Fertilizer: FAUJI FERTILIZER COMPANY – Analysis of Financial Statements Financial Year 2005 – 2001 H 2010


(August 27 2010): The agriculture sector of Pakistan depicted a growth of 4.7% in 2009 as compared to 1.1% witnessed last year. Consequently, fertilizer demand in Pakistan increased substantially as compared to last year; urea in particular witnessed 18% year on year growth during the year ended 2009.

This growth trend is attributable to increased urea availability as compared to last year. Substantially large quantity of 1,560-kilo tonnes urea was imported in the country during 2009 which was the highest ever. Industry urea production of 5,048-kilo tonnes and sales of 6,446-kilo tonnes during 2009 were also the highest ever. All time high industry DAP sales of 1,767-kilo tonnes in the domestic market during 2009 registered a growth of 128%.

High DAP sales were mainly because of low domestic prices in 2009, better availability, application of DAP in lower quantities during 2008, better crop yields and anticipation of DAP price increase in the domestic market due to price recovery in the international market. DAP production during the period was 540 kilo tonnes and DAP imports were 981 kilo tonnes.

Nature of Business Fertilizer
Ticker FFC

During 1H10, urea industry grew by 3% to 3.1 million tonnes as compared to the same period last year. Major reasons for the increase in urea off-take include sufficient availability with 0.6 million tonnes of imported urea, TCP selling urea at Rs 75/bag discount to local production and higher prices of phosphate fertilizers shifting greater investment by dealers and farmers to urea. Gas prices remained unchanged. Average selling price of domestic urea was Rs 788/bag while average landed cost of imported urea was Rs 1585/bag. During the period, the industry gave benefit of Rs 28 billion to the farmers by maintaining local urea prices significantly lower than international prices.

In 1H10, phosphate industry showed a decrease of 38% from 550kT to 341kT during the corresponding period last year. The off-takes declined sharply in the second quarter after a strong first quarter. The decline was due to high phosphate prices, lack of liquidity in market and water shortages in certain areas. Total imports of phosphate fertilizers were 257kT as compared to 99kT last year.

Fauji Fertilizer Company Limited was incorporated in 1978 as a private limited company. This was a joint venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark. The initial authorized capital of the company was 813.9 million rupees. The present share capital of the company stands at Rs 6.8 billion. Additionally, FFC has Rs 4.8 billion stakes in the subsidiary Fauji Fertilizer Bin Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited).

Fauji Fertilizer Company Limited engages in the manufacture, purchase and marketing of fertilizers and chemicals in Pakistan. Ammonia/Urea is sold under the brand name of Sona. The company also imports nitrogen, phosphate and potash based fertilizers. During 2009, FFC sold 2.464 million tonnes of urea against 2.342 million tonnes last year, an improvement of 5%. Although sales of imported fertilizers were lower than last year, FFC ended the year by selling 2.505 million tonnes of fertilizers exceeding last year’s performance by 2%.


During the period under review, net sales for the company increased from Rs 16,897 million in 1H09 to Rs 19,947 million, an increase of 18%. Cost of sales rose by 20% due to the hike in prices of raw materials, fuel and power and salaries and wages resulting in a gross profit of Rs 8,834 million, an increase of 16% as compared to the corresponding period last year.

Profit after tax increased by 12% from Rs 4,548 million to Rs 5,101 million in 1H10 translating into an EPS of Rs 7.52 (1H09: Rs 6.70). Finance cost decreased from Rs 520 million to Rs 494 million.

Total assets declined from Rs 38,552 million in FY09 to Rs 34,535 million in 1H10. The drop was mainly caused by the decline in short term investments and cash and bank balances. There was a 50% decline in short term investments from Rs 6,769 million to Rs 3,385 million; major decline was in the local currency term deposits with banks and FIs. Cash and bank balances declined from Rs 3,849 million to Rs 781 million. On the liabilities side, there was a major decrease in short-term borrowings and trade and other payables.


During the year FY09, the company recorded sales of Rs 36,163 million as compared to Rs 30,593 million, depicting an increase of 18.2% in sales over last year. This increase in sales is attributed to the fact that in order to meet the growing demand of feed for the growing population, FFC was operating its business at full capacity. The aggregate utilization of all three plants of the Company during 2009 was 120%. The additional production of 142 thousand tonnes compared to last year was mainly due to De-Bottle Necking (DBN) of Plant III commissioned in early 2009.

The rise in sales volume and turnover of the Company in 2009 more than offset the 13% increase in cost of sales, mainly due to increase in gas prices. Consequently, the gross profit of FFC registered an increase of 26.65% over last year, and the gross profit margin and net profit margin showed a Year-on-Year growth of 7.1% and 14.4%, respectively.

Similarly, the return-on-assets and return-on-equity ratios of FFC also showed an increase of 12.0% and 27.0%, respectively, as compared to the values of last year. The rise in ROA and ROE is mainly because of an increase in the company’s net income as a result of good performance. Hence, we can see that in 2009 the overall profitability of FFC has gone up.

The current ratio of the company decreased by 12.8% in 2008, before showing a slight increase of 2.4% in 2009. Although both current assets and current liabilities of FFC increased in absolute terms during 2009, the current assets increased by 53.6% whereas current liabilities increased by only 51.0%, which contributed towards a rise in the current ratio and liquidity of the company. The rise in current assets was mainly to a drastic increase in short-term investments and cash and bank balances and the rise in current liabilities was mainly due to higher level of short term financing in order to meet working capital requirements.

In terms of asset management, FFC has shown an improvement over last year, the inventory turnover has been reduced from 7 to 2 days. This shows that it takes FFC approximately 2 days to sell its entire inventory; hence, there is hardly any excess inventory sitting idle. This is because FFC has effectively matched the supply of its product with market demand. The Days Sales Outstanding has reduced from 13 to 4 days, due to a reduction in trade debts and other receivables showing an improvement in the firm’s ability to collect its credit sales in a timely manner. This has reduced the operating cycle of the company from 13 to -1. The sales/equity ratio has also increased by 10.8% over last year due to an 18.2% increase in sales during 2009 versus only a 6.5% increase in equity. In 2009, total assets turnover of the FFC increased by 2%, since both sales and total assets increased from their previous year levels.

The debt-to-asset ratio of FFC has increased from 61.51% to 66.07%. This shows that the Company has increased its use of debt financing – the short-term borrowings of the company have increased by 95.52%, whereas the current portion of long-term financing has increased by 142.19% over last year. This rise in debt utilization resulted in order to meet working capital requirements and the Company’s capital expansion plans. Due to greater use of debt, the times-interest-earned ratio of FFC has also reduced from 15.44 to 14.82, which has in effect lowered the Company’s margin of safety. The debt-to-equity ratio of FFC has also increased by 21.8% during 2009. Consequently, the debt management performance of the Company has declined in 2009.

Earnings per share of the company showed a 30% increase this year, rising to Rs 19.24 as compared to Rs 14.8 during last year. The price earning ratio also increased from 6.1 to 7.92 this year. This is mainly due to rise in investment and dividend income of FFC. Investment income showed an increase of 53% due to higher available funds & returns, while dividend income registered an increase of 156% compared to last year yielding net contribution margin of 26% towards EPS and net of tax profit, which witnessed 35% increase for the year compared to 2008. The market/book ratio of the Company has also increased from 2.36 to 5.34 in 2009 – this shows that investors are willing to pay more than 5 times the book value for the company’s stock. Overall, the profitability of FFC has improved significantly during 2009; this increase in profitability ratios indicates that FFC has high growth prospects for the future.


Factors that will affect domestic fertilizer off-take in 2010 will be water availability, fertilizer prices, fertilizer imports, Government fertilizer related policies and crop production/ prices (cotton, rice, wheat and sugarcane). Urea trade patterns will likely change as more importing countries expand domestic capacity in 2010. In Pakistan fertilizer sector currently consumes around 16% of the country’s total natural gas output which is all set to increase to about 33% next year with the onset of the new plants; hence, the country needs to focus on gas exploration in order to augment supply and prevent any adverse impact on fertilizer production in future.

Domestic fertilizer demand would also be impacted by the floods. There would be no short-term direct impact of floods as sowing for the Rabi season starts in September-October However, the fertilizer companies will experience negative consequences in the long term. Floods have caused major damage to the crops which would eventually have an adverse effect on the farmers’ purchasing power in the coming months. Hence, the fertilizer off-take is expected to be hit in the remaining part of the year. Urea sales would be affected less as compared to DAP as DAP is more sensitive to farmer income.

The Government is expected to maintain its focus on the agriculture sector due to its significant contribution towards GDP, and critical issues like soil conservation, farm mechanization, land reclamation, and plant protection. Fauji Fertilizer Company Limited is focused on growth opportunities and continues to aggressively explore ways of improving profitability and minimizing business risks emanating from economic, market, and climatic conditions. However, in view of shortage of gas in the Country and upcoming urea plants, further expansion and growth opportunities in production of urea by the company are limited.


PROFITABILITY 2005 2006 2007 2008 2009
Gross Profit Margin 36.06% 32.42% 35.59% 40.40% 43.27%
Net Profit Margin 19.22% 15.48% 18.86% 21.33% 24.40%
Return on Assets 17.21% 16.90% 18.33% 20.44% 22.89%
Return on Common Equity 39.36% 35.78% 42.11% 53.11% 67.44%
LIQUIDITY 2005 2006 2007 2008 2009
Current Ratio 0.91 0.90 0.94 0.82 0.84
ASSET MANAGEMENT 2005 2006 2007 2008 2009
Inventory Turnover (Days) 8.0 12.0 14.0 7.0 2.00
Days Sales Outstanding 15.0 10.0 17.0 13.0 4.0
Operating Cycle 4.0 9.0 24.0 13.0 -1.0
Total Asset Turnover 0.90 1.09 0.97 0.96 0.94
Sales/Equity 2.05 2.31 2.23 2.49 2.76
DEBT MANAGEMENT 2005 2006 2007 2008 2009
Debt to Asset (%) 56.27% 52.77% 56.47% 61.51% 66.07%
Debt/Equity(%) 128.67% 111.71% 129.70% 159.82% 194.69%
Times Interest Earned 23.13 14.94 12.11 15.44 14.82
Long Term Debt to Equity (%) 27.19% 27.71% 39.55% 63.57% 58.21%
Debt to Equity 0.36 0.40 0.765972 30:70 26.74
MARKET VALUE 2005 2006 2007 2008 2009
Earning per Share (pre tax) 10.63 10.29 11.52 14.8 19.24
Price Earning Ratio 18.97 15.45 15.03 6.1 7.92
Dividend per Share 2.25 3.90 3.50 3.25 3.25
Market/Book Ratio 5.43 4.02 4.60 2.36 5.34
Number of Shares Issued (Millions) 493 493 493 493 679
Market Prices (Dec 30) 137.00 105.55 118.75 58.73 102.93
Book Value 25.21 26.26 25.80 24.90 19.28