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Fauji
Fertilizer
BY
Dilawar Hussain
 Never
mind the turnover of Rs4.0 billion for the first quarter
2003, which Fauji Fertilizer - the biggest among urea
producers in the country - said "were the highest ever
achieved by the company during the first quarter in any one
year", profits are down 20 per cent.
And while the company
admitted that the higher sales had much to do with the
acquisition of Pak Saudi Fertilizer Limited (PSFL), the
higher financial charges due to mainly leveraged buy-out of
PSFL and the lower 'other income' were at least contributory
reasons for lower profits.
Chairman Lt. Gen. Syed
Muhammad Amjad (retired) wrote in the directors review for
the first quarter ended March 31, 2003 that FFC urea sales
for the period, though higher by industry standards, were
lower than planned targets.
In consequence net profit
after tax for the quarter were negatively impacted due to
increase in selling expenses, financial charges and
reduction in investment income.
Net profit after tax fell 20
per cent to Rs609 million, from Rs762 million in the first
quarter of the previous year.
But for all that the Board
approved the first interim dividend at 30 per cent, which
required an appropriation of Rs769.5 million from the
available divisible profit for the period.
Fauji Fertilizer has a record of handsome dividend payouts;
for all of last year, the company had disbursed cash
dividend at 90 per cent, up from 85 per cent the year
earlier.
As the company holds a huge
256 million shares outstanding, liquidity is considerable.
In the first four months of the current calendar year,
nearly 292 million shares were traded at the Karachi Stock
Exchange.
The 10-rupee share is
currently priced at Rs82.90, which places it on
price-to-earnings multiple of 8.7 on the annualized first
quarter earnings of Rs2.37 per share.
For the first quarter 2003 under review, the chairman noted
that the company had achieved 55 per cent increase in
production and 46 per cent enhancement in revenues with
corresponding increase of 17 per cent in the gross profit,
over the same period of 2002.
He noted that the production of company's brand 'Sona' urea
stood at 384 thousand tons, which represented an operating
efficiency of 116 per cent.
Acquisition Unit (Pak Saudi
Fertilizer) produced 169 thousand tons at 118 per cent of
designed capacity. Sales of own manufactured urea at 406
thousand tons, including 126 thousand tons produced by the
Acquisition Unit, were up by 11 per cent.
Margins had come under
pressure. Gross margin was down to 39 per cent, from 49 per
cent in the first quarter last year, while net profit margin
to sales had also declined to 24 per cent, from 44 per cent.
Financial charges increase to
Rs201 million for the period under review, from Rs41 million
in the corresponding period of the previous year, due partly
to the acquisition costs which were financed mainly through
borrowings.
"Other income" decreased 46
per cent to Rs139 million, from Rs256 million due to lower
investments and decline in interest rates.
Wajahat Ali, research head at Taurus Securities observed
that Fauji Fertilizer had lowered its depreciation rate on
plant and machinery to 5 per cent with effect from January
1, 2003, following an assessment of extended useful life.
He estimated that the
reduction in depreciation rate would lower depreciation
charge by about Rs240 million in the current year, and as
there would be no change in the tax basis, the amount should
effectively flow through to the bottom line.
Though, why the company had
decided to lower the depreciation charge remains
unexplained.
Effective March 21, 2003, the feedstock price of gas used in
the Expansion Unit had been enhanced almost five times from
a fixed rate to a floating rate.
"As a result, margins from
urea operations are likely to be constricted by
approximately Rs200 per ton", said the chairman.
Analysts observed that the
increase in feedgas prices would further lower Fauji's
margins. With the end in subsidy, margins were likely to
drop further going forward, unless the company raised urea
prices.
Feed gas prices would rise by
another 7.5 per cent in July, 2003, analysts said.
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