospects have also increase to 2.42% as compared to 1.29% standing at the end of FY06. [See Table # 1]

DUPONT ANALYSIS

The DuPont Analysis suggests that return on equity of the company has increased by almost 150 basis points to 30% in FY07 as compared to 28.64% in FY06 with a growth prospect of 2.42% YoY.

FFBL's net profit margins have gone up by 4.12% to 20.75% and equity multiplier by 17.13% to mark 341.36%. But her assets turnover ratio (ATR) and equity turnover ratio (ETR) have been distorted and are not depicting the fair results. Her ATR has declined to 42% (-11%) and ETR has declined to 144% (-28%). [See Table # 1]

LIQUIDITY AND RISK ANALYSIS

FFBL's liquidity is witnessing a negatively curved movement along with her sales decline mentioned earlier. Her current, quick and cash ratios stand at 1.17, 0.93 and 0.8 marking a decline of 13.17%, 17%, and 12.41% respectively. [See Table # 2]

Her cash conversion cycle has increased from -62.52 days to -85 days showing a backward movement of almost a month. This is only due to her A/C Payble's Policy that it holds the payment for long. Her receivables turnover days have increased to 7.27 days from 5.74 days almost one and a half day increase, but the increase seems quite reasonable when we compared it with day's payble turnover which stands at 121 days up by 24%. [See Table # 2]

Adding to her disturbing liquidity are her increasing cash outflows and increasing cash and bank overdrafts which stand at Rs.3.22bn and Rs525mn.

The main reason of the cash outflows and bank overdrafts has been the investing outflow of almost Rs.4bn (96% higher than the last year), while her operating cash inflows have increased 62% to mark decent amount of Rs.3.65bn as compared to Rs.2.26bn for the FY06.

Over all, the company is in the middle of an expansion phase which is the major cause of its disturbing cash flows and these figures don't really depict negative impression of the company in the scenario.

INDUSTRY ANALYSIS

The fertilizer industry is facing the capacity constraints, and imports about 3% of the urea and 76% of the DAP consumption in Pakistan. The situation worsened this year as the industry performance wasn't so impressive for the FY07. The unit sales of Urea declined by 330KT (-6.3%) and DAP unit sales declined by 84KT (6% decline).

The urea production went down by 1% and DAP by 21% reducing the annual production of the both fertilizer products by 49KT and 93KT respectively, whilst the imports of DAP have increased by 353KT (42%).

During November (Rabi season), Government also arranged import of 150 KT Urea from Saudia to ensure adequate supplies in the local market. All Urea manufacturers carried inventories throughout the year, which peaked at a high level of 810 KT in May 2007. It resulted into an immense competition among the companies, who offered lucrative incentives and discounts to increase sales and liquidate their stocks. All time high sales during quarter July-September improved the situation with Rs.20 price hike during the last half of the FY07.

On the other hand a dramatic rise in DAP prices, from US$250 per ton to US$620 per ton in the international market, although subsidized by Government of Pakistan (GOP) from Rs 250 per 50 Kg bag to Rs 470 per bag, in order to ensure availability of DAP at reasonable prices in the country, could not resist the negative impact on DAP use in the country during FY07, as mentioned earlier.

MARKET COMPETITIVE ANALYSIS

Though FFBL with FFCL are the market leaders both in DAP and Urea market, but now their market shares are being shared by the other entrants and existing companies like Engro, Azgard Nine, NFML and DCL and some others.

FFBL is the sole producer of DAP while it also produces about 14% of Urea in the country. It does not import the excess amount of the both needed in the market. Whilst, her DAP market share has declined from 27% to 15.2% in the 4th quarter FY07 and her Urea market share has also declined from 13.7% to 13% in the 4th quarter FY07.

FUTURE OUTLOOK

There are numerous opportunities available with the sector to cash as there are expectations of the increase in cereal demand for food and biofuel, higher acreage usage for crops. But the situation can worsen due to inflating international and domestic DAP prices and supply shortages, which may hit the consumption negatively.

While, currently the company is under an expansion phase, her opportunities are also multiplying. Some of the highlights of the expansionary projects are:

* Dharki Power Project is in implementation phase and, operations would likely to start by 3rd quarter 2009.

* Dividends should start flowing in to Company from PMP in 2009 and from Dharki Power Project in 2010.

* Their further projects under consideration are:

o Grain Terminal

o Power

o LPG/LNG

Her supply situation will improve in FY10-11 when her DAP Plant of 3 millions capacity will come online and will be able to capitalize about 40% of the demostic demand.

TABLE 1

OPERATIONAL PERFORMANCE

FY07

FY06

% CHANGE

Net Sales

12,242,888

14,707,288

-16.76%

Gross Profit Margins

39.39%

31.85%

7.54%

Operating Profit Margins

38.25%

28.26%

10.00%

Net Profit Margins

20.75%

16.62%

4.12%

Asset Turnover

42.15%

53.13%

-10.98%

Fixed Assets Turnover

68.45%

89.90%

-21.45%

Equity Turnover

143.88%

172.26%

-28.38%

GROWTH POTENTIALS

DuPont Analysis (ROE)

29.85%

28.64%

1.22%

Net Profit Margins

20.75%

16.62%

4.12%

Asset Turnover

42.15%

53.13%

-10.98%

Equity Multiplier

341.36%

324.23%

17.13%

Growth Rate

2.42%

1.29%

1.13%


TABLE 2

INTERNAL LIQUIDITY

FY07

FY06

% CHANGE

Current Ratio

1.17

1.34

-13.17%

Quick Ratio

0.93

1.12

-16.86%

Cash Ratio

0.80

0.92

-12.41%

Receivable Turnover Days

7.27

5.74

26.61%

Inventory Turnover Days

28.92

29.15

-0.79%

Payable Turnover Days

121.21

97.41

24.44%

Cash Conversion Cycle

(85.03)

(62.52)

36.00%

CASHFLOW STATEMENT

CFO

3,653,112

2,260,861

62%

CFI

(3,966,261)

(2,018,563)

96%

CFF

(2,915,536)

(2,233,351)

31%

Net Cash Flow

(3,228,685)

(1,991,053)

62%

Cash & Equiv. at beg.

2,703,913

4,694,966

-42%

Cash & Equiv. at end

(524,772)

2,703,913

-119%


TABLE 3

MARKET ANALYSIS

FY06-07

FY05-06

YOY CHANGE

UREA

INDUSTRY

FFBL

SHARE OF FFBL

INDUSTRY

FFBL

SHARE OF FFBL

INDUSTRY

FFBL

Opening

233

25

 

72

4

     

Production

4,755

488

10%

4,804

601

13%

(49)

(113)

Imports

110

2

 

625

89

 

(515)

(87)

Urea available for sales

5098

515

10.10%

5,501

694

12.62%

(403)

(179)

Sales

4,917

493

10.03%

5,247

669

12.75%

(330)

(176)

Closing

161

23

14.29%

233

25

10.73%

(72)

(2)

Sales to avail. ratio

96%

96%

 

95%

96%

     

DAP

Opening

119

4

 

292

26

     

Production

357

357

100%

450

450

100%

(93)

(93)

Imports

1,200

-

847

-

 

353

-

 

DAP available for sales

1676

361

21.54%

1589

476

29.96%

87

(115)

Sales

1,424

352

24.72%

1,508

473

31.37%

(84)

(121)

Closing

252

9

3.57%

119

4

3.36%

133

5

Sales to avail. ratio

85%

98%

 

95%

99%