Pakistan Fertilizer Sector: FFC

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fertilizerDemand for Urea and DAP (Dai Ammonium Phosphate), an essential crops nutrient, has greatly increased over the last one year resulting in bouyancy in fertilizer scripts which outperformed the benchmark KSE 100 index. The prices of UREA have increased in recent time curtsy to new tax regulation and gas curtailment by govt. Price of UERA have reached to approximately PKR 1,020. In the form of these price hikes, manufacturers have completely transferred the tax cost to customers. With successful transfer of GST levy to customers along with high demand, urea sector looks to be on sound footings for the coming year. Recent investments and initiatives in this sector are likely to reap strong earning results in coming years. Major investment has been done by ENGRO in the form of its new plant, which is expected to produce 1.3mn tones of urea. DAP on the other hand might face cut in its demand since its prices have almost doubled over the last one year. Sharp price increase along with greater price difference between urea and DAP may cause demand contraction in future unless some respite is provided by the government in the form of increased wheat support prices (since DAP is a major input for wheat crop).

Fertilizer Sector shows growth and expansion opportunities, benefitting from an agrarian economy. Agrarian sector almost contributes about 23% in overall GDP. Over the past decade government policies have also favored Fertilizer sector providing them with the luxury of huge subsidies on gas bulk. The benefits however at times come with risks of supply curtailment by government due to recent energy shortfall. This gas shortage reaches its peak normally during three winter months, however over the last few years, this period was extended beyond the normal three month time. Fertilizer companies were able to pass on the resultant expenses to end-consumers this time around but fears remain as to how much price can be passed on to end-consumer in case of further increase in gas curtailment period. International grain prices have also spiked over the last year. This increase in international prices is explained by Heavy floods in Australia, drought conditions in Russia which caused a ban on its exports along with unrest in the Middle East. Prices of Urea are likely to continue its upward trend because of the factors explained above. Domestic prices of urea are still at a considerable discount from international prices, displaying a strong appetite for growth. These strong fundamentals are however dependent on a crucial factor of gas supply.

Fauji Fertilizer Company remains the market leader in Fertilizer Industry and still remains strong in domestic market. About 44% shares in FFC are owned by Fauji Foundation group. Fauji Fertilizer Company has its monopoly in the province of Punjab, the hub of agricultural activities. FFC also holds 51% stake in Fauji Fertilizer Bin Qasim and 12.5% in Pak Maroc Phosphore. FFC has also filed a pre-merger application for 75-79 per cent shares of Agritech Limited. FFC has also diversified its operation by taking up wind projects in Thatta/Sindh.

 

PKR(mn)
CY09 CY10 % growth CY10 CY09
Net   Sales

36163

44874

24%

Operating Ratio
Gross   Profit

15684

19564

25%

Gross   Profit Margin

44%

43%

Distribution   Cost

3175

3944

24%

EBITDA   Margin

38%

38%

Operating   Profit

12474

15619

25%

Net   Profit Margin

25%

24%

Other   Expenses

1272

1376

8%

Valuation Ratio
Other   Income

2801

3153

13%

Basic   EPS

13

13

Finance   Cost

945

1087

15%

Diluted   EPS

13

10.4

Profit   before Tax

13057

16310

25%

Dividend   Yield

12%

16.20%

Proft   after Tax

8823

11029

25%

Performance
EPS

10.4

13

25%

ROE

71%

67%

ROA

26%

23%

Leverage
Debt   to Equity

18%

19%

Interest   coverage

16%

15%

Source :Standard Capital Securities(Pvt) Ltd

FFC is one of the most stable companies with strong cash flows, stable earnings, consistent dividend payouts and low leverage. FFC is likely to remain stable benefitting from government subsidies, strong urea growth, domestic market advantage and high prices gap between domestic and international markets. The recent gas curtailment will also benefit FFC since it gets gas from Mari Gas network while other major fertilizer companies are based on the SNGPL network which is increased span of gas curtailment.

FFC is likely to continue its steady growth along the lines of agriculture growth trends. Its likely acquisition of Agritech and expansion in wind energy might create synergy benefits as well. The acquisition of Agritech will require debt raising along with cuts in dividend payouts, however strong domestic demand for urea along with current low capex business can reap higher dividends in subsequent years.

Prevailing domestic energy crisis is one of the major risks for FFC. Regular gas supply is also of great importance in fertilizer companies operation and if the current gas curtailment reaches to a significant level then it might not be possible for FFC to run its operations smoothly. Having said that, domestic economy highly relies on agriculture for its food security, so there are good chances that the necessary measures will be taken to accommodate Fertilizer sector. Another factor that needs to be taken into account is FFC exposure to foreign exchange rate risk in the form of a substantial stake in Pak Maroc Phosphore Company which operates in Morocco and abroad.

CY 09 CY10 %change
CFO            8,919,075            14,628,659

64%

CFI         (1,372,806)              1,101,352

-180%

CFF         (6,191,009)         (11,421,711)

84%

 

Recent economic meltdown along with financial stress might push government to withdraw some of its subsidy. In that case, it would be difficult for FFC to maintain the same cash flows and earnings growth.

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